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20 Sep 2013

Whether sales tax or service tax is applicability on hire charges received on transfer of right to use goods

Recently in the case of State of Andhra Pradesh v/s RashtriyaIspat Nigam Limited., 2013(13) S.T.R. 513 (SC), Honorable Supreme Court has observed that when the effective control of the goods remains in the hands of the transferor only, despite of it being used by the transferee, then hire charges received in lieu of the goods used, is not leviable to sales tax.

Goods are merely given to the transferee for specific use, but transferee cannot use them as per his own will, which implies that the effective control and possession remains in the hands of the transferor only. Further, goods being in the custody of the transferee do not militate against possession.

The essential condition of section 5E of the Andhra Pradesh general Sales Tax Act for levy of sales tax involves transfer of right to use, but here the right to use goods is not transferred and hence sales tax is not leviable on hire charges.

However, as per Section 66E of the Finance Act, 1994, as amended declared Service includes “when there is transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods”. Hence service tax will be levied by virtue of such transaction falling in the declared service.