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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 ..... financial lease arrangement. The dispute in the present proceedings are with reference to their business in operating lease with reference to motor vehicle given to the clients. The respondent -assessee procured orders from their clients and after verification entered into a lease agreement with them. The respondent thereafter sent quotation for different type of vehicles as required by the clients and on confirmation of the requirements order for the vehicle to be supplied. The 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. 3. Accordingly, proceedings were initiated against the respondent - assessee by issue of various show cause cum demand notices covering the period 2004-05 to 2011-12. A total demand of Rs. 24,39,00,455/- was issued against the respondent-assessee. The respondent-assessee contested the demand and filed their defence submissions. The case was adjudicated by the Original Authority resulting in the impugned order. The Original Authority dropped the proceedings initiat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in K. L. Johar and Co. Vs. DCTO -1965 2 SCR 112 (SC) the Apex Court held that Sales Tax can be levied on hire purchase transactions resulting in sale but only to that extent of sale price which will be the last instalment of payment. The Apex Court held that there is a sale only when the purchaser exercise such option to purchase which is at a later date and therefore the depreciated value of goods involved in such transaction would be assessable to sales tax. Hon'ble Madras High Court in A.V. Meiyappan Vs. Commissioner of Commercial Tax - 1967 (20) STC 115 (Mad.) held that there is a sale only when ordinary commercial sale requiring absolute transfer of ownership can be taxed under Entry 54 List-II of the Constitution. 46th amendment of the Constitution introduced the concept of deemed sale and 6 transactions were brought in the ambit of sale in terms of Article 366(29A). The Apex Court in 20th Century Finance Corporation Ltd. Vs. State of Maharashtra -2000 (6) SCC 12 examined the leasing and the lease transactions under Article 366(29A) (d) of the Constitution. 6. Ld. Counsel further elaborating the evolution, the concept of lease arrangement submitted that such lease transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the owner or an eventual owner, the assets should be depreciated only on the books of the lessee. On the contrary, in the case of an operating lease, since the assets are owned by the lesser, depreciation can be claimed only by the lesser. 8. Apart from the above, any financial lease, as the lessee is the owner or the eventual owner the lease, would normally be covering the economic life of the asset. The total cost of the vehicle alongwith interest would stand covered. In operating lease, since the income is in the form of rental and not sale of assets, 60% to 80% of the value is collected as rentals and the balance amount is normally recovered after the expiry of lease period by way of sale for the residual nominal price. 9. Ld. Counsel appearing for the respondent-assessee elaborately referred to the various decisions of the Hon'ble Supreme Court on lease arrangement and the ratio laid down by the Apex Court on financial lease versus operating lease. He referred to the decisions in Asia Brown Bovery Ltd. vVs. Industrial Corporation of India and Others -2004 (12) SCC 570 and Association of Leasing and Financial Service Company Vs. Union of India -2010 (20) STR 417 (SC). 10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to service tax as financial lease. They are discharging much higher quantum of VAT by paying tax as operating leases. (d) Accounting Standard 19 should be examined and applied in order to arrive at correct nature of the lease arrangement. 12. We note that the Commissioner after examining the Board's clarification dated 09.07.2001, referring to AS-19 and Supreme Court decisions finally arrived at the conclusion that the respondent are not liable to pay service tax on operating lease arrangement. 13. In Association of Leasing and Financial Service Company (supra), the Apex Court observed as below- "18. The Institute of Chartered Accountants of India (ICAI) has also issued AS-19 "Accounting for Leases". It is mandatory in respect of financial leases executed on or after April, 2001. It inter alia provides for capitalization of finance lease assets in the books of the lessee instead of lessor. The lessor [NBFC] is required to show the assets leased only as receivables in its balance sheet instead of as fixed assets. The implication of the above AS-19 for the NBFC prescribed by RBI vide amendments to the 1998 Directions is that all financial leases would now be accounted like hir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service. Hence, the impugned tax is different and distinct from tax on sale of goods under Entry 54 List II of the VIIth Schedule to the Constitution. 20. According to Sale of Goods Act by Mulla [6th Edition] a common method of selling goods is by means of an agreement commonly known as a hire-purchase agreement which is more aptly described as a hiring agreement coupled with an option to purchase, i.e., to say that the owner lets out the chattel on hire and undertakes to sell it to the hirer on his making certain number of payments. If that is the real effect of the agreement there is no contract of sale until the hirer has made the required number of payments and he remains a bailee till then. But some so-called hire-purchase agreements are in reality contracts to purchase, the price to be paid by instalments and in those cases the contract is a contract of sale and not of hiring. It depends on the terms of the contract whether it is to be regarded as a contract of hiring or a contract of sale. A hire-purchase agreement partakes of the