Indian Leasing News
Important: There are a number of news items archived on 25th June - check them up here.
General business news
Direct taxes news
Sales-tax and other indirect taxes
Accounting and miscellaneous
Read chronologically -most recent items on top or go for the sections above. Do you have any interesting news to contribute - if yes, write it across and we will publish it with credit to you.
State tax officers dithering on Supreme Court ruling on inter-state sales
- 28th August 2002
Though the Supreme Court clearly ruled in 20th Century that a lease that causes movement of goods from one state to another is an inter-state sale, the sales-tax department is still hesitant.
Service tax case weakened: Kerala High Court says sales-tax and service tax can go together
- 28th August 2002
In a ruling relating to mobile phone SIM cards, the Kerala High Court has ruled sales-tax and service tax on leases can go together.
Supreme Court ruling upholds hire-vendors property rights
- Oct 6, 2001
In a recent Supreme Court ruling, the Court upheld the hire-venodor's property rights and said no case for theft lies when the owner repossesses hired goods.
Cricket match flops: the leasing lagaan is on- 10th July 2001
The leasing lagaan - service tax on lease and hire purchase transactions - is on and has already been notified vide notifications issued on 9th July..
Karnataka HC ruling deals body blow to tax depreciation on leases- 11th June 2001
If this ruling is followed by the tax department, it would be difficult in most leases for lessors to claim tax benefits of depreciation.
Entry tax net thickens with Supreme Court holding excavators and rollers to be vehicles - 7th June 2001
The Supreme Court has held that for the purpose of entry tax, excavators and road rollers are "motor vehicles"
Whether software is "goods" -SC is not sure; refers to larger bench - 4th June 2001
The Supreme Court has transferred to a larger bench the question whether income from sale of software is consideration for "transfer of right to use goods".
Sales-tax ruling from AP High Court further affirms no tax on inter-state leases - 4th June 2001
A ruling from the AP High Court in Coromandal Finance has further strengthened the already clear legal position of sales-tax on leases.
Service tax proposals passed, official assurance that tax will not be on rentals- 30th Apriil 2001
Despite all protests and claims as to unconstitutionality, the service tax proposals were passed without any amendment. However, in an official briefing in Mumbai, it has been stated that the levy will not be on rentals.
Delhi sales-tax on leases: don't read it, you might simply faint !! - 30th Apriil 2001
For those who are weak at heart, reading Delhi sales-tax proposals on leasing may be seriously injurious to health: the new law proposes TDS, tax clearance certificate, and a mandatory reporting requirements on all lessees, failing which your lessees may be behind bars !
Karnataka proposes sales-tax on lease of software - 28th March 2001
To get its share of the prospering IT industry in the State, Karnataka has proposed a sales-tax on lease of software.
Maharashtra proposes VAT system of sales-tax on leases - 28th March 2001
Leases of tax paid goods enjoyed sales-tax exemption in Maharashtra, but no more so, as proposed in State Budget for 2001-2.
Delhi proposes sales-tax on lease: leaves leasing industry shelter-less - 26th March 2001
Sales-tax on leases is a big nuisance in India, and the only succour so far was the NCT of Delhi which did not impose tax on leases. The State FM's Budget proposal will close the only available sales-tax shelter.
Sales-tax contingency deposit not liable to income-tax - 8th March 2001
The Allahabad High Court has held in this case that contingency deposits collected pending sales-tax accrual is not liable to tax as income based on collection.
Repossession of hired machinery from Sick Undertaking permitted - 8th March 2001
The Calcutta High Court in this case allowed repossession of assets hired to a sick undertaking.
Rajasthan imposes entry tax on to-lease assets - 8th March 2001
The entry tax law in Rajasthan imposes entry tax on vehicles being taken into the State for leasing purposes.
Hire vendor not- liable to motor vehicles tax defaulted by operator - 8th March 2001
The Supreme Court in this case held that the finance company cannot be denied registration of a vehicle on account of default by hirer in payment of motor vehicles tax..
Extra shift depreciation is available to lessors - 7th March 2001
A Calcutta High Court ruling holds that leasing is not equivalent to plying vehicles on hire, to qualify for higher depreciation rates.
Vehicles leased are not vehicles plying on hire - 7th March 2001
A Calcutta High Court ruling holds that leasing is not equivalent to plying vehicles on hire, to qualify for higher depreciation rates.
Tribunal ruling allows provisions to be deductible expense - 6th March 2001
This is a very significant ruling by the Madras tax tribunal - it allows provisions made as per RBI norms to be deductible expenses.
Service tax proposal perturbs leasing and hire purchase industry - 6th March 2001
The Budget 2001 proposal on service tax put leasing industry in the dock. Read full fledged article on this site..
CBDT circular clarifies lessors' tax treatment not to be affected by accounting standards - 14th Feb 2001
By a circular dated 9th Feb., the CBDT has clarified that prime facie, the tax treatment of leases will not be affected by the accounting standard.
ICAI issues accounting standard on leases - 8th Feb 2001
The Institute of Chartered Accountants of India has issued Accounting Standard 19 on lease accounting, mandatory for all leases entered into after 1st April 2001.
Maharashtra interprets SC ruling in 20th Century: warns of forthcoming retrospective amendment - 3rd Jan 2001
The State Govt. of Maharashtra issued a circular interpreting the SC ruling in 20th Century but at the same time cautioned of a possible forthcoming retrospective amendment of the CST Act.
SC holds hired vehicles liable for confiscation for narcotics carriage - 28th Dec, 2000
The Supreme Court in this ruling held that a vehicle taken on hire purchase, if used for illegal trade, will be liable for confiscation though its legal owner is not involved in such misuse..
