2008 (7) TMI 29 - AT - Service Tax

Leasing out extrusion machine - agreement is only for the 35 months during which a monthly user charge is required to be paid & agreement doesn t provide for transfer of assets at the end of term Revenue proposed to treat this as banking & financial service - service tax will be leviable only on the lease management fee/processing fee/documentation charges (recovered at time of entering into the agreement) & on the finance/interest charges (recovered in EMI) and not on the principal amount

Summary

Issues:
Interpretation of whether leasing of an extrusion machine constitutes banking and financial services under the Finance Act, 1994.

Analysis:
The case involved the appeal against the demand for service tax on the lease of an extrusion machine by the respondents to M/s Jain Irrigation. The Revenue contended that the lease amounted to banking and financial services as per the Finance Act, 1994. The Revenue relied on Section 65(12) and Section 65(14) of the Finance Act, 1994, and a circular to support its argument that any corporate body providing services would be liable to tax under banking and financial services. The Revenue also cited a Tribunal decision where leasing of an ATM was considered banking and financial services. However, the respondent argued that the lease did not fall under banking and financial services, citing a Tribunal decision where interest on loan was not considered part of taxable service.

The Tribunal analyzed the definition of banking and financial services under Section 65 of the Finance Act, 1994, which includes financial leasing services by a body corporate. The Tribunal noted that financial leasing involves transferring ownership to the lessee by the end of the lease term. In this case, the lease agreement did not provide for transfer of assets, and ownership and control remained with the lessor. The Tribunal referred to an accounting standard to determine financial leasing and a Board circular clarifying that service tax on financial leasing is leviable only on specific charges like lease management fee and finance/interest charges, not on the principal amount.

The Tribunal distinguished between the decisions cited by the Revenue and the respondent, noting that the decision cited by the respondent was a final decision where interest was charged separately. Considering the Tribunal's previous decisions and the specific terms of the lease agreement in this case, the appeal filed by the Revenue was rejected. The Tribunal held that the lease of the extrusion machine did not constitute banking and financial services under the Finance Act, 1994.

This comprehensive analysis of the judgment highlights the key arguments presented by both parties, the legal provisions involved, and the Tribunal's reasoning in arriving at the decision to reject the appeal filed by the Revenue.