nature of a contract of bailment with an element of sale added to it. However, if the intention of the financing party in obtaining the hire-pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equal to the amount of the purchase price stated in the agreement or upon payment of a stated sum. The essence of the transaction is bailment of goods by the owner to the hirer and the agreement by which the hirer has the option to return the goods at some time or the other [See para 36.242, 36.243]. Further, in the bailment termed "hire" the bailee receives both possession of the chattel and the right to use it in return for remuneration to be paid to the bailor [See para 32.045]. Further, under the head "equipment leasing", it is explained that it is a form of long-term financing. In a finance lease, it is the lessee who selects the equipment to be supplied by the dealer or the manufacturer, but the lessor [finance company] provides the funds, acquires the title to the equipment and allows the lessee to use it for its expected life. During the period of the lease the risk and rewards of ownership are transferred to the lessee who bears the risks of loss, destruction and depreciation or malfunctioning. The bailment which underlies finance leasing is only a device to provide the finance company with a security interest [its reversionary right]. If the lease is terminated premature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the impugned levy relates to or is with respect to the particular topic of "banking and other financial services" which includes within it one of the several enumerated services, viz., financial leasing services. These include long time financing by banks and other financial institutions (including NBFCs). These are services rendered to their customers which comes within the meaning of the expression "taxable services" as defined in Section 65(105)(zm). The taxable event under the impugned law is the rendition of service. The impugned tax is not on material or sale. It is on activity/service rendered by the service provider to its customer. Equipment Leasing/Hire-Purchase finance are long term financing activities undertaken as their business by NBFCs. As far as the taxable value in case of financial leasing including equipment leasing and hire- purchase is concerned, the amount received as principal is not the consideration for services rendered. Such amount is credited to the capital account of the lessor/hire-purchase service provider. It is the interest/finance charge which is treated as income or revenue and which is credited to the revenue account. Such interest or finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment of the Constitution (Forty-sixth Amendment) Act was to reserve the exclusive competence to tax hire-purchase transactions with the State Legislature and exclude the Parliament from the legislative sphere. In support of the above contentions, learned counsel placed reliance on para 44 of the judgment of this Court in the case of Bharat Sanchar Nigam Limited (supra), the relevant portion of which is quoted hereinbelow : "44. Of all the different kinds of composite transactions, the drafters of the Forty-Sixth Amendment chose three specifications, a works contract, a hire-purchase contract and a catering contract to bring them within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same time." 39. Emphasizing the underlined words, the learned counsel contended that a hire-purchase does not involve a sale and service at the same time and, therefore, service tax cannot be levied on the interest/finance charges which is sought to be done in the present case. In our view, the judgment in Bharat Sanchar Nigam Limited's case has no application to the present case. As stated above, what is challenged in this case is the ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which a lessee is free to select, order, take delivery and maintain the asset. The lessor (NBFC) arranges the finances. It accepts the invoice from the vendor (supplier) and pays him. Thus, the lessor (NBFC) renders financial services to its customer(s) and what is taxed under the impugned provision is the income, by way of finance/interest charges in addition to management fees/documentation charges, which is earned by the financier (lessor). The taxable event is the service which is rendered by the finance company to its customer(s). The value of 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. Thus, Section 67 of the Finance Act, 1994 seeks to tax financial services rendered by the appellant(s) with reference to the income which the appellant(s) earns by way of interest/finance charges. In the circumstances and for the reasons given hereinabove, the question of splitting up of transactions, as contended on behalf of the appellant(s), does not arise. As held hereinabove, equipment leasing and hire-purchase finance constitute long term financing activity. Such an activity was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious judicial pronouncement of the Apex Court and more specifically the decision in Association of Leasing and Financial Service Companies (supra). 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. As already noted for such conclusion the impugned order examined elaborately all the relevant conditions of the lease agreement. On close consideration of the findings recorded in the impugned order and the grounds of appeal contesting such findings, we are of the view that the impugned order is legally sustainable. 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. As such, we note that there is no factual or legal error in the impugned order calling for interference. Accordingly, we find the appeals by the Revenue are without merit. The same are dismissed. The COs filed by the respondent are also disposed of. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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