Lease of Wagons to Railways Cannot be Treated as ‘Supply of Tangible Goods’ as VAT/Sales Tax has Already been Paid: CESTAT

The Bangalore bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has ruled that the appellants’ action does not constitute a taxable service of “Supply of Tangible Goods” because the respondent-Company has previously paid VAT/Sales Tax.

The appellants are registered with the service tax department and engage in iron ore mining, sale, and export. The appellants took advantage of Indian Railways’ ‘own your waggon scheme’ by purchasing and leasing out six rakes of railway waggons to M/s. South Western Railway, Hubli, under agreements dated 23.2007 and 8.3.2007; the dry leaves of waggons were initially for a primary period of 10 years, extendable to a secondary period of up to 20 years. As per Section 65(105)(zzzzj) of the Finance Act, 1994, the Central Excise Department proposed a demand for service tax on lease/rental costs received on lease of waggons as aforesaid under the category “Supply of Tangible Goods.”

The department claimed that I the appellant-lessor is the sole owner of the waggon; (ii) the appellant-lessor must bear the cost of repairs and modifications to the waggons; (iii) the lessor has the right to terminate the agreement in certain circumstances; (iv) the appellants have insured the waggons; and (v) the appellants have not paid VAT/sales tax on the lease transaction.

The appellants have surrendered the right of possession and effective control of the waggons leased out by them to the South Western Railways, according to the CESTAT bench of Technical Member Mr. P Anjani Kumar and Judicial Member Mr. P Dinesha.

“The appellants have also discharged applicable VAT / Sales Tax on such transaction, therefore, the activity undertaken by the appellants does not constitute a taxable service of “Supply of Tangible Goods”. In view of the same, all the impugned orders are liable to be set aside and appeals are allowed with consequential relief, if any, as per law. We order so,” the Tribunal said.

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