ST - A transaction which is a ‘deemed sale' under Article 366(29A)(d) could not be taxed as a service: CESTAT

By TIOL News Service

MUMBAI, AUG 08, 2017: THE Appellants are engaged in the business of providing helicopters on charter hire basis to their clients and during
the charter hire period, the Appellant, in terms of their agreements with their clients, are responsible not only for maintenance of the
helicopters as per the DGCA's Regulations by qualified maintenance crew so as to keep the helicopters always in air worthy condition, but
also engaging the experienced and licensed air crew for operating the helicopters and providing air transportation to the clients as per their
requirements and directions.

Treating this activity as "Supply of tangible goods for use without transfer of right of possession and effective control", the appellants are
paying service tax.

For providing the above service, the Appellant have taken on lease two helicopters from M/s Abu Dhabi Aviations, Abu Dhabi (M/s ADA) and
M/s BRICS Leasing & Finance International Limited, Ireland (BLFIL).On expiry of the lease term, the helicopters are required to be returned by
the Appellant.

The department viewed that leasing of the helicopters by the Appellant from the two lessors abroad amounts to receiving "Infrastructure
support service" from the lessors which is taxable as "Support Service of Business or Commerce" during the period prior to 01.7.2012 and as
a service not covered by negative list of Section 66D of the Act during period w.e.f. 01.7.2012.Inasmuch as the appellant is liable to pay
Service Tax under reverse charge mechanism.

The contention of the appellant is that since these leases are dry leases, that is, lease of only helicopters without any maintenance or
operating crew and the lease agreements involve transfer of right to use the helicopters to the Appellant during the period of lease, the same
constitutes ‘deemed sale' under Art 366(29A)(d) of the Constitution of India and, hence, the same would not attract Service Tax.

There is also a demand of short payment of service tax which the appellant admits but they submit that the same was due to genuine financial
problems, however, the short paid amount was paid on their own along with the interest for the period of delay.

SCNs came to be issued and consequently a total service tax demand of Rs.18,84,25,686/- was confirmed alongwith interest and penalties.

The appellant is before the CESTAT.

After considering the elaborate submissions made by both sides, the Bench in a detailed order inter alia held as follows –

+ While after 46th Constitutional Amendment and consequent amendments to the State Sales Tax Acts and Central Sales Tax Act, 1956,
supply of any goods by a person to another person for some consideration which involves transfer of right to use became deemed sale subject
to the Sales Tax, the supply of goods for some consideration where there was no transfer of right to use remained outside the purview of the
term "Sale" and, therefore, outside the purview of Sales Tax. For this reason only, when during the period prior to 1.7.2012, the Government
inserted a Clause (zzzzj) in Section 65(105) of the Finance Act, 1994 w.e.f. 16/5/08 for levying Service Tax on supply of tangible goods for
use, this levy was confined to only those transactions which were without transfer of the right of possession and effective control over the
goods.

+ During the period w.e.f. 1.7.2012, negative list based Service Tax regime came into force. Sections 65B(44) of the amended Finance Act,
1994 contained the definition of "Service". Section 66D contained the negative list of Services and, thus, all the Services which were not in the
negative list attracted Service Tax unless exempted by some exemption notification.

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+ Thus, the main definition of "Service" besides excluding the normal sales involving transfer of title in the goods, also excludes the transfer,
delivery or supply of any goods which is deemed to be a sale under Article 366 (29A) of the Constitution.

+ Clause (d) of Article 366(29A) covers supply of goods by a person to another person for some consideration which involves transfer or right
to use the goods. Thus, supply of any tangible goods by a person to another person for use, for some consideration, which involves transfer of
right to use the goods, is outside the main definition of "Service" as given in Section 65B(44).

+ The term "declared service" is defined in Section 66E which enumerates nine types of services as covered by these terms. Only Clause (f) of
Section 66E covers supply of goods by way of hiring, leasing, licensing etc., but such supply has to be without transfer of right to use.

+ Thus, transfer of goods by way of hiring, leasing etc. by a person to another person for some consideration, which involves transfer of right
to use the goods, is not covered by the definition of "Declared Service". Therefore, during period w.e.f. 1.7.2012, supply of any tangible goods
by a person for some consideration to another person for his use, and which involves transfer of right to use the goods, is not covered by the
definition of "Service" under Section 65B(44) read with Section 66E.

