Calcutta High Court
Commissioner Of Service Tax Ii Kolkata vs M/S Computer Exchange Private Limited on 19 June, 2025
Author: T.S Sivagnanam
Bench: T.S Sivagnanam
OD-2 2025:CHC-OS:95-DB
IN THE HIGH COURT AT CALCUTTA
SPECIAL JURISDICTION [CENTRAL EXCISE]
ORIGINAL SIDE
CEXA/12/2025
IA NO: GA/1/2025, GA/2/2025
COMMISSIONER OF SERVICE TAX II KOLKATA
VS
M/S COMPUTER EXCHANGE PRIVATE LIMITED
:CORAM:
THE HON'BLE THE CHIEF JUSTICE T.S SIVAGNANAM
-A N D-
HON'BLE JUSTICE CHAITALI CHATTERJEE (DAS)
Heard On : 19.6.2025
Judgment On : 19.6.2025
Appearance :
Mr. Uday Shankar Bhattacharyya, Adv.
Mr. Kaustuv Kanti Maiti, Adv.
...for appellant.
Mr. Ankit Kanodia, Adv.
Ms. Megha Agarwal, Adv.
...for respondent.
T.S SIVAGNANAM, CJ. :
1. This appeal has been filed by the Central Excise Department challenging
the order passed by the Customs, Central Excise and Service Tax Appellate
Tribunal, East Zonal Bench, Kolkata (the Tribunal) in Excise Appeal
No.75602/2017 dated 6.6.2024.
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2. The revenue has raised the following substantial questions of law for
consideration.
"a. Whether the service provided by the respondent is an act of 'Supply
of Tangible Goods Services' when the effective control of the
supplied equipment was with the respondent as mentioned in the
agreement executed between the respondent and their customers ?
b. Whether the service provided by the respondent as supply of
'Tangible Goods Service' when there is an activity of supply of
tangible goods for use by its customer and the said tangible goods
have been supplied by the respondent to its customer without
transferring right of possession and effective control of such tangible
goods ?
c. Whether the learned Tribunal erred in holding that the effective
control of the equipment is with the service recipient though the
agreement contains that the effective control of the supplied
equipment was with the respondent ?
d. Whether the transfer of right to use of the equipment by the
respondent to its customer on rental basis for limited purpose comes
within the purview of supply of tangible goods for use as per
provision of Section 65(105)(zzzzj) of the Finance Act, 1994 ?
e. Whether the payment of VAT on rentals of the equipment is a
deemed sale within the meaning of Article 366(219A) of the
Constitution of India ?
f. Whether the learned Tribunal is erred in passing the impugned
order dated 06.06.2024 by not considering the principles laid down
by the Hon'ble Supreme Court reported in 2006(12) STR 161 (SC) in
the case of BSNL vs. Union of India since permission of the
respondent would have to be taken by its customers for
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removal/shifting of the equipment from location to another and no
alteration or modification addition, or deletion of the equipment could
be made without the permission of the respondent and the
customer/hirer could not engage its or outside engineers to attend
the equipment without prior permission of the respondent?"
3. We have heard Mr. Uday Shankar Bhattacharyya, learned senior
standing counsel for the appellant/department and Mr. Ankit Kanodia, learned
counsel for the respondents.
4. The learned Tribunal by the impugned order rightly allowed the
assessee's appeal and set aside the order passed by the Commissioner of
Service Tax-II, Kolkata by order-in-original no.112/COMMR/ST-II/KOL/2016-
17 dated 20.1.2017. The appellant issued show cause notice dated 7.10.2016
proposing that an amount of service tax, education cess and SHE cess totaling
to Rs.2,69,68,866/- leviable on taxable service namely, 'supply of tangible
goods service' during the period from 2011-12 to 2014-15 shall not be
recovered from the assessee under the provision to section 73(1) of the Finance
Act; why appropriate interest on the due amount of service tax and education
cess shall not be demanded under section 75 of the Act; why an amount of
CENVAT credit to the tune of Rs.62,329/- wrongly taken and utilised by the
assessee during the relevant period should not be recovered along with
appropriate interest under Rule 14 of the CENVAT Credit Rules, 2004 read
with Section 75 and proviso to Section 73(1) of the Finance Act; why penalty
under section 77 of the Act should not be imposed for contravention of
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Sections 67, 68, 69 and 70 of the Act; and why penalty under section 76 of the
Act shall not be imposed upon them for nonpayment of service tax by resorting
to willful suppression of facts with an intent to evade payment of service tax as
mentioned above. Among the above issues the demand for CENVAT credit to
the tune of Rs.62,329/- has been dropped by the adjudicating authority and,
therefore, we are not required to go into such aspect.
