TMI Blog2012 (11) TMI 1275X X X X Extracts X X X X X X X X Extracts X X X X ..... has erred in law in not concluding that the CBDT circular No.2 dated February 9, 2001 was binding on the AO in the context of the depreciation claimed by the appellant for the assets given on lease. 4. The learned CIT(A) has erred in law and on fact in not deciding on the ground pertaining to exclusion of amount of expenditure incurred in foreign currency by the appellant from the amount of export turnover for the purpose of computation of relief under section 10A of the Act. 3. As regards ground No.4, the learned counsel for the assessee submitted that the alternate plea of the assessee to the above ground is covered by the decision of the Hon ble Karnataka High Court in the case of CIT vs. Tata Elxsi Ltd. Others (205 Taxman 321(Kar) wherein it has been held that when certain expenditure is excluded from the export turnover, then the same is also required to be excluded from total turnover for the purposes of computing deduction u/s 10A of the of the Income-tax Act, 1961 [hereinafter referred to as the Act ]. Respectfully following the same, we direct the AO to exclude the expenditure incurred in foreign currency by the assessee from both the export t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has drawn our attention to various clauses of the Lease Agreement to demonstrate that the lessee is a mere bailee of the lessor and that it does not have any proprietary right, title or interest in the equipment or any part thereof and that the lessee shall install, use and operate the equipment correctly and maintain the same in good working condition and repair it at own cost and comply with statutory operations and other requirements of law. He submitted that as per clause 11 of the Lease Agreement, the lessee shall not make any alteration, addition or improvement to the equipment or change the condition thereon without the prior consent of the lessor and that the lessee shall preserve the lessor s rights during the period of lease. He has drawn our attention to clause 18 of the Lease Agreement viz., the clause on the termination of lease which stipulates that the lessor shall be entitled to terminate the lease without any notice except as specified in clause 18.1.2 and at any time after the occurrence of such event and that as per clause 18.2 the lessor shall, without any notice, be entitled to remove and re-possess the equipment and for that purpose by itself, its servants ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ular No.2 of 2001 is applicable and binding on the department. He submitted that the Special Bench of the Tribunal at Mumbai, in the case of Indus Ind Bank Ltd. vs. Addl.CIT (ITA Nos.6566/Mum/2002 ITA No.606/Mum/2003 dated 14-3-2012) has dealt with the issue of depreciation on assets leased in the event of the transaction being held as a financial lease and submitted that the Hon ble Special Bench has held the issue in favour of the revenue by holding that in the case of financial lease, it is the lessee who is entitled to depreciation and not the lessor. He submitted that for coming to this conclusion, the Tribunal has only followed the decision of the Hon ble Supreme Court in the case of Asea Brown Bovery Ltd. vs. Industrial Finance Corporation of India (154 Taxman 512) but according to the learned counsel for the assessee, the Special Bench of the Tribunal has not considered the circular No.2 of 2001. Therefore, the Special Bench decision cannot be applied to the facts of the case before us. He has also drawn our attention to the Direct Taxes Code 2010 to demonstrate that the term finance lease has been defined therein and therefore, according to him, finance lease has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry and an hire-purchase agreement: i) When the machinery is given on hire by the owner to the hirer on payment of hire charges, the income derived by the owner is business income and the owner is also entitled to depreciation on the machinery so hired out. ii) The hirer who pays hire charges is also entitled to claim it as revenue expenditure as he has no ownership on the new asset. iii) The transaction of hire is therefore a bailment of machinery. iv) There is no extinguishment of any right of the owner in the machinery but it is merely a license given to the hirer to use for a temporary period the machinery so hired. v) In contra-distinction to the above, in the case of hire-purchase agreement, the equipment shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipment. vi) The periodical payments made by the hirer should, for tax purposes, be regarded as made up of (a) consideration for hire to be allowed as deduction in the assessment and (b) payment on account of purchase to be treated as capital outlay, depreciation being allowed to the lessee on the initial value. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntary Lease Schedules attached/to be attached hereto. AND WHEREAS the Lessee has offered to take on lease the Equipment so purchased by the Lessor. AND WHEREAS the Lessor has agreed to purchase and let on lease the Equipment to the Lessee upon and subject to the following terms and conditions. NOW THIS AGREEMENT WITNESSETH AND IT IS HEREBY AGREED BY THE PARTIES HERETO AS UNDER: 1.1 The Lessor hereby agrees to let and the Lessee hereby agrees to take on lease the equipment from the Lessor upon the terms and conditions mentioned in Lease Summary Schedule hereto. As and when the Equipment is leased to the Lessee, the Lessee shall further execute from time to time Supplementary Lease Schedules in favour of Lessor pertaining to the Equipment and disbursal made by the Lessor in relation thereto. Each such Supplementary Lease Schedule shall be deemed to form an integral part of this Agreement as if the same were annexed hereto or set out herein in extenso. 2.1 The Lessee shall pay to the Lessor lease rentals as set out in Lease Summary Schedule and more specifically mentioned in Supplementary Lease Schedules attached/to be attached heret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r other mark on the Equipment identifying the sole and exclusive ownership thereof of the Lessor and not allow or permit the same to be removed or defaced. OWNERSHIP 6. The Lessee acknowledges, confirms and declares that it holds the Equipment as a mere bailee of the Lessor and that it shall not have any proprietary right, title or interest in the Equipment or any part thereof and shall at all times, protect and defend as bailee/licensee of the Equipment, the Lessor s absolute and paramount right and title thereto and 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. 