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CCE And ST, New Delhi Versus M/s Lease Plan India Limited

2018 (1) TMI 717 - CESTAT NEW DELHI

Classification of services - nature of lease - operating lease of finance lease - Banking and Other Financial Services or otherwise? - business in operating lease with reference to motor vehicle given to the clients - Revenue entertained a view that the terms and conditions governing both types of leases, namely financial lease and operating lease are similar and as such the consideration received in such business transaction is liable to be taxed under BOFS - Held that: - The whole thrust of th .....

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’s account as these are shown as own assets. In financial lease no depreciation is accounted for. The income shown on such arrangement is EMI received which is principal + interest. - Listing out the difference between operating lease and financial lease the impugned order categorically recorded that the lease arrangements on which the respondent–assessee discharged VAT are operating leases and are not liable to service tax - the impugned order is legally sustainable - Appeal dismissed - dec .....

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missioner of Service Tax, New Delhi. 2. Brief facts of the case are that the respondent-assessee are engaged in business of financial as well as operating lease of vehicles. They were registered with the Service Tax Department and were paying service tax under the category of Banking and Other Financial Services (BOFS) in terms of Section 65(12) read with Section 65(105)(zm) of the Finance Act, 1994. The respondent-assessee is paying service tax at the applicable rate on the consideration receiv .....

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he Revenue entertained a view that the terms and conditions governing both types of leases, namely financial lease and operating lease are similar and as such the consideration received in such business transaction is liable to be taxed under BOFS. 3. Accordingly, proceedings were initiated against the respondent - assessee by issue of various show cause cum demand notices covering the period 2004-05 to 2011-12. A total demand of ₹ 24,39,00,455/- was issued against the respondent-assessee. .....

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as per operating lease agreement are not covered by the tax entry BOFS. The service tax demand was dropped on this basis. The Revenue preferred these appeals against this order. 4. Ld. AR appearing for the Revenue elaborating the grounds of appeal submitted that the activities of the respondent-assessee are covered by the tax entry BOFS. In terms of the agreement, the lessee pays the maintenance charges, insurance and all taxes. Accordingly, the arrangement is for financial lease only. Referring .....

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at the respondent-assessee fulfils the requirement of financial lease and the criteria of Accounting Standard AS-19 has to be examined to arrive at a correct categorisation of lease arrangement. It is the case of the Revenue that what is claimed to be operating lease arrangement is actually a financial lease, liable to service tax. 5. Ld. Sr. Counsel appearing for the respondent-assessee supported the findings recorded in the impugned order. He submitted that to appreciate the scope of service t .....

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ther for a consideration. That absolute sale alone can be taxed by the State Government under Sales Tax. Later in K. L. Johar and Co. Vs. DCTO -1965 2 SCR 112 (SC) the Apex Court held that Sales Tax can be levied on hire purchase transactions resulting in sale but only to that extent of sale price which will be the last instalment of payment. The Apex Court held that there is a sale only when the purchaser exercise such option to purchase which is at a later date and therefore the depreciated va .....

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Apex Court in 20th Century Finance Corporation Ltd. Vs. State of Maharashtra -2000 (6) SCC 12 examined the leasing and the lease transactions under Article 366(29A) (d) of the Constitution. 6. Ld. Counsel further elaborating the evolution, the concept of lease arrangement submitted that such lease transactions are broadly classified into two categories, namely, financial lease and operating lease. He further submitted that financial lease which will also include hire purchase finance, is nothin .....

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he lessee, the actual or eventual owner to capture their assets in their books and also claim depreciation. On the contrary, when it comes to an operating lease, the assets are owned by the lesser and these are handed over to the lessee for a temporary period for their use. Accounting Standards 19 therefore mandates that in the case of operating lease, the lesser should capture the assets in their books and depreciation should also be claimed by the lesser only. 7. Ld. Counsel submitted that the .....

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e lessee, the owner or eventual owner who is allowed to capture the assets in their books. The lessee is also allowed to claim depreciation. The lesser has to show this as a loan transaction and the funded amount (Principal + Interest) only as receivables. Lesser cannot take its assets into its books. On the contrary in the case of an Operating Lease lesser is the owner and therefore allowed to capture the assets in their books. The income realised from the lessee has to be booked as lease or re .....

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the owner or the eventual owner the lease, would normally be covering the economic life of the asset. The total cost of the vehicle alongwith interest would stand covered. In operating lease, since the income is in the form of rental and not sale of assets, 60% to 80% of the value is collected as rentals and the balance amount is normally recovered after the expiry of lease period by way of sale for the residual nominal price. 9. Ld. Counsel appearing for the respondent-assessee elaborately ref .....

