CESTAT Kolkata Sets Aside Full Service Tax Demand on Tanker and Bowser Supply to Oil India Limited
Background and Factual Matrix
The CESTAT Kolkata recently adjudicated an appeal filed by M/s. Borthakur & Co. against Order-in-Original No.15/ST/ADJ/Commissioner/DIB/2014-15 dated 27.03.2015, wherein the adjudicating authority had confirmed a service tax demand of Rs. 72,42,802/- along with interest and an equivalent amount as penalty.
The case revolved around a contractual arrangement under which M/s. Borthakur & Co. supplied tankers and bowsers to M/s. Oil India Limited (OIL) for transportation of crude oil across OIL's operational areas in Assam. Under the terms of the agreement, the tankers and bowsers were placed at OIL's exclusive disposal and stored within OIL's premises throughout the contract tenure.
The assessee had treated this arrangement as a deemed sale under the Assam Value Added Tax Act, 2003. Consequently, OIL deducted VAT at source under Section 47(2) of the Assam VAT Act and deposited the amount with the state exchequer. On this basis, M/s. Borthakur & Co. did not discharge service tax liability on these transactions.
The Department took a contrary view and issued a Show Cause Notice dated 16.09.2014, invoking the extended period of limitation. The Department alleged that the transactions fell squarely within the ambit of "supply of tangible goods service" as defined under Section 65(105)(zzzzj) of the Finance Act, 1994, and that the assessee had suppressed facts with intent to evade payment of service tax.
Core Dispute: Transfer of Effective Control and Possession
The Assessee's Position
The assessee advanced multiple arguments in its defence:
- Transfer of possession and effective control to OIL: The assessee contended that under the agreement, both possession and effective control over the tankers and bowsers had been transferred to OIL. This, it argued, satisfied all conditions for a valid deemed sale under
Section 2(43)of the Assam VAT Act, which defines "sale" to include:
"a 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"
- Reliance on the BSNL test: The assessee drew upon the five-attribute test laid down by the Supreme Court in Bharat Sanchar Nigam Limited (BSNL) v. Union of India — 2006 (2) S.T.R. 161 (S.C.) to argue that all requisite elements of a transfer of right to use goods were satisfied. The Supreme Court in that case held:
"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."
Mutual exclusivity of VAT and Service Tax: The assessee argued that VAT and service tax operate in mutually exclusive domains and that having discharged VAT liability, a further service tax demand could not be sustained. Reliance was placed on:
- Imagic Creative Private Limited v. Commissioner of Central Taxes — 2008 (9) S.T.R. 337 (S.C.)
- Commissioner of Service Tax – V, Mumbai v. UFO Moviez India Limited — 2022 (61) G.S.T.L. 4 (S.C.)
- Nayana Premji Savala v. Union of India — 2022 (66) G.S.T.L. 417 (Bom.)
- Arkay Logistics Ltd. v. C.C.E. & S.T., Surat — 2023 (8) TMI 1237 (CESTAT Ahmedabad)
Reliance on Board Circular: The assessee also placed reliance on Board Circular No. 334/1/2008-TRU dated 29.02.2008, wherein paragraph 4.4.3 clarified:
"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."