IGST on importation of tank containers lease services into India

In re Deccan Transco Leasing Private Limited (GST AAR Telangana)

Is GST liable to be paid on leasing of tank containers taken form a supplier i e., lessor who is located outside India and the tank containers do not reach India? As it is finance lease, it is supply of goods and tank containers do not reach the Indian Territory.

Yes. The applicant is liable to pay IGST on importation of lease services into India in light of the above discussion.

Read AAAR Order : GST on leasing of Tank Containers taken from a supplier located outside India

FULL TEXT OF THE ORDER OF AUTHORITY OF ADVANCE RULING, TELANGANA

ORDER UNDER SECTION 98(4) OF THE CENTRAL GOODS AND SERVICES TAX ACT, 2017 AND UNDER SECTION 98(4) OF THE TEALANGANA GOODS AND SERVICES TAX ACT,2017.

1. M/s. Deccan Transco Leasing Private Limited, Block -2 (DG-6) Flat No. :103, Raintree Park, Spinal Road, Kukatpally, Hyderabad – 500 072 Telangana. (GSTIN No. 36AABCL4306J1ZN) has filed an application in FORM GST ARA-01 under Section 97(1) of TGST Act, 2017 read with Rule 104 of CGST/TGST Rules.

2. At the outset, it is made clear that the provisions of both the CGST Act and the TGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to any dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provision under the TGST Act. Further, for the purposes of this Advance Ruling, the expression ‘GST Act would be a common reference to both CGST Act and TGST Act.

3. It is observed that the queries raised by the applicant fall within the ambit of Section 97 of the GST ACT. The Applicant enclosed copies of challans as proof of payment of Rs. 5,000/- for SGST and Rs. 5,000/- for CGST towards the fee for Advance Ruling. The concerned jurisdictional officer also raised no objection to the admission of the application. The application is therefore, admitted

4. Brief facts of the case:

M/s Deccan Transcon Leasing Private Limited ( DTLPL ) are Non-vessel owner container carriers/ Operators (NVOCC) who arc based in India but lease containers from suppliers outside the country and in turn use it in transportation of bulk chemicals

The applicant entered into a lease purchase agreement from M/s. Tankspan Leasing Limited (TLL) on 28.08.2018. In terms of this agreement the applicant pays lease rentals every month and he is entitled for the purchase of the container during the period of lease or at the end of the lease period by paying the agreed rate.

The applicant submits that they have recognized the tank containers and assets in the books of account from the inception of the lease and there is certainty that the same would be purchased later. Therefore the applicant is of the opinion that this transaction is a transaction for supply of goods from the inception of the agreement in terms of SLNo.l(c) of Schedule II to Section 7. The applicant abstracted the said entry’ and opined that all the requirements mentioned in the entry in the schedule II are fulfilled by them i.e.,-

• There shall be transfer of title in goods.
• Such transfer is at future date as per pre-existing agreement.
• Such transfer is after payment of full consideration.

The applicant contends that the title is transferred at the end of the lease period as evident from the sale invoices raised by the supplier to the applicant.

The applicant further contended that the said transfer of title occurred on a future date in pursuance of a pre-existing lease agreement and the supplier transfers title only after payment of full consideration as evident from terms of agreement.

The applicant contends that the purpose and objective of the entry 1(c) of Schedule II is to declare that the transaction involving future title transfers as per the pre-existing agreements is to treat such transaction as supply of goods from the commencement of the agreement though the owner retains title to those goods until the happening of the ultimate event at the option of the hirer. The applicant further contended that any interpretation of this transaction where in it is treated as lease before the transfer of the title and as sale after the transfer of title goes contrary to the spirit of the above Entry. The applicant further contended that the entry cannot be rendered otiose by such interpretation and relied on the Honble Apex Court’s decision in the case of Grasim industries 2002 (14 1) ELT 593.

The applicant further contended that the Sales Tax Act, 1950 was amended to include hire purchase as deemed sale after the same was included in the definition of sale m Entry 29A of Article 366 of Constitution of India. Further that the definition of sale under CST Act under Section 2(g) is remaining untouched and therefore the deeming fiction. That accordingly a Supreme Court of India in many cases held levy of sales tax on consolidated proceeds of hire purchase and lease purchase transaction as valid and relics on (2000) 120 STC 1.

That as per the agreement the applicant is entitled to purchase the tank upon payment of pre agreed price mentioned therein and the lease rentals paid adjusted against the purchase price.

That the applicant recognised these containers as asset in his books of account from the inception of the lease due to the certainty of acquisition at a future date.

Therefore the applicant averred that the transaction is one for purchase of goods and not for lease service. Further they averred that such goods have never entered the territory of the country and therefore do not attract any tax under CGST/IGST Acts. The applicant relied on Mohit minerals Vs UOI (2020) 33 GSTL 321 (GUJ) wherein it was held that the transaction occurring totally outside India is not liable for GST in India.

5. Questions raised:

Based on the facts mentioned hereinafter, the applicant sought Advance Ruling on the following issues:-

1. Is GST liable to be paid on leasing of tank containers taken form a supplier i.e., lessor who is located outside India and the tank containers do not reach India? As it is finance lease, it is supply of goods and tank containers do not reach the Indian Territory.

