CESTAT Quashes Service Tax Demand, Holding Diesel Generator Set Lease Was Deemed Sale Not Taxable as Service [Read Order]

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has set aside a service tax demand raised against Spain Electronotics, holding that the leasing of diesel generator (DG) sets involved a transfer of possession and effective control, thereby constituting a deemed sale under Article 366(29A) of the Constitution and not a taxable service.

The appeal was filed by Spain Electronotics challenging an order dated 31.05.2018 passed by the Commissioner (Appeals), Central Tax/GST, New Delhi, which had upheld the adjudication order confirming three separate service tax demands. These demands were raised under the categories of “supply of tangible goods service” and “works contract service” for the years 2008–09, 2013–14, and 2014–15 respectively.

The primary issue concerned a show cause notice dated 05.07.2013, alleging that the appellant had provided taxable services by leasing 1000 KVA DG sets to Indian Oil Corporation Limited (IOCL) for use at the Panipat-Jalandhar LPG pipeline. The department argued that the appellant retained control over the equipment, and therefore the transaction was chargeable under Section 65(105)(zzzzj) of the Finance Act, 1994 as a service.

In contrast, the appellant submitted that the lease conferred IOCL exclusive possession and operational control of the DG sets, including related certifications and maintenance obligations. It was argued that such transfer met all five criteria laid down by the Supreme Court in the Bharat Sanchar Nigam Ltd. case (2006), establishing it as a deemed sale and thereby falling within the scope of VAT levied by State Governments rather than service tax under Union law.

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The Tribunal found merit in this argument, noting that the equipment was clearly identified, delivered, and controlled by IOCL during the lease term, with the appellant having no residual right of usage or transfer. It held that the transaction fell squarely under Article 366(29A)(d), and therefore, service tax was inapplicable. The Bench concluded that only VAT could have been levied by the State on such contracts.

With respect to another show cause notice dated 15.09.2015 and a subsequent demand dated 04.04.2016, the Tribunal held that the appellant had sold DG sets and performed incidental installation and commissioning without charging any additional amount. It ruled that this did not amount to provision of “works contract services” as contended by the department.

The order was delivered by Member (Technical) P.V. Subba Rao and Member (Judicial) Binu Tamta on 10 March 2025. The Tribunal allowed the appeal and set aside the impugned order along with the associated demands, interest, and penalties.

To Read the full text of the Order CLICK HERE

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