100% depreciation allowed on glass bottles - 27th July, 2000
The Madras High Court in a recent ruling confirmed 100% depreciation on glass bottles.
RBI tinkers its way to mending NBFC norms - 30th June, 2000
On 30th June, RBI made changes in definition of "deposits" and provisioning norms for lease and hire-purchase transactions
SC ruling on sales-tax on lease transactions puts industry on a mat - 30th June, 2000
CBDT instructions on depreciation on lease transactions may mean trouble for past leases -30th June, 2000
Tribunal approves RSEB transaction -30th June, 2000
Supreme Court upholds hire venor's property rights
In a recent ruling, the Supreme Court has upheld that the hirer's interest in a hire purchase transaction is merely a promissory or executory interest, and therefore, the repossession of a hired vehicle by the hire vendor does not anyway amount to theft.
In Charanjit Singh Chadha v. Sudhir Mehra, 2001 SOL Case no 518, the SC has discussed the nature of a hire purchase agreement and the rights the agreement confers on the hirer. "Hire purchase agreements are executory contracts under which the goods are let on hire and the hirer has an option to purchase in accordance with the terms of the agreement. .. Under the hire purchase agreement, the hirer is simply paying for the use of the goods and for the option to purchase them. The finance charge, representing the difference between cash price and the hire purchase price, is not interest but represents a sum which the hirer has to pay for the privilege of being allowed to discharge the purchase price by instalments". The apex court went on to say: "The hire purchase agreement in law is an executory contract
On the owner's right of repossession, the Court held : "If the hirer himself has committed default by not paying the instalments and under the agreement the appellants have taken repossession of the vehicle, the respondent cannot have any grievance. The respondent cannot be permitted to say that the owner of the vehicle has committed theft of the vehicle or criminal breach of trust or cheating or criminal conspiracy as alleged in the complaint".
The leasing lagaan is on:
leasing industry's cricket match with the CBEC flops
Aamir Khan was literally speaking for the leasing industry when the villagers of Champaner plead before the King: "Maalik teen saal se sookha par raha hai - yeh lagaan maaf karai deo" [Me Lord, it has not rained for last 3 years, please do avoid this tax]. And the King says in reply - The expenses of the Empire are not destined by the rains in your farms.
No doubt, the leasing industry has been passing through one of the worst phases in its existence. Lesser of business, and much lesser recovery. And on top of that, the threat of service tax, not to speak of a wide variety of other taxes and duties.
The fact that the service tax on lease transactions is not Constitutionally valid has not deterred the powers-that-be, nor have they been moved by the miseries of an industry that has been brought to the brink of a collapse by wrong and untimely regulation.
So, no answer to the doubts raised over the Constitutionality of the levy, and the North Block has gone ahead and imposed service tax, prospectively, on all lease and hire purchase transactions.
Full text of the Clarification relating to leasing/ hire purchase is as follows:
"2 Financial services covered under the tax net are specifically mentioned in the definition itself.
2.1 Financial leasing including equipment leasing and hire purchase:
2.1.1 In case of financial leasing including equipment leasing and hire-purchase, the service is taxable only if it is rendered by a body corporate. The term body corporate has the meaning assigned to it in clause (7) of section 2 of the Companies Act, 1956. Briefly, body corporate means a private limited, public limited company or a Government company. Such companies should be either a banking company or a financial institution or non-banking financial company to come under the tax net. In other words individuals, proprietorship or partnership firms will not come under the tax net. The leasing or hire-purchase may be of motor vehicles, machinery and equipment or other goods.
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 instalments (EMI) over the period of lease or hire-purchase 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 credited 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 services 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/documentation 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.
2.1.4 A question has been raised whether lease or hire-purchase agreements entered into prior to the imposition of levy (prior to 16-7-2001) would be leviable to service tax. In this regard, it is clarified that such agreements entered into prior to 16-7-2001 will not be liable to service tax, provided the property/goods has also been received by the lessee prior to 16.7.2001. "
See Vinod Kothari's detailed analysis here.
Official website on service tax The official site of the CBEC at www.cbec.gov.in gives service tax notifications only upto some 1998.
Karnataka HC ruling deals body blow to tax depreciation on leases
There may not much of leasing happening in India as of now, but there is a lot happening on the legislative and judicial front - thanks to the vanished companies who filed cases and appeals when they were in business, and now find it no more worth spending money in legal fees for their near-sunk fortunes. Result: poorly argued cases before legal forums, and extreme rulings.
So, here is another big blow from the Karnataka HC - the ruling in Gowri Shankar Finance Ltd v. CIT 166 CTR 137. If this ruling is followed by the tax department, it would be hard for any lessor to claim depreciation on the leases being done in India.
In essence, this ruling holds that if the lessee after paying lease rentals is not required to return the goods to the lessor, the lease is not a true lease but an instalment payment plan on which depreciation will not be allowed to the lessor. The HC rules that "ordinarily, the lessor is not entitled to claim depreciation on the assets leased by him because, in that case, the leased asset is used for the business/ profession of the lessee and that of the lessor." The facts in the case were almost representative of a usual lease in India, except that the asset in question were consumer durables. The HC narrates the facts: " The arrangements are made in such a way that if a customer sticks to the terms of the agreement, then, the entire amount including the lease rent gets paid before the expiry of the period of the lease and the ownership of the goods passes on from the assessee to the customers automatically. The customers are not required to return the goods to the assessee. It is like selling goods by way of instalments". The HC goes on to say: "Had the assessee been leasing out the goods, then after the expiry of lease period the leased goods would be returned to the assessee for further leasing". "The goods never come back to the assessee for leasing them to any other person. Though the transaction was termed as a lease deed, in fact that was in the nature of hire-purchase/ instalment scheme".
