RAMESH NAIR

1. The brief facts of the case are that the appellant was engaged into business of supply of DG Sets on rental basis for a non temporary period. The case of the department is that renting of DG Set to the service recipient is classifiable under the category of „Supply of Tangible Goods‟ defined under clause 65(105)(zzzzj) of Finance Act, 1994. Accordingly, the appellant are liable to pay the service tax under the said head.

2. Shri Rahul Patel, learned Chartered Accountant appearing on behalf of the appellant submits that the DG Set supplied by the appellant is for definite no temporary period. The responsibility to provide infrastructure, installation, cabling, fitting etc. was upon the client. The client was responsible for commissioning and installation of DG Set in their own plant/ premises. The client was to make proper arrangement for safe custody and space for DG Set. The client was to adjust power requirements and utilize power generated by DG Set. It is the client who was to decide the operating environment and level of activity of DG Set according to its requirements. The client only was to bear cost of consumables such as diesel according to its requirement. The DG Set was permanently attached to the premises of the client by losing its mobility for the period of agreement. The client was to hand over possession and custody of DG Set back to the appellant upon termination of the agreement which signifies that during the tenure of agreement, the possession and custody of the DG Set was with the client. As per this undisputed fact, the appellant has lawfully transferred the rights under the agreement which inter alia includes right of use, right of possession and effective control unto the client and client accepted same until termination of the agreement. He submits that in some of the cases appellant has provided manpower to operate the DG Set according to requirement of the client and maintain the same.

2.1 He further submits that for this arrangement of renting of DG Set, the appellant were duly registered under the Provisions of Gujarat Value Added Tax Act, 2003 and subjected to renting of DG Set to VAT. He referred to registration Certificate and VAT Assessment Order which are enclosed with the appeal papers, therefore, the renting of DG Set to the client is a deemed sale as per Article 366 (29A) of the Constitution of India and accordingly they became subject matter of VAT under the GVAT Act. He submits that since the transaction was subjected to VAT payment, the same cannot be treated as service liable for service tax. He referred to CBEC Circular No. 334/1/2008-TRU dated 29.02.2008 to submit that it was clarified by the Board that when supply of tangible goods were used is leviable to VAT/ Sales Tax as deemed sale of goods shall not be covered for the purpose of service tax. He also placed reliance on this Tribunal‟s decision in the case of M/s Quippo Energy Private Limited vs CST Ahmedabad in ST Appeal No. 11566 of 2016 vide Final Order No. 11873-11875 of 2022 dated 06.12.2022.

2.2 Without prejudice to his above submissions, he further submits that even if it is accepted that the transaction in the present case falls under supply of tangible goods service as per the contention of the department itself, that the possession and effective control has not been transferred, the effect shall be as if, the appellant have used the DG Set for generation of electricity which was supplied by the appellant to the service recipient. In such case, the generation of electricity and supplying the same to the client is nothing but sale of goods as the electricity has been classified as goods. Hence on same ground the consideration charged by the appellant from the clients shall be treated as price for sale of electricity and accordingly service tax was not leviable under the category of supply of tangible goods.

2.1 He also submits that the larger period was not available to the adjudicating authority as the issue was highly contentious in the nature and appellant had acted in a bonafide manner which any man reasonable prudence would have otherwise acted that the demand is also hit by limitation. In support of his submission, he placed reliance on the following decisions and Circulars:

• Circular No. 334/1/2008-TRU dated 29.02.2008
• Circular No. 198/8/2016-ST dated 17.08.2016
• Quippo Energy Ltd. A/11873-11875/2022
• CST vs UFO Moviez India Ltd. 2022-VIL-07-ST-ST
• Subhash Light House 2022-VIL-106-CESTAT-CEST-ST
• Express Engineers & Spares Pvt Ltd. 2022(1) TMI 564-CESTAT
• You Broadband & Cable India Ltd. 2020 (2) TMI 187 – CESTAT Amd
• GIMMCO Ltd 2017 (48) STR 476 (T)
• Imagic Creative Pvt ltd. 2008 (9) STR 337 (SC)

3. Shri R.K. Agarwal and Shri Anup Kumar Mudvel learned Superintendents appearing on behalf of the Revenue reiterates the findings of the impugned order.

