Transaction of vessels/vehicles to Customers with right of possession and effective control is not liable to Service tax under the category of “Supply of tangible goods for use” service as VAT Paid to State Govt: CESTAT [Read Order]

The Ahmedabad bench of Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that transaction of vessels/vehicles to customers with right of possession and effective control is not liable to service tax under the category of “Supply of tangible goods for use” service as VAT Paid to State Government.

Arkay Logistics Ltd, the appellant is engaged in providing cargo handling services, port handling services, business auxiliary services etc.  During the audit, it was noticed that the appellant has shown in the balance sheet for the period 2010-11 to 201112, chartered hiring income where no service tax has been paid.

On being asked the reason for nonpayment of service tax, the appellant stated that they had not paid service tax where the control and possession had been given to the charterer. Further appellant stated that they had provided the vehicles and vessels on bare charter to the charterer and as per the terms of the hiring the equipment was under the control and possession of the charterer/ hirer.

Auditors observed that the appellant was engaged in providing services in the category of Supply of Tangible Goods Services. The Finance Act, 2008 has introduced a new taxable service Supply of Tangible Goods service for levy of service tax w.e.f. 16.05.2008 vide Notification No. 18/2008-ST dated 10.05.2008. Four show cause notices were issued to the appellant demanding Service Tax on hire income. The said notices were adjudicated and confirmed  Service Tax demands along with interest thereon and also imposed penalties under the Finance Act, 1994.

Shri Ramnath Prabhu appearing on behalf of the appellant submitted that the appellant during the year had given vehicles on the charter basis to M/s Essar Steel India Ltd. and for the period 2011-12 to 2013-14 has chartered vessels under bareboat charter agreement to Arkey Holding Ltd., Hazira and Arkey Sea Logistics Ltd., Hazira. Under the agreements, the effective control and possession of the vehicles and vessels are transferred by the appellant to the Transferee/ Charterers, and consequently, the transaction being a ‘deemed sale’ the appellant has discharged appropriate VAT on the transfer of the right to use the said goods. 

He further submitted that the Charter of a vessel/vehicle attracts levy of VAT under the Gujarat VAT Act, 2003 as the same is a ‘deemed sale’ under sub-clause (d) of Section 2(23) thereof, as per which ‘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’.

Shri Shri Tara Prakash, Deputy Commissioner (AR) appearing on behalf of revenue opposed the contention of the Counsel and reiterated the findings of impugned orders.

A two-member bench comprising Mr Ramesh Nair, Member (Judicial) and Mr C L Mahar, Member (Technical) observed that the appellant has discharged the VAT liability considering the same as a ‘deemed sale’ under the provisions of Gujarat Value Added Tax Act, 2003, hence no service tax can be demanded on the said transaction.  

 Further viewed that since the appellant has admittedly paid the VAT to the state VAT department, the transaction is not liable to service tax under the category of “Supply of tangible goods for use” service. 

 The CESTAT set aside the impugned and allowed the appeal.

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