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TMI Blog2018 (1) TMI 717X X X X Extracts X X X X X X X X Extracts X X X X ..... ease 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. - S.T. Appeal Nos.51947 to 51950 of 2014 with ST/C.O/ 51124, 51148, 51149 & 50701/2015 - Final Order Nos.50113 – 50116/2018 - Dated:- 10-1-2018 - Mr. S. K. Mohanty, Member (Judicial) And Mr. B. Ravichandran, Member (Technical) Sh. Amresh Jain, AR for the Revenue Sh. V. Venkataraman, Sr. Advocate Sh. S. K. Gupta, Advocate for the Respondent-assessee ORDER Per : B. Ravichandran These four appeals are by the Revenue against a common impugned order dated 29.11.2013 of Commissioner of Service Tax, New Delhi. 2. Brief facts of the case are that the respondent-assessee are engaged in business of financial as well as operating lease of vehicles. They were registered with the Service Tax Department and wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... STR 417 (SC). Ld. AR submitted that a financial lease transfers all risks and reward incidental to ownership, even though the title may or may not be eventually transferred to the lessee. Financial lease is a financial loan from the lesser to the lessee. On the other hand, operating lease is a lease other than financial lease. In the present case, the Revenue contended that the respondent-assessee fulfils the requirement of financial lease and the criteria of Accounting Standard AS-19 has to be examined to arrive at a correct categorisation of lease arrangement. It is the case of the Revenue that what is claimed to be operating lease arrangement is actually a financial lease, liable to service tax. 5. Ld. Sr. Counsel appearing for the respondent-assessee supported the findings recorded in the impugned order. He submitted that to appreciate the scope of service tax levy vis-a-vis the sales tax levy with reference to lease transaction it is necessary to appreciate the legislative history as well as various decided cases of the Hon ble Supreme Court. Service tax was introduced w.e.f. 01.03.1994 under Entry 97 List-I of Seventh Schedule of the Constitution, by the Central Governme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and these are handed over to the lessee for a temporary period for their use. Accounting Standards 19 therefore mandates that in the case of operating lease, the lesser should capture the assets in their books and depreciation should also be claimed by the lesser only. 7. Ld. Counsel submitted that there are essentially three fold distinction between a financial lease and operating lease: (a) In a financial lease, the asset is owned or eventually owned by the lessee. The arrangement therefore is a simple loan arrangement as a lease finance. On the contrary, in the case of operating lease, the assets are owned by the lesser and the lessee has only the right to use the goods on payment of rentals or hire charges. (b) In the case of a financial lease in terms of Accounting Standards 19, it is the lessee, the owner or eventual owner who is allowed to capture the assets in their books. The lessee is also allowed to claim depreciation. The lesser has to show this as a loan transaction and the funded amount (Principal + Interest) only as receivables. Lesser cannot take its assets into its books. On the contrary in the case of an Operating Lease lesser is the owner and therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets and their ownership is identified to the lessee who alone depreciates the said assets. In any case, ld. Counsel submitted that taking insurance or bearing incidental are not criteria covered in AS 19 to decide the ownership. It is not disputed that the respondent- assessee collected only lease rental and the assets are put up for sales post lease period through a bidding process as per the agreement. It is not open to the Revenue to assume the transaction to be a financial lease. 11. We have heard the ld. AR and the ld. Sr. Counsel at length and perused their written submission, filed after the hearing. We have also carefully considered the impugned order. We note that the impugned order has examined the issue elaborately by extensively referring to the terms of agreement, Accounting Standard 19 issued by the Institute of Chartered Accountants and the legal provision under Finance Act, 1994 relevant to the present dispute. We note that the whole dispute is with reference to categorising the lease arrangement either as Financial lease or Operating lease . The following facts are admitted and are not in dispute: (a) The appellants are engaged in providing both financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of services to its customer(s) which is the taxable event under Section 65(105)(zm) of the Finance Act, 1994 (as amended). Apart from NBFCs, even banks through their subsidiaries with the approval of RBI can undertake equipment leasing, hire- purchase business and financial services. These are not direct lending activities. However, RBI treats them as services or facilities. The financial facilities are extended by way of equipment leasing or hire- purchase finance subject to approval of RBI [See Taxmann s RBI Instructions for Banking Operations 7th Edition page 224]. 