Custom, Excise & Service Tax Tribunal
Kansai Nerolac Paints Ltd vs Commissioner Of Customs on 30 December, 2016
IN THE CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL, WEST ZONAL BENCH AT MUMBAI COURT No. I Appeal No. ST/669/11 (Arising out of Order-in-Original No. 246-247/14-15/V/2011/COMMR/KS/ST dated 13.09.2011 passed by Commissioner of Central Excise, Mumbai) For approval and signature: Honble Mr. M.V. Ravindran, Member (Judicial) Honble Mr. C.J. Mathew, Member (Technical) ================================================
1. Whether Press Reporters may be allowed to see : No the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982?
2. Whether it should be released under Rule 27 of the : No CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?
3. Whether Their Lordships wish to see the fair copy : Seen of the Order?
4. Whether Order is to be circulated to the Departmental : Yes authorities?
Kansai Nerolac Paints Ltd.
Appellant Vs. Commissioner of Customs Mumbai Respondent Appearance:
Mr. Mehul Jiwani, C.A. for appellant Shri R. Kapoor, Commr (AR) for respondent CORAM:
Honble Mr. M.V. Ravindran, Member (Judicial) Honble Mr. C.J. Mathew, Member (Technical) Date of Hearing: 30.12.2016 Date of Decision: 18.01.2017 ORDER NO.
Per: M.V. Ravindran This appeal is directed against order-in-original No. 246-247/14-15/V/2011/COMMR/KS/ST dated 13.09.2011.
2. The relevant facts, after filtering out unnecessary details, are the appellant herein during 2002-03 to 2006-07 had provided Computer Colour Display Machines along with software for matching of shades to their dealers. The said machines are used by the dealers for preparing shades of paint of particular colour and the same are sold by the dealers to the customers. Appellant has been recovering rent for the machines provided by them and are paying sales tax. The case of the department in the two show-cause notices, that service tax liability arises on the amount received as rent and the department sought to classify the said services under the category of Banking & Other Financial Services. Appellant contested the show-cause notices on merits as well as on limitation. Adjudicating authority did not agree with the contentions raised and confirmed the demand with interest and also imposed penalties.
3. Learned C.A. would submit that the definition of Banking & Other Financial Services under Section 65(12) provides that the services shall be provided by the banking company or a financial institution including a non-banking financial company. It is his submission that the appellant is none of them and is a manufacturing company and manufacture paints. He would read Circular No. 83/1/2006-ST dated 4.7.2006 dated wherein the CBEC has classified that service tax is not payable by the company under the category of Banking & Other Financial Services. He would submit that similar issue came up before the Tribunal in the following cases -
(a) Banswara Syntex 2010 (18) STR 68 (Tri. Del)
(b) Vidharba Iron & Steel Corpn. Ltd. 2014 (36) STR 324 (Tri. Mum)
(c) Inox Air Products Ltd. 2015 (38) STR 191 (Tri Mum)
(d) Commissioner of Central Excise v. G.E. India Inds. (P) Ltd. 2008 (12) STR 609 (Tri.).
(e) Mega Enterprises 2015 (40) STR 528 (Tri. Mum) wherein it was held that the demand under Banking & Other Financial Services is not sustainable.
3.1 It is his further submission that the entire arrangement by an agreement entered with the dealers is not a financial leasing but transaction of operating lease. He would submit that the Apex Court in the case of Asea Brown Boveri Ltd. 2004 (004)-CLJ-0433-SC has laid down the feature of financial lease transaction and in the case in hand these ingredients are not satisfied. It is the further submission that show-cause notice for the period 2002-03 to 2005-06 was served by Pune Commissionerate on 20.06.2007. It is the submission the show-cause notice 28.06.2007 is time barred and there is no suppression of facts.
4. Learned A.R. (Commissioner) would take us through various clauses of the agreement entered by the appellant with the dealers. He would submit that the entire issue is regarding whether this operating lease is financial leasing services. He would submit that financial leasing is a financial loan and operating lease is a lease other than the finance lease. Hence the term finance lease into financial leasing is covered by the definition of business and other financial services. It is his submission that the adjudicating authority was correct in confirming the demands.
