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NEWS AND DEVELOPMENTS ON INDIAN LEASING
[This page lists news and developments in Indian leasing - please do visit the International leasing news and developments by
clicking here.]Read daily customised news on leasing - click on this button :
Read on for chronological listing of events, most recent on top, or go to a specific section by clicking on the topics below
Sick Industries Act does not block repossession of hired assets
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What is sec. 22 (1) of SICA |
The assets given out under a hire-purchase agreement do not belong to the hirer as the hirer is
a mere user, without rights of ownership over the asset. On default of the hire-purchase agreement, the owner has rights to take back the asset, and the embargo in sec. 22 of the Sick Industrial Companies Act does not come in the way.
In GE Capital Transportation Financial Services Ltd. v. Dee Pharma Ltd. 96 Comp. Cas. 192, the Delhi High Court relied upon its own ruling in Credit Capital Finance to hold that the bar in sec. 22 (1) of Sick Companies Act does not operate against assets acquired under hire-purchase agreements (similar ruling available in case of leased assets in case of Cholamandalam Finance). Also refer below for another report in case of repossession of leased assets - click here.
RBI asks no-depository companies also to file returns
The country's central bank that made history of sorts by asking 37000 odd companies to register as financial companies, though they had nothing to do with finance in the real sense, has now asked all of them to file returns of deposits, and to file NIL returns, if they have no such deposits. The Press Release dated 22nd January issued by the RBI runs as follows: "It (the RBI) has found that many companies, more particularly the companies having NoF of less than Rs.25 lakh, have not submitted this return to the Reserve bank despite holding public deposits although the return is statutory. The Reserve bank has taken a serious view of the non-compliance of the law by these NBFCs. ..Further, although the Reserve Bank had earlier clarified that the companies not holding public deposits need not file this return, in view of the large scale non-compliance of law, it has considered necessary to ask these companies also to file a 'Nil' return in order to comply with the provisions of law."
Though it has given an eloquent explanation for reversal of its earlier stand, the above Press Release of the RBI is a virtual about-turn as against its policy that companies not holding or accepting public deposits, though statutorily regarded as financial companies, will not be supervised or required to file regular returns. Obviously filing of returns is only a prerequisite of supervision. At one point, a Task Force appointed by the RBI even recommended that the law be amended to exclude companies not accepting public deposits from the purview of "financial companies".
Companies Ordinance 1999 gives substantial relief in inter-corporate loan and investment restrictions
One would have thought the repromulgated Companies Ordinance is the replica of the one that expired due to the inability of the Government to have requisite majority to have it approved in the Parliament. But the Ordinance goes all out to rectify the lacunae in the previous version and thus not only continues the pace of corporate reforms, but virtually frees intercorporate loans and investments from the holds of the law. In doing so, a relaxation to NBFCs, which was earlier curtailed by the previous Ordinance, has been restored.
Click here for full details of the amendments in sec. 372A of the Companies Act.
Another technical limitation imposed on sec. 138 prosecutions
Section 138 of the Negotiable Instruments Act was intended to enhance the acceptability of cheques as the commercial World's alternative to legal tender. A negotiable instrument is supposed to carry general acceptability as near-money. That is why sec. 138 made the bouncing of a cheque a criminal offence.
However, the operation of sec. 138 prosecutions has really rendered the section nugatory. Reports indicate that a sec. 138 complaint filed in Mumbai today will come for hearing in year 2002. At the same time, there are rulings and rulings on the conditions under which a 138 prosecution will fail, which sounds strange, because the very intent of sec. 138 was that the drawer of a bounced cheque should either pay up on demand or face the consequences. Admittedly, Courts should have helped to advance the cause of the section, not scuttle it by building around technicalities.
But then, none other than the Supreme Court, in a recent ruling [Sadanandan Bhadran v. Madhavan Sunil Kumar 1998 II AD (Cr.) SC 669, dated 28th August, 1998] held that once the notice demanding payment on a bounced cheque has been issued, even if the cheque be represented, the limitation period within which the prosecution has to be filed will run from the date of the first dishonour and not subsequent dishonour. This has overruled the decision of the Kerala High Court on the same point.
