9911796707
TMI Blog2013 (12) TMI 968X X X X Extracts X X X X X X X X Extracts X X X X ..... ing company or a financial Institution including a non-banking financial company in relation to banking and other financial services attracted service tax. W.e.f. June'07 an explanation was added to Section 65(12) explaining that for the purpose of Clause (a) of Section 65(12) the term "financial leasing" means a lease transaction where:- i) contract for lease is entered into between two parties for leasing of a specific asset; ii) such contract is for use and occupation of the asset by the lessee; iii) the lease payment is included so as to cover the full cost of the asset together with interest charge; iv) the lessee is entitled to own; or has the option to own, the asset at end of the lease period after making the lease payment; Though in this case the agreements of the appellant with Airlines do not contain option to own or entitlement to own the aircraft parts at the end of the lease period, the Department was of the view that during the period prior to 01.06.2007, the service of the leasing aircraft parts being provided by the appellant to various airlines, was covered by the definition of "banking and financial service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.2007 and that in view of above submissions, the impugned order is not correct. 4. Sh. Sujit Ghosh, Advocate, the ld. counsel for the Respondent, pleaded that the appellants activity is operational lease and not finance lease, that as Commissioner has correctly observed in the impugned order that it is only financial leasing agreements which are covered under section 65(105)(zm) read with 65(12) of the Finance Act, 1994, that even though the explanation precisely defining the scope of the term "financial lease" was added to Section 65(12) only w.e.f. 01.06.2007, this amendment has to be treated as clarificatory amendment and even during period prior to 01.06.2007 operating lease agreements were not covered for taxation under section 65(105) (zm) read with 65(12), that the Apex Court in the case of Association of Leasing & Financial Service Companies Vs. Union of India reported in 2010 (20) STR-417 (S.C.), in para 21 of the judgment has observed that in substance a finance lease, unlike an operating lease, is a financial loan (assistance/facility) by the lessor to the lessee, that from this observation, it is clear that operating lease is different from finance lease, that from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t asset and allow lessee to use that asset during the lease period and the lease period equals or exceeds 75% of the assets estimated useful life. (iii) during lease, while the lessor is the title holder of the asset, the lessee effectively owns the asset with risk and reward of ownership transferred to him-the lessee pays for the maintenance and insurance of the asset; (iv) the lessor recovers a large part or all of the cost of the asset plus interest from the rent as paid by the lessee; (v) the lessee has the option to purchase the asset or entitlement for purchase the asset at the end of the lease period; and (vi) While the lessor shows the asset leased in his balance sheet as "receivable", the lessee is considered to be the owner of the asset for the purpose of income tax and therefore claims depreciation expense and interest expense; Thus in substance the finance lease is a financial loan from the lessor to the lessee and the intention of the financing party entering into finance lease agreements is to secure the return of the loan advanced to the customer. The equipment lease and hire purchase agreements are also Financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very and maintain the asset. The lessor (NBFC) arranges the finances. Thus, the lessor (NBFC) renders financial services to its customers and what is taxed under the impugned provisions is the income, by the way of financial/interest charges, the addition to management fee/documentation charges which is earned by the finance (lessor). The taxable event is the service which is rendered by the finance company to its customer(s). The value of the taxable service under section 67 is income by way of interest/ finance charges (measure of tax) which is not determinative of the character of the levy. 5.2.1 Thus the lease agreements in which there is no component of finance would not be covered by the term 'Financial Lease'. 5.3 The definition of "Banking and other financial services" as given in section 65(12) during the period of dispute was as under:- "Banking and other financial services" means the following services provided by a banking company, on a financial institution or including a non banking financial company on any other body corporation namely- (i) financial leasing services including equipment leasing and hire purchase b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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