In terms of Article 366 of the Constitution of India, hiring, leasing or licensing of any goods with transfer of the right to use is deemed to be a sale, thereby subject to VAT/ CST. Further, in terms of Section 66E(f) of the Finance Act, 1994, transfer of good by way of hiring/ leasing/ licensing of goods without transfer of right to use is a 'declared service', thereby  subject to service tax. 

Vide the Circular, Central Board of Excise and Customs ['CBEC'] has clarified that in any given case involving hiring, leasing or licensing of goods, it is essential to determine whether, in terms of the contract, there is transfer of right to use the goods, as per the principles laid down by the Supreme Court in the case of BSNL vs. Union of India [2006 (2) STR 161 SC]. In the said case, the Supreme Court held that a transaction involves transfer of right to use goods, in case it fulfills the following criteria:

  • There must be goods available for delivery;
  • There must be consensus ad idem as to the identity of the goods;
  • Transferee should have legal right to use the goods;
  • Such right should be to the exclusion of the transferor i.e. it should not be merely license to use the goods, and
  • During the period of transfer, owner cannot again transfer the same right to others.

Circular further states that:

  • The term of contract must be studied vis-a-vis the criteria laid down by the Supreme Court in order to determine whether a transaction involves transfer of right to use goods.
  • The cases decided under Sales Tax / VAT legislations should not be applied mechanically but applicability of the said cases in a given case should be examined in view of the facts and terms of the contract of the given case.

Circular also cites examples of 'financial lease' & 'operating lease', as well as 'dry leases' & 'wet leases' for aircraft industry, to emphasize the diverse nature of transactions and clarifies that in all these cases, no presumptions/ assumptions about service tax liability should be made and terms of the contract should be examined in view of the criteria laid down in the BSNL Judgment and other judicial pronouncements.

Nangia's Take –

Circular merely emphasis that in transactions, involving hiring, leasing or licensing of goods, criteria laid down by the Supreme Court must be followed and applied to determine applicability of service tax viz a viz the contractual terms. Although concepts of finance lease, operating lease, dry lease and wet lease are discussed briefly, the Circular does not bring about clarity with regard to applicability of service tax on the said transactions.

[Source: Circular No. 198/8/2016-Service Tax dated 17 August 2016]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.