4. We have carefully considered the submissions made by both the sides and perused the records. We find that the fact is not under dispute that the appellant have provided the DG Set on rental basis under an agreement to their clients. The issue to be decided is that whether such supply of DG Set on rent is classifiable under „Supply of Tangible Goods Service‟ defined in clause 65(105)(zzzzj) of Finance Act 1994. To arrive at a conclusion, it is important to go through the terms and conditions of the agreement. As per the terms of the agreement, the following points are extracted:

“a) Supply of DG set is an absolute transaction involving dispossession by your appellant in favour of client.

b) Supply is irrevocable in nature during the tenure of agreement.

c) Supply is effected by virtue of an agreement whether written or implied, which is enforceable at law and therefore exchanging rights and obligations by and between the parties to agreement which inter alia involved transfer of right to use, right to possess and effective control unless and until agreement stands terminated.

d) Your appellant does not retain control of usage over the machinery during tenure of agreement.

e) Client may use and exploit benefits of DG set in whatever manner he wants, during the tenure of agreement. Client may operate the DG set as per his own will, desire and requirement.

f) Switch on/off of the DG set is controlled by the client and not by your appellant.

g) Your appellant is not entitled to transfer, sell, rent out supplied DG set to any other person during the tenure of agreement.

h) DG set stands supplied for a substantially longer period of time which indicates intention of the parties as to possession and control.

i) Cost of diesel is to be borne by client and not by your appellant.

j) DG set once supplied gets attached permanently to earth with loads of connections, cables and attachments to present setup of client's plant.

k) DG set once commissioned at the client's plant / premises, it looses it characteristic of isolated machinery but works in synchronization with existing plant/machinery setup of client.

l) Client shall be responsible for obtaining approvals, licenses, permissions if any required for generating of electricity. Helping by your appellant in obtaining permissions does not mean that permissions are obtained by your appellant as contemplated by show cause notice.”

From the above terms, it is observed that the appellant have supplied the DG Set to their client for a fixed period and during the period the DG Set is permanently installed in the premises of the client and the same is operated as per the requirement of the client. The department‟s main contention to classify their service under „Supply of Tangible Goods Service‟ is that since the appellant have provided the operator to operate the DG Set and also the repair maintenance is under the obligation of the appellant, the right to use, possession and effective control has not been transferred to their client, therefore, the supply of tangible goods clearly falls under the definition of „Supply of Tangible Goods Service‟ as per the clause 65(105)(zzzzj) of the Finance Act. We find that merely because the appellant have provided the operator and undertaken the repair and maintenance, the status that the right to use, possession and effective control has been transferred to the client is not affected. The providing of operator and repair and maintenance is undertaken by the appellant only because of their technical expertise. However the use of the generator set accordingly to the requirement of the client is completely the prerogative of the client. Therefore, in the given arrangement of supply of DG Set to the client, we are of the view that the right to use, possession and effective control has been clearly transferred to the client. Therefore, such supply does not fall under the definition of „Supply of Tangible Goods Service‟ provided under clause 65(105)(zzzzj) of Finance Act which for the ease of reference is reproduced below:

“To any person, by any other person in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliances;”

From the above definition it is clear that merely supply of tangible goods will not fall under the category of taxable service but the most important aspect is that the right of possession and effective control of any equipment given on rent should not be transferred. In the present case, since the right of possession and effective control has been transferred, as can be seen from the agreement, the supply of DG Set shall not fall under the definition of „Supply of Tangible Goods Service‟. The most important aspect which is the deciding factor that whether supply of tangible goods will attract service tax or otherwise is that whether such arrangement of supply of tangible goods attracts VAT under the State VAT Act or otherwise. In the present case, admittedly the appellant are registered with the Gujarat VAT department and discharging VAT on the same supply of DG Set to their client. The Central Board of Excise and Customs in Circular No. 334/1/2008-TRU dated 29.02.2008 with regard to taxability of „Supply of Tangible Goods‟ clarified as under:

“4.4 Supply of tangible goods for use :

4.4.1 Transfer of the right to use any goods is leviable to sales tax / VAT as deemed sale of goods [Article 366(29A)(d) of the Constitution of India]. Transfer of right to use involves transfer of both possession and control of the goods to the user of the goods.