It may be contended that in a lease, at the end of the lease period, the lessee is required to return the goods and there is no automatic transfer of title to the lessee. However, the ruling of th HC will put stress on the return of the goods to the lessor at the end of the lease period. Departmental enquiries will focus on the end-of-term treatment and it would be hard for the lessors to establish that they maintained effective control over the asset at the end of the lease term.
Links: For a CBDT circular holding that on finance leases, depreciation is claimable by lessors, click here.
Service tax proposals passed, promise that the levy will not be on rentals
In present day legal drafting, the golden rule of interpretation is: what I say is not what I mean, and what I mean is not what I say. So, even though the final cleared version of service tax proposals clearly states that leasing and hire purchase are services on which service tax of 5% will be applicable, there is an official, oral, assurance that the tax will not be charged on rentals.
The text of the service tax proposals was passed without any amendment.
However, an informed friend says that there was an open-house meeting of new assessees on 24th April in Mumbai, where Mr M.G. Venugopalan, Director General (D.G.) and other senior officials clarified issues regarding service tax. The following oral clarifications have been given which would later be notified in Official Gazette through circulars: "Regarding financial leasing including equipment leasing and hire purchase, strong representations have come across the country on the applicability of the service tax on lease rental. The D.G. confirmed that there would be no service tax on lease rentals but only on services rendered for leasing (e.g. lease management fees etc.) as lease rentals are treated as deemed sale."
Let us look forward to see how the executive changes the clear meaning of the law.
For more on service tax proposals and related articles, see below.
Sales-tax contingency deposit not taxable as income of the lessor
The Allahabad High Court in CIT v. Auto Sales 246 ITR 494 has held that contingency deposits collected by a hire purchase company and held during the tenure of hire for sales-tax payable at the end of the tenure are not taxable as the income of the hire vendor.
The decision arises in context of SC ruling in Chowringhee Sales Bureau P. Ltd where the SC had held that sales-tax was a tax on the seller, and whether he ultimately recovers the same from the customer or not is not relevant for law. Therefore, amount of sales-tax collected was taken as the income of the seller.
In the instant case, the Court drew a distinction based on facts. The contingency deposit was held as a deposit and was transferred to sundry creditors account. The amount was payable to the customer, if sales-tax was not payable. The Court also placed stress on the fact that there was no liability on the date of giving of vehicles on hire, when the amount of deposit was collected [the case pertains to 1971-2 when transfer of title in case of hire purchase was taken as sale].
The ruling of the SC in Punjab Distilleries where deposits against bottles, which were not returnable by the customers was held as income, was also distinguished on facts.
Extra shift depreciation available to leasing companies
The Madras ITAT has held that the benefit of extra shift depreciation is allowable to a leasing company. The doubts were earlier cast based on a ruling of the Delhi ITAT in the case of Shree Leasing. This is the ruling of the Madras ITAT in First Leasing Co. 70 TTJ 331.
Vinod Kothari comments: Extra shift depreciation was removed many years ago and the matter is unlikely to be of direct relevance to many, but once again, the relevance of actual wear and tear to the asset has been highlighted.
Links There is yet another ruling in the same matter. Click here on this site.
Vehicles leased are not vehicles plying on hire
The Calcutta High Court has held that vehicles given on lease are not vehicles plying on hire. The ruling comes in context of higher depreciation rates available for vehicles given on hire.
The present case, Soma Finance and Leasing Co. Ltd. vs. CIT 244 ITR 440 is not a very well argued ruling at all as no one has appeared for the lessor at all. The Court seems to have given the ruling based on papers only. It also does not appear as if the facts were made known to the Court well - as to whether the vehicles were actually running on hire by the lessees or not.
The Court has simply ruled that leasing of vehicles is not equivalent to plying them on hire, and therefore, the higher rate of depreciation is not available in such a case.
The ruling should not change the position that if the effective use of the vehicle is for hiring purposes, the higher rate of depreciation, so far 40%, should be allowable.
Mandatory provisions by leasing companies allowed as deductible expense
This is a very significant ruling and might give some relief to the trouble-torn leasing and hire purchase industry. The ruling relates to provisions for non-performing assets that leasing and hire purchase companies are required to make as per RBI rules.
As per quint-essential provisions of income-tax law, a provision is not an expense. There are specific provisions in the income-tax law relating to provisioning by banks and financial institutions, but none regarding NBFCs. This is an area where NBFCs have been asking for a level-playing field with banks.
However, if the ruling of the Madras Tribunal is the final word on the law, then NBFCs do not have to ask for this levelling any more - as what they have been pleading for years is already there.
In the case of Overseas Sanmar Financial Ltd. the Madras ITAT Bench C has held that provisioning against bad and doubtful debts by an NBFC as per the norms of the RBI is deductible against the income of the company. The Tribunal held that the RBI is only a wing of the Finance Ministry to which the CBDT is attached. If the RBI by its mandatory circulars or accounting standards requires an NBFC to make a certain provision, which it deems it necessary for true and fair assessment of the profitability/ assets of the company, the CBDT must give effect to it for tax purposes as well. Here is a very important citation from the ruling:
"The consequence is the share in the true income of the NBFC would have to be restrained to that part that is arrived at after allowing for provision for doubtful and non-performing assets. RBI's directive to account for income on cash basis is an appreciation of the fact that it does not make sense to account the income on accrual basis giving no credence to the actual recovery and later allowing deduction for irrecoverable debts including debts that could not be recovered in full from the security provided because of erosion in the value of the security. The Department that is partner in income earned by companies and other persons to our mind should accept the concept of income as directed to be shown by the RBI and after deducting for provision for doubtful loans and advances from such income".