5. We have considered the submissions made by both sides and perused the records.
6. Undisputed facts are that the appellants are manufacturing company and manufacture paints; the paints are sold to the dealers; Computer Colour Display machines along with software are also provided to arrive at desired combination of shades required by consumers; CCD along with software are used by the dealers; the dealers are charged rent for such machine provided. It is the case of the Revenue that the amount received as rent is chargeable under Banking & Other Financial Services. We have read the definition of Banking & Other Financial Services provided under Section 65 (12) of the Finance Act, 1994 during the relevant period which reads as under:-
Section 65 (12) (July 2004) (12) banking and other financial services means
(a) the following services provided by a banking company or a financial institution including a non-banking financial company or any other body corporate namely :
(i) financial leasing services including equipment leasing and hire-purchase by a body corporate;
(ii) credit card services;
(iii) merchant banking services;
(iv) securities and foreign exchange (forex) broking;
(v) asset management including portfolio management, all forms of fund management, pension fund management, custodial, depository and trust services, but does not include cash management
(vi) advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisitions and advice on corporate restructuring and strategy; and
(vii) provision and transfer of information and data processing;
(b) foreign exchange broking provided by a foreign exchange broker other than those covered under sub-clause (a); Section 65 (12) (August 2006) (12) banking and other financial services means
(a) the following services provided by a banking company or a institution including a non-banking financial company or any other body corporate namely :
(i) financial leasing services including equipment leasing and hire-purchase;
(ii) omitted
(iii) merchant banking services;
(iv) securities and foreign exchange (forex) broking;
(v) asset management including portfolio management, all forms of fund management, pension fund management, custodial, depository and trust services, but does not include cash management
(vi) advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisitions and advice on corporate restructuring and strategy;
(vii) provision and transfer of information and data processing; and
(viii) banker to an issue services; and
(ix) other financial services, namely, lending; issue of pay order, demand draft, cheque, letter of credit and bill of exchange; transfer of money including telegraphic transfer, mail transfer and electronic transfer, providing bank guarantee, overdraft facility, bill discounting facility, safe deposit locker, safe vaults; operation of bank accounts;)
(b) foreign exchange broking provided by a foreign exchange broker other than those covered under sub-clause (a); 6.1 The taxable service definition of Banking and other Financial Services under Section 65 (105) (zm) reads as under:-
(zm) to a customer, by a banking company or a financial institution including a non-banking financial company, or any other body corporate or (any other person) in relation to banking and other financial services;
6.2 Applying the above definition of Banking and other Financial Services and the definition of other taxable service, we find that the amount received by appellant in the case in hand would not be covered for taxing under Banking and other Financial Services. The Circular dated 04.07.2006 of the CBEC indicates as under:-
3. Banking and other financial services are defined under section 65(12). Such services provided to a customer by a banking company or a financial institution including a non-banking financial company or any oilier body corporate or any other person to a customer are liable to service tax under section 65(105)(zm). The expression any other person appearing in section 65(105)(zm) is to be read ejusdem generis with the preceding words. The expression other financial services appearing under section 65(12)(a)(ix) is a residuary entry and includes; those services which are normally rendered by banks or financial institutions.
4. Hence, banking and other financial services provided by a?banking company or a financial institution or a non-banking financial company or any other service provider similar to a bank or a financial institution are liable to service tax under section 65(105)(zm) of the Finance Act, 1994. Department of Posts is not similar to a bank or a financial institution and hence does not fall within the category of any other similar service provider. 6.3 The Tribunal in the case of Banswara Syntex (supra) while considering a similar issue of whether leasing of land, building as well as machinery would fall under Banking and other Financial Services or otherwise, held that such amount received as lease rent would not be covered under Section 65 (105) of Banking and other Financial Services in the Finance Act, 1994. We reproduce the ratio in paragraphs 6, 7 and 8:-
6.?There is no difficulty to understand that Section 65(105)(zm) has brought a banking company, a financial institutions including a non-banking financial company, a body corporate and commercial concern providing service in relation to banking and other financial services are liable to service tax on the value of taxable services. The meaning of the term other financial services is given by Section 65(12) of the Finance Act, 1994. One of the categories of service covered by such activity is financial leasing services including equipment leasing and hire-purchase. These provisions were examined by us. We notice that meaning of the term body corporate adopted from Companies Act brings the appellant to the fold of law, being a public limited company. But what is required to be examined is whether such a limited company has provided financial services.
7.?The facts on record suggest that Banswara Syntex Ltd. is not engaged in leasing business to be called a corporate body providing financial service. Finding the present appellant not engaged in lease finance, bringing the appellant to the fold of tax under Section 65(12)(zm) of the Finance Act, 1994 is unwarranted. We get support to say so, when we read the decision of the Tribunal in the case of CCE, Vadodara v. G.E. India Industries (P) Ltd. reported in 2008 (12) S.T.R. 609. So also when we read the letter dated 9-7-2001 issued by the TRU of the CBEC vide No. BII/I/2000-TRU, it is made clear that a company falling under the definition of body corporate should either be a banking company or a financial institution or a non-banking financial company which came under the purview of law. Such essential ingredient is absent in the present case.
