The Mumbai Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that the activity of leasing of tinting machines by Asian Paints to their dealers/ distributors, on the facts and circumstances of the case, satisfied all five criteria laid down by the Supreme Court in BSNL v. Union of India [2006 (2) S.T.R. 161 (SC)] for determining whether a transaction constitutes a “deemed sale” under Article 366(29A)(d) of the Constitution of India. Since the transaction was one of “deemed sale”, with both possession and effective control having been transferred to the lessee, and VAT having been duly paid on the lease rentals, the transaction fell outside the ambit of service tax under the Finance Act, 1994.
A Single Technical Member M.M. Parthiban observed that where an operating lease arrangement satisfies all five criteria laid down by the Supreme Court in BSNL v. Union of India for determining a “deemed sale” under Article 366(29A)(d) of the Constitution of India, namely, goods available for delivery, consensus ad idem on identity of goods, legal right to use vested in the transferee, exclusion of the transferor during the lease period, and inability of the owner to transfer the same rights to others, and where VAT has been duly paid and assessed on the lease rentals, the transaction falls entirely within the domain of “deemed sale” leviable to VAT/Sales Tax and outside the ambit of service tax under the Finance Act, 1994.
The Tribunal relied on the TRU clarification dated Feb 29, 2008, which expressly stated that where both possession and effective control of goods have been handed over to the lessee, the transaction is “deemed sale” leviable to VAT and service tax will not apply. The CBIC Circular dated Aug 17, 2016 was also relied upon for its emphasis on examining each agreement against the BSNL criteria without making a priori assumptions about service tax liability.
Accordingly, the Tribunal concluded that there is no scope for subjecting any portion of the lease rental to service tax in the absence of a valid machinery provision in the taxing statute. Consequently, demands confirmed on such basis, along with interest and penalty imposed by invoking the extended period of limitation, are liable to be set aside.
Briefly, Asian Paints Limited, a manufacturer of paints and varnishes under Chapter Headings 3208 and 3209 of the Central Excise Tariff Act, 1985, held centralised registration as a Large Taxpayer Unit (LTU) with the jurisdictional Central Excise authorities in Mumbai. During the course of an EA-2000 audit conducted in April/May 2008, the departmental authorities noticed that the appellants had been collecting “lease rental charges” from their dealers and distributors on account of the supply of tinting machines, computerised colour mixing machines used for mixing base paint with colour shades as per customer requirements.
The department interpreted this leasing activity as a taxable service under the category of “Banking and Other Financial Services” (pre-negative list regime) and subsequently under the declared service of “transfer of goods by way of hiring, leasing, licensing etc. without transfer of right to use such goods” under Section 66E of the Finance Act, 1994 (post-negative list regime). Since the appellants had not paid service tax on these lease rentals, the department issued multiple Show Cause Cum Demand Notices (SCNs) covering the period from April 2005 to March 2015, seeking recovery of service tax along with applicable interest and proposing penalties under Sections 77 and 78 of the Finance Act, 1994.
The original adjudicating authority confirmed all the proposals in the SCNs vide Order-in-Original. On appeal, the Commissioner (Appeals) set aside the demands for the pre-negative list period (prior to July 01, 2012) but upheld the demands for the post-negative list period (July 01, 2012 to March 31, 2015) along with interest and penalty.
