CESTAT Dismisses Department's Appeal, Rules Fitout Lease as Deemed Sale, Not Subject to Service Tax [Read Order]

The Delhi Bench of Customs,Excise and Service Tax Appellate Tribunal(CESTAT) dismissed the Department’s appeal, ruling that the lease of fitouts by the assessee was a “deemed sale” under Article 366(29A) of the Constitution and not subject to service tax.

The Department-appellant filed this appeal against the order dated 19.06.2019, which dropped the service tax demand on lease rentals for fitouts. The Principal Commissioner held it was a deemed sale under Article 366(29A) and not taxable as renting of immovable property.

In this case,ASF Buildcon Pvt Ltd.,respondent-assessee, had signed lease agreements with TATA Consultancy Services and CMC Ltd. for renting out built-up spaces along with fitouts. The agreements showed separate charges for rent and fitouts.

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The Department argued that service tax should apply to the fitout charges as part of the rent. ASF Buildcon claimed the fitouts were a deemed sale under Article 366(29A) and had paid VAT on them.

The Commissioner examined the agreements and found that the fitouts involved transfer of right to use goods. Since separate invoices were issued and VAT was paid, the Commissioner held that service tax was not applicable.

The two member bench comprising  Justice Dilip Gupta(President) and P.V.Subba Rao(Technical Member) referred to Entry 54 of List II in the Constitution, which empowered States to levy tax on the sale or purchase of goods. This provision was central to the issue raised in the appeal.

The appellate tribunal also noted that the Forty-Sixth Amendment to the Constitution expanded the meaning of "sale or purchase of goods." Through Article 366(29A), the amendment included various transactions under the scope of sales tax, such as the transfer of goods without a contract, works contracts, hire purchase arrangements, and the transfer of the right to use goods for consideration.

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The CESTAT concluded that this amendment allowed States to levy VAT or Sales Tax on these types of transactions, which were not previously considered sales under the Sale of Goods Act, 1930.

The tribunal pointed out that the term “transfer of right to use goods” was not defined in the Constitution or tax laws. The Supreme Court explained this term in the Bharat Sanchar Nigam Limited case, where it listed five key points: the goods had to be available, both parties needed to agree on the identity of the goods, the transferee had to have the legal right to use the goods, the transferee had exclusive use of the goods, and the transferor couldn’t transfer the same rights to anyone else.

In Petronet LNG Ltd. vs. Commissioner of Service Tax, the Tribunal ruled that the charters for vessels Disha, Rahi, and Trinity Glory transferred possession and control to the assessee, making them outside the scope of taxable services.

In Gimmco Ltd. vs. Commissioner of Central Excise, the Tribunal found that the lessee had the right to use the equipment, which was treated as a sale under VAT law.

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In Dipak Nath vs. ONGC, the Court decided that ONGC had control over the crane, even though the contractor operated it, as ONGC could deploy it at any time.

The decisions clarified that whether there was a transfer of the right to use depended on the contract terms. If possession and control were transferred along with the right to use, service tax did not apply. If possession stayed with the transferor, service tax could not be charged. Employee involvement and the return of goods after use did not change this.

The Commissioner concluded that a “deemed sale” had occurred, following the Supreme Court's ruling in Bharat Sanchar Nigam Ltd. The fitouts were leased to TATA Consultancy Services and CMC Limited, and these items were essential for using the leased premises.

In a similar case, the Chennai Tribunal ruled that service tax did not apply on fitouts, as VAT was already paid. The rent for fitouts and premises was separately agreed, so service tax was not applicable.Therefore, the lease for the fitouts was a “deemed sale,” and ASF Buildcon had paid VAT. The issue of dominant nature was not relevant.

In short,the appeal filed by the department was dismissed.

To Read the full text of the Order CLICK HERE

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