5. According to the department that the assessee has not registered
themselves for providing 'supply of tangible goods' services as provided by them
and they have not shown the received amount against the said service in the
ST-3 return and did not pay service tax thereon during the period April, 2011
to March, 2015. The department referred to Section 65(105)(zzzzj) of the
Finance Act, 1994 and after referring to the decision of the Hon'ble Supreme
Court in Bharat Sanchar Nigam Ltd. vs. Union of India, 2006 [2] STR 161 [SC]
proceeded to examine the terms and conditions of the agreement entered into
between the assessee and their clients. In the show cause notice it was alleged
that the assessee are providing server, computers, printers, computer
peripherals, etc. to different clients on hire without transferring right to use of
such tangible goods as they have restricted removal/shifting of the equipment
from one location to another. According to the department such restricted right
to use the equipment can never be construed as 'transfer of right to use'.
Furthermore, the maintenance and repairing of the said computers and
accessories are being carried out either by the assessee or by their approved
agent. Thus, it was alleged that the assessee are effectively retaining control
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over the said computers and accessories and such transaction cannot be
termed as 'deemed sale' but are more appropriately classified as 'supply of
tangible goods' services. In the show cause notice the extended period of
limitation was invoked alleging that all acts of omission and commission
committed by the assessee was with the sole intention to evade payment of
service tax, education cess and SHE cess and, therefore, proviso to Section
73(1) of the Act is invoked and the show cause notice issued within such
extended period. The assessee in their reply dated 10.11.2016 contested the
demand of service tax and other charges as well as the act of invoking the
extended period as also the proposal to impose penalty. They contended that
they are engaged in the business of information technology goods, for rental,
purchase and sale and it includes a retail store for sale of computers and other
IT peripherals as well as supply of equipment on hire basis to various
customers along with the right to use such equipment to such clients of the
assessee. They also provided repair and maintenance service in the form of
AMCs and other service contracts. It was stated that with respect to business
of rental of equipments entered into by the assessee with their clients, since
the right to use of the equipment was transferred to the clients along with
physical possession of the goods, the assessee classified the same as 'deemed
sale' of goods under Article 336(29A) of the Constitution of India and in respect
of the said transaction Value Added Tax (VAT) was levied and has been fully
paid on all such transactions during the period under consideration namely,
2011-12 to 2014-15. Further, the assessee submitted that it has also paid
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service tax on AMC contract and other services rendered by them, such as,
installation of equipment and ancillary services in relation to the service of
rental of information technology equipments. The assessee to demonstrate as
to the nature of transaction between themselves and their clients produced a
certified copy of the agreement and the e-mails. By referring to the terms and
conditions of the agreement the assessee submitted that the amount collected
as rental charges suffered VAT as the same tantamount to transfer of right to
use the goods wherein the assessee transfers the right to use and effective
control over the equipment to its clients and thereby attracting the provision
'deemed sale' as envisaged under Article 336(29A) of the Constitution of India.
Further, it was stated that in terms of the agreement effective right to use and
control of the equipment was transferred to the clients of the assessee, it paid
state VAT/GST as applicable and, as such, the revenue did not suffer service
tax, be deemed to sale under the Constitution of India. The assessee referred to
the decision of the Hon'ble Supreme Court in Bharat Sanchar Nigam Limited
[supra] and in paragraph 91 of the judgment where the Hon'ble Supreme Court
has laid down the conditions/attributes to constitute transfer of right to use
the goods. The assessee also referred to the letter of the Ministry dated
29.2.2008 and contended that based on such instruction, in assessee's case
since the entire amount of rental charges has suffered VAT that does not arise
any question of payment of service tax on the same account. Several decisions
of the learned Tribunal were referred to as well as the ruling given by the
authority for advance ruling. With regard to invoking the extended period of
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limitation the assessee submitted that the extended period cannot be invoked
since there was no fraud, collusion or any willful mistake or suppression of fact
or contravention of any of the provisions of the Act or the rules made
thereunder with intent to evade payment of tax. Furthermore, the assessee
contended that it had regularly filed its service tax return and other statutory
records before all the authorities there had been no scrutiny of records by the
department and the VAT authorities also accepted the payment made by the
noticees regarding the transaction as being the cess.
