CESTAT Mumbai Holds Lease Rentals Collected By Asian Paints For Tinting Machines Not Liable To Service Tax

The Mumbai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has recently granted relief to Asian Paints Ltd., holding that service tax could not be levied on lease rentals collected from dealers for tinting machines after finding that the arrangement amounted to a deemed sale.

The tribunal held, "I have no hesitation in holding that the transaction in the case before us is of 'deemed sale' as per Article 366 (29A)(d) of the Constitution of India."

The order was passed by Technical Member M.M. Parthiban.

Asian Paints manufactures paints and varnishes and leases automated colour dispensing machines, along with related equipment, to its dealers.

During an audit, the Department noticed that the company had collected lease rentals from dealers. It issued show cause notices covering the period from April 2005 to March 2015, alleging that service tax was payable on those rentals.

The original authority confirmed the demand. The Commissioner (Appeals) later dropped the demand for the period before 1 July 2012 but upheld it for the period from 1 July 2012 to 31 March 2015. Asian Paints challenged that decision before the tribunal.

Before the tribunal, Asian Paints argued that the lease agreements transferred the legal right to use the identified tinting machines to dealers. It submitted that the dealers retained possession and effective control over the equipment during the lease period and that VAT had been paid on the lease rentals.

Relying on the Supreme Court's decision in Bharat Sanchar Nigam Ltd. v. Union of India, Asian Paints argued that the lease agreements transferred the right to use the tinting machines to its dealers. It maintained that the arrangement was a deemed sale and not a taxable service.

After examining the lease agreement, the tribunal found that the dealers received identified machines, acknowledged their delivery and retained possession and effective control throughout the lease period. It also noted that the lessor could not transfer the same machines to anyone else while the lease remained in force. The lease rentals had also been subjected to VAT.

Applying the five-fold test laid down by apex court in BSNL, the tribunal concluded that the arrangement satisfied the requirements for the transfer of the right to use goods and therefore qualified as a deemed sale.

It also drew support from its earlier decision in Arval India Pvt. Ltd. v. Principal Commissioner of Service Tax, Mumbai-IV, which held that lease rentals treated as a deemed sale and subjected to VAT cannot again be brought to service tax.

In view of these findings, the tribunal set aside the order upholding the service tax demand for the period from 1 July 2012 to 31 March 2015 and allowed Asian Paints' appeal.

Having decided so, it also observed that the penalties imposed by invoking the extended period were not legally sustainable.

For Appellant: Unnati Jani, Assistant Manager (Taxation)

For Respondent: Dhananjay Dahiwale, Authorized Representative