2018 (2) TMI 936 - AT - Service Tax

Banking and Financial Service - appellant is engaged in the financial leasing of equipment and machines under the agreement named as Fixed Period Rental Agreement - Held that - admittedly there is no transfer of the ownership of the goods at the end of lease, the same does not fall in the category of financial lease and falls in the category of operating lease - demand not sustainable. Business Auxiliary Service - it was alleged that appellant is providing Business Auxiliary Service for the foreign entity, namely, M/s Canon Singapore Pvt. Ltd. and the services provided do not qualify as export of service under the Export of Service Rules, 2005 - Held that - The terms of the authorized distributor agreement are clearly on principal to principal basis - for the previous period 2003-2008, the Department has accepted the view that the appellant is carrying out the sales and promotion on their own behalf. Hence, these activities are not covered under Business Auxiliary Service . Management, Maintenance and Repair Service - import services - recipient of services - reverse charge mechanism - Held that - it is difficult to agree with the finding of the Ld. Commissioner (A) that it is not an export of service. Since it will be export of service, in that circumstances too, no service tax is leviable and the demand on this issue is therefore unsustainable. Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Banking and Financial Service (Financial Leasing vs. Operating Leasing)
2. Business Auxiliary Service (Export of Service)

Detailed Analysis:

Issue No. 1: Banking and Financial Service

The primary issue was whether the leasing activities of the appellant fell under 'Financial Leasing' or 'Operating Leasing'. The show cause notices were based on the assumption that the appellant was liable for service tax under Financial Leasing Service. However, the adjudicating authority concluded that the leasing activity was covered by 'Operating Lease' instead of 'Financial Lease'. This conclusion was based on the fact that the equipment remained the absolute property of M/s CSPL under the 'Fixed Period Rental Agreement'. The Tribunal referenced the Supreme Court’s decision in the case of Association of Leasing and Financial Services Companies vs. Union of India, which distinguished between financial and operating leases. It was noted that financial leases involve a component of finance and transfer of ownership or an option to purchase the asset at the end of the lease period, which was not present in the appellant’s agreements. Consequently, the Tribunal held that since the lease agreements did not qualify as financial leases, they were not taxable under 'Banking and Financial Services'. Thus, the demand for service tax on this ground was deemed unsustainable and set aside.

Issue No. 2: Business Auxiliary Service

The second issue was whether the promotional activities undertaken by the appellant for M/s CSPL constituted 'Business Auxiliary Service' and if they qualified as export of service. The appellant argued that they imported and sold Canon products on a principal-to-principal basis and not as an agent of M/s CSPL. The promotional activities were undertaken to boost their own sales, and any reimbursement from M/s CSPL was considered a subsidy or discount, not a consideration for service. The Tribunal agreed with the appellant, noting that the terms of the authorized distributor agreement indicated a principal-to-principal relationship. Additionally, for the previous period (2003-2008), the department had accepted that the appellant was carrying out sales and promotion on their own behalf.

Furthermore, even if the promotional activities were considered 'Business Auxiliary Service', the Tribunal found that they would qualify as export of service under the Export of Services Rules, 2005. The Tribunal referenced the case of Gap International Sourcing India Pvt. Ltd., where it was held that services provided to a foreign company without a branch or establishment in India, and paid for in convertible foreign exchange, qualify as export of service. Therefore, such services are not taxable in India. The Tribunal concluded that the promotional activities for M/s CSPL, a foreign entity, met these criteria and thus were not subject to service tax.

Conclusion:

The Tribunal set aside the demands on both issues, allowing the appeal in favor of the appellant. The leasing activities were classified as 'Operating Lease' and not taxable under 'Banking and Financial Services'. The promotional activities were considered an export of service and not taxable as 'Business Auxiliary Service'.