The Supreme Court in this case held that on a cheque being dishonoured, the holder of the cheque may "go on presenting the cheque so as to enable him to exercise such right (right of filing prosecution) at any point of time during the validity of the cheque. But, once he gives a notice under clause (b) section 138 he forfeits such right .."
Put simply, this means the holder may still represent the cheque and file prosecution based on a bouncing subsequent to the first, but only on the condition that holder must not have served notice under sec. 138 (b). The biggest difficulty that would arise in actual implementation of the apex court's order is whether any demand for payment is a notice under sec. 138 (b). Obviously, a notice under sec. 138 (b) does not have to say that it is being served under that section; at the same time, any holder of a cheque will like to make a written demand for payment at the very first dishonour. If any written demand for payment be construed as a notice under sec. 138 (b), it amounts to frustrating right of prosecution for subsequent presentations.
The entire focus of suits under sec. 138, it appears, will now shift to technicalities instead of substance. That a cheque given for payment of a liability has bounced was good enough as an offence, but no more so under sec. 138 as battered by over 5000 rulings over last 10 years.
Lender may repossess hypothecated car
There is a widely prevailing notion that the lender under a hypothecation contract does not have a right of repossession except under a Court order. We have elsewhere reported the ruling of the AP High Court in State Bank of India v. Shah Ali holding that the lender had a right of repossession without Court intervention if the hypothecation agreement contained such a right.
In conformity, the Punjab and Haryana High Court has held, in Citi Bank, NA v. State of Haryana and another 94 Comp. Cas. 449 that the lender has a right of repossessing the hypothecated goods. The Ld. Single Judge held that "the bank could take repossession of the vehicle hypothecated with them either if there was likelihood of due money not being paid, or the vehicle was likely to be transferred to defeat the security and the due amounts of the bank" This also was based on construction of the agreement of the lending bank.
This goes on to suggest that if a clause in a hypothecation agreement confers a right of repossession, such clause is to be given effect. The decision of the Court should give lot of comfort to vehicle financiers, who may like to opt for loans instead of leases and hire-purchase, to avoid vexatious tax consequences.
Adjustment of deposit required in monthly instalments, where loan payable in monthly instalments
Where the loan given by a bank to a customer carried a higher rate of interest, and the deposit placed by the customer with the bank carried 13% interest, the bank could not put the customer to disadvantage by adjusting the deposit against the outstanding loan instalments at its discretion. If the bank decides to do so, it must adjust the deposit also as and when the instalments fell due, since doing it on a later date would imply that the customer would keep paying the higher rate of interest on the loan, while the deposit will keep giving the customer a lesser interest. Smt Leela Ashok Naik and another v. State Bank of India 94 Comp. Cas. 460.
Lease and finance companies have a practice of collecting deposits as security deposits, and obviously intend to adjust them against outstanding instalments, but make sure that the above principle is either followed, or the application of the principle is excluded by a clear clause in the agreement to this effect.
Recovery of leased assets from a sick undertaking
In Kotak Mahindra Finance Limited v. Deve Paints Ltd., (1998) CLJ 241 (Bom.), the High Court interpreted sec. 22 (1) of the Sick Industrial Companies Act and held that there is no bar in that section in repossessing leased assets as the said assets belonged to the leasing company and not to the lessee.
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Click here to read more about the lessor's predominant ownership rights over leased assets. Also refer to another report. |
The noted section of the Sick Companies Act contains a restriction on any distress proceedings against the properties of the sick company. The distinction in case of leased properties is that the property belongs to the leasing company and not to the sick company.
Similar ruling was given by the Delhi High Court in case of Credit Capital Finance in case of leased assets and by the Madras High Court in case of Cholamandalam Investment in case of hire-purchase assets. Also refer to another report - up there.