4.4.2 Excavators, wheel loaders, dump trucks, crawler carriers, compaction equipment, cranes, etc., offshore construction vessels & barges, geotechnical vessels, tug and barge flotillas, rigs and high value machineries are supplied for use, with no legal right of possession and effective control. Transaction of allowing another person to use the goods, without giving legal right of possession and effective control, not being treated as sale of goods, is treated as service.

4.4.3 Proposal is to levy service tax on such services provided in relation to supply of tangible goods, including machinery, equipment and appliances, for use, with no legal right of possession or effective control. Supply of tangible goods for use and leviable to VAT/sales tax as deemed sale of goods, is not covered under the scope of the proposed service. Whether a transaction involves transfer of possession and control is a question of facts and is to be decided based on the terms of the contract and other material facts. This could be ascertainable from the fact whether or not VAT is payable or paid.”

From the above clarification, it is unambiguous that when on supply of tangible goods, the sales tax is payable or paid the same transaction will not be subject to payment of service tax, for the reason that as per Article 366 (29A) of Constitution of India, the supply of tangible goods is considered as deemed sale and any sale transaction will not be a domain of service. The identical issue has been considered by this Tribunal in the case of Quippo Energy Private Limited vide Order No. 11873-11875 of 2022 wherein following order was passed:

“4. Heard both the sides and perused the records. To appreciate the rival contentions, it would be appropriate to first reproduce Section 65(105)(zzzzj) of the Act, which defines the Taxable Service -“Supply of Tangible Goods” which is as follows :-

“Section 65(105)(zzzj) - “Taxable Service” means any service provided or to be provided to any person, by any other person in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and the effective control of such machinery, equipment and appliances.”

Service tax on the supply of tangible goods was introduced w.e.f. 16.05.2008 vide Notification No. 18/2008-ST. dtd. 10.05.2008. Further w.e.f. 01.07.2012 in the negative list regime, the transfer of goods, by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods constituted the declared service, in terms of clause (f) of Section 66E of the Finance Act, 1994.

4.1 In view of both i.e. before 01.07.2012 and after, supply of tangible goods or transfer of goods without transferring the right of possessions or by way of hiring, leasing, licensing or any such manner without transfer of right to use such goods, were liable to service tax.

4.2 To fall within the definition of taxable service, fallowing three conditions are required to be satisfied –

(1) there should be a supply or transfer of goods for use;

(2) The transfer must be by way of hire or lease or licences for using the goods; and

(3) The right of possession and effective control of such goods must not have passed on to the transferee.

Once these above three conditions are satisfied, the provisions of the said entry will be attracted.

4.3 We find that in the present matter there is no dispute related to the above first two conditions. The disputes, centres around the third conditions, that whether the transaction between the Appellant and its customers would involve the transfer of right of possession and effective control or a transfer of right to use. To examine this issue, it would be appropriate to refer to the agreement entered into between the appellant and its customers. As noted, the appellant suppliesPower Generating Equipments / gas genset (Plant) to Customers on standby charges and variable charges basis under the agreement. We find that during the subsistence of the agreement, the lessee alone has the right to use the Plant and even the Appellant cannot trespass that right of the lessees/ customers. The Lessees fix the pattern in which the plant is to be used and the time when it will function. All the permission to be obtained from the statutory authorities to be obtained such as Electrical, Pollution, CCR have to be taken by the Customers, the lessee shall ensure the safety of the plant in a manner similar to its own plant. Customers have to provide fuel, Jacket water & feed water, the site and other facilities. Further, as per clauses of lease agreements, the customers will also indemnify the Lessor against the loss or damage arising to or in connection with plant for the reason other than Lessor‟s personnel. We also find that the clause 8.6 of agreement between the Appellant and Shah Pulp & Paper Mills Ltd. (Customer) provide as under : -

“ 8.6 By virtue of the agreement, the lessee shall be considered to have possession of the plant and shall have the right to use the plant for the purpose for which it is leased to him.”

