The Mumbai bench of the Customs Excise and Service Tax Appellate Tribunal (CESTAT) has ruled that the transaction for leasing power-generating equipment qualifies as a deemed sale and is therefore exempted from service tax.
The appellants Aggreko Energy Rental India Pvt. Ltd are engaged in the business of importing Diesel Generating (D.G.) Sets and associated equipment, which they provide on a lease/hire basis to customers across India. The equipment is sourced from an associated company in the United Kingdom and stored in various warehouses in India before being leased to customers. The appellants are registered with the relevant authorities and pay VAT/CST on lease charges, treating these transactions as deemed sales rather than taxable services under the Finance Act, 1994.
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In addition to leasing equipment, the appellants conduct several related activities, including transportation, loading, unloading, commissioning, decommissioning, and insurance, obtaining necessary approvals, and providing fuel. The appellants ensure that applicable service tax is paid on any activities that fall under taxable service categories.
During an audit, the departmental authorities observed that contracts with customers, such as M/s Bharat Oman Refineries Ltd. (BORL), involve the appellants supplying D.G. Sets. The audit revealed that the appellants retained control over the equipment, including transportation and insurance responsibilities, leading the authorities to conclude that these transactions should be classified under the category of ‘Supply of Tangible Goods for Use’ (STGU) service, thereby triggering a service tax liability.
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Mr. V. Sridharan, representing the appellants, argued that their primary business is the rental of D.G. Sets, as established by contracts indicating that equipment is leased for a fixed duration with operational discretion given to customers. The rental period begins upon equipment commissioning and ends upon decommissioning. He emphasized that the additional services—transportation, loading, unloading, installation, and insurance—are ancillary and do not affect the lease nature of the transaction, as the customer maintains exclusive possession and control over the equipment during the rental period.
Further noted that any necessary repair and maintenance require customer permission, highlighting that these incidental activities are distinct from the core leasing service. He added that when operators are provided, they act solely under customer instruction, and service tax is duly paid for these independent services.
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Mr. Pramod Kumar Maurya, representing the revenue, reaffirmed the audit findings and stated that payment of VAT does not exempt the appellants from service tax liability. He cited Section 65(105)(zzzzj) of the Finance Act, which defines the taxable service concerning the supply of tangible goods without transferring possession and effective control. Maurya noted that service tax for such transactions was instituted from May 16, 2008, and reiterated that the appellants’ activities fall within the taxable service scope.
The two-member bench, consisting of S.K. Mohanty (Judicial Member) and M.M. Parthiban (Technical Member), referenced a similar case Quippo Energy Pvt. Ltd. where it was determined that leasing power-generating equipment constituted a deemed sale, and thus, service tax could not be levied. Additionally, the tribunal cited the UFO Moviez India Ltd. case, reaffirming that leasing transactions for equipment are not subject to service tax.
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The tribunal ultimately aligned with the precedent established in prior cases, concluding that the appellants’ leasing activities do not attract service tax.
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