6. In support of their contention, reliance was placed on the decision of the
Hon'ble Supreme Court in Lakshmi Engg. Works Vs. CCE, reported in 1989 (44)
ELT 353 and Pushpam Pharmaceuticals Company vs. CCE, reported in 1995
(75) ELT 721 SC. The assessee also contested the proposal for levy of interest
under Section 75 of the Act and also the penalty under Sections 77 and 78 of
the Act by contending that penalty under Section 78 can be imposed only
under the exceptional limitation scenario marked fraud, collusion, willful
misstatement, suppression of facts, or contravention of any of the provisions of
the Act or the Rules made thereunder with the intent to evade payment of
service tax. It was contended that none of these conditions were satisfied and
therefore the proposal to impose the proposed penalty under Section 78 is bad
in law. In support of their contention, reliance was placed on the decision of
the Hon'ble Supreme Court in the case of Hindustan Steel Ltd. vs. State of
Orissa, 1978(2) E.L.T 159 (SC). The adjudicating authority after referring to the
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relevant conditions in the agreement entered into between the assessee and
their clients held that the assessee was providing equipments to different
clients on hire without transferring right to use such tangible goods and they
merely rented out computers, printers, computer peripherals and accessories
at a specific location and such restriction to use the equipment can never be
construed a transfer of right. Further, it was held that the maintenance and
repairing of the computers during the period of rent and supply of accessories
were being made either by the assessee or by their approved agent and such
legal authority normally falls upon a person who holds the right of possession
of the equipment and such equipments being under the effective control and
possession with the supplier assessee. Thus, the authority came to the
conclusion that the assessee has retained the effective control of the equipment
supplied to the customers all along during the entire period of the agreement
and the customers were making use of the equipments under the effective
control of the assessee who exercised its right over the equipment during the
entire period when the agreement was in existence. The adjudicating authority
referred to the decision of the Hon'ble Supreme Court in BSNL and held that
the tests/conditions laid down therein do not stand fulfilled in the case of the
assessee. Several other decisions of the learned Tribunal were also referred to
and the contentions raised by the assessee were rejected and the proposal to
levy service tax as made in the show-cause notice was affirmed. The objection
raised by the assessee with regard to invoking the extended period of limitation
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was also rejected and ultimately the entire proposal made under the show-
cause notice was confirmed.
7. This order was put to challenge before the learned Tribunal by the
assessee and the assessee has been successful and aggrieved by the same the
Department is on appeal before us.
8. In the preceding paragraph we have mentioned upon the salient features
of the agreement entered into between the assessee and their clients. In order
to better appreciate the factual position, the salient features of the agreement
are quoted hereinbelow :-
"1. The owner is engaged in the business of
providing desktop, server, printers and computer
peripherals etc (herein after referred to as
Equipments) on hire.
2. That the hirer undertakes:
a) To use the equipments with due care and
diligence,
b) To inform and take written permission of Owners
for removal/shifting of the equipment from one
location to another location.
c) To preserve and not to deface or alter or
remove/replace the Logo or any other
device/indication of the Computer Exchange's Pvt.
Ltd. ownership of the equipment.
d) To allow during business hours of the Owner's
representatives to enter their (Hirer)
premises/office and inspect the equipments
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physically and or otherwise on receipt of 24 hours
prior notice to this effect from them.
e) Not to mortgage, transfer, pledge, assign or
otherwise encumber the equipment(s) or any part
thereof. The Hirer hereby acknowledges that the
equipment(s) is/a is/are and shall at all times
remain the sole and exclusive property of Computer
Exchange Pvt. Ltd. and the Hirer shall have no
right or title over the equipment other than user
for their own lawful purposes.
f) Not to make any alteration, modification,
addition or deletion to the equipment without prior
written permission from Owner.
g) Hirer will not engage it's or outside engineers
to attend to the equipments without prior
permission of the Owner."
9. To decide the correctness of the decision taken by the learned Tribunal,
we have to bear the factual position in mind and apply the same to the tests
laid down by the Hon'ble Supreme Court in BSNL and examine whether the
transaction done by the assessee was for the transfer of right to use the goods.
Para 91 of the judgment of the Hon'ble Supreme Court in BSNL is as follows :-
"91.To constitute a transaction for the transfer of
the right to use the goods the transaction must
have the following attributes:
a. There must be goods available for delivery;
b. There must be a consensus ad idem as to the
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identity of the goods;
c. The transferee should have a legal right to use
the goods-consequently all legal consequences of
such use including any permission or licenses
required there for should be available to the
transferee;
d. For the period during which the transferee has
such legal right, it has to be the exclusion to the
transferor this is the necessary concomitant of the
plain language of the statute - viz. a "transfer of
the right to use" and not merely a licence to use
the goods;
e. Having transferred the right to use the goods
during the period for which it is to be
transferred, the owner cannot again transfer the
same rights to others."
10. The first two attributes to be fulfilled is that there must be goods for
delivery. These tests stand satisfied and is not in dispute. The next attributes is
that there must be consensus/ad idem as to the identity of the goods.