In view of such conditions, the effective control of the gas genset are purely in the hands of customers of the Appellant, as the customers is at his liberty to use the equipments hired by him. It is seen from the agreements that there is no dispute as to the fact that the goods are in the possession of the lessee and is being used by him for the intended purpose without any interference or hurdle from the appellant. On going through the clauses of agreement, as produced before us, we find that the appellants had handed over the „Goods‟ possession to the lessee as also the right to use. Therefore we are of the view that the transaction of appellant does not satisfy the condition of “without transferring right of possession and the effective control of such machinery, equipment and appliances.”Hence the activity does not fall under the definition of “Supply of tangible goods for use”.

4.4 Being identical issue involved, we take support from Hon‟ble Supreme Court‟s decision in the case of BSNL v. Union of India - 2006 (2) S.T.R. 161 (S.C.), which mentions - „what are the attributes for treating a transaction as transfer of rights to use the goods‟ The Hon‟ble Supreme Court in the said case on this issue inter alia observes as under :-

“90. The entire infrastructure/instruments/appliances and exchange are in the physical control and possession of the petitioner at all times and there is neither any physical transfer of such goods nor any transfer of right to use such equipment or apparatuses.

91. To constitute a transaction for the transfer of the right to use the goods the transaction must have the following attributes:

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 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 rights to others.”

4.5 In the light of above discussion and observations of Hon‟ble Supreme Court, we note that Appellant have complied with all the tests as laid down in the above case to hold that there is transfer of right to use gas genset. Thus the activity is not in the nature of „service‟ under the Finance Act in both during the period prior to negative list regime and thereafter as held in the impugned orders.

4.6 We find that the adjudicating authority has held that since as per contract the equipment will remain sole property of equipment provider and skilled manpower supplied by the Appellant are responsible for maintenance operations of gas genset/plant, it is clear that the legal right and effective controls rests with the appellant. We find that except the above findings the Commissioner has not dwelled upon any of the submission and facts made by the appellant. The terms and condition of the agreement are its essence and is deciding factor for determination of nature of contract/agreement. As per agreement the equipment is delivered to the customers ; in terms of Clauses ofagreements as discussed above customers are required to get all permissions for installation of equipments; Clause of agreements also provide that customers shall be responsible for all injuries, losses and damages cause to the equipment and shall also indemnify the appellant against any loss or damage arising to or in connection with the; Further the skilled manpower is not supplied by the Appellant under the Lease agreement. There is sperate service agreement entered between the Appellant and customer under which various services are provided on which service tax has been discharged by the Appellant. Once the control and possession of gas genset/equipments was transferred to the customers, mere supply of manpower for maintenance will not change the nature of the transaction. All these factors are to be taken into consideration while determining the nature of service. Therefore finding of the impugned orders in present matters legally not correct.

4.7 We further find that a reading of the definition of „sale‟ under the provisions of Gujarat VAT Act, 2003 and Central Sales Tax Act, 1956 makes it crystal clear that every transfer of property in goods by one person to another in the course of trade or business, includes the transfer of right to use of any goods for any purpose. The Section of the said Act also provides levy of tax on the transfer of the right to use any goods. Article366(29A)(d) inserted by the Constitution (46th Amendment) Act, 1982 on 2-2-1983 also reads as under :

“366. (29) “tax on income” includes a tax in the nature of an excess profits tax;

(29A) “tax on the sale or purchase of goods” includes –

(a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;

(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

(c) a tax on the delivery of goods on hire purchase or any system of payment by instalments;

(d) a tax on 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;

(e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;

(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration,and such transfer, delivery or supply of any goods shall be 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;”

In view of the Article 366(29A) (d) of the constitution, 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, has to be considered as deemed sale or purchase of goods. It is clear that a tax on the sale or purchase of goods includes a tax for transfer of right to use goods as that is deemed sale.