19. The significance of the above circulars and guidelines is to show that the activities undertaken by NBFCs of equipment leasing and hire-purchase finance are facilities extended by NBFCs to their customers; that, they are financial services rendered by NBFCs to their customers and that they fall within the meaning of the words banking and other financial services which is sought to be brought within the service tax net under Section 66 of the Finance Act, 1994. One more aspect needs to be highlighted. With the application of AS- 19, the leased assets are required to be shown as receivables and not as fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be exigible to local sales tax/VAT. Funding or financing the transaction of equipment leasing and hire-purchase covers two different and distinct transactions. The activity of funding or financing by NBFC who is in the business of financing by giving loans, or equipment leasing or hire-purchase finance falls in the category of financial services rendered by NBFCs to their customers. It is an activity in relation to the hire-purchase or lease transaction. In this connection, as and by way of illustration we need to give an illustration which brings out the distinction between a finance lease and operating lease . A finance lease transfers all the risks and rewards incidental to ownership, even though the title may or may not be eventually transferred to the lessee. In the case of finance lease the lessee could use the asset for its entire economic life and thereby acquires risks and rewards incidental to the ownership of such assets. In substance, finance lease is a financial loan from the lessor to the lessee. On the other hand an operating lease is a lease other than the finance lease. Accounting of a finance lease is under AS-19, which as stated above, is mandatory for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come under the category of para banking . That, in substance a finance lease, unlike an operating lease, is a financial loan (assistance/facility) by the lessor to the lessee. That, in the bailment termed hire the bailee receives both possession of the chattel and the right to use it in return for remuneration. On the other hand, equipment leasing is long term financing which helps the borrower to raise funds without outright payment in the first instance. Here the interest element cannot be compared to consideration for lease/hire which is in the nature of remuneration (consideration) for hire. Thus, financing as an activity or business of NBFCs is different and distinct from operating lease/hire-purchase agreements in the classical sense. The elements of the finance lease or loan transaction are quite different from those in equipment leasing/hire-purchase agreements between owner (lessor) and the hirer (lessee). There are two independent transactions and what the impugned tax seeks to do is to tax the financial facilities extended to its customers by the NBFCs under Section 66 of the 1994 Act (as amended) as they come under banking and other financial services under Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which it has been clarified that service tax, in the case of financial leasing including equipment leasing and hire-purchase, will be leviable only on the lease management fees/processing fees/documentation charges recovered at the time of entering into the agreement and on the finance/interest charges recovered in equated monthly instalments and not on the principal amount). Merely because for valuation purposes inter alia finance/interest charges are taken into account and merely because service tax is imposed on financial services with reference to hiring/interest charges, the impugned tax does not cease to be service tax and nor does it become tax on hire-purchase/leasing transactions under Article 366(29A) read with Entry 54, List II. Thus, while State Legislature is competent to impose tax on sale by legislation relatable to Entry 54 of List II of Seventh Schedule, tax on the aspect of the services , vendor not being relatable to any entry in the State List, would be within the legislative competence of the Parliament under Article 248 read with Entry 97 of List I of Seventh Schedule to the Constitution. 38. According to Mr. Arvind Datar and Mr. K. Parasaran, le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one connections are enjoyed. The question was whether such connections constituted a sale or a service or both. If it was a sale then the States were legislatively competent to levy sales tax on the transaction under Entry 54, List II of the Seventh Schedule to the Constitution. If it was service then the Central Government alone had the legislative competence to levy service tax under Entry 97, List I and if the nature of the transaction partook of the character of both sale and service, then the moot question would be whether both the legislative authorities could levy their separate taxes together or only one of them. It was held that the subject transaction was a service and, thus, the Parliament had legislative competence to levy service tax under Entry 97, List I. In para 88 of the said judgment, this Court observed that No one denies the legislative competence of the States to levy sales tax on sales provided that the necessary concomitants of a sale are present in the transaction and the sale is distinctly discernible in the transaction. This does not however allow the State to entrench upon the Union List and tax services by including the cost of such service in the value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itioners (supra) . 15. Regarding the contention of the Revenue with reference to ownership of the vehicle and its implication the decide lease arrangement, we refer to the decision of Apex Court in Industrial Credit and Development Syndicate Ltd. Vs. CIT, Mysore Anrs. (2013) 3 SCC 541. The Apex Court dealing with the provisions of Motor Vehicle Act and Income Tax Act with reference to depreciation, held that no inference can be drawn from the registration certificate under Motor Vehicle Act as to the ownership of the legal title of the vehicle. It was held that if the lessee was in fact the owner he would have claimed depreciation of the vehicle, which as specifically recorded in the order of the Appellate Tribunal was not done. The entire lease rent received by the assessee is assessed as business income in its hand and the entire lease rent paid by the lessee has been treated as deductable Revenue expenditure in the hands of the lessee. 16. 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 respondent submitted profit and loss accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X
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