By TIOL News Service

NAINITAL, NOV 24, 2014: THESE appeals were filed by Revenue against the order of Tribunal setting aside the demand under Rent a Cab operator service by holding that, for imposing service tax within the meaning of Section 65(105)(o) of the Service Tax Act, the hirer must have possession of the vehicle in question.

Before the High Court, revenue argued that:

The Tribunal has been in error in not noting that, essentially, there is no distinction between "hiring" and "renting". The important element is the consideration of what is "taxable service". The Court may not overlook the words "in relation to". It has the effect of widening the scope of the activities, which are sought to be taxed. No reliance can be placed on the provisions of the Motor Vehicles Act, 1988 in interpreting the provisions contained in the Finance Act. In these cases, factually, the respondents / assessees entered into contracts with public sector organizations and the nature of the transactions make it clear that it partakes element of a rent-a-cab scheme and the vehicles were being offered to the organizations, which were using them.

After hearing both sides, the High Court held:

What is sought to be taxed under the provisions, is service, which is rendered in relation to renting of cabs. Under Section 65(91) of the Service Tax Act, "rent-a-cab scheme operator" has been defined as a person, who is engaged in the renting of cabs. The words "in relation to", undoubtedly, do have the effect of expanding the scope of taxation. With this proposition, we can have no quarrel. But, this cannot detract from our enquiring into as to what is the transaction, which is actually brought to tax. We are constrained to pose this question and answer this question as what is sought to be taxed is the service in relation to the renting of cabs. So, the most important and crucial element, which we must bear in mind, is, whether there is a business of renting of cabs. Unless there is renting of cabs, there is no question of further enquiring as to the services, which may be rendered therein. In other words, any service, which may be rendered and which does not relate to renting of cabs, would be irrelevant for our consideration. When we consider the matter in the said light, we have no doubt in our minds that the Tribunal has, in this case, correctly propounded the principle that, unless the control of the vehicle is made over to the hirer and he is given possession for howsoever short a period, which the contract contemplates, to deal with the vehicle, no doubt subject to the other terms of the contract; there would be no renting.

When a person chooses to hire a car, which is offered on the strength of a permit issued by the Motor Vehicles Department, then the owner of the vehicle, who may or may not be the driver, will offer his service while retaining the control and possession of the vehicle with himself. The customer is merely enabled to make use of the vehicle by travelling in the vehicle. In the case of a passenger, he is expected to pay the metered charges, which is usually collected on the basis of the number of kilometers travelled. These are all matters, which are regulated by the Government. Unlike the said scenario, in the case of a rent-a-cab scheme, as is clear from the very fundamental principle underlying the scheme, it is to give the hirer the freedom to use the vehicle as he pleases, which, undoubtedly, implies that he must have possession and control over the vehicle. This is the fundamental distinction between rent-a-cab and a pure case of hiring.

Unless there is control, which is passed to the hirer under the rent-a-cab scheme, there cannot be a taxable transaction under Section 65(105)(o), read with Section 65(91) of the Service Tax Act.

We are, therefore, unable to subscribe to the view taken by the Punjab & Haryana High Court - 2010-TIOL-436-HC-P-H-ST and the impugned orders passed by the Tribunal are confirmed.

(See 2014-TIOL-2039-HC-UKHAND-ST)