Vinod Kothari comments: This is an extremely important ruling and NBFCs must make the most out of it. Though a ruling by Tribunal does not have very persuasive force with tax officers other than those under the jurisdiction of the particular Tribunal, the case is worth trying and the arguments given in this case are very strong indeed.
Links Some time back, the Supreme Court gave a landmark ruling regarding tax treatment of doubtful receivables in the case of UCO Bank - see our comments here on this site.
Service tax proposal puts leasing industry in the dock
A proposal for 5% service tax on gross receivables out of lease and hire purchase transactions has put leasing industry in a dock. The industry has reacted with representations and memoranda - may be the proposal will get dropped in the process of passing of the Bill, but if it stays, it is surely going to pull the plug on the leasing industry.
Read a full scale article by Vinod Kothari on the proposal - click here.
Attention please The Budget proposal was covered on the day of presentation of the Budget itself - those who are registered for our mailing list got instant feedback. If you want to receive quick news feeds on what is happening to the leasing industry, you must register for our mailing list. To register, click here.
CBDT clarifies on tax treatment, post-accounting-standard
In a rare gesture, the CBDT promptly allayed fears that the recent accounting standard on lease accounting for the Institute of Chartered Accountants of India will have any impact on the tax treatment of leases.
For a detailed article by Vinod Kothari on the CBDT circular, click here. For text of the CBDT circular, click here.
Madras High Court confirms
100% depreciation on glass bottles
The Madras High Court in the case of First Leasing Co. of India v. CIT 244 ITR 238 confirmed the allowance of 100% depreciation on glass bottles.
The issue before the Court was whether each bottle formed an individual plant, or all the bottles acquired under a single invoice and leased under a single agreement formed one plant. The Madras ITAT had taken a view that the leasing company handled the whole block of bottles under an agreement as one plant, and therefore, it is erroneous to hold each bottle as a plant.
Reversing this argument, the Court held that the purpose of law was not to create complexities where none existed. Each unit of plant and each item of machinery, if found depreciable, has to be depreciated at an appropriate rate. "If it is possible to identify the item which is claimed by the assessee as machinery or plant, and the unit to identified is capable of standing by itself without having to be put together and being integrated with other units before it can become productive even in a minimal sense of being functional, then the plant would qualify for deprecation notwithstanding the fact that the assessee by the nature of its business uses a large number of such units", held the Court.
The Court referred to ruling of the AP High Court in Margdarshi Chit Funds 227 ITR 646 which has also taken a similar view.
Vinod Kothari comments: The ruling will not have any impact with effect from 1st April 1996 when the-then existing second proviso below sec. 32 (1) (ii) was deleted.
CBDT's leasing depreciation instructions
likely to spell trouble to the leasing industry
The CBDT has issued instructions to taxing authorities on allowance of depreciation on lease transactions. The Circular dated 31st Dec., 1999 was recently published by a tax journal. As the Circular is a set of instructions to the taxing officers, it is an internal circular, but it would certainly have great persuasive effect on the taxing officers.
According to the Circular, there are several factors, including the extent of warranties given by a lessor on the goods, risks during transit, insurance costs, variation of lease rentals based on depreciation allowance, etc. that would have to be borne in mind before tax officers decide on the genuineness of a lease transactions.
The Circulars are the consummation of the large scale disallowances made certain assessing officers. The CBDT had constituted an Expert Group to go into the question of allowance of depreciation to lease transactions. The Circular is issued in response to the report of the Expert group.
While the Circular does talk about allowance of depreciation on "finance leases", there are certain references in the circular to establishing the genuineness of the lease transaction based on the risks absorbed by the lessor during transit, rental variation based on depreciation allowance, etc.
Since the circular is not clear on the CBDT's position about financial leases, it is very likely that assessing officers will adopt their "safe way out" and disallow depreciation on an en-bloc basis.
It is painful to see that the Association of Leasing and Financial Services Cos. has been pleading for clear and transparent rules for true leases for years, the CBDT has only issued the present circular, which instead of removing any doubts would only end up creating more confusion and more chaos. No taxes can be as harmful as uncertainty in taxes.
Click here for the text of the CBDT Circular.
Tax tribunal upholds RSEB transaction
In Unimed Technologies Ltd. v. Deputy Commissioner of Income-tax 73 ITD 150, the Ahmedabad Income-Tax Tribunal has approved the (shall we say) infamous lease transaction with RSEB as a genuine transaction. The Tribunal draw stength from the fact that the Govt. of RSEB had exempted sales-tax on the sale made by RSEB, the transaction took place after a public offer made by RSEB, etc.
The Tribunal rejected the claim that the transaction in question was a tax avoidance transaction, though it was pre-ordained and pre-arranged. The famous case of CWT v. Arvind Narrottam came to the rescue of the assessee.
Sales-tax and indirect taxes
Tamil Nadu sales-tax hesitating to give effect to Supreme Court ruling
In Sundaram Finace Ltd v. Secretary to the Govt, 127 STC 65 the appellant was denied relief of stay and asked to go for usual course of appeal. From a reading of the decision by the lower authorities have taken a view that the company had bought goods from outside States and moved the goods as owner to effect delivery of the goods to the lessees. Therefore, the lease cannot be regarded as inter-state.
Obviously, this is clearly ruled out by the SC ruling. The retention of title in case of lease transaction is made irrelevant by including a transfer of right to use goods as a sale. If title was not retained, a lease were no different from a normal sale. But having included such title-retention transfers also as a sale. no distinction could be made on that ground.