7. The lessee shall install, use and operate the Equipment carefully and maintain the same in good working condition and repair at its own Cost and expenses in conformity with the instructions or operational manuals given by the manufacturer and/or the Lessor and comply with all statutory operation and other requirements of law, rules, regulations, maintenance and directions as applicable to the storage or/and repairs, installation governing use and operation of the Equipment in that behalf, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Lessor shall be entitled to terminate this Lease and to retain any insurance receipts by the Lessor in respect of thereof. Without prejudice to the aforesaid rights of the Lessor in event of such termination the Lessor shall also be entitled to recover from the Lessee all sums computed in the manner set out in clause 18.2 hereof. 8.4 In the event of failure of the Lessee to insure the equipment or to pay the insurance premia as above the Lessee hereby agrees that the Lessor may insure the Equipment and/or pay the insurance premia as above and the Lessee shall forthwith on receipt of a notice of demand from the Lessor reimburse all sums so paid by them together with service charges thereon at the rate of 21% per annum from the date of such payment by the Lessor. PAYMENT OF SALES TAX RATES AND OTHER CHARGES 9.1 The Lessee shall during the period of this Lease and till the Equipment is delivered back to the Lessor in good working order and condition (fair wear and tear accepted) bear all charges and other duties, taxes and penalties as may be levied from time to time by the Government or any other authority pertaining to or in respect of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Lessee (whether at its own cost or not and whether with or without the approval of the Lessor) shall belong to the Lessor and be deemed to be part of the Equipment and shall be subject to the terms and conditions of this Lease. 15.2 In the event that the Lessee shall refuse, fail or be unable for any reason to accept delivery and installation of the Equipment other than for reason of the manufacturer failing to supply the same in satisfactory order and condition, the Lessor shall be entitled to terminate this Lease at any time within one month thereafter, by a notice in writing to the Lessee and the Lessee shall on demand, pay to the Lessor al costs of the Equipment together with a service charge thereon at the rate of 21$ per annum and expenses incurred by the Lessor for insuring, transportation, storing and maintaining the Equipment and for its disposal and/or lease to third party or in other manner whatsoever without prejudice to the Lessor s remedies for damages for breach of contract. Without prejudice to the aforesaid right of the Lessor, in the event of such termination, the Lessor shall also be entitled to recover from the Lessee and the Lessee shall be liable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urrences of any of the events specified below, the Lessor shall be entitled without prejudice to any other rights or remedies which the Lessor may have under this Lease or otherwise in law and notwithstanding any subsequent acceptance of lease rentals, to terminate this lease, without any notice except as specified in 18.1.2 hereof and at any time after the occurrence of such event. 18.1.1. If the Lessee fails to pay the lease rentals on the dates and in the manner stipulated in the Supplementary Lease Schedule(s) or other sums payable hereunder within 10 days of their becoming due, whether demanded or not. 18.1.2. If the Lessee fails or neglects to observe or perform or commits or allows to be committed a breach of any of the terms, conditions, provisions or stipulations of this Lease on its part to be observed and performed (other than failure to pay any sum hereunder when due and payable) and if such breach is remediable, fails to remedy the same within fourteen days of notice by the Lessor specifying such default and requiring such default to be remedied. 18.1.3. If any representation or warranty made or deemed to be made by the Lessor in pursuant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Supplementary Lease Schedule on the footing and if the Lease had not been terminated to the end and intent that the Lessee shall pay to the Lessor not only arrears of lease rentals up to the date of termination of the Lease but also such further amount for the unexpired residue of the term which the lessee would have to pay to the Lessor the Lease continued. the cost of all repairs and maintenance of the (ii) Equipment to render and maintain it in good working order and condition and all costs, charges and expenses incurred by the Lessor in repossessing the Equipment and in endorsing its remedies however occasioned. The parties hereto agree and record that the amount to the paid by the Lessee to the Lessor as aforesaid have been bona fide and satisfactorily estimated to be the proper and reasonable amount that may be suffered by the Lessor as and when by way of liquidated damages. Notwithstanding anything to the contrary herein contained, in the event of such the Lessor shall also be entitled to sell, release or otherwise dispose (iii) of the Equipment in such manner as the Lessor may think fit and the Lessor sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hewlettee-Packard Equipment 4. LEASE TENOR 36 months 5. LEASE VALUE ₹ 8,304,659 6. LEASE MANAGEMENT FEES 0% 7. LEASE RENTALS ₹ 806,964 12 rentals The pmpt rate indicates the total (₹ 32.39 PMPT) rental charge per month for every ₹ 1000/- financed. The rentals are Quarterly in advance and shall commence from the date of delivery of the equipment 8. SECURITY DEPOSIT Nil 9. REPAIR AND MAINTENANCE Lessee s responsibility. Insurance INSURANCE ETC. policy to be endorsed with Hewlett-Packard India Lt., as Less payee. 10. SALES TAX ON LEASE RENTALS To be paid by the Lessee as applicable. 11 PAYMENT TERMS The Lessee shall provide post dated cheques covering the rentals payable for four quarters on an annual basis commencing from the star ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owner of the equipment during the period of lease, the lessee alone is the possessor and enjoyer of the equipment with all the rewards and risks involved therein. As observed by the Hon ble Supreme Court in the case of Asea Brown Bovery Ltd.(supra), period of lease may extend over and covers the entire life of the property for which it remains useful divided either into one term or divided into two terms with a clause for renewal. In either case, the lease is non-cancellable. In the case before us also, the lease is not cancellable as is found from clause 15.3 wherein it is stipulated that the lessor shall not be responsible for any direct, indirect or consequential loss to the lessee or third party arising from any delay in delivery and/or installation of the equipment either by the action of the manufacturer or otherwise however or by reason of any delay in the commencement of the lease. It is also noticed that the equipment is selected by the lessee relying entirely on its own judgment and not on the statements or representations, if any, made by the lessor or its agent or servants and all the liabilities that the lessor might otherwise incur and any right or immunity, the l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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