CA Pradeep Jain &
CA Neetu Sukhwani
The main thrust of the present article is to analyse the landmark judgment given by the Hon’ble Uttrakhand High Court recently, in the case of Commissioner of Customs & Central Excise Vs Sachin Malhotra, Raj Kumar Taneja, and M/s Shiva Travels [2014-TIOL-2039-HC-UTTRAKHAND-ST] wherein the difference between renting and hiring has been reported for the purpose of levying service tax under the category of “Rent a cab services”. The highlights of the decision are summarised as follows:-
IMPACT IN PRE NEGATIVE LIST ERA:- It is worth observing that the above decision is being given in the context of provisions contained in the statue when the positive list of services was prevalent and service tax was leviable on the provision of specified services. Moreover, if a particular activity was held to be not covered by the definition of taxable service as defined in the statue, the same was outside the ambit of service tax. Therefore, it is pertinent to determine whether the activity of hiring of vehicle, could be considered as leviable to service tax under any other category of service or not. If the specified list of services as prevalent during the positive list tax regime is examined, the probable category of service that may be made applicable to the activity of hiring is the “Supply of Tangible Goods Service”. The section 65(105)(zzzzj) defined the taxable service as “any service provided or to be provided to any person, by any other person in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliances.”
It is also important to note here that the Article 366(29A) of the Constitution defines six categories of deemed sales, amongst which, one is transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration. Needless to mention that as sales tax is levied on the deemed sales, no service tax can be levied on said deemed sales.
It is submitted that the Hon’ble High Court has concluded that when the control and possession of the vehicle remains with the owner of the vehicle providing the services of transporting the passengers, the said activity is covered by hiring and is not renting of vehicles. Therefore, no service tax is payable on the hiring of vehicles by the owner under the category of “rent a cab” services. However, as the other aspects and consequences of leviability of service tax on the activity of hiring has not been examined in the said decision, the same is discussed below. The situation of hiring of vehicles may get covered under the category of “Supply of Tangible Goods Service”. The situation of hiring of vehicles by the owner satisfies all the criteria of the taxable service i.e.,-
Likewise, when the control and possession of the vehicle is transferred to the person hiring the vehicle, it has been held that only then, service tax is leviable under the category of rent a cab service. In this respect, it is worth observing that the transaction of right to use any goods for a consideration without transferring the title of goods is also covered by the concept of deemed sales as stated in Article 366(29A) of the Constitution of India thereby meaning that sales tax is leviable on the said transaction. Consequently, the Central Government has no authority to levy service tax on the deemed sales. However, the ratio pronounced by the High Court has ignored the said concept of deemed sales and has held that when the owner of vehicle transfers control and possession of the vehicle, then only service tax will be leviable under the category of rent a cab services. Accordingly, the distinction made by the High Court between hiring and renting seeks to create ambiguity as regards the levy of service tax under the category of rent a cab services.
IMPACT IN POST NEGATIVE LIST ERA:- The impact of the said decision creating distinction between renting and hiring remains more or less same in the negative list era also. The only difference being that under negative list tax regime, the taxable services are not defined and all services except those specified in the negative list or mega exemption notification no. 25/2012-ST dated 20.06.2012 are chargeable to service tax. Therefore, hiring not being specifically covered by exemption is leviable to service tax. Moreover, the clause (f) of the declared list of services under section 66E specifically covers the activity of hiring without transfer of right to use goods. The clause (f) of section 66E reads as follows:-
“Transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods”.
The meaning of the term “transfer of right to use goods” is explained in the Education Guide released by the Board as transfer of possession and effective control over the goods in terms of the judgment of the Supreme Court in the case of State of Andhra Pradesh Vs RashtriyaIspat Nigam Ltd. [2002-TIOL-560-SC-CT]. Hence, the hiring of vehicles will be covered by the clause (f) of the section 66E of the Finance Act, 1994. Further, the ambiguity as regards levy of service tax on renting would prevail, particularly when the taxable service of rent a cab is not defined in the Finance Act, 1994.
Before parting:- First and foremost, the decision by differentiating between hiring and renting has created the dispute of classification of service as hiring attracts service tax at the rate of 12.36% while there is abatement available for the renting of cab. The rent a cab service has been given abatement vide notification no. 26/2012-ST dated 20.06.2012 and is also covered under reverse charge mechanism. The abatement notification seeks to grant abatement of 60% to the renting of motor vehicle designed to carry passengers subject to the condition of non-availment of cenvat credit on inputs and capital goods. It is practically observed that no assessee is aware of the distinction between hiring and renting and normally, service tax is paid by availing the benefit of abatement without even examining whether the services fall under renting of cab or hiring. This decision will give an additional tool to the revenue department to deny the benefit of abatement to the assessees by contending that they are required to pay service tax at full rate instead of claiming the benefit of abatement notification. Furthermore, the service tax on renting of cab is to be paid by the service recipient under reverse charge mechanism if the benefit of abatement is availed and when the service is not provided to a person engaged in similar business. But, when the difference between hiring and renting is not known to assessees, the confusion as regards service tax liability under reverse charge mechanism will also increase. This is for the reason that the renting of cab is covered under reverse charge mechanism while hiring is not covered. The provisions as regards levy of service tax under the rent a cab services are already very complex and this decision pronounced by the High Court adds to the complicacies.