Transfer of Right to use goods for cash, deferred payment or valuable consideration is considered as deemed sales under sub-clause (d) of Article 366(29A) of Constitution of India and also consequently under Punjab VAT Act and CST Act liable to VAT and CST respectively.
Right to use of tangible goods service has also been brought under service tax net by the Finance Act, 2008, w.e.f 16-05-2008 vide notification No. 18/2008-ST, dated 10-05-2008.whereby taxable service has been defined u/s 65(105)(zzzzj) of Finance Act, 1994 to mean as
“any services 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”.
The settled law is that one transaction can be either a service or a sale hence both VAT and service tax cannot be levied on the same transaction. This may lead to rise a question in one’s mind that transfer of right to use goods when can be considered as sales and when service? The attempt is made to answer the question herein this article.
When Transfer of right to use is a deemed sales: The phrase “transfer of right to use any goods for any purpose is of great significance to impose tax on it as deemed sales. The thrust is on the transfer of right to use the goods. It is important to understand here that in transfer of right to use goods all the rights except the ownership rights are transferred by the transferor to the transfree so as to enable him to use the goods at his own will to the exclusion of the transferor.
Supreme court in BSNL vs Union of India (2006) 145 STC 91 (SC) held as under:
To constitute a transaction for the transfer of right to use goods, the transaction must have the following attributes:
a. There must be goods available for delivery;
b. There must be consensus ad idem as to the identity of goods;
c. The transfree should have a legal right to use the goods-consequently all legal consequences of such use including any permissions or licenses required therefor should be available to the transfree;
d. For the period during which the transfree has such legal right, it has to be for the exclusion to the transferor this is the necessary concomitant of the plain language of the statue – viz. a “transfer of the right to use” and not merely a licence to use the goods;
e. Having transferred the right to use goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.
The judicially evolved principles to identify a transaction involving the transfer of right to use goods to be a sale clearly exclude the indispensability of delivery of physical possession thereof an essential precondition.
The Supreme court further in 20th century Finance Corporation Limited v State of Maharashtra- 2000 (6) SCC 12 at 44 ruled that
“(c) Where the goods are available for the transfer of right to use the taxable event on the transfer of right to use any goods is on the transfer which results in right to use and the situs of sale would be the place where the contract is executed and not where the goods are located for use.
(d) in cases where goods are not in existence or where there is an oral or implied transfer of the right to use goods, such transactions may be effected by the delivery of goods. In such cases the taxable event would be on the delivery of goods”.
The important attribute constituting Transfer of right to use goods as deemed sales is that there should be transfer of effective control and possession of the goods. If the owner retains effective control over the equipment, it is not a transfer of right to use.
Other attributes like the intention of the parties, mode of use and several other surrounding and relevant aspects have to be considered to come to the conclusion whether or not under a particular contract, there is transfer of right to use any goods. A mere contract of hiring, without transfer of control, may be a contract of bailment and not a contract for transfer of right to use goods.
Transfer of a right to use goods implies that full liberty is vested in the transfree to have the right to use goods to the exclusion of all other including the owner of goods.
When Transfer of Right to use goods is a service: The Finance Act, 2008 w.e.f 16-05-2008, has levied service tax on such services provided in relation to right to use of tangible goods, including machinery, equipment and appliances, for use, with no legal right of possession and effective control. Excavators, Cranes, dump trucks, high value and sophisticated machineries are ussualy supplied for use, without any legal right of possession and effective control.
Such transaction of allowing use of the goods to another person, without giving legal right to possession and effective control, not being treated as deemed sale of goods, is treated as service.
The taxable service u/s 65(105)(zzzzj) of Finance Act, 1994 has been defined as under:
“taxable service means any services 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”.
The Central Government in its letter D.O. F. No. 344/1/2008-TRU, dated 29-02-2008 has clarified that ”supply of tangible goods for use and leviable to VAT/sales tax as deemed sales of goods, is not covered under the scope of the proposed service.
The essential difference between Transfer of Right to use goods as deemed sales and service is the transfer of effective control and possession of the goods and whether such effective control and possession of the goods is transferred while allowing another person to use the goods is a question of fact and is to be decided based on the terms of the contract and other material facts.