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s not correct in their submission that the respondent fulfilled all the criteria for a financial lease in the impugned transactions. The respondent -assessee fulfilled the essential criteria for categorisation under operating lease being not the owner of the asset. The requirement of financial lease is not met. The presumption of the Revenue that the insurance is taken in the name of lessee and as such they alone are the owner is not supported by the facts. In fact, such contention by Revenue is .....

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disputed that the respondent- assessee collected only lease rental and the assets are put up for sales post lease period through a bidding process as per the agreement. It is not open to the Revenue to assume the transaction to be a financial lease. 11. We have heard the ld. AR and the ld. Sr. Counsel at length and perused their written submission, filed after the hearing. We have also carefully considered the impugned order. We note that the impugned order has examined the issue elaborately by .....

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ent of the client. (b) Appellants have paid VAT or Service Tax in respect of these services under BOFS for financial lease and VAT in respect of operating leases. (c) The respondent -assessee would have paid much lesser service tax on operating leases in case the same are subjected to service tax as financial lease. They are discharging much higher quantum of VAT by paying tax as operating leases. (d) Accounting Standard 19 should be examined and applied in order to arrive at correct nature of t .....

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datory in respect of financial leases executed on or after April, 2001. It inter alia provides for capitalization of finance lease assets in the books of the lessee instead of lessor. The lessor [NBFC] is required to show the assets leased only as receivables in its balance sheet instead of as fixed assets. The implication of the above AS-19 for the NBFC prescribed by RBI vide amendments to the 1998 Directions is that all financial leases would now be accounted like hire-purchase transactions [S .....

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which are regulated as para banking activities by the RBI under the provisions of the 1934 Act. They are regulated not only to protect depositors but also customers [See Section 45-I(c)(iii)(i)]. The above activities are financing activities encompassed under Section 45-I(c)(i) which in turn constitutes rendition of services to its customer(s) which is the taxable event under Section 65(105)(zm) of the Finance Act, 1994 (as amended). Apart from NBFCs, even banks through their subsidiaries with .....

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of equipment leasing and hire-purchase finance are facilities extended by NBFCs to their customers; that, they are financial services rendered by NBFCs to their customers and that they fall within the meaning of the words banking and other financial services which is sought to be brought within the service tax net under Section 66 of the Finance Act, 1994. One more aspect needs to be highlighted. With the application of AS- 19, the leased assets are required to be shown as receivables and not a .....

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the Constitution. 20. According to Sale of Goods Act by Mulla [6th Edition] a common method of selling goods is by means of an agreement commonly known as a hire-purchase agreement which is more aptly described as a hiring agreement coupled with an option to purchase, i.e., to say that the owner lets out the chattel on hire and undertakes to sell it to the hirer on his making certain number of payments. If that is the real effect of the agreement there is no contract of sale until the hirer has .....

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if the intention of the financing party in obtaining the hire-purchase and the allied agreements is to secure the return of the loan advanced to its customer the transaction would be merely a financing transaction. [See page 75]. The point which needs to be re-stated is that the funding activity undertaken by the financing party which could be in the form of loan or equipment leasing or hire- purchase financing, would be exigible to service tax if such activity falls in the category of banking a .....

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-purchase covers two different and distinct transactions. The activity of funding or financing by NBFC who is in the business of financing by giving loans, or equipment leasing or hire-purchase finance falls in the category of financial services rendered by NBFCs to their customers. It is an activity in relation to the hire-purchase or lease transaction. In this connection, as and by way of illustration we need to give an illustration which brings out the distinction between a finance lease and .....

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. Accounting of a finance lease is under AS-19, which as stated above, is mandatory for NBFCs. It is a completely different regime. According to Chitty on Contract, a hire-purchase agreement is a vehicle of instalment credit. It is an agreement under which an owner lets chattels out on hire and further agrees that the hirer may either return the goods and terminate the hiring or elect to purchase the goods when the payments for hire have reached a sum equal to the amount of the purchase price st .....

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that it is a form of long-term financing. In a finance lease, it is the lessee who selects the equipment to be supplied by the dealer or the manufacturer, but the lessor [finance company] provides the funds, acquires the title to the equipment and allows the lessee to use it for its expected life. During the period of the lease the risk and rewards of ownership are transferred to the lessee who bears the risks of loss, destruction and depreciation or malfunctioning. The bailment which underlies .....

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) payment on account of purchase. 21. To sum up, NBFCs essentially are loan companies. They basically conduct their business as loan companies. They could be in addition thereto in the business of equipment leasing, hire purchase finance and investment. Because NBFCs are basically loan companies, they are required to show the assets leased as receivables in their balance sheets. That, the activities of hire- purchase finance/equipment leasing undertaken by NBFCs come under the category of para b .....