Sales-tax and service tax can go together
While the lease and hire purchase transactions continue to breathe heavy under the stay granted by the Madras High Court, the Kerala High Court has ruled that sales-tax and service-tax on the same transaction is in order. In Escotel Mobile Communications v. Union of India and others 126 STC 475, the Kerala High Court dealt with a case relating to SIM cards which are apparently charged to salestax as a transfer of right to use goods, and are also now subject to service tax.
The High Court found no objection to the double taxation on the familiar "aspect theory" - that is, different aspects of the same transaction.
Vinod Kothari comments: the leasing industry's case against service tax is cosiderably weakened by this ruling.
SC ruling widens the entry tax dragnet
Knowing that finance companies had substantial exposure to excavators and road rollers and such equipment which were bought from Pondichery and like places for lower sales-tax, here is a problem: you might rejoiced the sales-tax saving but there is an entry tax payable on such items in a large number of states.
Previously, it was generally contended that entry tax is payable on motor vehicles, that is, goods vehicles or passenger vehicles. The latest Supreme Court ruling expands the scope of entry tax in that it holds that for the purpose of entry tax, any equipment which is adapted for use on roads is a motor vehicle. The ruling specifically holds excavators and road rollers to be motor vehicles for the purpose of entry tax.
So finance companies have yet another demon to fight.
The case in question is Bose Abraham v. State of Kerala and another 121 STC 614
Software sales whether liable to sales-tax: SC refers matter to larger Bench
Software developers transfer the right to use software. A transfer of right to use "goods" is taxable as a sale. Therefore the key question is whether software is "goods".
Longtime back, the AP High Court had drawn a distinction based on whether the software is branded or not. Branded software was held as "goods".
Now the SC considered this question in Tata Consultancy Services v. State of AP 122 STC 198. However, in view of the technical issues inherent and the wide ramifications of the issue, the matter was left undecided by the Court and referred to a larger Bench.
Needless to say, if software is held to be goods, it will lead to a major implication for lots of industries making or transferring intangible goods.
AP High Court ruling further affirms no sales-tax on inter-state leases
The AP High Court has ruled in the case of Coromandal Finance 122 STC 538 that the sales tax on leases is in fact a tax on the transer of right to use goods and not on the use of goods. Therefore, the tax cannot be imposed on an inter-state or import lease, or a lease taking place out of the State, even if the goods are used in a particular state.
The ruling re-affirms, or further strengthens the view, already clear after the Supreme Court ruling - see below.
However, a useful implication of the ruling is also the statement in Para 10 of the ruling which says that if the transfer of right to use has taken place before the enactment of the law in the State, a subsequent tax on such transaction cannot expose the said transaction to tax. In other words, if the transfer of right to use has taken place at a time when there was no tax in the State on leases, subsequent taxation cannot affect such transaction.
Delhi drafts the most optimistic sales-tax proposals on leasing: a simple poison pill, that is.
It has not been long ago that I asked a serious question: are you still doing leasing in India? I need to ask it again. This time, I am prompted by the optimistic drafting of the Delhi proposals on sales-tax on leasing.
Here is a law that throws the onus of enforcing the law not on the sales-tax department but on your lessee. What an excellent effort at "internal control" ! For example, if the Govt. wanted to control crime, it could simply make it a requirement that every person, before buying his daily ration, will seek a certificate of innocence from the nearest police station, or else, the ration seller will be put behind bars !
This is, put in other words, the requirement of the Delhi sales-tax proposal on leasing. In order to curb sales-tax avoidance by leasing companies (who the Govt. knew of, as potential tax avoiders with distinctive reputation, even before enacting a law that taxes lease transactions - remember, there is no analogous provision for any other sale, or anywhere else in any other taxing law to my knowledge in the country), the Govt proposes that every lessee, before paying his lease rentals to a lessor, will insist on a tax clearance certificate from the sales-tax Department. So, the evaders of tax are automatically caught ! If Yashwant Sinha were to take a cue and control income-tax evasion, he would simply say: no one would get paid for whatever he does, unless he obtains a certificate of tax-chastity from income-tax department. One only wonders why such a noble thought of systematic hit at tax avoidance never struck anyone else!
Not stoppoing at that, there are more gems of wisdom in the proposals. If you thought sales-tax concerns the seller who is supposed to file sales-tax returns, this law requires even the buyer to file such returns. The law requires that the lessee will file information about any lease transaction done to the Commissioner of sales-tax.
Deduction of sales-tax at source is another idea aimed at ultimate enforcement. So, imagine someone taking a car on lease: he will have to deduct tax at source and remit it to the Department. Recently, in the context of works contract, the Supreme Court held such provisions to be against the Constitution, but that has not deterred the brilliant draftsman to incorporate a similar provision for leases, because unconstitutional law-making has no costs attached to it !
The proposed levy will be applicable to all existing leases as well. Read an initial news item on the same issue below.
Karnataka proposes sales-tax on lease of software
To claim its share out of the prospering IT industry in the State, the State Finance Minister, Karnataka presened a Budget that seeks to levy a sales-tax of 4% on "programming, provision or leasing of software".
Essentially, the levy is completely misplaced: the State has a right to tax a sale, not a service. Programming or provision of a software is a service in most case and not a sale. It is a sale only in few cases where marketable software, which is placed in the market as merchandise, is made available. Even in that case, the right of the State is limited to the sales that take place within the State: that is, the situs of the "goods", in this case, software, is within the State at the time of the sale.
Sales-tax situs rules, drafted back in 1950s, lean on Sale of Goods law which belongs to the 19th century. The rules are not geared to define the situs of something like software. It would be hard for the State to impose the tax for sales taking place through the cyberspace.
