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2018 (1) TMI 717

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 the distinction for financial lease and operating lease is the ownership of the asset. This aspect has been adequately analysed and covered in the impugned order with more specific reference to Accounting Standard 19 - 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 income for operating lease were shown as lease rental and the assets were depreciated in the lesser’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 .....

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dicated by the Original Authority resulting in the impugned order. The Original Authority dropped the proceedings initiated through four show cause notices covering the above period. He held that there is a clear distinction between financial lease and operating lease agreement entered into by the respondent-assessee. Accordingly, it was held that activities undertaken by the respondent -assessee 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 to the observation of Hon ble Supreme Court in the case of Association of Lessee and Financial Service Companies - 2010 (20) STR 417 (SC). Ld. AR submitted that a financial lease transfers all risks and reward incidental to ownership, even though the title may or may not be eventually transferred t .....

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unsel 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 nothing but a loan transaction, advancement or assistance through funds for procurement of assets. Under financial lessee, the lessee is the owner of the asset and depreciation under Section 32 of the Income Tax Act, 1961 is claimed by him. The lesser cannot book or register these assets as they belong to or eventually get owned by the lessee. The Chartered Accountant Institute revised the Accounting Standards 19 mandating the lesser to book the loan amount as only receivables alongwith interest and the 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 .....

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ion of Leasing and Financial Service Company Vs. Union of India -2010 (20) STR 417 (SC). 10. Contesting specific grounds raised by the Revenue in their appeal, ld. Counsel submitted that the Revenue is 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 contrary to their own assertion. If lessee is the owner, there is no need to sell assets post the lease period. It is the common fact that in operating lease after expiry of the lease period, the assets are sold through bidding process. In a financial lease assets and their ownership is identified to the lessee who alone depreciates the said assets. In any case, ld. Counsel submitted that taking insurance or bearing incidental are not criteria covered in AS 19 to decide the ownership. It is not .....

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98 Directions is that all financial leases would now be accounted like hire-purchase transactions [See Manual of NBFCs 9th Edition Page 268]. Similarly, under the RBI Guidelines dealing with accounting for investments, NBFCs having not less than 60% of the total assets in lease and hire purchase and deriving not less than 60% of their total income from such activities can be classified as hire purchase/equipment leasing companies. All these circulars and guidelines issued by RBI are relied upon only to show that equipment leasing and hire-purchase are activities undertaken as business by NBFCs 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 the approval of RBI can undertake equipment leasing, hire- purchase business and financial services. .....

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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 and other financial services under Section 65(12) of the Finance Act, 1994. The financial transaction was earlier out of the tax net. In the process there are two different and distinct transactions, viz., the financing transaction and the equipment leasing/hire-purchase transaction. The former is exigible to service tax under Section 66 of Finance Act, 1994 (as amended) whereas the latter would be exigible to local sales tax/VAT. Funding or financing the transaction of equipment leasing and hire-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 financ .....

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sionary right]. If the lease is terminated prematurely, the lessor is entitled to recoup its capital investment [less the realizable value of the equipment at the time] and its expected finance charges [less an allowance to reflect the return of the capital] [para 32.057]. In the case of hire-purchase agreement the periodical payments made by the hirer is made up of : (a) consideration for hire (b) 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 banking . That, in substance a finance lease, unlike an operating lease, is a financial loan (assistance/facility) by the lessor to the lessee. That, in the bailment termed hire the bailee receives both possession of the chattel and the right to use it in return for remuneration. On the other hand, e .....

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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 exemption from payment of service tax to financial leasing services including equipment leasing and hire- purchase on that portion of taxable value comprising of 90% of the amount representing as interest, i.e., the difference between the instalment paid towards repayment of the lease amount and the principal amount in such instalments paid (See Notification No.4/2006 - Service Tax dated 1-3-2006). In other words, service tax is leviable only on 10% of the interest portion. (See also Circular F.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 pr .....

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the service tax imposed by Section 66 of the Finance Act, 1994 (as amended) on the value of taxable services referred to in Section 65(105)(zm) read with Section 65(12) of the said Act, insofar as it 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 principal question which arose for determination was in respect of the nature of the transaction by which mobile phone connections are enjoyed. The question was whether such connections constituted a sale or a service or both. If it was a sale then the States were legislatively competent to levy sales tax on the transaction under Entry 54, List II of the Seventh Schedule to the Constitution. If it was service then the Central Government alone had the legislative competence to levy service tax under Ent .....

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as not the subject matter of the discussion in the Bharat Sanchar Nigam Limited s case. The service tax in the present case is neither on the material nor on sale. It is on the activity of financing/funding of equipment/asset within the meaning of the words financial leasing services in Section 65(12)(a)(i). Lastly, we may state that this Court has on three different occasions upheld the levy of service with reference to Entry 97 of List I in the face of challenges to the competence of the Parliament based on the entries in List II and on all the three occasions, this Court has held that the levy 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 Apex Court dealing with the provisions of Motor Vehicle Act and Income Tax Act with reference to depr .....

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