+ Thus, during period from 1.7.2012, when negative list based Service Tax Regime is in force, a transaction of supply of tangible goods by a
person to another person for some consideration and which involves transfer of right to use, being not covered by definition of "service",
cannot be subjected to Service Tax, as for this period, for subjecting an activity to Service Tax, first, it has to be determined as to whether it is
covered by the definition of "service" and if the activity is not covered by the definition of "service", it cannot be subjected to Service Tax.

+ The question as to whether leasing of helicopter by the Appellant on dry lease basis from the two overseas lessors – ADA, Abu Dhabi and
BLFIL, Ireland are service transactions attracting Service Tax, has to be decided in the light of the legal position and the judgments of the
Tribunal.

+ Accordingly, answer to the question as to whether these transactions are service transactions attracting Service Tax under the provisions of
Finance Act, 1994 depends upon whether the lease of the helicopters by Appellant from the two lessors located overseas involves transfer of
right of possession and effective control/transfer of right to use from the lessors to the Appellant.

+ If these transactions involved transfer of right to use the helicopters by the foreign lessors to the Appellant, the same would be "deemed sale
in course of import" under Section 5(2) read with Section 2(g) of the Central Sales Tax Act, 1956 and also under Article 366(29A)(d) of the
Constitution and if these transactions are held to be deemed sale, there would be no service tax liability for the period w.e.f. 01.7.2012, as
during this period, for subjecting an activity to Service Tax, it was necessary to, first, determine as to whether the activity is covered by the
definition of "Service" in Section 65B(44) read with the definition of "declared service" in Section 66E and since supply of tangible goods for
use by a person to another person for some consideration, which involves transfer of the right of possession and effective control over the
goods is not covered by the definition of "Service" such transactions would be outside the purview of Service Tax.

+ As regards the period prior to 01.7.2012, when the Service Tax was leviable only on the "Taxable Services" as defined in various clauses of
section 65 (105) of the Finance Act, 1994, as discussed in Para 16 above, in view of the Tribunal's judgment in case of Petronet LNG -
2013-TIOL-1700-CESTAT-DEL, a transaction which is a deemed sale under Article 366(29A)(d) could not be taxed as a service.

+ Since the lease of the helicopters by the Appellant from ADA, Abu Dhabi and BLFIL, Ireland involves transfer of right to use from the lessors
to the Appellant (lessee), the same are deemed sale and, therefore, the
same cannot be taxed as Service under the provisions of the Finance Act, 1994 either during the period to 01.07.2012 or thereafter.

+ The Commissioner's findings for the period w.e.f. 01.07.2012 holding that the leasing of helicopters by the Appellant from the two lessors
located abroad is a service not covered by the Negative List or any exemption, is absurd
, as he has not even discussed the definition of ‘service' given in Section 65B(44) r/w definition of ‘declared service' in Section 66E of the
Finance Act 1994, and how the transactions, in question, which admittedly involve transfer of right of possession and effective control over the
goods during the period of lease would be covered by the above mentioned definition of ‘service'.

+ Even if the Tribunal's judgment in case of Petronet LNG

In the matter of imposition of penalty of Rs.1,68,01,844/- on the Appellant u/s 78 of the Finance Act, 1994 the Appellant's contention is that
what has been portrayed by the department as evasion of Service Tax is actually delayed payment of Service Tax Rs.1,68,01,844/- for the

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months of Jan-11, Feb-11, Mar-11, May-11 and July 11, which had been paid by the Appellant on their own along with the interest for the
period of delay and, therefore, no penalty is imposable.

The Bench agreed with this plea made by the appellant.

Conclusion: The impugned order confirming the service tax demands totaling Rs.18,84,25,686/- along with interest and penalty in respect of
lease of the helicopters by appellant from the two lessors abroad is set aside. The penalty imposed of Rs.1,68,01,844/- on the appellant u/s 78
for alleged evasion of service tax of same amount during January 2011 to July 2011 in respect of services provided to their clients in India is
set aside.

The appeal was allowed.

(See 2017-TIOL-2031-CESTAT-MUM)

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