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