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TMI Blog2012 (11) TMI 1275X X X X Extracts X X X X X X X X Extracts X X X X ..... ing that the CBDT circular No.2 dated February 9, 2001 was binding on the AO in the context of the depreciation claimed by the appellant for the assets given on lease. 4. The learned CIT(A) has erred in law and on fact in not deciding on the ground pertaining to exclusion of amount of expenditure incurred in foreign currency by the appellant from the amount of 'export turnover' for the purpose of computation of relief under section 10A of the Act." 3. As regards ground No.4, the learned counsel for the assessee submitted that the alternate plea of the assessee to the above ground is covered by the decision of the Hon'ble Karnataka High Court in the case of CIT vs. Tata Elxsi Ltd. & Others (205 Taxman 321(Kar) wherein it has been held that when certain expenditure is excluded from the export turnover, then the same is also required to be excluded from total turnover for the purposes of computing deduction u/s 10A of the of the Income-tax Act, 1961 [hereinafter referred to as "the Act"]. Respectfully following the same, we direct the AO to exclude the expenditure incurred in foreign currency by the assessee from both the export turnover as well as total turnover for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the lessee is a mere bailee of the lessor and that it does not have any proprietary right, title or interest in the equipment or any part thereof and that the lessee shall install, use and operate the equipment correctly and maintain the same in good working condition and repair it at own cost and comply with statutory operations and other requirements of law. He submitted that as per clause 11 of the Lease Agreement, the lessee shall not make any alteration, addition or improvement to the equipment or change the condition thereon without the prior consent of the lessor and that the lessee shall preserve the lessor's rights during the period of lease. He has drawn our attention to clause 18 of the Lease Agreement viz., the clause on the termination of lease which stipulates that the lessor shall be entitled to terminate the lease without any notice except as specified in clause 18.1.2 and at any time after the occurrence of such event and that as per clause 18.2 the lessor shall, without any notice, be entitled to remove and re-possess the equipment and for that purpose by itself, its servants or agents enter upon the premises of the lessee. As per clause 20.5 of the Lease Agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal at Mumbai, in the case of Indus Ind Bank Ltd. vs. Addl.CIT (ITA Nos.6566/Mum/2002 & ITA No.606/Mum/2003 dated 14-3-2012) has dealt with the issue of depreciation on assets leased in the event of the transaction being held as a financial lease and submitted that the Hon'ble Special Bench has held the issue in favour of the revenue by holding that in the case of financial lease, it is the lessee who is entitled to depreciation and not the lessor. He submitted that for coming to this conclusion, the Tribunal has only followed the decision of the Hon'ble Supreme Court in the case of Asea Brown Bovery Ltd. vs. Industrial Finance Corporation of India (154 Taxman 512) but according to the learned counsel for the assessee, the Special Bench of the Tribunal has not considered the circular No.2 of 2001. Therefore, the Special Bench decision cannot be applied to the facts of the case before us. He has also drawn our attention to the Direct Taxes Code 2010 to demonstrate that the term 'finance lease' has been defined therein and therefore, according to him, finance lease has not been specifically considered by the 1961 Act. Therefore in the absence of specific definition, it would be unf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the owner is business income and the owner is also entitled to depreciation on the machinery so hired out. ii) The hirer who pays hire charges is also entitled to claim it as revenue expenditure as he has no ownership on the new asset. iii) The transaction of hire is therefore a bailment of machinery. iv) There is no extinguishment of any right of the owner in the machinery but it is merely a license given to the hirer to use for a temporary period the machinery so hired. v) In contra-distinction to the above, in the case of hire-purchase agreement, the equipment shall eventually become the property of the hirer or confer on the hirer an option to purchase the equipment. vi) The periodical payments made by the hirer should, for tax purposes, be regarded as made up of (a) consideration for hire to be allowed as deduction in the assessment and (b) payment on account of purchase to be treated as capital outlay, depreciation being allowed to the lessee on the initial value. vii) Thus hire purchase agreement has two elements - (1) element of bailment and (2) element of sale. In the absence of the element of sale, the agreement cannot be treated as transfer and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IS AGREEMENT WITNESSETH AND IT IS HEREBY AGREED BY THE PARTIES HERETO AS UNDER: 1.1 The Lessor hereby agrees to let and the Lessee hereby agrees to take on lease the equipment from the Lessor upon the terms and conditions mentioned in Lease Summary Schedule hereto. As and when the Equipment is leased to the Lessee, the Lessee shall further execute from time to time Supplementary Lease Schedules in favour of Lessor pertaining to the Equipment and disbursal made by the Lessor in relation thereto. Each such Supplementary Lease Schedule shall be deemed to form an integral part of this Agreement as if the same were annexed hereto or set out herein in extenso. 