Maharashtra proposes VAT-based sales-tax on leases: leases to lose tax exemption
For the leasing industry, it is too many bad things in too short a time!
Leases of tax paid goods were exempted in Maharashtra. The exemption was given around 1995. So, if some one were to buy tax paid goods in the State and lease them in the State, there was no tax on the lease of such goods.
Coupled with the Supreme Court's ruling that inter-state leases were not liable to tax, the tax on lease in the State was virtually inapplicable in most cases.
No more so, however, if the State Finance Minister has his way, and with the benefit of history, most likely, he will. So, leases of tax-paid goods in the State will no more be exempt from tax. Here is an excerpt from the Finance Minister's Budget Speech (Part II) :
36. I am proposing to amend the Lease Act so as to convert it into a full VAT. The tax paid under the Bombay Sales Tax Act as also under the Lease Act on the goods being leased will be allowed as set-off. I also propose to introduce a residuary entry under the Lease Act.
The text of the exact proposal, that is, the draft of the Bill, is not available to date on the State govt's Budget site. There are several questions answer to which will depend on this fine print - for example, whether the proposal is applicable to existing leases too, whether the tax paid on purchase is to be pro-rated or claimed in full, etc. However, taking a cue from the VAT system that prevailed in case of hire purchase transactions, most likely, the cost of the goods will be allowed to be pro-rated against the lease period, and the difference between the lease rentals and the cost spread on a flat basis will be liable to be taxed.
The imposition of a residuary entry in the Lease-tax schedule means there will be a sales-tax on lease of everything: so far the scheduled had a closed-end list of items and there were number of escape routes thanks to principles of narrow interpretation of taxing entries.
In addition, there is a proposed 0.2% re-sale tax on all resales, which might possibly cover all hire-purchase transactions as well.
We will come back with more on this, once we have a look at the Finance Bill.
Are you aware of Budget proposals in other States? Do share your information.
Delhi proposes sales-tax on leases:
To close the only available sales-tax shelter
Obnoxious, monstrous, illogical, unreasonable - these are not good words from English but some of the many adjectives you can use for the sales-tax levy on lesae transactions. No principles of good public finance can ever defend the incremental, widely varying and completely lopsided levy of sales-tax on leases which has passed through the bumpy road of legislation and litigation recently ending up in a Supreme Court ruling that clarified its applicability, a good 16 years after it was imposed.
Remember what the SC had ruled: the incidence of sales-tax lies at the place where the lease agreement is executed. And Delhi was one of the few States in the country which over the years had not imposed any sales-tax on leasing, not because it was extra-ordinarily friendly to the leasing industry, but because it kept sleeping over the matter. Result: all major lease agreements in the country were executed in Delhi to take advantage of the SC ruling. Some big players were doing it even before the SC ruling came.
Now comes the big blow: the Finance Minister of Delhi proposes, in his Budget 2001-2, to impose a 4% sales-tax on lease transactions. Unarguably, this will take away the largest sales-tax shelter available to the leasing industry. Major lease transactions will now on either have to resort to the unclear, controversial route of inter-state lease structure (unless the CST amendment takes care of that too!), or be ready to pay anywhere between 4% to 14% sales-tax in different jurisdictions over the country.
All this, in a regulatory framework which treats lease transactions as financial transactions, and at times makes attempt to levy service tax on such transactions. In other words, if one were to sum up the parts of the several treatments that the leasing industry receives, it is a sale, service, financing, asset-owning, secured lending and hiring activity all at the same time!
Sri Lankan leasing association has mooted a proposal before its Govt to define a national policy on leasing: so the Government could clarify what does it want to do with the industry in terms of taxation, regulation, legal rights, etc., so that micro laws and regulations keep up with the macro policy of the government. We in India surely do not have to wait for a motivation from our neighbours.
Do you want to post a thought or two on this? Do write and I will be happy to publish your thoughts here.
Rajasthan imposes entry tax on assets to be leased
If leasing companies thought managing all-India jurisdictions on sales-tax was bad enough, here is something new for a change: entry tax on assets being moved into States for leasing purposes.
The Rajasthan Tax on Entry of Goods into Local Areas Act, 1999 is one such statute. The Act contains specific provisions [ sec. 11 (2)] which requires every lessor and every lessee, irrespective of the value of goods taken into the State, to register himself under the Act if the lessor or lessee "brings, or causes to be brought" goods into the State.
The entry of such goods is also liable to tax, at rates as notified by the Government.
Going literally by the definition, a lessor who has any goods being used in Rajasthan, and every lessee of such goods, needs a registration under the Act in the State. Failure to register is punishable with minimum fine of Rs 5000 extending to Rs. 20000.
The Act also contains a specific definition of "lease" which, literally, includes a hire purchase transaction as well.
Maharashtra interprets SC ruling in 20th Century
The State Govt. of Maharashtra issued a Trade circular dated 15th Dec. 2000 interpreting the ruling of the Supreme Court in 20th Century Finance Corporation [see below for details].
After discussing the background of the Supreme Court ruling and the important ratios of the ruling, the State government circular says that the Government has decided as follows:
(a) Where the goods are in existence at the time of execution of the contract and if the agreement is signed in Maharashtra, the State govt. will tax such lease no matter wherever the goods are put to use or delivered.
(b) In case of an oral agreement of lease, or where the delivery is first effected and then a written agreement is executed, the situs will be in the State of delivery.