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hire which is in the nature of remuneration (consideration) for hire. Thus, financing as an activity or business of NBFCs is different and distinct from operating lease/hire-purchase agreements in the classical sense. The elements of the finance lease or loan transaction are quite different from those in equipment leasing/hire-purchase agreements between owner (lessor) and the hirer (lessee). There are two independent transactions and what the impugned tax seeks to do is to tax the financial fac .....

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tirety, we are of the view that the impugned levy relates to or is with respect to the particular topic of banking and other financial services which includes within it one of the several enumerated services, viz., financial leasing services. These include long time financing by banks and other financial institutions (including NBFCs). These are services rendered to their customers which comes within the meaning of the expression taxable services as defined in Section 65(105)(zm). The taxable ev .....

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t is credited to the capital account of the lessor/hire-purchase service provider. It is the interest/finance charge which is treated as income or revenue and which is credited to the revenue account. Such interest or finance charges together with the lease management fee/processing fee/documentation charges are treated as considerations for the services rendered and accordingly they constitute the value of taxable services on which service tax is made payable. In fact, the Government has given .....

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No. B.11/1/2001-TRU dated 9-7-2001 in which it has been clarified that service tax, in the case of financial leasing including equipment leasing and hire-purchase, will be leviable only on the lease management fees/processing fees/documentation charges recovered at the time of entering into the agreement and on the finance/interest charges recovered in equated monthly instalments and not on the principal amount). Merely because for valuation purposes inter alia finance/interest charges are taken .....

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the State List, would be within the legislative competence of the Parliament under Article 248 read with Entry 97 of List I of Seventh Schedule to the Constitution. 38. According to Mr. Arvind Datar and Mr. K. Parasaran, learned counsel appearing on behalf of some of the appellants, once the subject matter of hire-purchase and leasing is constitutionally characterized as a sale (deemed sale) by the Constitution (Forty-sixth Amendment) Act, the said subject matter can be taxed only under Entry 5 .....

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portion of which is quoted hereinbelow : 44. Of all the different kinds of composite transactions, the drafters of the Forty-Sixth Amendment chose three specifications, a works contract, a hire-purchase contract and a catering contract to bring them within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same time. 39. Emphasizing the underlined words, the learned counsel contended that a hire-purchase does not involve a sale and servic .....

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relates to financial leasing services including equipment leasing and hire-purchase as beyond the legislative competence of Parliament by virtue of Article 366(29A) of the Constitution. In short, legislative competence of the Parliament to impose service tax on financial leasing services including equipment leasing and hire-purchase is the subject matter of challenge. Legislative competence was not the issue before this Court in the Bharat Sanchar Nigam Limited s case. In that case, the princip .....

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ry 97, List I and if the nature of the transaction partook of the character of both sale and service, then the moot question would be whether both the legislative authorities could levy their separate taxes together or only one of them. It was held that the subject transaction was a service and, thus, the Parliament had legislative competence to levy service tax under Entry 97, List I. In para 88 of the said judgment, this Court observed that No one denies the legislative competence of the State .....

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n 65(12)(a)(i). The taxable event is indicated in Section 65(105)(zm). As stated above, the impugned provision operates qua an activity of funding/financing of equipment/asset under equipment leasing under which a lessee is free to select, order, take delivery and maintain the asset. The lessor (NBFC) arranges the finances. It accepts the invoice from the vendor (supplier) and pays him. Thus, the lessor (NBFC) renders financial services to its customer(s) and what is taxed under the impugned pro .....

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he appellant(s) with reference to the income which the appellant(s) earns by way of interest/finance charges. In the circumstances and for the reasons given hereinabove, the question of splitting up of transactions, as contended on behalf of the appellant(s), does not arise. As held hereinabove, equipment leasing and hire-purchase finance constitute long term financing activity. Such an activity was not the subject matter of the discussion in the Bharat Sanchar Nigam Limited s case. The service .....

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evy of service tax falls within Entry 97 of List I. The decisions are in the case of T.N. Kalayana Mandapam Association (supra), Gujarat Ambuja Cements Ltd. (supra) and All-India Federation of Tax Practitioners (supra) . 15. Regarding the contention of the Revenue with reference to ownership of the vehicle and its implication the decide lease arrangement, we refer to the decision of Apex Court in Industrial Credit and Development Syndicate Ltd. Vs. CIT, Mysore & Anrs. (2013) 3 SCC 541. The A .....

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essed as business income in its hand and the entire lease rent paid by the lessee has been treated as deductable Revenue expenditure in the hands of the lessee. 16. We are in agreement with the respondent-assessee and the findings of the Commissioner regarding the treatment of Accounting Standard 19 to decide the nature of lease arrangement. The respondent submitted profit and loss accounts for the relevant period. On perusal, we note that the income for operating lease were shown as lease renta .....

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