Non-payment of lease rentals to lead to winding up
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Important: Make sure the client cannot liken your lease with a loan transaction; otherwise, money-lending laws will have an applicable. |
In Goodwill India Limited v. TSP Paper Mills Ltd. (1998) 2 CLJ 147 (P&H), the High the lessee who was in default of rentals took the plea that the lease transaction was in effect at par with a loan transaction, and as such it was hit by the provisions of the Usurious Loans Act. The High Court rejecting the plea held that the lease was a valid lease, and was therefore different from a loan, and therefore, the plea that it attracted the provisions of the Usurious Loans Act was not acceptable. Since there was a default of rentals, it was held that the company was unable to pay its debts, and the required formalities have been complied with, the winding up proceedings were allowed to be initiated.
Interest-tax not applicable to hire-purchase transactions, holds Madras ITAT
In Harita Finance Limited v. Asst. Commissioner of Income-tax Order dated 29th June, 1998, the Madras ITAT Bench A has held that interest-tax is not applicable on hire-purchase transactions.
It may be recalled that the matter of applicability of interest-tax on hire-purchase transactions has been raging in controversy for a long time. Though the total revenue implications are meager, if not negative (2% levy on finance charges would be offset by the non-chargeability of interest-tax on interest earned by the banks which finance the hire-purchase financiers), the CBDT has been contending that hire-purchase transactions may be, in some cases, substantive loans, and may as such attract interest-tax.
The CBDT first issued a Circular no. 738 dated 25th March, 1996 wherein it proceeded to treat all hire-purchase transactions as financing transactions. After great protest, it came out with another Circular no. 760 dated 13th January, 1998 where it opened up the question of substance versus form, and held that if the hire-purchase transactions were loans in substance, the levy of interest tax was justifiable. To reveal the substance of hire-purchase transactions, the Circular called for a case-by-case examination of transactions by the tax officials.
The ruling of the Tribunal in this case does not do away with the Circular - rather, the Tribunal has extended credence to the Circular by expounding its provisions. Based on examination of the clauses in the agreement, the Tribunal concluded that the case before it was not one chargeable to interest-tax.
In other words, the question of substance-versus-form stands reinforced.
Yet another ruling on investment allowance - allowable where actual user not commenced
In French Motor Car Co. Ltd. v. Dy Commissioner of Income-tax 68 ITD 176, the Calcutta ITAT upheld the contention of the lessor that where an asset on lease had been leased out on 29th March, even though the lease agreement was entered on 1st April, and even though the evidence of the lessee having actually put the asset into use was not available, investment allowance was available to the lessor. The ITAT relied upon a ruling of the Calcutta High Court in CIT v. Mercantile Construction Co. 74 Taxman 41.
The above ruling of the Calcutta ITAT is obviously without the benefit of the Supreme Court ruling in First Leasing Company's case. The Supreme Court ruling in the First Leasing case has set at rest all doubts as to eligibility of leasing company per se to claim for investment allowance. However, factual issues such as whether what matters is the date of the agreement or the date of delivery of the asset, or the date of installation or the date of actual use by the lessee remain in doubt. The present case advances the body of law by ruling out the significance of the date of the agreement and the date of actual usage by the lessee. However, since the date of installation is relevant as per sec. 32A, the Tribunal remanded the matter for fresh collection of evidence to the assessing officer.
Depreciation rate change for commercial vehicles made effective FULLY: Elemis shows excellent opportunities
While the News item below dealt with the Notification dated 24th December giving partial effect to Depreciation rate changes for commercial vehicles, a new notification dated 9th January, 1999 has given full effect to the proposed changes in depreciation rates for commercial vehicles. Presumably, the Bill seeking to make amendments in the Income-tax law had already been passed by the Winter session of the Parliament, though it is not clear as to why then the previous Notification was required at all.
The changes now effected are as follows:
An amended copy of the Depreciation rate schedule is available on this site. Click here.
Leasing companies can make excellent use of the new Notification. Larger companies can use this even for acquiring portfolios already under lease by smaller companies. At the same time, 40% depreciation available in the second half is like 80% depreciation rate - very close to the fanciful 100% depreciation rate. In other words, smaller companies can even use the new facility to leverage their existing portfolios by assigning them to bigger companies.
Our calculations on Elemis [click here for details] that the required IRR for 40% full year depreciation transaction in the month of February or March is only about 14%, which would equal about 20% for a normal financial transaction. In other words, if you are targeting about 20% IRR for a plain vanilla plant and machinery lease, you would find a break even at 14% for a commercial vehicle IRR. And this, we see, is enticing enough.
