Whether industrial unit can be covered under banking and other financial services?

PJ/CASE LAW/2015-16/2619

Case:- INOX AIR PRODUCTS LTD. Versus COMMISSIONER OF CENTRAL EXCISE, NAGPUR

Citation:-2015 (38) S.T.R. 191 (Tri. - Mumbai)

Brief facts:- The appellants filed these appeals against the impugned order passed by the Commissioner (Appeals).

Brief facts of the case are that the appellants are engaged in the manufacture of industrial gases. The appellants are supplying industrial gases to their various customers. At the request of certain customers, the appellants are also supplying vacuum insulated storage tanks on lease basis. The appellants entered into contracts with their customers in respect of the storage tanks. According to the terms and conditions of the agreement, the appellants are charging a fixed amount per month as a consideration amount for lease of the equipments for three years. The Revenue issued show cause notices demanding Service Tax on the ground that the appellants are providing banking and other financial services which are taxable as per the provisions of Section 65(12) read with Section 65(105)(zm) of the Finance Act, 1994. The adjudicating authority confirmed the demand. The appellants filed appeals and the same were dismissed.

Appellant’s contention:- The contention of the appellants is that the demand is for the period January 2004 to September 2005 and as per the provisions of the Finance Act, banking and other financial services are the services provided by a banking company or a financial institution including a non-banking financial company or any other body corporate. The appellants are engaged in the manufacture of industrial gases hence it cannot be said that the appellants are a banking company or other financial institution. The appellants relied upon the Board Circular dated 9-7-2001 whereby the Board has clarified in respect of the banking and financial services. The appellants relied upon the decision of the Tribunal in the case of CCE, Vadodara-I v. G.E. India, Industries (P) Ltd. reported in 2008 (12)S.T.R.609 to submit that the appellants cannot be held to be a financial banking company or financial institution.

Respondent’s contention:- The Revenue relied upon the findings of the lower authority and submitted that as per the terms and conditions of the agreement, the storage tanks are installed by the appellants and the same are in the nature of equipment and the appellants are receiving a fixed amount for utilization of the facility of the tank. This shows that the appellants had given the equipment on lease. As the appellants had leased the equipment which they termed in the agreement as a loan hence the appellants are liable to pay Service Tax as provider of banking and other financial services.

Reasoning of judgement:- The commissioner went through the terms and conditions of the agreement. As per the agreement, the vacuum insulated storage tank was supplied to their customers for a fixed term, i.e. for three years, and the appellants are charging Rs. 27,500/- per month. As per the agreement, the property, i.e. tank, always remained the property of the appellants and the same was only loaned for use to their customers. The customers were not entitled to sell or offer for sale, mortgage and pledge the tanks.

The Revenue wants to classify the activity undertaken by the appellants under the banking and other financial services as provided under Section 65(12) of the Finance Act. For ready reference, the relevant portion of Section 65 of the Finance Act was reproduced below:-

“Section 65(2)

“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) ......

(iii) ......

(vi) ......

(b) foreign exchange broking provided by a foreign exchange broker other than section those covered under sub-clause (a)

Section 65(4)

“body corporate” has the meaning assigned to it in Clause (7) of Section 2 of the Companies Act, 1956 (1 of 1956).

Section 65(105)(zm)

“Taxable service” means any service provided or to be provided to a customer, by 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”.

Thus, Banking and Financial Service is a service provided by a banking company or a financial institution or any other body corporate or commercial concern in relation to banking and other financial services and includes equipment leasing and hire-purchase by a body corporate.”

Further, they found 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 were 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, they found merit in the contention of the appellants in this regard. Further, they 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 are the Revenue or income and are 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.”

In view of the above, the impugned order was set aside and the appeal was allowed.

Decision:- Appeals allowed.

Comment:-The analogy of the case is that as assessee are engaged in the manufacture of industrial gases and not are banking company or financial institution or non-banking financial company or any other body corporate or commercial concern in relation to banking and other financial services therefore it cannot be said that they were providing banking service merely because they had leased out the equipment. Hence, transaction was not liable to Service Tax as banking and other financial services.

Prepared by:- Monika Tak

Checked by Prayushi Jain

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PJ/CASE LAW/2015-16/2619

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