Some examples based on case laws will more help understanding the issue in hand:
Giving shuttering on hire: If the goods, namely, shuttering are supplied to the builders for a specified period for the purposes of construction at a consideration; the transfree is in effective control of the shuttering during the period it remains in his possession(I.e during the construction) and therefore, it falls within the definition of the extended definition of sale- Aggarwal Brothers vs. State of Haryana (1999) 113 STC 317(SC).
Supply of equipments and Machineries to contractors: In State of A.P. vs. Rashtriya Ispat Nigm Limited(2002) 126 STC 114(SC) Rashtriya Ispat Nigam Limited allotted different works of the steel projects to contractors. To facilitate the execution of work by the contractor with the use of sophisticated machinery, RIN undertook to supply machinery to the contractor for the purpose of being used in the execution of the contracted work of the petitioner and received charges for the same.
The taxation authorities made assessment leving tax on the hire charges because the machinery was given in possession of the contractor and he was responsible for any loss or damage to it and, therefore, concluded that there was transfer of property of goods for use for a specified purpose and for a specified period for money consideration. The A.P High Court held that:-
“In our view, whether the transaction amounts to transfer of right or not cannot be determined with reference to a particular word or clause in the agreement. To determine the nature of transaction, the agreement has to be read as a whole. From a close reading of all the clauses in the agreement, it appears to us that the contractor is entitled to make use of the machinery for purposes of execution of the work of the petitioner and there is no transfer of right to use as such in the favour of contractor because the effective control of the machinery even while the machinery is in useof the contractor is that of the petitioner-company. The contractor is not free to make use of the same for other works or move it out during the period the machinery is in his use. The condition that he will be responsible for the custody of the machinery while the machinery is on the site doesnot militate against the petitioner’s possession and control of machinery. Therefore, the transaction doesnot involve transfer of the right to use the machinery in favour of the contractor.”
The view of A.P High Court was upheld by the Supreme Court.
Hiring of tents, pandals furniture etc.: If pandal after having been erected, is given to the customers for use then it may not be the transfer of goods but will be a service of errecting pandal as in such case tent and kanats are not transferred as such. However, when tents, kanats and furniture are given by dealers to customers as such and the customers erected tents etc. of their own, and pay hire charges for the tents, kanats, chholdari, crockery etc., there would be transfer of goods with effective control and possession and the right to use them would be taxable as deemed sales and not service. The transfer of various items such as chairs, tables and crockery would also fall within the meaning of transfer of the right to use.
Delivery of possession of the goods to the transfree by the transferor is one of the essential ingredients where the transfree is put in effective and general control of the goods as distinguished from a mere custody or licence to use the same. Whether there is transfer of the right to use the goods or not is essentially a question of fact which has to be determined in each case having regard to the terms of the contract.- Harbans Lal vs. State of Haryana (1993) 88 STC 357 (P&H).
Transfer of Factory as a whole: In CST vs. Prahlad industries (1999) 112 STC 548 (All.) the respondent leased its factory premises along with plant and machinery. On the question whether or not the lease rental was taxable, the High Court held that the plant and machinery were attached to the earth and were immovable property and, therefore, were not goods within the meaning of the Act. There was no agreement between the parties that the lessee shall be entitled to sever the goods fastened to the earth. The subject matter of the lease was the woolen factory and the same was leased out as a unit and not as an individual piece of plant and machinery. Therefore, there was no transfer of right to use goods.
Rent-a- cab and Taxi hire charges: when a taxi-cab is hired under rent- a-car scheme and a cab is provided, ussualy driver accompanies the cab; there the driver will have custody of car but effective control and possession is with the hirer then such hiring of car may be treated as transfer of right to use.
However in contrast if a taxi-car is hired for going from one place to other. There the driver will have both the custody as well as the possession of the taxi-car and such hiring will be service and not deemed sales in the sense of transfer of right to use taxi-car.
Conclusion: Whether a transaction is a transfer of the right to use the goods or a service is essentially a question of fact which has to be determined in each case having regard to the terms of the contract. The transfer of effective control and possession of the goods in such cases plays a vital role in determining whether it is a deemed sales or service.