2.1 The Lessee shall pay to the Lessor lease rentals as set out in Lease Summary Schedule and more specifically mentioned in Supplementary Lease Schedules attached/to be attached hereto without any demand from the Lessor. All payments of lease rentals hereunder, shall be made by the Lessee to the Lessor without any deduction or abatement whatsoever, and shall be paid to the Lessor at their office at New Delhi by demand draft payable at New Delhi or at such other places as the Lessor may specify from time to time and payment ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all times, protect and defend as bailee/licensee of the Equipment, the Lessor's absolute and paramount right and title thereto and shall not at any time, advance or make any claim adverse to or in derogation of the Lessor's absolute and permanent ownership right and title. 7. The lessee shall install, use and operate the Equipment carefully and maintain the same in good working condition and repair at its own Cost and expenses in conformity with the instructions or operational manuals given by the manufacturer and/or the Lessor and comply with all statutory operation and other requirements of law, rules, regulations, maintenance and directions as applicable to the storage or/and repairs, installation governing use and operation of the Equipment in that behalf, and ensure that the Equipment is operate by suitably trained personnel for the purpose for which it is designated and not to do or omit to be done anything by which the warranties and performance guarantee given by the manufacturer would be invalidated or become unenforceable wholly or partly. INSURANCE 8.1 Immediately after signing of the Lease the Lessee shall insure the Equipment in the joint names of the Lessor an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Lessor may insure the Equipment and/or pay the insurance premia as above and the Lessee shall forthwith on receipt of a notice of demand from the Lessor reimburse all sums so paid by them together with service charges thereon at the rate of 21% per annum from the date of such payment by the Lessor. PAYMENT OF SALES TAX RATES AND OTHER CHARGES 9.1 The Lessee shall during the period of this Lease and till the Equipment is delivered back to the Lessor in good working order and condition (fair wear and tear accepted) bear all charges and other duties, taxes and penalties as may be levied from time to time by the Government or any other authority pertaining to or in respect of this Lease and pay the same on demand by the Lessor. 9.2 The Lessee agrees that the transaction covered by this Lease is not understood to be a sale exigible to tax under the existing sales tax laws. If however, by reason of any amendments of any law, Central or State, this transaction is held to be exigible to tax, as a sale or otherwise either in whole or in part, or any in part, or any input or material or equipment used or supplied in execution of or in connection with the Lease are eligible to tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice in writing to the Lessee and the Lessee shall on demand, pay to the Lessor al costs of the Equipment together with a service charge thereon at the rate of 21$ per annum and expenses incurred by the Lessor for insuring, transportation, storing and maintaining the Equipment and for its disposal and/or lease to third party or in other manner whatsoever without prejudice to the Lessor's remedies for damages for breach of contract. Without prejudice to the aforesaid right of the Lessor, in the event of such termination, the Lessor shall also be entitled to recover from the Lessee and the Lessee shall be liable to pay to the Lessor all sums computed in the manner set out in clause 18.2 hereof. 15.3 The Lessor shall not be responsible for any direct, indirect or consequential loss to the Lessee or third party arising from any delay its delivery and/or installation of the Equipment either by the action of the manufacturer or otherwise however or by reason of any delay in the commencement of the Lease. LESSEE'S CONFIRMATION REGARDING PURCHASE OF EQUIPMENT 16. The Lessee acknowledge represents, declares, agrees and confirms that: 16.1. The Equipment is of the required size, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to observe or perform or commits or allows to be committed a breach of any of the terms, conditions, provisions or stipulations of this Lease on its part to be observed and performed (other than failure to pay any sum hereunder when due and payable) and if such breach is remediable, fails to remedy the same within fourteen days of notice by the Lessor specifying such default and requiring such default to be remedied. 