Depreciation rate hike on commercial vehicles made effective partly:
As one of the measures to give support to the ailing commercial vehicles industry, the Finance Ministry recently proposed to:
The first proposal above, not requiring any legal amendment, has already been made effective, by a Notification dated 24th Dec., 1998. [Click here for a full text of the Depreciation Schedule incorporating the above Notification]. This amendment is effective for the income year relevant to Assessment year 1999-2000, but applies only to vehicles acquired on or after 1st October, 1999.
The pre-condition for availing the higher rate is that the new vehicle must replace a condemned vehicle of over 15 years of age. The conditions for availing the new benefit, from the viewpoint of leasing companies, are discussed below:
Even as this amendment was effected, the other proposal, viz., to allow full year's depreciation on vehicles bought at any time during the year, was not carried. This amendment will now possibly be carried as a Budget proposal, but giving effect from the current income year.
Extra-shift depreciation allowed in case of leasing companies:
In Commissioner of Income-tax v. Maharashtra Apex Corporation Ltd. 234 ITR 484, the Karnataka High Court held a lessor eligible for both investment allowance and extra-shift depreciation. While the investment allowance issue is now well-settled with Supreme Court ruling in First Leasing Company of India, the High Court's ruling goes to help lessors to favourably close pending litigation relating to extra-shift depreciation.
It is notable that there is a ruling of the Delhi Appellate Tribunal in Shree Leasing case where extra-shift depreciation to a lessor was not allowed.
The High Court in the above case proceeded on the simple ground that no distinction can be made between use by the lessor in his own business and use by the lessee upon the authority granted by the lessor.
PAN problem in case of vehicles
The new Rule 114B requires permanent account number (alternatively GIR, both here referred to as PAN) of the seller and the buyer, in a transaction involving sale or purchase of motor vehicles. "Which requires registration under chapter IV of the Motor Vehicles Act" is a surplusage, since every motor vehicle requires registration under Chapter IV, except a vehicle in possession of a "dealer".
So, it is clear that every person entering into a transaction of purchase or sale of a motor vehicle is required to quote his PAN. There is no mention of the value of such vehicle.
Is it necessary to have PAN:
Notably, even though Rule 114B requires quotation of PAN, there is no requirement in law which forces a person buying or selling a vehicle to have a PAN. Sec. 139A (1), which requires certain persons to compulsorily apply for PAN, does not cover the buyer or seller of a vehicle.
Hence, it must be understood that there is no bar on a person not having a PAN from entering into transactions covered by Rule 114B.
If you do not have a PAN:
The third proviso to Rule 114B provides that where a person entering into such transaction has either not been allotted a PAN or does not have one, AND is making payment in cash or otherwise than by crossed cheque or crossed bank draft, he shall be required to make a declaration in Form 60 (Form 61 in case of persons having agricultural income).
The use of the word "and" in the proviso (also in the title to Form 60) gives indication that Form 60 is required only if two conditions are satisfied:
In other words, even if the buyer/seller does not have PAN, but is making payment by crossed cheque or bank draft, he shall not be required to file the declaration in Form 60/61. Likewise, if the person has a PAN, but is making payment in cash, he shall not be required to make the declaration.
The normal meaning of the word "and" is conjunctive, and that of "or" is disjunctive. Sometimes, particularly when used in a negative sentence, "and" could be used as "or". But no such reading seems necessary here. In the title to Form 60, it seems only a person not having PAN and not making payment by crossed cheque has to file the declaration.
This, however, is not apparently the intent of the lawmaker. Understandably, the scheme of the new rule would have been that in all cases of transactions to which the rule will apply, either the parties concerned quote their PAN, or they file a declaration. The quoting of the PAN or filing of the declaration is only a means to an end - the conclusion lies in the information being sent to the Investigation wing of the Department, who is supposed to strengthen their information based on these filings. So, look at Rule 114D, which contains the filing requirement, and it obvious that there are only two types of cases covered there - either those where the PAN is quoted, or those where the Declaration is filed.
