Service Tax on DG Sets Given on Hire: CESTAT Chennai Treats It as Transfer of Right to Use, Not STGU Service

Background of the Dispute

The case of Edison Gentech Pvt. Ltd. Vs Commissioner of GST & Central Excise came up before the CESTAT Chennai against Order-in-Original No. 8/2016 (Reassigned) dated 31.05.2016 passed by the Commissioner of Central Excise, Chennai–III.

The assessee was registered for:

  • Transport of Goods by Road / Goods Transport Agency Service
  • Supply of Tangible Goods for Use (STGU) Service

Since 2004, the assessee had been engaged in providing diesel generator (DG) sets on rent to various industrial and commercial clients.

A departmental investigation alleged that:

  • The assessee had not discharged appropriate service tax under the STGU category on the DG hire activity
  • ST-3 service tax returns were not filed
  • Service tax on GTA services (transport of DG sets) had not been correctly paid

Based on this, a show cause notice dated 24.10.2013 was issued for the period 2008-09 to 2011-12, demanding:

  • Service tax on STGU service and GTA
  • Interest
  • Penalties under Section 78 and Section 77(1)(a) of the Finance Act, 1994

The Commissioner confirmed the entire demand with penalties, leading to the present appeal before the Tribunal.

Core Issue Before the Tribunal

The central question was:

Whether the arrangement for providing DG sets on hire amounted to “supply of tangible goods for use, without transfer of possession and effective control” under Section 65(105)(zzzzj) of the Finance Act, 1994 (i.e., STGU service), or whether it constituted a transfer of right to use goods, i.e., a “deemed sale” under Article 366(29A)(d) of the Constitution, liable only to VAT / sales tax.

This determination was crucial because:

  • If there was transfer of possession and effective control of DG sets to the customers → transaction would be a deemed sale, liable to VAT, not service tax under STGU.
  • If the assessee retained possession and control → transaction would fall squarely under STGU service, and service tax would be payable.

Assessee’s Stand: DG Hire Is Deemed Sale, Not a Service

Nature of Arrangement

The authorised representative for the assessee explained the business model as follows:

  • DG sets were transported to customers’ locations by hiring a Goods Transport Agency.
  • Once delivered, the DG sets remained installed at the customers’ premises.
  • The customers operated the DG sets according to their own operational requirements (e.g., during power cuts, production schedules etc.).

Key points emphasised:

  1. Possession and control with customers

    • The DG sets stayed at the customer’s site for the full rental period.
    • Customers decided when and how to run the DG sets.

  2. Operator supply only on request

    • Where customers insisted, the assessee provided an operator as an optional facility.
    • Separate invoices were raised towards manpower / operator charges.
    • Service tax on such manpower charges had already been paid under the Voluntary Compliance Encouragement Scheme (VCES) and accepted by the Department.

  3. VAT registration and payment since 2004

    • The assessee had been registered under The Central Sales Tax Act, 1956 and the Tamil Nadu Value Added Tax Act, 2006.
    • VAT / TNGST on DG hire charges had been paid consistently from 2004 onwards.
    • A copy of the Registration Certificate dated 19.11.2004 was furnished.

On these factual foundations, the assessee argued:

  • Since actual possession and effective control were with the customers, the transaction constituted “transfer of right to use goods” under Article 366(29A)(d) of the Constitution.
  • Accordingly, it was a deemed sale, and only VAT was attracted; service tax under Section 65(105)(zzzzj) was inapplicable.

The assessee placed strong reliance on:

  • CBEC Circular No. 334/1/2008-TRU dated 29.02.2008, especially para 4.4.3, which clarifies:

    Where there is transfer of possession and effective control of the goods, the transaction is treated as sale / deemed sale and subjected to VAT / sales tax, and is outside the scope of STGU.

  • The specific wording of Section 65(105)(zzzzj) which covers supply of tangible goods “without transferring right of possession and effective control”.

Other Key Defences

  • Fuel reimbursement not taxable:
    Where diesel and oil were supplied for running the DG sets, such fuel was procured for and on behalf of the customer. Reimbursements of such expenses, often in the customer’s name, could not form part of taxable value of any service.

  • Sub-letting restriction irrelevant:
    The Department’s argument that customers were not allowed to sub-let DG sets was termed legally untenable. Transfer of right to use goods does not require transfer of ownership or right of further alienation. What matters is effective control and exclusive use during the hire period.

  • Reliance on Circular dated 23.08.2007:
    The assessee referred to departmental clarification that once a transaction is treated as sale and subjected to VAT, the same transaction cannot be again taxed as a service.