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TMI Blog2011 (4) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... nd leasing locomotives and rolling stock abroad. 2. It has approached this Authority for Advance Ruling on the question sought to be raised by it since it proposes to enter into a new business and wants to seek a ruling regarding its liability to pay service tax, if any, on that business. Since there is serious objection on the part of the Commissioner of Service Tax, on the ground that the claim is vague, we set out the activity proposed to be undertaken by the applicant as disclosed in its application. "Now the company intends to enter into business of providing locomotives, coaches, wagons, etc. under Operating Leasing Agreement in the domestic market. The criteria for that may be company to take locomotives either on operating lease or through outright purchase from Indian railways which in turn may be leased or sub-leased to the prospective clients in India". 3. While indicating its interpretation of law in Annexure II to the application, the applicant has stated that it proposes to operate on dry lease of its locomotives, coaches and wagons etc. and dry lease is a leasing arrangement of equipment for definite periods with obligation on the lessee to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an occupation of the asset by the lessee; (iii) the lease payment is calculated so as to cover the full cost of the asset together with the interest charges; and (iv) the lessee is entitled to own, or has the option to own, the asset at the end of the lease period after making the lease payment; (ii) xx xx xx (iii) merchant banking services, (iv) securities and foreign exchange (forex) broking, and purchase or sale of foreign currency, including money changing;] (v) asset management including portfolio management, all forms of fund management, pension fund management, custodial, deposiroty and trust services; (vi) advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisitions and advice on corporate restructuring and strategy; (vii) provision and transfer of information and data processing; and (viii) banker to an issue services; and (ix) other financial services, namely, lending; issue of pay order, deemed draft, cheque, letter of credit and bill of exchange; transfer of money including telegraphic transfer, mail transfer and e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comotives, coaches and wagons as now proposed to be undertaken. We have earlier admitted the application with a view to give a ruling on this question and since at the argument it was made clear to us that the applicant would be purchasing or hiring these equipments and would merely be letting them out to the proposed lessee, for a short term on a rent to be paid for use of the equipment without providing any other services to the lessee, we think that it would be proper to give a ruling on that question on the basis of the submissions made regarding the nature of the transaction. We make it clear here itself that if the applicant were to depart from what is set out before us as the proposed activity which is the leasing of its equipments for a short period on rent without providing any other service and without having any control over the equipment, this ruling will have no application. We also make it clear that once a lease is entered into and the transaction is reduced to writing, it would be open to the authority concerned to scrutinize the transaction with reference to whether the assets to be leased are capitalized in the accounts of the lessor, the proportion the rent for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the cost of the acquisition of the equipment by the applicant and the equipment would always remain as that of the applicant. 8. The definition speaks of „financial leasing service including equipment lease or hire purchase. Financial leasing is indicated as meaning a lease transaction where four elements have to cumulatively exist including the payment of the lease amount being calculated as to cover the full cost of the asset together with the interest charges and the lessee being entitled to own the leased asset at the end of the period after making the lease payment. A contract of hire purchase is explained in Halsburys Law of England, Vol.2 paragraph 1852 thus: "(A) contract of hire purchase or more accurately the contract of hire with an option of purchase is one under which the owner of goods lets them out on hire and undertakes to sell them to, or agrees that they shall become the property of the hirer, conditionally on his making a certain number of payments". Thus, a transaction of hire purchase contemplates the payment of the value of the equipment by the hirer and transfer of title to the hirer at the end of the transaction. In fact, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equipment and without the intention of giving the lessee the option to purchase the equipment on the expiry of the term or on fulfilling its obligation to pay the hire charges (which takes in the value of the equipment itself) in instalments in terms of the transaction. 10. Section 65(12) of the Act defines banking and other financial services. The intention manifested is to deal with financial services. Whether it is financial services rendered by a banking institution or by a non-banking institution, those will fall under the definition. Originally, in addition to a banking company or a financial institution including a non-banking financial company, any other body corporate rendering such a service was also included. With a view to rope in other commercial concerns undertaking the business of rendering financial services, the definition was amended to include them. The services remained banking and other financial services. Financial services included financial leasing services and that included equipment leasing and hire purchase. We think that the thrust of the definition was always on financing as a service, whatever form it took and whoever undertook it. It is, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osed to grant a lease for two years only). The lease amount or rent is to bear only a small proportion to the cost of the equipment. The term of the lease has no correlation with the life of the equipment which on the expiry of the short term, would revert to the control of the applicant. The subject matter of the lease was to be in the possession and effective control of the lessee during the term of the lease. There was no intention to convey the title to the equipment to the lessee on the expiry of the term or to confer on the lessee an option to purchase the equipment. It appears to be a simple case of hiring of locomotives, coaches/wagons for a short duration on a rent to be paid by the lessee who was entitled to have the equipment under its control and risk during the term of the lease. Such a transaction cannot come within the purview of „financial leasing services contained in Section 65(12) of the Act. 14. Since exclusive possession and effective control of the equipment is to be transferred to the lessee during the term of the lease, Section 65(105)(zzzzj) cannot also be attracted. 15. We, therefore, rule that the proposed leasing of the locomotives ..... X X X X Extracts X X X X X X X X Extracts X X X X
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