Transfer of Right to Use Goods vs. Declared Services: Insights from Universal Dredging and Reclamation Corporation Ltd. v. Commissioner of CGST & Central Excise

Introduction

The case of Universal Dredging and Reclamation Corporation Ltd. v. Commissioner of CGST & Central Excise adjudicated by the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) in Chennai on June 24, 2020, represents a pivotal moment in the interpretation of service tax applicability under the Goods and Services Tax (GST) regime. The appellant, a major dredging company, challenged the demand for service tax levied under the reverse charge mechanism on payments made to a foreign lessor for hiring a cutter suction dredger.

Summary of the Judgment

The Tribunal meticulously examined whether the transaction between Universal Dredging and the foreign company constituted a 'declared service' under Section 66E(f) of the Finance Act, 1994, necessitating service tax under the reverse charge mechanism. By analyzing the charter agreement and relevant legal precedents, the Tribunal concluded that the arrangement was a transfer of right to use goods and not a transfer of goods by hiring or leasing. Consequently, the demand for service tax was deemed not applicable, leading to the dismissal of the demand and allowing the appeal in favor of the appellant.

Analysis

Precedents Cited

The Tribunal's decision leaned heavily on several key precedents and interpretative guides:

• BSNL vs. UOI (2006): This Supreme Court judgment provided the foundational test for determining whether a transaction constitutes a transfer of right to use goods. The five-point test from this case was pivotal in assessing the charter agreement in question.
• International Seaport Dredging Ltd. vs. CESTAT Chennai (2018): This case supported the notion that effective control and possession are critical in distinguishing between a transfer of goods and a service.
• Petronet LNG Ltd. vs. CESTAT Delhi (2013): Emphasized the importance of contractual clauses in determining the control and possession of hired equipment.
• Heligo Charters Pvt. Ltd. vs. CST Mumbai (2017): Reinforced the criteria for assessing service tax liability under similar hiring arrangements.
• Jay Yuhshin Ltd. vs. CCE New Delhi (2020): Addressed the applicability of limitation periods in revenue-neutral scenarios, further supporting the appellant's position.

Legal Reasoning

The Tribunal employed a structured approach to dissect the nature of the transaction:

1. Definition Under GST: Post the amendments effective from July 1, 2012, the definition of 'service' under Section 65B and 'declared services' under Section 66E were pivotal. The classification hinges on whether the transaction is a supply of tangible goods service or a transfer of the right to use goods.
2. Five-Point Test from BSNL:
   1. Availability of goods for delivery.
   2. Consensus ad idem regarding the identity of goods.
   3. Legal right to use goods, including necessary permissions and licenses.
   4. Transfer of rights excludes the transferor from exercising control over the goods.
   5. The transferor cannot re-transfer the same rights to another party.
3. Application to the Charter Agreement: The Tribunal scrutinized clauses within the charter agreement to ascertain compliance with each element of the test. Key observations included:
   • The vessel was delivered as per the agreement, ensuring goods' availability.
   • Detailed specifications in the agreement ensured consensus on goods' identity.
   • The appellant obtained necessary licenses, indicating a legal right to use.
   • Control over the vessel was effectively transferred to the appellant, with limited rights retained by the lessor only in breach scenarios.
   • No provisions allowed the lessor to transfer the same vessel rights to another party during the charter period.
4. Exceptions and Clarifications: The Tribunal addressed the department's reliance on clauses allowing the lessor to withdraw the vessel, clarifying that such clauses are standard in charter agreements to protect the lessor's interests and do not negate the appellant's control unless breaches occur.
5. Revenue-Neutrality and Limitation: The appellant's payment under the reverse charge would have been creditable, making the situation revenue-neutral. Therefore, invoking extended limitation periods was unwarranted as per the precedent set by Jay Yuhshin Ltd. vs. CCE New Delhi.

Impact

This judgment has significant implications for the classification of hiring and leasing transactions under GST:

• Clarification on 'Declared Services': Reinforces the distinction between a mere transfer of goods for hire and a transfer of the right to use goods, thereby influencing tax liability.
• Contractual Clauses as Determinants: Highlights the importance of specific contractual provisions in determining control and possession, guiding businesses in structuring their agreements.
• Precedence for Future Cases: Serves as a reference point for similar disputes, ensuring consistency in the application of GST laws concerning service tax under the reverse charge mechanism.
• Revenue Implications: Businesses may reassess their leasing and hiring agreements to ensure tax compliance, potentially reducing unnecessary service tax liabilities.

Complex Concepts Simplified

Transfer of Right to Use Goods

This concept refers to a transaction where the lessee gains the legal right to use the leased or hired goods exclusively. It involves both possession and effective control over the goods, distinguishing it from a mere licensing or hiring arrangement where control might remain with the lessor.

Declared Services under GST

Section 66E(f) of the Finance Act, 1994, outlines specific services that are deemed taxable under the reverse charge mechanism. These include the transfer of goods by hiring, leasing, or licensing without transferring the right to use the goods.

Reverse Charge Mechanism

Under the reverse charge mechanism, the liability to pay tax shifts from the service provider to the service recipient. This is particularly relevant in cross-border transactions where the recipient (applicant) is responsible for remitting the tax.

Revenue-Neutral Situation

A scenario where any tax paid would be offset by an equal amount of tax credit, resulting in no net revenue impact for the government. In such cases, extending limitation periods for tax demands may not be justified.

Conclusion