By: Anjlika Chopra, Director, Deloitte Touche Tohmatsu India When the law makers introduced the concept of deemed sale, little did they realize that, they have opened a Pandora’s box! Amongst various matters dealt with on a regular basis, supply of tangible goods on a ‘right to use’ basis frequently invites trouble. It is amazing to witness that, even after decades of introduction of the concept of ‘deemed sale’, coupled with approximately two decades on service tax law, industry is still struggling to ascertain which division of the Exchequer should get the revenue: service tax or VAT. Or whether the right conferred would be a State or a Central subject.
The key phrases are ‘effective control’ and ‘possession’. Levy of service tax on such supply was introduced in 2008, to bring under the scanner, transactions which involve supply of tangible goods, such as, excavators, high value machinery, etc. for use, with no legal right of possession and effective control, to the hirer. To rephrase, where such hiring arrangement involves transfer of effective control and possession, pay VAT, else, service tax. But, alas, the practical world is not that simple. The law makers did not oblige us by defining ‘effective control’ and ‘possession’. The interpretation of this terminology was left open for the industry and revenue authorities. Simultaneously, the role of judiciary was confined, since, each case has to be decided on peculiar facts and circumstances. Nonetheless, the judicial precedents have provided certain benchmarks for us to follow.
The one, leading the frontier is the Apex Court’s judgment, in the case of Bharat Sanchar Nigam Ltd. of 2006, which provided some specific guidelines to ascertain whether or not a transaction involves a transfer of right to use. Various other pronouncements, including HLS Asia, in 2003 and 2007, RashtriyaIspat Nigam, in 1990, have highlighted distinguishing attributes of ‘effective control’, each providing a distinct parameter to structure a transaction. For instance, ascertainment of goods taken on hire, exclusivity of goods to others, legal rights and obligations arising in relation to those goods for the supplier and hirer, ownership of risk and rewards, intention of the parties, each attribute holding its own ground.
In this regard, it is relevant to highlight a recent decision by the Hon’ble Delhi Tribunal, in the case of Petronet LNG. The issue involved was similar; assessee hired LNG tankers from a consortium of ship owners, for a period of 25 years. The service tax department contended that, the transaction qualified as a service and should attract service tax, on the following grounds:
- All the statutory licenses, insurance for the tankers were in the name of the ship owners; - Right of inspection to Petronet LNG would not detract the authority of owners over the ships; and - In case the ships are requisitioned by Government, the hire charges paid by Government shall be detained by the owners. Service tax authorities adopted the view that, the transaction lacked the necessary elements of transfer of possession and control. However, on a careful analysis of the relevant clauses of the agreement, such as, license in owners’ name, it emerges that, these were merely to facilitate legitimate use of supplied goods; owners were restricted from subsequent sale of ships; the ships were to be operated as per assessee’s directions; further, requisition of ships, by Government would only be in exercise of statutory power, which prevails over any other right. The Delhi Tribunal refuted the department’s case and decided in favor of the assessee.
The above decision brought to light another important aspect, of location of goods. The erstwhile service tax import rules provided for levy of service tax under reverse charge, only where the goods given on hire were located in India during the entire period of rendition of service. Post replacement of the erstwhile service tax import rules, by the Place of Provision of Services Rules, 2012, the reverse charge implications could be different. For example, in case the hiring transaction of a means of transportation is for a period of one month, the place of provision of service would be the location of the service provider in terms of Rule 9, which in such a case, would be outside India and thus no service tax implications would arise. However, for a longer duration of hiring, Rule 3 would assume relevance and the location of the service recipient would determine the place of provision of service, resulting in taxability under reverse charge. Moreover, as per CBEC’s Education Guide, cryogenic vessels could be classifiable as ‘containers used to store or carry goods while being transported’ and therefore not a ‘means of transportation’ in which case Rule 3 and not Rule 9 would be applicable. As is apparent, such related additional issues could continue to vex the industry and there is a dire need for the law makers to put a lid on the Pandora’s box.