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TMI Blog2019 (3) TMI 1100X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices under Section 65(10) of the Finance Act, 1994 from 16.07.2001 vide Notification No. 04/2001-ST dated 09.07.2001. Subsequently, on introduction of new definition and re-alignment of Section 65 of the said Act, "Banking and other Financial Services" are now defined by Section 65(12) of the Finance Act, 1994. 2.2 Immediately, Writ Petitions were filed by the Association of Leasing and Financial Services Companies before the Hon'ble High Court of Madras against the levy of service tax on leasing/hire purchase transactions, as being ultra vires the provisions of Articles 14, 19(1)(g), 265, 366, (29A), Entry 54, List-II, Schedule VII of the Constitution of India and also being beyond the legislative competence of Parliament. The Writ Petition was admitted and the Hon'ble High Court had granted a stay. The Equipment Leasing Association (India), of which the appellant is a member, filed similar petitions and were granted stay by the Hon'ble High Court. Hence, the appellants neither declared the taxable value of the hire-purchase and leasing services nor did they pay the appropriate service tax. 2.3 Subsequently, the prayers in all the related Writ Petitions were disposed of by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e definition of Banking and Other Financial Services for the period from 16.07.2001 to 09.09.2004, as amended from 10.09.2004 to 30.06.2007 as well as the period after 01.07.2007. In all these definitions, there is no levy on the activity of Operating Lease transactions; there is a clear difference between Financial Lease and Operating Lease. 5.2 He explained that in order to treat a lease agreement as a Financial Lease, it should satisfy all the four sub-clauses to the Explanations in the definition of "Banking and Other Financial Services" after 01.07.2007. Since the lessee under the lease agreements does not have either the right or option to own the asset at the end of the lease period, the fourth sub-clause of the Explanation would not apply to the disputed transactions, which are in the nature of Operating Lease. 5.3 Further, the Accounting Standards (AS-19) issued by the Chartered Accountants of India defines the term "Financial Lease" as "a lease that transfers substantially all the risks and rewards incident to ownership of an asset." The difference between the two types of leases was summarized by the Ld. Consultant, as under : Finance Lease Operating Lease Lessor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.5 Leasing activity as entered into by the appellant is in the nature of Operating Lease and therefore there is no liability to pay service tax. To support his arguments, he relied upon the decision in the case of C.C.E. & S.T., New Delhi Vs. M/s. Lease Plan India Ltd. - 2018-TIOL-550-CESTAT-DEL. 5.6 Countering the allegation of the Department that all the leases are actually in the nature of Financial Lease and is merely stated to be Operational Lease by the appellant, Ld. Consultant submitted that the accounts maintained would clearly show the difference between Financial Lease and Operating Lease. He referred to the financial statements of the appellant-company and submitted that the Financial Leases are shown as current assets whereas Operational Lease is shown under the category of fixed asset. This is because in Operational Lease the ownership of the equipment/machinery/vehicle leased out is retained by the appellant-company. After the lease period, the moveable property has to be returned to the appellant, who has the right to sell the same to third parties. Occasionally, the lessee himself, as stated earlier, approaches to buy the moveable property and even then, it is s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se transactions are in the nature of Financial Lease and not Operating Lease. 7. Heard both sides. 8. The appellant, as a Non-Banking Financial Company, has been entering into agreements in the nature of leasing of equipment, vehicles, etc. It is not disputed that they have discharged their entire tax liability on the lease agreement, which they believed to be Financial Leases. The present dispute is with regard to the Show Cause Notices with respect to the agreements/transactions which according to the appellant fall under the category of Operating Leases. Thus, our main endeavor would be to find out the nature of leasing in such transactions. 9.1 Before appreciating the facts, it would be relevant to extract the definition of "Banking and Other Financial Services" as amended with effect from 01.07.2007, which contains the Explanation as to what is a Financial Lease : "[(12) "Banking and Other Financial Services" means - (a) the following services provided by a banking company or a financial institution including a non-banking financial company or any other body corporate [or commercial concern], namely :- (i) financial leasing services including equipment leasing and hire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r) and the hirer (lessee). There are two independent transactions and what the impugned tax seeks to do is to tax the financial facilities extended to its customers by the NBFCs under Section 66 of the 1994 Act (as amended) as they come under "banking and other financial services" under Section 65(12) of the said Act. "The finance lease" and "the hire-purchase finance" thus squarely come under the expression "financial leasing services" in Section 65(12) of the Finance Act, 1994 (as amended)." (Emphasis supplied) Earlier the same judgement of the Hon'ble Supreme Court accepted the accounting methodology as propounded in the Accounting Standards (AS-19) of the Institute of Chartered Accountants of India: "18. The Institute of Chartered Accountants of India (ICAI) has also issued AS-19 "Accounting for Leases". It is mandatory 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h an element of sale added to it. However, 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the finance company with a security interest [its reversionary 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." 10.2 With this background of the legal provisions and precedents, let us now examine the facts. The lease agreement is produced before us. The relevant clauses are reproduced as under : "Lease 3. The Lessor hereby lets on lease to the Lessee and the Lessee takes on lease from the Lessor, from the commencement date, the equipment described in the Schedule hereto/in the Schedule to the supplemental agreement. (i) The Lessee shall be solely responsible for taking/obtaining delivery and possession of the equipment leased under this agreement/supplemental agreement from the Manufacturers/Suppliers in accordance with the relative purchase orders, at the place specified therein. . . . Own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... larly, in Clause 21 it is stated that upon determination of the lease, the lessee has to deliver the equipment/vehicle to the lessor at the place notified. Thus, after determination of the lease in an Operating Lease, the lessee has to return the equipment/vehicle to the lessor. The lessee is not entitled to own or does not have an option to own the asset at the end of the lease period, which is the distinguishing feature between an Operating Lease and a Financial Lease. 11. Ld. Counsel for the appellant has also produced the financial statements of the appellant-company during the period 2010-11. As per Accounting Standards (AS-19), the Financial Lease is shown as current assets. Further, the Operating Lease is shown under the category of fixed assets. This is because, the equipment which are given on lease under the category of Operating Lease always remain in the ownership of the lessor (appellant-company). 12. We are therefore convinced that 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. 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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