No Transfer of 'Effective Control': CESTAT rules Medical Equipment Leasing as Service, Not Deemed Sale, upholds Service Tax Demand [Read Order]

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Bench at Hyderabad dismissed an appeal filed by assessee against the impugned order of the Commissioner (Appeals) October 29, 2023 (impugned order), whereby, he upheld the Order-in-Original passed by the adjudicating authority.

The appellants, engaged in procuring and leasing out expensive medical equipment to hospitals across the country, entered into an agreement with the hospitals for leasing the said equipment and paid the Sales tax/VAT in the bills raised to the hospitals. They considered the said transaction taxable under State VAT Act as deemed sale because it involved transfer of right to use the goods.

On the basis of scrutiny of financial records and agreements, the department noted that the said activity belongs to the category of ‘Supply of Tangible Goods Services’ (SOTG) under Section 65(105)(zzzzj) of the Finance Act, 1994. Therefore, demand was raised. The adjudicating authority held that there has not been any transfer of effective control and legal right of possession to the hospital.

On appeal, the Commissioner (Appeals) upheld the adjudication order observing that their customer/hospital was not in possession of the goods and hence, the appellants were engaged in SOTG services without transferring the right of possession and control to the hospital.

S.C. Kamra, representing the appellant, contested that as per Article 366(29A) of the Constitution, their transaction would fall in the category of deemed sale with respect to transfer of right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration. The Department, represented by K. Raji Reddy, reiterated the findings of the Commissioner (Appeals).

The Bench, comprising of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member), opined that it is important to ascertain whether there has been any transfer of legal right to possess and effective control between the appellant and the hospital, or otherwise. In case there is no transfer of such legal right at all, it would fall under the category of SOTG service. However, in case there is a transfer, it would be covered within the category of deemed sale leading to no scope for levying service tax.

The bench resorted to the case of Bharat Sanchar Nigam Ltd Vs UOI [2006 (2) STR 161 (SC)], where the Supreme Court laid down certain guidelines in para 91 stating: “To constitute a transaction for the transfer of the right to use the goods the transaction must have the following attributes:

• There must be goods available for delivery;
• There must be a consensus ad idem as to the identity of the goods;
• The transferee should have a legal right to use the goods;
• For the period during which the transferee has such legal right, it has to be at the exclusion to the transferor;
• Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others”

In light of the Supreme Court judgement, the bench examined the terms and conditions of the agreement. As a result, it was concluded that the agreement is providing the hospitals the right to use equipment in terms of agreement but not an absolute legal right to use and operate at their own will, making it a classic case of hiring of equipment on need basis and nothing beyond.

As all the conditions could not be satisfied to consider this transaction as a transaction of deemed sale, the appeal was found to be devoid of merits leading to its dismissal.

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