The Calcutta High Court dismissed an appeal filed by the Commissioner of Service Tax II, Kolkata, challenging the Customs, Central Excise and Service Tax Appellate Tribunal’s decision in favour of M/s Computer Exchange Pvt. Ltd. The dispute revolved around the classification of rental transactions involving computer hardware and IT peripherals specifically, whether they constituted a “supply of tangible goods service” liable for service tax, or a “deemed sale” subject to VAT.
The Central Excise Department contended that Computer Exchange provided equipment such as desktops, servers, and printers on hire without transferring effective control or right to use to the clients, and hence, the transactions fell under the scope of taxable services under Section 65(105)(zzzzj) of the Finance Act, 1994. It argued that the company’s failure to register for such services and to reflect receipts in their ST-3 returns amounted to suppression of facts, warranting invocation of the extended limitation period and imposition of penalties.
However, the bench comprising of Chief Justice T.S. Sivagnanam and Justice Chaitali Chatterjee (Das), found that the Tribunal had rightly applied the principles laid down in the Supreme Court’s landmark BSNL v. Union of India, (2006) 3 SCC 1. Analyzing the clauses of the rental agreement, the Court held that all five attributes required to constitute a valid “transfer of the right to use goods” were satisfied — including transfer of possession and control, exclusivity of use, and prohibition on re-transfer by the lessor. The equipment was customized, installed at the client’s premises, and used by them under conditions that confirmed legal and effective control.
The Court further held that since VAT had been paid on the rental transactions and the agreements fell within the ambit of Article 366(29A) of the Constitution (deemed sale), no service tax could be levied. It noted that Computer Exchange had also discharged its service tax liability on ancillary services such as AMCs and installations, and regularly filed returns — negating the department’s claim of suppression or fraud.
On the issue of limitation, the Court emphasized that the extended period under Section 73(1) of the Finance Act could not be invoked in the absence of wilful suppression or intent to evade tax. Relying on Uniworth Textiles Ltd. and Hindustan Steel Ltd 2013 (288) ELT 161 (SC), the Court held that bonafide classification disputes do not warrant penalties or interest.
Concluding that the Tribunal’s ruling was legally sound, the High Court affirmed that no substantial question of law arose. Accordingly, the appeal was dismissed, and the associated stay application rejected. The ruling reaffirms the legal clarity around the distinction between service provision and deemed sales in rental transactions involving tangible goods.
Appearance in the Case:
Appellant: Mr. Uday Shankar Bhattacharyya, Adv. Mr. Kaustuv Kanti Maiti, Adv. …for appellant.
Respondent: Mr. Ankit Kanodia, Adv., Ms. Megha Agarwal, Adv.
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