2014 (8) TMI 710 - AT - Service Tax

Banking and other Financial Services - taxability of lease rent - finance lease agreement - Held that - According to the Accounting Standards for Financial Lease published by ICAI, a lease is classified as a financial lease, if there is an option for transfer of asset to the lessee at the end of the lease period. Besides this, in a financial lease, lease period is almost the entire economic life of the asset. Though during the period of dispute, the term, Financial Lease was not defined in Section 65(12) of the Finance Act, as held by the Tribunal in the case of Commissioner of ST Vs. Lufthansa Technik Service India Pvt. Ltd. reported in 2013 (12) TMI 968 - CESTAT NEW DELHI in absence of the definition of this term, the same must be interpreted in the sense it is understood in the common parlance or trade parlance and accordingly, this term is to be understood according to its meaning in the ICAI Accounting Standard or International Accounting Standards. There is absolutely no element of financing and the agreements, in question, are purely the agreements of renting of immovable property(plant & machinery) which became taxable under Section 65(105)(zzzz) of the Finance Act, 1994 w.e.f 1.6.2007. Therefore, during the period of dispute, the renting of plant & machinery by the appellant under lease agreement/licence agreement was not taxable as Banking and Financial Services under Section 65(105) (zzm) read with Section 65(12) and as such, the impugned order is not sustainable - Decided in favour of assessee.

Summary

Issues involved:
Interpretation of whether the activity of leasing out factory premises constitutes "Banking and Financial Services" under Section 65(105)(zzm) read with Section 65(12) of the Finance Act, 1994.

Analysis:
The appellant, a manufacturer of flexible laminates, leased their factory premises to another company, leading to a dispute with the department over the taxability of this activity. The department argued that the leasing activity falls under the definition of "Banking and Financial Services" and issued a show cause notice for service tax demand, interest, and penalties. The Commissioner confirmed the service tax demand, leading to the appeal.

The appellant contended that the lease agreement did not involve an element of financing, distinguishing it from financial leasing services. They cited relevant tribunal judgments to support their argument that the activity should be considered as renting of immovable property rather than financial leasing. The Joint CDR defended the department's position, asserting that the leasing activity indeed falls under Banking and Financial Services.

Upon reviewing the records, it was found that the initial lease agreement was later converted into a license agreement for renting the plant and machinery. The department considered this activity as a financial lease falling under the definition of Banking and Financial Services.

The Tribunal analyzed the relevant provisions of Section 65(105)(zm) and Section 65(12) of the Finance Act, 1994. It noted that during the disputed period, there was no specific definition of financial lease. However, an explanation added w.e.f. 1.6.2007 clarified the scope of financial leasing. The Tribunal emphasized that the features of financial lease outlined in the explanation align with Accounting Standards for Financial Lease Agreements.

Considering the absence of a specific definition of financial lease during the disputed period, the Tribunal applied the interpretation based on common parlance and trade parlance, as established in previous tribunal judgments. It concluded that the lease agreements in question did not meet the criteria for a financial lease and were essentially rent agreements for immovable property. Therefore, the activity was not taxable as Banking and Financial Services under the relevant sections of the Finance Act. The impugned order was set aside, and the appeal was allowed.