TMI Blog2019 (3) TMI 1100X X X X Extracts X X X X X X X X Extracts X X X X ..... the lessor (appellant-company). As per the documents, the transactions fall under the category of Operating Lease only. The allegation of the Department that the agreements are actually Financial Lease and that Operating Lease is only a misnomer, is factually wrong. The issue as to whether Operating Lease is subject to levy of service tax has been analyzed by the Tribunal in the case of M/s. Lease Plan India Ltd. [2018 (1) TMI 717 - CESTAT NEW DELHI], where it was held that the lease arrangements on which the respondent–assessee discharged VAT are operating leases and are not liable to service tax - Following the said decision, it can be held that the lease agreements are in the nature of Financial Leasing, is incorrect and hence, the demand cannot sustain - impugned Order is set aside - appeal allowed - decided in favor of appellant. - Appeal Nos.: ST/650 & 651/2012 - Final Order Nos. 40530-40531/2019 - Dated:- 18-3-2019 - Ms. Sulekha Beevi C.S., Member (Judicial) And Shri Madhu Mohan Damodhar, Member (Technical) Shri. P. C. Anand, Consultant for the Appellant Shri. K. Veerabhadra Reddy, ADC (AR) for the Respondent ORDER Per Bench : Brief fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pril 2011. 3.1 However, it is the case of the Department that even though the appellants have discharged their service tax liability on Financial Leasing activities, the appellants did not discharge service tax on certain leasing transactions which they claim to be Operating Lease transactions. That they did not reflect the said income received from Operating Leasing transactions in their ST-3 returns. 3.2 Instead, letter dated 29.03.2010 was issued by the appellants stating that Financial Lease is different from Operating Lease and that Operating Lease would not fall within the meaning of Financial Leasing Services as defined in the Finance Act, 1994. 3.3 The Department was of the view that there was no difference in respect of Financial Lease and Operating Lease offered by the appellant as per the terms of contracts except for the clause relating to return of the asset to appellant at the end of the tenure in the case of Operating Lease. Further, whatever risks and rewards clause were built into the leasing contracts were the same for Financial and Operating Leases. It therefore appeared that the Operating Lease entered into by the appellant is only a misnomer and that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d reward of ownership transferred to him. The lessee has only the right to use the asset; the risk and reward/benefit of ownership remains with the lessor; and it is the lessor who pays for the maintenance and insurance of the asset, there is no transfer of risk and reward of ownership to the lessee. The lessor recovers a large part or all of the cost of the asset plus interest from the rent paid by the lessee. Payment of lease rent by the lessee are considered as operating expenses and shown in his profit and loss account statement. The lessee has the option to purchase the asset or entitlement for purchase of the asset at the end of the lease period. The option is denied and if at all it may be considered and the valuation thereof is fixed by the lessor. While the lessor shows the asset leased in his balance sheet as receivable , the lessee is considered to be the owner of the asset for the purpose of income tax and therefore claims depreciation expense and interest expense. The lessor is the owner of the goods so leased. 5.4 The inten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Master Lease Agreement and submitted that Clause 21 of the agreement refers to the residual value in the case of Financial Lease agreement, while in the case of Operating Lease agreement, it refers to delivery of equipment on termination of the lease. In the Financial Lease, the residual value is fixed at the time when the lease agreement is signed while in the Operating Lease, in as much as the equipment will be sold to the person as chosen by the lessor, the lessee is directed to return or deliver the goods to the lessor in good condition. That the agreement would establish that the transactions on which demand has been raised are in the nature of Operating Lease. 6.1 Ld. AR Shri. K. Veerabhadra Reddy appearing on behalf of the respondent supported the findings in the impugned Order. He submitted that the definition of Banking and Other Financial Services when introduced with effect from 16.07.2001 itself, included the activity of Financial Leasing Services. The amendment brought forth with effect from 10.09.2004 mentioned the words Financial Leasing Services including equipment leasing and hire-purchase . After 01.07.2007, an Explanation was added in the definition so as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract is for use and 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) to (ix) (Emphasis added) The first three Clauses are almost common to both Financial Leasing as well as Operating Leasing. The arguments revolve around the fourth Clause. 10.1 The Hon ble Apex Court in the case of M/s. Association of Leasing Financial Service Companies (supra) has analyzed the difference between Financial Lease and Operating Lease. The relevant portion of the said judgement is reproduced as under : 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- purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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. These are not direct lending activities. However, RBI treats them as services or facilities. The financial facilities are extended by way of equipment leasing or hire-purchase financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. 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 operating lease . A finance lease transfers all the risks and rewards incidental to ownership, even though the title may or may not be eventually transferred to the lessee. In the case of finance lease the lessee could use the asset for its entire economic life and thereby acquires risks and rewards incidental to the ownership of such assets. In substance, finance lease is a financial loan from the lessor to the lessee. On the other hand an operating lease is a lease other than the finance lease. 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 stated in the agreement or upon payment of a st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... title or interest in the equipment or any part thereof and shall at all times, protect and defend as ballee/licencee of the equipment the Lessor s absolute and permanent ownership right and title thereto and that he shall not at any time, advance or make any claim adverse to or in derogation of the Lessor s absolute and permanent ownership right and title. The Lessee further agrees and covenants that he shall not claim any benefits under the Tax Laws associated with the ownership of the equipment such as depreciation, investment allowance, etc. . . . 21. DELIVERY OF EQUIPMENT ON TERMINATION OF THE LEASE : a) Upon determination of the lease of the equipment granted hereunder, by efflux of time, unless a renewal is granted or agreed to, the Lessee shall, at its cost, forthwith, such determination, deliver or cause to be delivered to the Lessor at the place to be notified by the Lessor to the Lessee, the equipment in good order and condition (ordinary wear and tear being excepted). b) Compliance with proper use: If anytime during the continuance of the lease, it appears to the lessor from the inspection carried out pursuant to Clause 14 hereof that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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