4.8 It is observed that the appellant have been paying VAT on such leasing of equipments since year 2007-08. We also find that DOF No. 334/1/2008- TRU, dated 29-2-2008 Circular in Para 4.4 also states that “Supply of tangiblegoods for use and leviable to VAT/Sales tax as deemed sale of goods, is not covered under the scope of the proposed service. Whether a transaction involves transfer of possession and control is a question of facts and is to be decided based on the terms of the contract and other material facts. This could be ascertainable from the fact whether or not VAT is payable or paid”. It is not in dispute that the appellant were paying VAT since 2007-08 and the services of “supply of tangiblegoods” came into service tax net later. The subject DOF was issued before the enactment and intended that the “proposed service” would not include the transaction on which VAT is “Payable or paid”. The another circular dtd. 23.08.2007 issued by the department also clarifies that the payment of VAT/ Sales Tax on the transaction has to be treated as sales of goods and levy of Service tax on such transaction would not arise. The transfer of right to use gas genset/ plant on lease charges basis is a deemed sale in terms of Article 366(29)A of the Constitution, which is exclusive from service. Since the nature of transaction under dispute is deemed sale, no service tax can be demanded, as held in various judgments and relied upon by the Appellant in the present matter.

4.9 Following the cited decisions and our independent observations in the facts of the present cases, we are of the considered opinion that the demand raised cannot sustain and requires to be set aside.

5. Accordingly, the impugned orders are set aside. The appeals are allowed with consequential relief if any, as per law.”

The similar issue has also been considered by this Tribunal in Mumbai Bench and passed the following decision in the case of UFO Moviez India Limited 2018 (11) GSTL 391 which is reproduced below:

“5. We have carefully considered the arguments and written submissions made by both sides.

6. We find that the first demand of service tax is on lease rentals collected by the appellant from the theatre owner. The appellant is receiving film in analogue format from the distributors/producers and converting into compressed encrypted digital format for which they are charging digitalization fee from the distributors/producers and are also discharging service tax on the same. The distributors on the other hand are entering into agreements with the theatre owners for exhibition of movies. The agreement between the distributors and theatre owners are based on number of shows. The distributor also enters into a content distribution agreement with the appellant to deliver the digital content in movie theaters and to monitor the number of shows exhibited. The appellant track the number of show with the help of smart card inserted into the DCE as part of the service to distributors. The theatre owner in order to receive the digital content and exhibit cinema require Digital Cinema Equipments which are either owned by them or are taken on lease by them. The appellant has leased such equipments to some of the theaters. The appellant in order to fulfil contract with the distributors are inserting smart cards to monitor the number of shows in such DCE. They are also collecting registration fee from theaters for conducting feasibility study which is reimbursement of expenses. The demand against them is on lease of DCE equipments given to the theatre owners on the ground that since the effective control and possession of such equipments has remained with the appellant, hence the services are of “supply of tangible goods for use”. We find that the adjudicating authority has held that since as per contract the equipment will remain sole property of equipment provider and he shall bear the cost of normal wear and tear and repairs it is clear that the legal right and effective controls rests with the appellant. We find that except the above findings the Commissioner has not dwelled upon any of the submission and facts made by the appellant. The terms and condition of the agreement are its essence and is deciding factor for determination of nature of contract/agreement. The findings of the impugned order nowhere leads to the conclusion on the basis of this vital aspect. The appellant before the adjudicating authority and in their appeal memo has made submission on clause of agreements i.e. in terms of Clause 1B of the agreement the equipment is delivered to the theatre owner; in terms of Clause 1D the Theatre owner would put a person well versed with handling of equipment; Clause 5J where the theatre owner is required to get all permissions for installation of DCE; Clause 5K as per which the theatre owner shall be responsible for all injuries, losses and damages cause to the equipment and shall also indemnify the appellant against any loss or damage arising to or in connection with the equipment for the reason other than normal wear or tear; Clause 16A as per which the appellant has transferred the right to use of DCE exclusively to the theatre owner and the theatre owner shall have effective control of the DCE and shall be free to make its own use for theatrical exhibition purpose at its sole discretion. The Ld. Senior Counsel appearing on behalf of appellant has argued by citing case laws that agreement should be read as a whole and not few clauses in isolation to decide the nature of service.