Reading "and" in Third Proviso to Rule 114B as a conjunctive would mean, there would be a class of transactions, presumably a very large one, where the PAN has not been quoted, but where payment has been made by crossed cheque. If the declaration were not to be filed in all such cases, then these transactions do not come at all for filing under Rule 114D, which would render the entire scheme of the rule futile. Rule 114D requires filing of information with the Income-tax Department of all cases where PAN has been quoted, and of all declarations received. So, if there is a class of cases where PAN has not been quoted, but where declarations are also not required to be filed because the payment is made in cash, such cases do not get reported at all, which is obviously not the scheme of the rule.
It is a pity that we are governed by more and more such rules where what the lawmaker wants to say, is not what he actually says. Therefore, one is supposed to comply with a rule, no matter what the rule says, but based on what the rule might have intended to say. That is to say, we are supposed to interpret legal gibberish, and abide by the same. The age old golden rule of literal construction no more seems to hold ground.
On balance, it appears that the requirement of making declaration in Form 60 will arise in all those cases:
Either
Where PAN has not been quoted by any of the parties to the transactions covered by Rule 114B;
Or
Payment has been made in cash or otherwise than by crossed cheque.
Who to make declaration to:
From Rule 114C (2) (b) it appears that the declaration is to be made to the registering authority, as also to the seller or buyer [rule 114C (2) (h)]. Obviously, it serves no great purpose to require the declaration to be obtained by a counter-party to the transaction, and that too, when the registering authority has been subjected to this requirement, but the rule requires declaration to be obtained by the buyer/seller, as well as the registering authority.
Here lies a difficulty: the registering authority can insist upon production of PAN, but how are they supposed to know whether the payment for the transaction was made in cash or otherwise than by crossed cheque? Not being possessed with necessary information, it appears that in practice, for every registration of a motor vehicle, the registering authorities will either ask for a PAN or require both parties to file the Form 60 declaration, thus causing a redundant information to be collected and submitted to the authorities.
The rule is not specific about the time at which the declaration is to be made. However, the understanding is that the declaration, being an alternative to PAN quotation, will be made simultaneously as the documents relating to the transaction are exchanged.
Filing of the declarations:
The person receiving declarations or required to collect PAN is required to submit the same to the authorities. The authority in question is the Director of Income-tax (Investigation).
Read literally, this rule sounds funny. Take, for instance, the case of a sale of a motor vehicle. Say, Maruti sells a vehicle to a customer. The rule requires both the buyer and the seller to declare their PAN, or to file a declaration. Therefore, Maruti or the dealer will have to declare its PAN on the invoice, and the customer will also be required to quote his PAN on his purchase order, or alternatively file a declaration. This apart, the registering authority will be required to ensure that both the buyer and seller have quoted their PAN, or furnished a declaration. This itself may require modification of the motor vehicles registration forms.
Now, each of the persons referred to in Rule 114C (2) is required to a file a statement with the tax authorities. The persons referred to in 114C (2) include the seller as well as the buyer, That is to say, there is a filing requirement on both parties to the transaction, as also the registration authority. The filing requirement is there in those cases where PAN has been quoted, as also in those cases where the PAN has not been quoted and a declaration has been filed.
So, for every vehicle sold, there will be three statements filed with Investigation cell - one by the seller (Maruti in our example), one by the buyer, and one by the registering authority. Funny as it may sound, the rule does require every buyer of a vehicle to also file a statement with the Department. If the whole idea of the Rule was to collect information about those exceptional cases where payments for vehicles have either been made in cash, or a vehicle has been bought a person not quoting his PAN, one wonders what is the point in collecting information about each and every transaction where the PAN has been quoted.
The Murphy's rule of official investigation is: redundancy overtakes relevance. We find it hard to believe in rule of reporting by exception: we find reporting by rule as more satisfying. The great idea of filing information about every vehicle in the country sold, and in addition, every vehicle in the country bought, and in addition, every vehicle in the country registered (and remember, every vehicle which is sold, is also bought, is also registered) will bury in the heap of redundancy the entire purpose of the new rule.