(c) All pending cases and appeals will be decided on the basis of the above decisions. The government has also indicated its resolve to collect demands arising out of the ruling, and has agreed to grant refunds if the tax is refundable. The refund is, however, subject to sec. 8 (2) of the Act and the general guidelines set by the Supreme Court in Mafatlal Industries 111 STC 467. The ruling in Mafatlal relates to unjust enrichment where the Supreme Court held that the benefit of refund can be granted only where the dealer can prove that the incidence of tax was not passed on to the customer.
The portents are thus clear: the State govt. is not going to grant refunds easily, but will vigorously chase demands created by the ruling. Leasing companies in Bombay and Pune: beware!
Most alarmingly, the Circular also states the following: "It may not be out of place to mention that all the State governments including Maharashtra Government have already moved the Union Government for a suitable retrospective amendment of the CST Act so as to resolve the different problems arising from the application and non-application of the unamended sections 3, 4 and 5 of the CST Act to the lease transaction".
Vinod Kothari comments: While the State government may fix the place of signing of the agreement as the situs for taxing the lease, the fact remains that that has not been done by the State Govt. The SC ruling may read down a particular explanation, but cannot have the effect of inserting or correcting one. Therefore, unless the State government amends the lease-tax law, it cannot have the right to collect the tax based on place of signing.
As regards the possible retrospective amendment of the CST law, I have already cautioned in my article before that the pilgrim has not come to rest, and the law will be amended as the SC ruling will not be comfortable for any of the State governments. If a retrospective amendment is in fact passed, it is most likely going to undo the SC ruling and stablise the Bombay High Court ruling as a retrospective law. That would be draconian for the already-moribund leasing industry.
SC ruling on lease sales-tax
may put leasing companies on mat
The Supreme Court's much awaited ruling in the case of 20th Century Finance Corporation is out. While the ruling upholds the contention that Vinod Kothari has taken over years regarding inter-state leases and import leases, the ruling creates a new taxing principle altogether for intra-state lease transactions. The Supreme Court held that since the situs in case of intra-state leases has not been defined by appropriate law and sec. 4 is inapplicable, the place of signing the agreement will be decisive of the situs.
Click here for a detailed guide to the Supreme Court ruling by Vinod Kothari.
Accounting and miscellaneous
Repossession of hired assets from a sick undertaking permitted - Cal HC
This is one of the several rulings now, permitting the repossession of assets given out under a hire purchase agreement, from a company declared sick under the Sick Industrial Companies Act. The bar under sec. 22 of the Act against any proceedings against the company or the property of the company does not extend to hired assets, as the assets do not belong to the sick company, held the Court.
The case in point is Alpic Finance Limited v. Allied Resins and Chemicals and another 102 Comp. Cas. 198 (Cal).
Vinod Kothari comments: There are several other rulings on similar issues, e.g., see our report here.
Finance company not liable for defaulted vehicles tax of hire, holds SC
The Supreme Court in State of Maharashtra and another v. Sundaram Finance Limited 2000 AIR SCW 2255 held that the financier under a hire purchase agreement cannot be denied registration on the ground that the hirer has defaulted in payment of motor vehicles tax.
In a hire purchase agreement, the hirer's name is registered as the owner of the vehicle, but the legal ownership is retained by the hire vendor or the finance company. There is also a contractual provision, supported by Motor Vehicles Act that on non-performance under the hire purchase agreement, the hire vendor may have the vehicle registered in his own name.
In the case above, re-registration of the vehicle in the name of the finance company was denied by the Motor Vehicles department, on the ground that the hirer had not paid his tax dues. The Supreme Court held, based on a reading of the relevant law in Maharashtra, that the tax was payable by the "operator" of the stage carriage permit.
There was a ruling of the Madras High Court on the same issue, but the Supreme Court ruling sets the matter at rest.
Institute of Chartered Accountants issues accounting standard on leases
The Institute of Chartered Accountants of India (ICAI) has issued Accounting Standard 19 on accounting for leases. As one of its remarkable features, the accounting standard requires lessees to capitalise leased assets taken by them under financial leases. The accounting standard is applicable for leases entered into after 1st April, 2001. From that period, the existing Guidance Note on accounting for leases would cease to apply.
The leasing industry was visibly perturbed by the accounting standard as it was being discussed. Some of the leading leasing companies led by the Association of Leasing and Financial Companies had submitted a memorandum to ICAI seeking it to either substantially defer or liberate the proposed standard. However, the pleas were apparently rejected, and here is the accounting standard.
The main worry of the industry is that enactment of accounting rules requiring lessee capitalisation will also impinge upon the tax allowance. Even though tax rules are not necessarily connected with accounting treatment, they might have a persuasive value for the tax authorities, which are, even in absence of accounting standards, not very kind on financial lease agreements.
Indian leasing industry is predominated by financial lease contracts. Operating lease contracts, but for a very scattered car leasing deals or those in earth moving equipments, do not simply exist.
Forthcoming at the end of Feb is the Union Budget - the annual ritual that tinkers with the tax laws. If the accounting change also finds its replica in the tax rules, India's tax-oriented leasing industry is finished, because it might take quite some time for the leasing industry to graduate itself to operating leases.
:Links See Vinod Kothari's article on the accounting standard here.
For Vinod Kothari's article on CBDT Circular, click here.
SC holds hired vehicle used for narcotics carriage liable for confiscation
This is an important ruling relating to misuse of a vehicle given on hire purchase. In case of hired or leased vehicle, the vehicle belongs to its legal owner, but the effective user is the hirer/lessee. The effective user might have used the vehicle for an illegal trade, without the knowledge or authority of the legal owner. The question is, whether such vehicle will be liable for confiscation, even though the offence was committed by someone who is not the ower and the act of confiscation will put to prejudice the legal owner who is not involved in the illegal use. In other words, can a vicarious misuse affect the legal owner?
