2018 (1) TMI 717 - AT - Service Tax

Classification of services - nature of lease - operating lease of finance lease - Banking and Other Financial Services or otherwise? - business in operating lease with reference to motor vehicle given to the clients - Revenue entertained a view that the terms and conditions governing both types of leases, namely financial lease and operating lease are similar and as such the consideration received in such business transaction is liable to be taxed under BOFS - Held that - The whole thrust of the distinction for financial lease and operating lease is the ownership of the asset. This aspect has been adequately analysed and covered in the impugned order with more specific reference to Accounting Standard 19 - We are in agreement with the respondent-assessee and the findings of the Commissioner regarding the treatment of Accounting Standard 19 to decide the nature of lease arrangement - the income for operating lease were shown as lease rental and the assets were depreciated in the lesser s account as these are shown as own assets. In financial lease no depreciation is accounted for. The income shown on such arrangement is EMI received which is principal interest. Listing out the difference between operating lease and financial lease the impugned order categorically recorded that the lease arrangements on which the respondent assessee discharged VAT are operating leases and are not liable to service tax - the impugned order is legally sustainable - Appeal dismissed - decided against Revenue.

Issues Involved:
1. Classification of lease agreements as financial lease or operating lease.
2. Applicability of service tax under the category of Banking and Other Financial Services (BOFS).
3. Examination of Accounting Standard AS-19.
4. Ownership and depreciation of leased assets.
5. Legal precedents and interpretations by the Supreme Court.

Issue-wise Detailed Analysis:

1. Classification of Lease Agreements:
The respondent-assessee engaged in financial and operating leases of vehicles was paying service tax under BOFS for financial leases. The dispute arose over whether their operating lease transactions should also be taxed under BOFS. The Revenue argued that the terms and conditions of both types of leases were similar, implying that operating leases should be classified as financial leases and taxed accordingly.

2. Applicability of Service Tax under BOFS:
The Revenue initiated proceedings against the respondent-assessee, issuing show cause cum demand notices for ?24,39,00,455/- covering 2004-05 to 2011-12. The Original Authority, however, distinguished between financial and operating leases, concluding that operating leases were not covered under BOFS and thus not liable for service tax. The Revenue appealed this decision.

3. Examination of Accounting Standard AS-19:
The Revenue contended that the criteria of AS-19 should be used to classify the leases. AS-19 mandates that financial leases be shown as receivables by the lessor and as assets by the lessee, who also claims depreciation. Conversely, operating leases are recorded as assets by the lessor, who claims depreciation, and the lessee only pays rental charges. The Commissioner, after examining AS-19 and relevant legal provisions, concluded that the respondent’s operating leases did not qualify as financial leases.

4. Ownership and Depreciation of Leased Assets:
The respondent-assessee argued that under financial leases, the lessee is the owner and claims depreciation, while under operating leases, the lessor retains ownership and claims depreciation. The Commissioner found that the respondent’s operating leases were correctly categorized as such, with the lessor (respondent) showing the assets and claiming depreciation, thus not liable for service tax under BOFS.

5. Legal Precedents and Interpretations by the Supreme Court:
The Commissioner and the Tribunal referred to several Supreme Court decisions, including the Association of Leasing and Financial Service Companies case, which distinguished between financial and operating leases. The Supreme Court held that financial leases transfer all risks and rewards of ownership to the lessee, while operating leases do not. The Tribunal agreed with the Commissioner’s reliance on these precedents, affirming that the respondent’s operating leases were not financial leases and thus not subject to service tax under BOFS.

Conclusion:
The Tribunal upheld the Original Authority’s decision, dismissing the Revenue’s appeals. It found no factual or legal error in the Commissioner’s order, which was based on a thorough examination of lease agreements, AS-19, and relevant legal precedents. The Tribunal confirmed that the respondent’s operating leases were not liable for service tax under BOFS, as they were correctly classified and taxed as operating leases.

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