HIRE-PURCHASE TRANSACTION:
Technically speaking, a vehicle given on hire-purchase is the ownership of the hire-vendor. Therefore, the hirer is not the buyer of the vehicle. The finance company is owner and the buyer. This is irrespective of the manner in which the invoices are drawn up.
However, in the context of the Income-tax law, the involvement of the hirer in the hire-purchase transaction is recognised from day one.
Notably, the hirer is allowed the benefit of depreciation.
Further, sec. 4AAE of the Act, dealing with presumptive taxation in case of a goods transporter recognises the hirer of the vehicle as its owner, for the purposes of that section.
Thus, the income-tax law treats the hirer as the owner in all material aspects. The Supreme Court in the age-old ruling of K L Johar held that hire-purchase has an element of bailment and sale, and it cannot be denied that hire-purchase has an embedded sale element. In view of embedded purchase option, it cannot be said that a hire-purchase is a transaction or sale of the vehicle. Hence, it is necessary that the hirer's PAN should be quoted in case of every hire-purchase transaction.
In view of the above interpretation, the issuance of NOC under a maturing hire-purchase agreement cannot be taken as a sale, and therefore, there will be no need to require the hirer's PAN in case of termination of hire-purchase agreements.
If repossessed vehicles are being sold to any person other than the hirer, obviously the buyer's PAN will be required.
LEASE TRANSACTION:
On the other hand, a lease is a plain case of renting of the asset. The asset is bought by the lessor, and rented out to the lessee. The registration certificate carries the name of the lessee, but that is relevant only for Motor Vehicles Act.
Therefore, it cannot be said that a contract of lease is a contract of sale or purchase, as far as the lessee is concerned.
Hence, in case of lease transactions, the lessor being the purchaser has only to disclose his PAN, not the lessee. If at all a transfer of the asset is to be made to the lessee, then, of course, the disclosure of PAN of the lessee will be required.
Unpaid overdue charges on delayed rentals taxable
Not recovering rentals from a lessee is bad enough, but obviously worse is having to pay tax on the overdue charges, which were neither realised nor accrued in books. In Growth Leasing and Finance Limited v. Income-tax Officer 66 ITD 67, a very technical meaning of the accrual system of accounting was taken, and based on the contractual right of the company to receive the service charges on overdue rentals, the service charges were held taxable.
Click here to read the RBI's NPA accounting norms.The Prudential Norms of the RBI, how statutory, require a company to refrain from accruing any income if the asset has become a non-performing asset. Performing or non-performing, the income by way of service charges or overdue charges is never recognised in books. There is a good accounting principle that goes behind this - if there is an uncertainty in ultimate collection of an income, accounting standards advise that the recognition of income be postponed to the extent of uncertainty involved. Accrual, obviously, does not mean taking income into books based on a legal right of receiving, even if the income is not perceived as recoverable.
However, the Tribunal has gone on the basis of right of recovery, and held service charges, neither received nor accrued, to be taxable. This is in face of the fact that the client in the instant case was Nirlon, already declared as a relief undertaking.
Stright-line splitting of hire-purchase interest not permissible for tax purposes
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Click here to read more about methods of accounting for HP transactions. |
In Deputy Commissioner of Income-tax v. Nagarjuna Investment 65 ITD 17, the AP Tribunal has made a very detailed analysis of the two prevailing methods for recognition of interest in hire-purchase transactions - equal and sum-of-digits (SOD) methods or the index method, and held that the equal basis of splitting income does not represent the "real" income in case of a hire-purchase transaction.
The judgment runs over 50 pages, and the Tribunal has gone into detailed calculations of the straight-line and the index methods of computing interest.
Though the facts of this case are unique - here the assessee was following the SOD method for books of account and straight-line method for income-tax purposes - the detailed line of ruling by the Tribunal on what represents true and fair approximation of interest in case of hire-purchase transactions can lead tax officers to reject the splitting of finance charges on equal basis, even where the same method is adopted for books of account.
Pay some sales-tax on use of your telephone, said the officer
No you can't, said the Court, but ….