6.1 Further the fact that 600 theatres had exhibited the IPL matches and none of the content was provided by appellant. None of these submissions has been taken into account while passing the impugned order. We also find that in addition the appellant had made various other submissions which do not find mention in order and are discussed in later part of this order. The appellant has contended that the DCE equipments could be operated on standalone basis by the Theatre owner for screening of any content which the theatre owner would procure. The appellant had no say in all such actions of the theatre owner. The role of smart card was limited to keeping track of shows to be played and deducting credit which is available on the smart card for running of shows. It was installed on the direction of the distributors who had entered into agreement with the theatre owners for exhibiting their movie and the appellant had no connection with the theatre owner in respect of such smart card. Thus the smart card were not an instrument to control the operation of DCE on behalf of appellant or has no bearing on the agreement between the theatre owner and appellant in case of leasing of DCE Equipments. As far as insurance of the DCE equipment is concerned the Appellant were owners of the equipments and the nature of leasing agreement does not change for the reason that the insurance was done by the appellant. For bringing any service under the category of “supply of tangible goods service” in terms of Section 65(105)(zzzj) it is imperative to see that such service is in respect of services towards supply of tangible goods for use “without transferring right of possession and effective control”. In the present case once the DCE were transferred to theatre owner the appellant had no control over running of such equipments which are to be operated by the persons employed/deputed by the theatre owner. The theatre owner had contractual control over such equipments which was in their possession. All these factors are to be taken into consideration while determining the nature of service. It is observed that the appellant has been paying VAT on such leasing of DCE since year‟ 2006. Further the fact remains that in 2008 they approached the authority for determination of disputed question which ruled that the services are liable for VAT. The adjudicating authority has not given any findings on this aspect when brought before him. We also find that DOF No. 334/1/2008-TRU, dated 29-2-2008 Circular in Para 4.4 also states that “Supply of tangible goods for use and leviable to VAT/Sales tax as deemed sale of goods, is not covered under the scope of the proposed service. Whether a transaction involves transfer of possession and control is a question of facts and is to be decided based on the terms of the contract and other material facts. This could be ascertainable from the fact whether or not VAT is payable or paid”. It is not in dispute that the appellant were paying VAT since 2006 and the services of “supply of tangible goods” came into service tax net later. The subject DOF was issued before the enactment and intended that the “proposed service” would not include the transaction on which VAT is “Payable or paid”. The theaters are free to choose which movie to be displayed, the number of shows, the timing of shows, weather to play a movie or not and also have operational control over equipment. From these facts, it prima facie appears that the theatre were having absolute authority to run the Cinema Equipments as per their liking with no right of the appellant to interfere or to be forced by the appellant to run the Equipments as per their directions or control. The appellant has also relied upon the order of Tripura HC in case of Bharti Telemedia Ltd. v. The State of Tripura - 2015-TIOL-2983-HC-TRIPURA relating to identical situation and the Ld. Senior Counsel has argued that the ratio of said judgment would squarely applicable to the case.

6.2 We also find that the appellant had regularly been filing their returns and even the department from time to time had initiated enquiry with the appellant which was properly responded. The DGCEI also investigated the issue in 2008-2009 and after response by the appellant vide their letter dated 17-6-2009 no further action was taken which shows that even the revenue appears to have satisfied regarding non-applicability of tax on activities of the appellant. Further it is also not in dispute that the appellant had been paying VAT even before the levy of service tax which is being demanded in the instant case. Even the circular issued in 2008 referred above clearly states that VAT and Service Tax are mutually exclusive. Considering all above factors it appears there is no suppression of fact on appellant‟s part. It is also observed that the appellant obtained DDQ (Determination of Disputed Question) dated 26-6-2008 from Commissioner of Sales Tax, who held that lease rental is liable for VAT. The appellant accordingly was discharging the VAT liability even before the taxability on „Supply of Tangible goods for use‟. With the above undisputed facts. We are of the clear view that there is no suppression of facts with intent to evade payment of Service Tax on lease rentals on DCE, on the part of the appellant. Therefore we hold that the demand for extended period is clearly time-barred.

6.3 As regard demand of service tax on merit for the normal period, we observed in our above discussions that various vital facts and submissions of the appellant were not properly verified by the adjudicating authority, therefore we remand the case relating to lease rentals and registration fees for the normal period with direction to adjudicating authority to verify whether the contentions made by the appellants are correct with regard to the theatre owners having freedom to choose movie, number of shows, timing of shows, to determine whether to play a movie or not and have operational control of the equipment through their own men or not. Also to verify weather play out of IPL matches or local advertisements have happened in the past and pass a speaking order after giving an opportunity of being heard. The appellant is at liberty to make all submissions before the adjudicating authority.

