Equipment leasing without transferring the right to use remains a taxable declared service despite VAT payment.

The appellant, engaged in trading dialysis equipment and providing AMC/CMC and other services, leased dialysis equipment to Fortis Hospital under an agreement dated 23 March 2015.

It paid service tax on AMC and CMC services but treated the equipment-leasing receipts as a “deemed sale” under Article 366(29A)(d) of the Constitution and subjected them to VAT.

During an audit for the period 2012–13 to 30 June 2017, the Department alleged that the leasing arrangement did not transfer possession and effective control or the right to use the equipment.

A show-cause notice dated 20 July 2018 proposed recovery of service tax of ₹2,07,79,789, along with applicable cesses, interest and penalties.

The proposals were confirmed by Order-in-Original No. 98/2022 dated 26 July 2022, leading to the present appeal.

Whether the leasing of dialysis equipment by the appellant constituted a transfer of the right to use goods and was therefore a deemed sale under Article 366(29A)(d) of the Constitution, rather than a taxable service.

Whether the agreement transferred possession and effective control of the equipment to Fortis Hospital so as to exclude the transaction from the scope of Section 65(105)(zzzzj) and Section 66E(f) of the Finance Act, 1994.

Whether payment of VAT on the transaction precluded the levy of service tax and whether the extended period of limitation and consequential penalties were validly invoked.

The Tribunal applied Article 366(29A)(d) of the Constitution, under which a transfer of the right to use goods for consideration is deemed to be a sale.

Under Section 65(105)(zzzzj) of the Finance Act, 1994, as applicable before 1 July 2012, supply of tangible goods for use without transferring the right of possession and effective control was taxable as a service; after the introduction of the negative-list regime, Section 66E(f) treated transfer of goods by hiring, leasing or licensing without transfer of the right to use as a declared service.

Section 65B(44)(a) excluded from “service” only activities constituting a transfer, delivery or supply deemed to be a sale under Article 366(29A).

Relying on Bharat Sanchar Nigam Ltd. v. Union of India, 2006 (2) S.T.R. 161 (S.C.), the Tribunal applied the requirements that the goods must be identifiable and available for delivery; the transferee must obtain a legal right to use them; that right must be exclusive during the relevant period; and the owner must be unable to transfer the same right to another person during that period.

The Tribunal also considered the CBEC/TRU Circular dated 29 February 2008, the Education Guide dated 20 June 2012, Circular No. 198/08/2016-Service Tax dated 17 August 2016, and Indian Compressors v. Union of India, 2025 (32) Centax 134 (Del.).

The Tribunal examined the agreement and found that Fresenius retained significant control over the equipment.

The lease fee was calculated on a “per treatment” basis, with Fresenius entitled to determine usage through equipment meters.

Fresenius was responsible for supplying manuals, maintenance, spare parts and insurance.

Fortis could use the equipment only at the specified premises, could not remove it without Fresenius’s prior written consent, and was required to comply with operating instructions and use trained personnel.

Fresenius also retained a contractual right to inspect the equipment and the manner of its use.

Applying the BSNL criteria, the Tribunal held that the legal right to use the equipment had not been transferred exclusively to Fortis and that effective control remained with Fresenius.

The permission granted to Fresenius to enter the hospital for inspection or maintenance did not establish that possession and control had passed to Fortis.

Accordingly, the transaction was not a deemed sale merely because VAT had been paid; it was a taxable supply of tangible goods/service under the applicable provisions of the Finance Act.

It constituted a taxable service under Section 65(105)(zzzzj) for the pre-negative-list period and under Section 66E(f) thereafter.

Payment of VAT did not bar the levy of service tax in the circumstances.

The appeal was dismissed and Order-in-Original No. 98/2022 dated 26 July 2022 was upheld.