This author in his book [Vinod Kothari's Lease Financing and Hire-purchase] had expressed fears that the widely-worded language of the 46th Amendment to the Constitution
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What is sales-tax on lease transactions: |
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Sales-tax on "transfer of right to use any goods for any purpose" or lease-tax was introduced in India by the 46th Amendment to the Constitution. An extremely complicated and often-misunderstood issue, the tax has been a nightmare for leasing companies for a long time. But now, it seems leasing companies have a lot of companions, since the States have started imposing such tax on telephone, electric services, licensing agreements [see news item below] etc. The provisions of the law are not clear - particularly in relation to inter-State lease transactions - see report below. For details of sales-tax on leases and hire-purchase in India, refer to our sales-tax manual - click here. |
would tempt a tax officer to extend sales-tax to cover services - that the wide language may apparently seem to cover provision of a telephone instrument by the Telecom department, electric meters by the electricity company, and so on.
These worst fears are already coming true. In Andhra Pradesh, a proven example of an over-active State in enforcing lease-tax demands, the tax officer shot notices on the Telephone department contending that the receipts by way of telephone rent, included in every telephone user's bill every month, was the consideration for "transfer of right to use goods", treated as "sale" under the law.
The High Court upon writ in Union of India v. Secretary Revenue Department (CT II), Govt of AP 113 STC 203 dismissed the claim of the tax department, but only on a technical interpretation that the rent charged by the Telephone department was for the whole facility of a telephone connection, and not merely for provision of a telephone instrument.
However, wider issues involved in the case, noted below, were not dealt with by the Court:
Sales-tax changes on leases in West Bengal
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West Bengal in its Budget for year 1999-2000 has taken the initiative to make certain favourable changes in sales-tax on lease transactions. See the detailed report appended in a separate page. Click here for the full report.
AP Tribunal holds sales-tax inapplicable on
inter-state leases
Are you still paying sales-tax on inter-state leases?
This author has been contending, for over 10 years now, that sales-tax cannot be charged on inter-State lease transactions as they are outside the Constitutional powers of the States.
Read below for a history of legal developments relating to this matter.
Now the AP Tribunal in the case of Wimco Limited v. State of Andhra Pradesh 25 APSTJ 222 has held that the Constitution does not empower the State govt. to levy tax on inter-State leases, and where goods had moved from one State to another in pursuance of a lease agreement, the State cannot levy a tax.
The AP High Court has given a ruling in this matter earlier in the matter of ITC Classic. Subsequent thereto, the legislature moved an amendment in the Act inserting a retrospective provision to the effect that if the goods are being used in the State, the lease will be taxable in the State.
According to the Tribunal, this was violative of Article 228 of the Constitution, and therefore, had to be read down.
Lease-tax applicable on franchising agreements
This ruling will prove to be a landmark in time to come. If States make full use of this ruling, it will have major impact on trade and industry. Letting out trade marks is a very common way of doing business. A number of MNCs have let out their trade names to Indian companies. Likewise, a number of reputed brands have appointed franchisees. If all the royalties for transfer of right to use trade marks are to be taxed under sales-tax laws, there will be a substantial tax liability which was never apprehended by trade and industry. The ruling, when implemented, will be a shocking surprise.
After the Constitution (46th Amendment) Act of 1982, a transfer of right to use goods is treated as a sale by most States. "Goods" in sales-tax parlance includes intangible assets such as trade marks. Now, the Bombay High Court has ruled in Commissioner of Sales-tax v. Duke and Sons (P) Ltd. 112 STC 370 that agreements which convey a right to use trade marks, in other words, franchising agreements, are also within the purview of sales-tax on transfer of right to use goods.
The High Court drew a distinction between "assignment" and "transfer" of trade marks. Assignment would mean divestation of the rights of the original owner. If, however, without divesting his own rights over it, the owner of a trade mark permits someone to use it, it is a case of transfer of right to use it, and therefore, falls under the purview of the taxing clause which taxes transfer of right to use goods.
In other words, for the purpose of sales-tax, franchising agreements stand at par with leases - both are treated as transfer of right to use goods, and both would therefore attract tax.
On purely technical grounds, a counter argument possible is that the transfer of right to use that the Constitution envisaged for sales-tax purposes was one where the transferor's own right in what he was transferring stood divested -that is exactly what the Court has termed as "assignment of trade marks". It is quite possible, therefore, that the ruling would end up being contested in the Supreme Court.
