2013 (12) TMI 1123 - AT - Service Tax

Demand of service tax - Classification of service - Banking and financial service - Held that - As per Section 65(105) (zm) as it stood at the relevant time, the taxable service means any service provided or to be provided to a customer, by a banking company or a financial institution including a non-banking financial company, or any body corporate or commercial concern, in relation to banking and other financial services . The appellant is neither a bank or a non-banking financial company as defined in law. The appellant is also not a non-banking institution notified by the RBI whose primary business is of receiving deposits or lending money. Therefore, the appellant is not a service provider envisaged in law in respect of banking and financial services at the point of time. The appellant is a mere lessor of the land, plant and machinery owned by him. This Tribunal, in similar circumstances, in the case of GE India Industries (P) Ltd and Banswara Syntex, (2008 (7) TMI 29 - CESTAT, AHMEDABAD) held that if the agreement does not provide for transfer of assets at the end of the lease term during which monthly user charges are collected, and all risks and rewards incidental to ownership are not transferred, such leasing activities would not fall under the category of financial lease coming under the banking and financial service - Decided in favour of assessee.

Issues:
1. Classification of activity under "banking and financial service" for service tax liability.
2. Interpretation of lease agreement as financial leasing or simple lease agreement.
3. Applicability of service tax on the appellant's activities.
4. Comparison with relevant legal precedents in similar cases.

Analysis:

Issue 1: Classification of activity under "banking and financial service" for service tax liability
The appeal challenged an Order-in-Appeal regarding service tax liability on the appellant, a company engaged in a lease agreement with another entity. The department contended that the activity fell under financial leasing, attracting service tax under "banking and financial service" category. However, the Tribunal analyzed the legal provisions and concluded that the appellant did not fall under the definition of a banking company or financial institution, as per Section 65(105)(zm) at the relevant time. The Tribunal emphasized that the appellant was merely a lessor of assets without the characteristics of a financial lease, as per precedents like GE India Industries (P) Ltd. and Banswara Syntex. Therefore, the Tribunal held that the appellant's activity did not qualify as "banking and financial service," overturning the lower authority's decision.

Issue 2: Interpretation of lease agreement as financial leasing or simple lease agreement
The appellant argued that their lease agreement was a simple arrangement for land, building, and machinery, not constituting financial leasing. They highlighted that they retained ownership of the assets, receiving only lease rentals, and regaining possession after the lease period. The appellant contended that since they were not a banking or financial institution, they were not liable for service tax. Citing legal precedents, the appellant asserted that leasing activities did not amount to banking and financial services. The Tribunal agreed with this interpretation, emphasizing the absence of asset transfer or full risk and reward transfer characteristic of financial leasing, thereby supporting the appellant's position.

Issue 3: Applicability of service tax on the appellant's activities
The core issue revolved around whether the appellant's lease activities qualified for service tax liability under the category of "banking and financial service." The department imposed a substantial service tax demand on the appellant, alleging financial leasing activities. However, the Tribunal's analysis determined that the appellant's activities did not meet the criteria for such classification, given the nature of the lease agreement and the absence of banking or financial institution status. Consequently, the Tribunal set aside the service tax demand and penalties, ruling in favor of the appellant.

Issue 4: Comparison with relevant legal precedents in similar cases
The Tribunal referenced legal precedents such as GE India Industries (P) Ltd. and Banswara Syntex to support its decision. These cases established that leasing activities not involving asset transfer or full risk and reward transfer did not fall under the "banking and financial service" category for service tax liability. By aligning the appellant's case with these precedents, the Tribunal justified its conclusion that the appellant's activities did not constitute financial leasing and thus were not subject to service tax under the specified category.

In conclusion, the Tribunal's judgment favored the appellant by rejecting the service tax liability imposed on them, emphasizing the distinction between financial leasing and simple lease agreements in the context of "banking and financial service" classification.

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