Subleasing Of Containers; Deemed Sale , Service Tax Not Applicable ; Bombay High Court

The bench of Justices K. R. Shriram and A. S. Doctor ruled that in view of Article 366(29A)(d) of the Constitution of India, transfer of right to use goods is a deemed sale, which is subject to Sales Tax/VAT. The Court added that Article 366 (29A) of the Constitution does not distinguish between an owner or a lessor of the goods. Thus, the bench ruled that lease of goods for valuable consideration on a "transfer of right to use" basis is a deemed sale, even if the transferor is not the owner of the said goods.

The Petitioner is the Liquidator of the Company - Swire Oilfield Services India Private Limited, which is in liquidation.

Swire Oilfield was engaged in providing Cargo Carrying Units/ containers on rental basis to its customers. The said containers were not owned by the company but were taken on lease from another company vide a Lease Agreement. As per the said Lease Agreement, Swire Oilfield was permitted to sub-lease the containers to a third party.

Thereafter, Swire Oilfield sub-leased the said containers on hire for consideration and entered into a lease agreement with the lessee- CU Inspection India Private Limited. Swire Oilfield discharged VAT at the rate of 12.5% on the lease rental/hire earned by it. During the course of verification of its Income Tax Return, the revenue authority opined that Swire Oilfield had failed to obtain service tax registration even after crossing the threshold limit of Rs.10 lakh. Further, it ruled that the company had failed to pay service tax on the sub-leasing of Cargo Carrying Units/ containers. Hence, the revenue authority held that the company had failed to pay service tax and obtain service tax registration with the sole intent to evade payment of service tax on the taxable services provided by it. Accordingly, a show cause notice was issued, seeking to recover service tax along with interest and penalty.

The petitioner- Nayana Premji Savala, the liquidator of Swire Oilfield, in its reply to the said show cause notice submitted that the said containers were sub-leased on a "transfer of right to use" basis and there was a transfer of possession of the containers, which was a deemed sale under the Maharashtra Value Added Tax Act (MVAT Act). The petitioner argued that the company had discharged its liability to pay VAT on the transfer of right to use the said containers.

However, the revenue authority passed an order against the Company- Swire Oilfield, demanding service tax on the sub-leasing of containers. Against this, the petitioner filed a writ petition before the Bombay High Court.

The petitioner- Nayana Premji Savala, submitted before the High Court that as per Article 366 (29A)(d) of the Constitution of India, tax on sale or purchase of goods includes a tax on the transfer of the right to use any such goods for consideration. Further, it averred that the "transfer of right to use" goods for any purpose is included in the definition of sale under the MVAT Act and hence, the sub-leasing of containers by Swire Oilfield is a deemed sale transaction, which is subject to VAT.

The petitioner argued that the term "service", which has been defined under Section 65B(44) of the Finance Act, 1994, excludes an activity which constitutes merely a transfer, delivery or supply of goods which is deemed sale within the meaning of Article 366(29A) of the Constitution.

The revenue department contended that since the company- Swire Oilfield, is not the owner of the containers, therefore, it could not have effectively given control of or possession of the containers to the lessee. The revenue department added that since the company was not the rightful owner of the containers, it was not in a position to transfer effective control and a "right to use" to the lessee.

It added that merely because the company was permitted to sub-lease the containers to a third party, the company cannot claim to be the owner of the containers. Thus, the revenue department argued that since there was no transfer of ownership, there cannot be any sale/deemed sale and hence, the said transaction would fall under the definition of taxable service. Therefore, it contended that service tax was payable by the company.

The High Court noted that the company had transferred the right to use the containers to the lessee along with the possession and the effective control over the said containers, to the exclusion of the company. Thus, the Court ruled that the relationship between the company and the lessee did not fall under the definition of taxable service under Section 65 (105)(zzzzj) of the Finance Act, 1994.

The bench added that Section 65 (105)(zzzzj) would apply only where a service is provided in relation to supply of tangible goods, without transferring the right of possession and effective control.

Referring to Article 366(29A)(d) of the Constitution of India, the Court noted that the transfer of right to use the goods is a deemed sale, which is subject to Sales Tax/VAT. Further, it observed that under Section 2(24) of the MVAT Act, the term "sale" includes the "transfer of the right to use" any goods for any purpose and for consideration.

It added that on a harmonious reading of Section 2(24), 2(28) read with Section 3 of the MVAT Act, VAT under the MVAT Act is applicable on "transfer of right to use" goods within the State of Maharashtra.

While holding that Article 366 (29A) of the Constitution does not distinguish between an owner or a lessor of the goods, the Court ruled that the only requirement is that there must be a transfer of the right to use the goods for valuable consideration.

"There shall be a deemed sale where there is a 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. Here from the documents, and in particular the clauses reproduced in paragraph 14 above, it is quite clear that there has been a transfer of the right to use the containers for valuable consideration. Clause (29A) of Article 366 of the Constitution does not distinguish between an owner or a lessor of the goods. Only requirement is there should be a transfer of the right to use the goods for valuable consideration."

Referring to Section 66E(f) of the Finance Act, 1994, the bench noted that a 'declared service' includes the transfer of goods by way of hiring, leasing, licensing, without transferring the right to use such goods.

""Transfer of right to use goods" is excluded from the definition of 'service' as well as 'declared service' and hence, the same is not subject to service tax. Therefore, it is clear that a transfer of goods which does not involve a transfer of right to use, would be in the nature of a declared service and would be subject to service tax. Thus, only those cases where there is no transfer of right to use goods involved in a transfer of goods, service tax would be applicable", the Court said.

The bench referred to the Circular No.198/08/2016-SERVICE TAX, dated 17th August 2016, wherein the Central Government has clarified that in terms of Article 366 (29A)(d) of the Constitution of India, the transfer of the right to use any goods for any purpose and for consideration, is a deemed sale of goods.

The Court held that for a transaction to be a deemed sale, there is no requirement of transfer of ownership. While noting that the containers were given on lease and the possession and control of the same was transferred to the lessee, the Court ruled that it constituted a deemed sale within the meaning of Article 336(29A)(d) of the Constitution of India and hence, it was outside the purview of the Finance Act, 1994.

Further, observing that the company had paid VAT and deposited the same on the entire consideration received by it, the bench added that the sale of goods and services is mutually exclusive and both VAT and service tax cannot be levied on the same transaction.

The Court referred to the decision of the Apex Court in Commissioner of Service Tax-V, Mumbai versus M/s. UFO Moviez India Ltd. (2022), where the Supreme Court had observed that where VAT liability has been discharged during the relevant period, the question of claiming service tax does not arise.

The Court thus allowed the petition and quashed the order passed by the revenue authority.

Case Title: Nayana Premji Savala versus The Union of India & Ors.

Dated: 12.10.2022 (Bombay High Court)

Counsel for the Petitioner: Mr. Prakash Shah a/w. Mr. Rajan Mishra i/b. PDS Legal

Counsel for the Respondents: Mr. Karan Adik a/w. Ms. Ruju Thakker; Mrs. S.D. Vyas, B Panel Counsel for State

Citation: 2022 LiveLaw (Bom) 404 

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