Transfer of Goods by way of Hiring is Transfer of Right to Use Goods, doesn’t fall within ‘Declared Services’: CESTAT [Read Order]

The Customs, Excises, and Service Tax Appellate Tribunal (CESTAT) quashed the demand of the GST Department and held that transfer of goods by way of hiring is the transfer of right to use goods, doesn’t fall within ‘declared services’.

The appellants, M/s. Universal Dredging and Reclamation Corporation Ltd. were awarded dredging activity in the dock basin of Tuticorin Port by M/s.VOC Port Trust, Tuticorin. To carry out such dredging activity, they entered into an agreement with M/s. Codralux S.A., Luxembourg, and hired the charter vessel i.e. Cutter Suction Dredger for dredging activity.

Referring to various clauses in the agreement, the department was of the view that the appellants are liable to pay service tax under reverse charge mechanism on the consideration paid to foreign companies for hiring the vessel, being a ‘declared service’ under Section 66E (f) of the Finance Act, 1994. Show cause notice was issued proposing to demand the service tax for the period November 2015 to January 2016. After due process of law, the original authority confirmed the demands along with interest and also imposed penalties.

In the present case, the issue is whether the transfer of goods is by way of hiring the vessel simpliciter or whether it involves the transfer of right to use the vessel.

For a transaction to be a transfer of right to use the goods, there should be a transfer of possession as well as the transfer of effective control.

In the present case, the department has mainly relied upon clause (6) of the agreement, which relates to maintenance and operation states that, it is the responsibility of the appellant to maintain the vessel in proper condition. Undisputedly the operations are fully under the control of the appellant. The appellant has obtained the necessary license to use the vessel for dredging. This license is location-specific. During the charter period, the vessel can be used only in this location (port). The entire crew and staff are of the appellant. All this would go to show that the appellant has entire control for operating the vessel during the charter period, to contend that there is no transfer of possession as well as effective control.

The tribunal consists of Judicial Member Sulekha Beevi and Technical Member P. Venkata Subba Rao quashed the demand of the GST Department and held that transfer of goods by way of hiring is the transfer of right to use goods, doesn’t fall within ‘declared services’.

“We are of the considered opinion that the demand raised for the extended period cannot sustain. The Appellant succeeds on the issue of limitation also. The impugned order is set aside. The appeal is allowed with consequential relief, if any, as per law,” the tribunal said.