Payment of VAT/Sales Tax on deemed sales not Conclusive for Service Tax Exclusion: CESTAT [Read Order]

In a major ruling the Customs Excise and Service Tax Appellate Tribunal ( CESTAT), Allahabad, observed that the payment of Value Added Tax (VAT)/Sales Tax on Deemed Sales Not Conclusive for Service Tax Exclusion

The facts of the case in brief are that the Appellant is a non-profit making organization registered as a company incorporated under Section 25 of the Companies Act, 1956. During the relevant period, the Appellant was approved by the Department of Science and Technology and was providing ‘Integrated Research Solutions’ in Pre-Clinical Biology to National and International pharmaceutical, chemical and Biotechnology companies. The Appellant provided a comprehensive range of services for pharmacological, biological and analytical testing of drugs and chemicals.

The Counsel representing on behalf of the Appellant Mr. Atul Gupta urged that the taxable service with reference to ‘supply of tangible goods’ has been defined under Section 65(105) of the Finance Act, 1994 and Taxable service means any service provided to any person, by any 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 Appellant discharged VAT on the transaction and the VAT authorities already concluded the assessment proceedings in respect of the same transaction, considering the transaction as the transfer of right to use goods. Therefore, in terms of the above referred Circular, the same transaction is not taxable under the Service tax

The counsel vehemently argued that the Appellant transferred the Right to use the goods to the customer and the title of the goods was not transferred. The transfer of the Right to use the goods amounted to ‘deemed sale’ whereas transfer of title amounts to sale. Even after the transfer of right to use the goods, the Appellant continued to be the owner of the goods, therefore, the customer of the Appellant cannot get an absolute right to use the goods in any manner or for any purpose. The transfer of right to use goods, always provides the manner and purpose for which the goods may be used.

The coram of P.K. Chowdhari (Judicial member) and Sanjiv Sreevastava (Technical member) held that the Commissioner (Appeals) that the contention of the Appellant as regards the payment of VAT/Sales Tax considering the transaction as deemed sale, was also not conclusive for exclusion from the purview of service tax.

The tribunal satisfied that the exclusive possession with right to use the goods was given by the Appellant to M/s. FKOL, who were free to use the goods. We further find from the Clause 2.7 of the agreement, which provides that even if the Appellant decides to sell or transfer its right, title or interest in the goods during the term or the extended term for right to use granted, the appellant shall take prior consent from FKOL and further ensure that right to use of FKOL under the agreement are not disturbed/preserved and their interest is not prejudicially affected.

 Thus, evidently, the Appellant had granted exclusive right to use without disturbance or encumbrance to their clients – FKOL and accordingly, we hold that they have rightly paid the Sales Tax/VAT on transfer of right to use the goods, to their customers, which was a transaction of deemed sale.

Accordingly, CESTAT held that service tax was not attracted. Set aside the impugned order and allow the appeal with consequential benefits to the Appellant, in accordance with law.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates