The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has determined that the transfer of wagons to Indian Railways by Bagadiya Brothers Pvt Ltd constitutes a deemed sale under Article 366(29A) of the Indian Constitution, rather than a taxable service. As a result, no service tax is applicable to the transaction.
The decision was based on the finding that the transfer of the Right to Use of wagons to Indian Railways involves the transfer of possession and effective control, thus exempting service tax.
The appeal stemmed from an order passed by the Commissioner of Central Excise and Service Tax, Raipur, which dropped the demand for service tax, interest and penalties against Bagadiya Brothers Pvt Ltd.
The respondent company had entered into an agreement with Indian Railways under the Wagon Investment Scheme, which involved providing wagons to Indian Railways in exchange for a 10% freight rebate over ten years. The ownership of the wagons would eventually transfer to Indian Railways after this period.
The appellant revenue, Commissioner of Central Excise and Service Tax-Raipur, represented by Shri Harshvardhan argued that the agreement involved providing a taxable service as defined under Section 65B(44) of the Finance Act, 1994.
The revenue also contended that the rebate was a consideration for the service of supplying tangible goods, thereby making it subject to service tax. Additionally, the non-payment of VAT or sales tax by Bagadiya Brothers was highlighted as evidence that the ownership of the wagons had not been transferred, further classifying it as a taxable service.
The respondent, Bagadiya Brothers Pvt Ltd, represented by Shri Bipin Garg argued that the transaction constituted a deemed sale under Article 366(29A) since it involved the transfer of the right to use the goods with possession and effective control, thus exempted from service tax.
The CESTAT referred to Article 366(29A) of the Constitution, which includes transactions involving the transfer of the right to use goods as deemed sales. The bench also cited several Supreme Court and High Court rulings that stressed the distinction between a taxable service and a deemed sale such as BSNL vs. Union of India which clarified the criteria for a transaction to qualify as a deemed sale, Great Eastern Shipping Company Ltd. vs. State of Karnataka which determined that the transfer of the right to use a vessel constituted a deemed sale, G.S. Lamba & Sons vs. Grasim Industries Ltd. which held that the exclusive use of goods for a specified period indicated a transfer of the right to use.
The tribunal dismissed the revenue’s argument that non-payment of VAT altered the nature of the transaction. The bench emphasised that the essence of the transaction lay in the transfer of possession and control, not in the tax compliance by the parties.
The two-member bench comprising Mr. Raju (Technical Member) and Dr. Rachna Gupta (Judicial Member) concluded that Bagadiya Brothers had transferred both possession and effective control of the wagons to Indian Railways, fulfilling the criteria for a deemed sale.
The CESTAT ruling stressed that the transfer of wagons to Indian Railways by Bagadiya Brothers Pvt Ltd is a deemed sale, exempting it from service tax. As such, the bench dismissed the appeal filed by the revenue finding no merit in the same. The decision highlighted the importance of analysing the substance of transactions and distinguishing between deemed sales and taxable services.
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