18.1.3. If any representation or warranty made or deemed to be made by the Lessor in pursuant to this Lease is or proves to have been incorrect in any material respect or become incorrect in material respect. 18.1.4 If the Lessee being a limited company passes any resolution for winding up or allows a petition for winding up presented against it or if a Receiver is appointed for the whole part of the assets, properties or undertaking of the Lessee or compounds with or enters into any composition with its creditors. 18.1.5. If the Lessee does or suffers any act or thing or omits to do or suffer any act or thing whereby or in consequence of which the Equipment may be or is likely to be distracted, endangered, attached or taken in execution under any legal proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide and satisfactorily estimated to be the proper and reasonable amount that may be suffered by the Lessor as and when by way of liquidated damages. Notwithstanding anything to the contrary herein contained, in the event of such …the Lessor shall also be entitled to sell, release or otherwise dispose (iii) of the Equipment in such manner as the Lessor may think fit and the Lessor shall not be bound to account to the Lessee any manner whatsoever. 18.3.1. Upon termination of this Lease by efflux of time or otherwise the Lessee shall at its own cost and expenses, forthwith deliver or cause to be delivered to the Lessor the Equipment such time and place as may be directed by the Lessor in good repair, order and condition (subject to normal wear and tear0. 19. In this Agreement, unless the context otherwise so requires, the following expressions shall have the following meanings, viz. . . . . . . . . (f) 'SUPPLEMENTARY LEASE SCHEDULE' The Supplementary Lease Schedule or Schedules, which may now or from time to time to be incorporated hereunder as an integral part of this Lease. Lease shall mean and include the person(s), named herein and his heir successor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the effective date, lease period and the lease rentals of the specific equipment. As per the broader terms of the lease agreement, lessor alone shall remain the owner of the asset but as seen from the supplementary lease schedule the lease period is for a period of 36 months and the lease rental is decided at the rate of per month per thousand financed. The lessee is receiver of the equipment and is entitled to put to use the same. The lessee also holds the lessor harmless against nonperformance of the equipment, if any, and further agrees to look solely to the manufacturer for the purposes of guarantee and warranties with respect to the said equipment. It was also covenant that irrespective of the performance of the said equipment, the lessee agrees unconditionally to honour the terms of the supplementary lease schedule and confirms that it will continue to make the lease rental payment in the normal course of its business. It also specified that the lessee has made the selection of the equipment and its supplier in its sole discretion and that schedule 2 specifies that the repair and maintenance, insurance etc., shall remain the responsibility of the lessee and the sales tax or l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lessor. Thus, we are of the opinion that though the lease agreement states that the lessor is the owner and interest-holder of the equipment, it is, in fact, the lessee who is the de facto owner and user of the property and would also bear all risks and loss of the equipment along with regular repair and maintenance and also benefit from the exclusive right of possession and use of the equipment. Therefore, the terms of the contract between the lessor and lessee have to be examined to determine the owner of the asset and not legal ownership over the asset for claiming the depreciation. In view of the same, we hold that the agreement between the assessee and the lessee is a finance lease and as held by the Special Bench of the Tribunal in the case of Indus Ind Bank (supra), depreciation on leased asset in the case of financial lease is allowable to the lessee and not to the lessor. The learned counsel's reliance upon the clauses of the Direct Taxes Code (DTC) and the definition given there-under on 'finance lease' is not relevant to the facts of the case as observed by the Special Bench of the Tribunal in the case of Indus Ind Bank Ltd. (supra). Insofar as the assessee's submission ..... X X X X Extracts X X X X X X X X Extracts X X X X
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