8.?In the course of hearing, it was noticed that the Legislature intended to broaden the tax base bringing transfer of right to use tangible goods to the fold of law. This is appearing in Section 65(105)(zzzzi) of Finance Act, 1994 which came into force w.e.f. 16-5-2008. Finding that there was no law to tax the transfer of right to use movables before 16-5-2008, even on such count also, the appellant is excluded from the purview of law. 6.4 In the case of Inox Air Products Ltd. (supra) there was a issue of charging service tax on an amount received as lease rent under Banking and other Financial Services for lease of storage tanks to customers. The Tribunal held as under:-
8.?Further, we find that the Board by the circular relied upon by the appellants, clarified in respect of the activity covered under banking and financial services. As the appellants are not a banking company or a financial institution including a non-banking financial company or any other body corporate or commercial concern in relation to banking and other financial services, therefore, we find merit in the contention of the appellants in this regard. Further, we find that the Tribunal in the case of G.E. India, Industries Ltd. (supra) in a similar situation where extrusion material was given on lease to Jain Irrigation, the Tribunal after looking into the terms and conditions of the agreement which are similar to the present agreement, set aside the demand. The Tribunal held as under :-
4.?Since the Finance Act, 1994 does not define what is financial leasing, the Commissioner (Appeals) has relied upon the Accounting Standard published by ICAI. According to the accounting standards, the leasing is classified as a financial leasing if the ownership of the assets on lease is transferred to lessee by the end of the lease term and this opinion is created at the inception of the lease itself. In the instant case, the agreement is only for the period of 35 months during which a monthly user charge is required to be paid and agreement does not provide for transfer of the assets at the end of the term. Further from the agreement it is also seen that all risks and rewards incidental to the ownership have also not been transferred and ownership of the asset and effective control of the assets remain with the applicant in this case. Further, lease is for a short period of 35 months extendable to another period of 2 years and has no relation to the economic life of the asset which is invariably a consideration in lease. Further, the Board in Circular B/II/I/2000/TRU, dated 9-7-2001, has clarified as follows :
2.1?Financial leasing including equipment leasing and hire-purchase :
2.1.1?.......
2.1.2?In the case of leasing or hire purchase, it is understood that the general business practice is as follows :
The service provider enters into a leasing or hire-purchase agreement with the lessee or hire-purchaser. At the time of entering into the agreement, they collect a charge called lease management fee or processing fee or documentation charges or by any other name, which is usually a percentage of the transaction value. The lease rental or hire purchase amount is recovered in Equated Monthly Installments (EMI) over the period of lease or hire-purchases as indicated in the agreement through post-dated cheques and no separate bills are raised for the monthly recovery. Every agreement bears a unique number.
2.1.3?The EMIs consist of recovery of principal amount (towards the original cost of the equipment) and finance/interest charges. The allocation between the principal and the finance/interest charges are known to and agreed upon by both the parties. The customer repayment schedule contains the details of the EMIs with the break-up for the principal and the interest. In respect of leasing and hire purchase, the amount recovered as principal is not the consideration for services rendered but is credit to the capital account of the lessor/hire purchase service provider. The interest/finance charges is the Revenue or income and is credited to the Revenue account. Such interest or finance charges together with the lease management fee/processing fee/documentation charges is the consideration for the service rendered and therefore, they constitute the value of taxable service and Service Tax is payable on this value. Accordingly, it is clarified that Service Tax in the case of financial leasing including equipment leasing and hire purchase will be leviable only on the lease management fee/processing fee/documenta-tion charges (recovered at the time of entering into the agreement) and on the finance/interest charges (recovered in equated monthly installments) and not on the principal amount. 6.5 It can be seen from the above reproduced ratio of various decisions of the Tribunal similar issue has been decided in favour of the appellant herein. In the facts and circumstances of the case and the authoritative judicial pronouncements, we find that the impugned order is unsustainable and liable to be set aside and we do so.
7. The impugned order is set aside and the appeal is allowed.
(Order pronounced in Court on 18.01.2017) (C.J. Mathew) Member (Technical) (M.V. Ravindran) Member (Judicial) nsk 1 12 Appeal No. ST/669/11