The actual applicability of the tax and the rate of tax would depend upon the State law. Some States have listed down the goods on which there will a "transfer of right to use" tax. For example, in Karnataka, Gujarat, Rajasthan, UP and MP, the franchising tax cannot be imposed till the respective taxing schedules are amended. However, in States like West Bengal, Tamil Nadu, Bihar, Orissa, etc. which either do not have a specific taxing schedule, or State like Maharashtra where trade marks are specifically included already, the tax will be applicable not only in future but also in the history - as many years up the road as the tax officer is permitted to go.
Thus, huge liability by way of sales-tax awaits most industrial houses where the group trade mark is centrally owned, consumer goods franchisees, soft drinks franchisees, sweets franchisees - the list goes on.
Sales-tax on inter-State leases not payable
This is yet another ruling on the matter : that no State has any right to tax an inter-State lease or import lease transaction.
Earlier, we have provided our clients/readers/members of leasing Associations with the rulings of the AP High Court in ITC Classic's case and UP Taxation Tribunal in Amrita Bazar Patrika's case. Before we come to the latest ruling from the Karnataka High Court, let us put the facts on record once again:
You will all be pleased to note that a single Judge of the Karnataka High Court in India Equipment Leasing v. Deputy Commissioner of Commercial Taxes, ruling dated 29th June 1998, held that the State has no right to charge tax on inter-State leases. The Court has quashed assessments of about 30 leasing companies in the State and sent them back for re-examination.
The ruling of the Court is based on whether the movement of goods and the transfer of right to use are results of separate agreements, or single agreement. In a usual lease transaction, there will never be a separate agreement for movement of goods and for the lease, in which case, as per the Court's ruling, the lease will held to be inter-State lease and beyond the taxing competence of the State govt.
However, it might so happen that the goods might have been brought into the State for some other purpose, and thereafter, a lease is done. In that case, the lease will be intra-State. This, in the context of leasing companies, may be possible if goods are repossessed and given on lease, or goods are brought for one lease and leased to another lessee.
Credit Policy makes changes in registration norms; other significant changes for financial markets
The Credit Policy for 1998-99II announced by the RBI on 20th April made some perfunctory changes in registration norms applicable to NBFCs - the minimum net worth condition was hiked from Rs. 25 lacs to Rs. 2 crores.
While this change is unlikely to affect new entrants to the market, this is bound to create enormous difficulties for those small and private operators who do not want to raise any public resources but merely want to invest their own funds into a financial venture. It is notable that contrary to the popular belief, NBFCs in India are regulated even if they do not raise any public resources - even if one invests one's own capital for a financial activity, the above regulation will be applicable.
This leads to obvious curtailment of individual business liberty - and for no intelligent reasons - as follows. Suppose I have a core net worth of my own of Rs. 10 lacs which I want to invest in capital markets. If I open a small private company for doing so, the company becomes an NBFC in RBI definition to which the entire regulation will be applicable, including the net worth pre-condition, and hence, I will be denied my right of investing in the capital market unless I gather a capital of Rs. 2 crores. This is ridiculous, if all I wanted to do was to invest my own capital.
With the revised registration threshold, the RBI must take the long-awaited initiative of re-defining NBFCs to include only such companies which deal in public funds.
Besides this, the only other change for NBFCs is that incremental credit given by commercial banks for on-lending small transport operators will regarded as priority sector lending. Though this approach has been there for some time, it is expected that it would now lead to a positive change in the outlook of banks towards NBFCs.
For full text of the Policy, click here - this will take you to the RBI site.
Procedure in case of import and lease of duty-free/concessional duty items
Vide Notification Circular no. 44/98 - Cus. Dated 26th June, 1998, the Govt of India has clarified that in case of imports by leasing companies for lease of items which are eligible for duty free imports or imports at concessional rates, the import will be allowed on satisfaction of the following conditions:
The bill of entry shall be made in the following fashion:
M/s ------------------------- (lessee)
Financed by --------------------------------------- (Lessor) under leasing arrangement.