ST - Transfer of Goods Without the Right to use - CBEC Clarifies

By Vijay Kumar

AS per Section 66E(f) of the Finance Act 1994, the transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods, is a declared service. This came into force on 01 07 2012.

What is transfer of goods without transfer of the right to use? Who will hire/lease goods if the right to use is not transferred?

Just before the implementation of the new provisions in 2012, CBEC had organized a meeting in Hyderabad to 'sell' the new concepts. Ms Sheila Sangwan, then Member of CBEC and her team tried to explain the complexities of the new era in Service Tax.

In the meeting, a question was asked, "can you tell us a few examples of transfer of goods without transfer of right to use such goods". The CBEC Member and her team had no clue, though they had included it in the Statute.

Four years later, the CBEC has now attempted to clarify this issue.

In a Circular released yesterday, the Board states,

In terms of sub-clause (d) of clause (29 A) of Article 366 of the Constitution of India, the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration is deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made. It follows that such transactions will be liable for Sales Tax/Value Added Tax. In terms of section 66E(f) of the Finance Act, 1994, transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods is a "declared service" and hence liable to service tax.

Board says it is essential in any given case involving hiring, leasing or licensing of goods, it is essential to determine whether, in terms of the contract, there is a transfer of the right to use the goods. Further, the Supreme Court in the case of Bharat Sanchar Nigam Limited vs Union of India, reported in - 2006-TIOL-15-SC-CT-LB, had laid down the following criteria to determine whether a transaction involves transfer of the right to use goods, namely,-

a. There must be goods available for delivery;

b. There must be a consensus ad idem as to the identity of the goods

c. The transferee should have a legal right to use the goods - consequently all legal consequences of such use, including any permissions or licenses required therefor should be available to the transferee;

d. For the period during which the transferee has such legal right, it has to be to the exclusion to the transferor; this is the necessary concomitant of the plain language of the statute - viz. a "transfer of the right" to use and not merely a licence to use the goods;

e. Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same right to others.

Board states that this criteria (Board is not very fussy about English; what they meant was 'these criteria') must invariably be followed and applied to cases involving hiring, leasing or licensing of goods. The terms of the contract must be studied carefully vis-a-vis the criteria laid down by the Supreme Court in order to determine whether service tax liability will arise in a given case. It is not possible to either give an exhaustive list of illustrations or judgements on this issue. Cases decided under the Sales Tax/VAT legislations have to be considered against the background of those particular legislative provisions and terms of contract in that case.

Board has referred to six cases.

Board has referred to two situations involving either a financial lease or an operating lease and "dry leases" and "wet leases" in the aircraft industry only to explain and emphasize the diverse nature of such transactions.

Board directs that no a priori generalisations or assumptions about service tax liability should be made and the terms of the contract should be examined carefully, against the backdrop of the criteria laid down by the Supreme Court in the Bharat Sanchar Nigam Limited case as well as other judicial pronouncements.

But what is an example of transfer of goods without transfer of right to use such goods?

Board has still not answered the question.

The Board in D.O.F.No 334/1/2012-TRU, dated 16.03.2012 had given certain examples where the transaction does not involve transfer of right to use:

CBEC Circular No. 198/08/2016-SERVICE TAX, Dated: August 17, 2016