Department has not raised any objection. Therefore, this attribute also stands
satisfied. The third attribute is that the transferee should have a legal right to
use the goods - secondly, all legal consequences for such use including
permission of license required therefor should be available to the transferee.
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Admittedly, the computers, printers, servers, computer peripherals and other
equipments are hired by the assessee to their clients and they are installed in
the premises of their clients and the equipments are also customized to suit
the requirement of their clients. Pursuant to the agreement between the
parties, the transferee namely, clients of the assessee, have a legal right to use
the good. What is prevented under the agreement is only shifting of the
equipment from the location where it is installed to any other location, that too,
with the prior permission of the assessee. Therefore, this condition cannot be
construed to mean that the clients of the assessee do not have a legal right to
use the goods. Therefore, in our opinion, attribute (c) also stands satisfied in
the assessee's case.
11. The next attributes to be fulfilled is that for the period during the
transferee such legal right, it has to be to the exclusion of the transferor. It
cannot be disputed by the Department that after the assessee has entered into
an agreement with its client namely, transferee, during the period when the
agreement is in force, the assessee, namely, the transferor, has no right to
transfer very same goods in favour of their client. Therefore, the transfer of
such legal right in favour of the clients/transferee to the exclusion of the right
of the assessee, the transferor to transfer such right in favour of the third party
during the subsistence of the agreement. Therefore, attribute (d) also stands
satisfied in the assessee's case.
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12. The last attribute to be fulfilled is that when the assessee transferred
right to use the goods during the period for which it has to be transferred, the
owner cannot again transfer the same rights to the others. The terms of the
agreement makes it clear that the transferor namely, the assessee, cannot
transfer the equipment to third parties during the period when the agreement
is in force. In fact, the Department has not disputed this position and not made
any allegation in the show-cause notice in this regard. Therefore, all the
attributes as laid down by the Hon'ble Supreme Court in the BSNL to
constitute a transaction for the transfer of right to use the goods stands
fulfilled in the assessee's case.
13. Having steered clear on this issue, the next issue to be considered is
whether the extended period of limitation could have been invoked. The Hon'ble
Supreme Court while dealing with such issue has pointed out that the concept
of suppression amounts to that which one is legal to state but one intentionally
or deliberately or consciously does not state. In other words, the terms were
mainly to deliberately omit to state certain things and it was held that the
extended period of limitation is inapplicable in the absence of suppression of
facts and hence absence of an intent to evade payment of duty. In Uniworth
Textiles Ltd. Vs. Commissioner of Central Excise, Raipur, reported in 2013 (288)
ELT 161 (SC), it was held that every non-payment/non-levy of duty does not
attract extended period. There must be deliberate default. The conclusion that
mere non-payment of duty is not equal to collusion or willful misstatement or
suppression of facts is untenable. Furthermore, it was held that the act
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contemplated a positive action which buttresses the negative intention of willful
default. Furthermore, the section contemplates two situations, namely,
inadvertent non-payment and deliberate default and that the word 'willful
default' introduces a mental element and hence requires looking into the mind
of the assessee by gauging its actions which is an indication of one's state of
mind. Further, the show cause notice may not clearly bring out act of omission
of the assessee leading to invocation of the extended period of limitation. The
burden to justify invocation of the extended period lies with the Department
and the assessee cannot be asked to provide his bona fide when prima facie
acted in a bona fide manner.
14. We have carefully perused the allegations made in the show cause notice
and there is no mention of a deliberate intention to suppress the facts with an
intent to avoid payment of tax. The assessee has time and again contended
that they have a service tax registration in respect of the contracts which they
enter into with their clients for providing annual maintenance etc. in relation to
the hiring of the equipments to the clients. It is not disputed that the assessee
has been filing their service tax returns promptly and the entire service tax
liability has been paid. Therefore, the Department was aware of the nature of
the transaction done by the assessee and it can hardly be stated that there was
willful suppression of facts done by the assessee with the intention to evade
payment of duty. Therefore, the Department could not have invoked the
extended period of limitation. Thus, having decided both the issues in favour of
the assessee, the question of levy of penalty or interest could not arise.
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15. In the light of the above discussions, we are of considered view that the
learned Tribunal was justified in allowing the assessee's appeal and setting
aside the order of adjudication.
16. For all the above reasons, the appeal fails and is dismissed and the
substantial questions of law as suggested are answered against the revenue.
17. The stay application, IA NO: GA/2/2025, also stands dismissed.
(T.S. SIVAGNANAM, CJ. )
I agree.
(CHAITALI CHATTERJEE (DAS), J.)
Pkd./SM/SN/S.Das/Mg.
AR[CR]
.