Yes, held the Supreme Court in Ganga Hire Purchase P Ltd v. State of Punjab and Others JT (1999) (10) SC 254. In this case, the apex Court held that a vehicle acquired under hire purchase, and used by the hirer for carrying narcotics was liable for confiscation.
There has been a ruling of the AP High Court in Divisional Forest Officer v. Vijay B Gulati and Others 1997 (6) ALT 238 (FB) where the HC was dealing with an offence under the Forests Act. The HC held as under: "Confiscation of a vehicle which is used for unlawful purposes in normal course can be ordered only if the owner connived or had the knowledge of the unlawful use of the vehicle or that his agent did only such things as the owner desired and thus, the agent's culpability was shared by the owner and in the case of the servant namely the driver in particular only when it is shown that he was carrying out the desires of the owner. This is the proposition we hold on this point to set at rest the controversy".
The AP High Court ruling was not referred to before the Supreme Court. The SC goes on to hold that the word "owner" in context of the confiscation provisions should mean the registered owner.
RBI tinkers its way to mending NBFC norms
Like a country blacksmith, the RBI has been using its hammer to give shape to the NBFC norms, which have now undergone some dozen amendments in short span of 2 1/2 years, and they are not the most shapely norms.
The latest amendments announced on 30th June seek to make two changes to NBFC norms (leaving aside the changes for residuary non-banking companies).
The first change relates to an exemption being granted to deposits put in by relatives of directors. Deposits put in by directors in case of all companies, and by the shareholders in case of private limited companies, are presently exempt. The new exemption provides exemption from the regulations to the deposits put in by a relative of a director.
When it comes to "relatives", the RBI always takes pains to be very very specific. So, "relative" has been defined with reference to the Companies Act, but at the same, the RBI makes it a point to clarify something which is obvious enough in so many words - see the detailed explanation the RBI gives in its Press Note:
We have reviewed the position and it has been decided
to exempt the deposits from relative of a Director of the NBFC from the purview of public deposits;
that the onus of the proof that deposits have been accepted from the relative of a director of the company rests with the NBFC itself;
that the NBFCs shall obtain a separate application form from such depositors with suitable notice to their attention that such deposits would be treated as deposits from relatives;
that the relationship between the depositor and the specific director/s of the company would be material on the date of acceptance of such deposits. On any director ceasing to be the director of the company, such deposits would remain outside the definition of public deposits till the date of maturity. If the deposits are required to be renewed, the depositor-relative should have the relationship with one of the directors of the company on the date of renewal of such deposits by the NBFC. If the depositor does not have a relative among the directors on the date of renewal, the deposits, if renewed, would be treated as public deposits; and
that such deposits in the hand of both private limited NBFCs and public limited NBFCs as also the NBFCs accepting public deposits and those not accepting public deposits would be exempted from RBI Regulations.
On a macro basis, the exemption is nothing more than insignificant, as not more than 0.002% of the presently regulated deposits would come out of the regulated category as a result of this change, but the verbosity of the RBI seems to suggest as if it were making a substantial relaxation. So, thank you RBI for the "unregulated faith" brothers, sisters and fathers can now repose in companies managed by their relatives!
The second change is significant enough, but clouded in the traditionally incomprehensible language of the RBI. It relates to provisioning norms in case of lease and hire-purchase transactions. The purport of the amendment is explained below:
In case of non-performing hire-purchase transactions, there was a provision to be made by applying a straightline depreciation of 20% in the value of the asset. This was to be further compared with the "net realisable value" of the asset. The concept of "net realisable value" now goes: the provisioning has to be based only on the depreciated value of the asset - applying 20% annual depreciation.
As this depreciation is with reference to the original cost of the asset, it was creating problems in case of second hand assets. So, as per the amendment, in case of second hand assets, the provisioning is based on the actual cost of the second hand asset at the time of its acquisition by the concerned NBFC.
In case of lease transactions, there was no such administered depreciation requirement before - lease transactions continue to be unaffected by the amendment.
The provisioning requirements for lease and hire-purchase transactions having arrears of more than 24 months have slightly been smoothened by stretching the total write off period.
Notes below Clause 8 (2): Note 1 There, the RBI says something about the treatment of security deposit or caution money in case of hire-purchase transactions the meaning of which may be pretty difficult to come by. The deposit may be adjusted against the provisioning under para 8 (2) (i), in case such deposit has "not already taken into account while arriving at the equated monthly instalments under the agreement". What exactly is the meaning of the words in quotes? Perhaps the RBI means to say that such deposit should not have been treated as a part of "the financed amount", but not everyone writes the "financed amount" or the treatment of the deposit so very clearly in the documents. First of all, why a reference to "equated monthly instalments"? What if the instalments are not equated, as they are not, in so many cases. Next, there is no question at all of the deposit not being taken into account at all in computation of the EMIs - they invariably affect the computation of the EMIs as all computations are after all based on the net cash flows.
Why so uninitiated drafting? Why don't they consult someone with a rule in a draft form, instead of going through the slow tinkering process of "learning by mistakes"?
Note 2 Note 2 says something which is surely very very curious. What it means is that the value of any security deposit or "any other security available in pursuance of the lease agreement" may be deducted against the provisioning required under para 8 (2) (ii). But this is strange. The value of any security can be adjusted against the book value of the asset, as the security reduces the exposure, but how can the security be adjusted against the provision? Does this mean to say, for example, that if a company holds 10% security (not necessarily cash) and the required provision against book value is 10%, there is no provision to be made?
This is surely the meaning of the note, though this may not be the intent. However happy the result may be, the result is totally illogical.
For full text of the amended regulations, click here.