6.4 With regard to CENVAT credit on capital goods we find that it is not disputed that the appellant and theatre owner had joint partnership agreement to exhibit the advertisement and the proceeds were to be shared in the ratio of 75 : 25 or as the case may be. The advertisers were into agreement with the appellant for such advertisement. Further we find that as per Rule 2(a) of Cenvat Credit Rules, 2004 specified capital goods used for providing output service would be eligible for credit. In this case the capital goods are specified capital goods and has been used for providing the output services of the appellant namely content delivery services and sale of space for advertisement service. It is not in dispute that equipments are used for providing the output services of the appellant. We also find that there was no contract or agreement between the theatre owners and the persons whose advertisements were exhibited in cinema theaters. Only the appellant had an agreement with such persons to exhibit the advertisements. Thus there is no ground to hold that the appellant were providing any business supports service to theater owner. The DCE equipment at the most can be said to have been jointly used by the appellant and the theater owner to provide the services of Sale of Space for Advertisement. The DCE Equipment being specified capital goods as defined under Rule 2(a) and having been used for providing output service are eligible for availment of credit. In terms of Rule 3(1) of Cenvat Credit Rules and proviso to Rule 3(5) it transpires that the credit is available even if the capital goods are removed outside the premises of the provider of output service for providing the output service. As regard submission of Ld. AR that while removing capital goods to theatre, the appellant was supposed to reverse the Cenvat credit as said capital goods was purportedly sold to Cinema theatres. In this regard we find that though the DCE was deemed sold to Cinema Theatre but ultimate ownership of DCE remains with the appellant. The DCE admittedly used for exhibiting advertisement. The appellant paid service tax on service of sale of space for advertisement which was provided through the said DCE. It therefore leaves no doubt that credit on capital goods is available even if they are removed outside from the premises of the appellant for providing output service. We are therefore of the view that there is no ground for denial of Cenvat credit on capital goods to the appellant.

6.5 We also find that while invoking extended period for demand of Cenvat credit on DCE, in Para 33 of the Order-in-Original, adjudicating authority has admitted that the appellants have disclosed Cenvat credit on capital goods in the return, despite recording this, he has given adverse finding on limitation. Considering the fact that appellants have been paying VAT from 2006 that too at higher rate than the service tax rate, even before SOTGU Services became taxable service, no mala fide can be attributed to invoke extended period for denying Cenvat credit. Placing reliance on Dalmia Cements case of the Madras High Court and in view of our above observations, we are of the view that Cenvat credit on Digital Cinema Equipment has to be allowed, independent of taxability on lease Rentals of DCE. Accordingly we set aside the demand of Cenvat credit on Digital Cinema Equipment on merit as well as on limitation.

7. As a result, we pass following order.

(i) Demand of Cenvat credit and consequential interest and penalty commensurate to said demand on capital goods i.e. Digital Cinema Equipments is set aside on merit as well as on limitation.

(ii) The matter relating to demand of service tax for normal period on lease rentals of Digital Cinema Equipments is remanded for reconsideration, on merit to the adjudicating authority. The demand of service tax on lease rentals and corresponding interest and penalty for the extended period is set aside being time-bar.

8. The appeal is disposed of in the above terms.”

The above decision has been upheld by the Hon‟ble Supreme Court as reported at UFO Moviez Private Limited 2022 (61) GSTL 4 (SC), wherein the Hon‟ble Apex Court held as under:

“2.In the facts of the present case as it is not disputed that the respondent had regularly paid amount towards VAT liability in respect of the subject goods during the relevant period, the question of claiming service tax thereon does not arise.

3.Accordingly, in the facts of the present case, the civil appeal is dismissed.”

From the above decisions it can be seen that in a case where supply of goods has been treated as deemed sale under article 366 (29A) of Constitution of India. Accordingly, it was held that on such transaction no service tax is payable.

5. In view of the above settled position and discussion and findings given by us hereinabove, we are of the considered view that the supply of DG Set to the client of the appellant is not liable to service tax. Accordingly, the impugned orders are set aside. Appeals are allowed.

6. Pronounced in the open court on 12.09.2023.