6. Personal Hearing:

The Authorised representatives of the unit namely Sri. Venkatesh Prasad Charter Accountant and Sri. S. Kishor Kumar Reddy, Consultant, attended the personal hearing held on 11-11-2020. However, orders were not passed due to the retirement of state membered on superannuation. Further Government of Telangana vide G.O. Rt, No, 216, Rev(CT-H) Dept, Dt. 16.06.2021 have nominated Sri S.V. Kasi Visweswara Rao, Additional , Commissioner (ST) ns member to The Authority for Advance Ruling and hence the case wan re posted a fresh on 29.06.2021 Heard the case They reiterated the facts mentioned supra and sought for clarifications in respect of the queries raised in their application which are as under:-

1 That, they have taken certain containers (goods) on hire purchase from a foreign vendor and used them for transporting chemicals on International waters without the containers ever reaching the territories of India

2. That, they seek clarification whether this hire-purchase/lease transaction amounts io taxable supply.

3. That, they seek this clarification without reference to Set: 13 of the IGST Act.

7. Discussion & Findings:

We have considered the submissions made by the applicant in their application for advance ruling as well as the additional submissions made by Venkata Prasad, CA & AR during the personal hearing. Wo also considered the issues involved on which advance ruling is sought by the applicant and relevant facts. Ai the outset, we would like to state that the provisions of both the COST Act and the TGST Act are the same except for certain provisions. Therefore, unless a mention is specifically made to such dissimilar provisions, a reference to the CGST Act would also mean a reference to the same provisions under the TGST Act.

i. The applicant argues that the transaction made by them is a deemed sale of goods i.e., hire purchase as defined under Entry 29 of Article 366 of Constitution of India. They contended that Section 2(g) of CGST Act remains untouched even after the introduction of GST law. They further argued that the transaction made by them shall be treated as sale of goods in light of these provisions and a catena of case law emanating from these provisions. Accordingly they relied on 120 STC 1 and 34 STC 65. Therefore they contend that the transaction made by them as purchasers is not taxable as the goods never entered the territory of the country.

In this connection it is to inform that the constitution has been amended to include Entry 12A in the Article 366 which enables levy of tax on supply of goods & services except on alcoholic liquor for human consumption. Further the definition of goods in the Section 2(d) of the CST Act is amended to include only petroleum and liquor and Section 2(g) has to be applied only to the goods enumerated in Section 2(d). Therefore sales tax under CST Act can be levied only on these goods whereas tax on supply of goods and services is levied under CGST/SGST and IGST Acts. Hence the above argument of the applicant is not sustainable in light of the amendments to the constitution of India and the concomitant amendments to the GST and VAT Acts

ii. Further under Accounting Standard-19 of Accounting Standards of India the Ieased Asset will be shown in the books of lessee and this does not alter the nature of a lease transaction

However the question remains whether the applicant is recipient of goods & services under the GST Act which will be discussed below.

iii. The applicant argues that the transaction made by him falls under Entry 1(c) of Schedule 11 to Section 7 of the CGST Act. The said Entry declares a specific transaction to be supply of goods. However such transaction shall entail,-

a. Transfer of title in goods under an agreement.

b. And such agreement shall stipulate that property shall pass at a future date upon payment of full consideration as agreed.

iv. The law mandates that the transfer of title in goods happens under an agreement before the property in goods passes to the purchaser. Further the law mandates that such agreement shall have a clause which stipulates that goods wall necessarily pass at a future date to the purchaser.

The Entry employs two phrases in order to emphasize the obligatory’ nature of the contract to ensure passing of property from the supplier to the recipient at the completion of the period of the agreement or any such period, viz-

a. “An agreement which stipulates that

b. “Property in goods shall pass at a future date

Thus the Jaw leaves no scope for uncertainty regarding the transfer of property.

The law does not provide for an option to purchase the goods at the end of the lease period but makes it an obligation on the part of contracting parties to necessarily transfer such property on the completion of period of agreement.

Thus for a transaction to qualify under this entry it should be backed by an agreement which does not leave any option for return of the goods at the end of such agreement.

vi. The Hon’ble apex court of India in a catena of case laws held that the use of word “shall” raises a presumption that the particular provision is imperative (pesara pushpamala Reddy case 92011) 4 SCC 306). The Hon’ble Apex court in the case of state of Haryana vs Raghubeer dayal(1995) 1 SCC 133 observed that if statute is passed for the purpose of enabling the doing of something and prescribes formalities which are essential to validity of such thing, it it mandatory

The above Entry in the Schedule II employs the word ‘Stipulation’ to be enshrined in the agreement and also the word “Shall” to make it obligatory on the supplier to sell the goods at a future date when the full consideration is received. Both the words ”Stipulation” and “Shall” in the Entry do not leave any option to either the purchaser or the seller in this matter. The copies of sample agreement are examined in light of this discussion as follows:

The applicant has entered into an agreement for leasing goods from a foreign lessor. The relevant terms and conditions in the lease agreement are as under:-

a. “The Title of the Agreement is named as Lease Purchase Agreement”

b. In the agreement, it is stated that in consideration of terms and covenants………….lessor agrees to lease to the lessee and the lessee agrees to hire from lessor… tank containers identified ( Para A of the agreement ).

c. The term of the lease shall commence,., on the date of delivery of lessee of such container and shall continue for each container for a minimum period of 5/2 years (Para B of the agreement ).

d. The lessee shall pay an amount at a daily rate of US $ 10.20 per container. At the expiry of term of lease purchase, …and that no event of default has occurred, the lessee shall purchase all such containers on lease. … Upon such receipt of payment by lessor from lessee for full payment for the term of lease, such title of ownership shall pass to lessee ( Para C of the agreement ).

e. Upon expiration of the minimum lease purchase term or expiration of lease purchase term .. where the lessee has not purchased the containers in accordance in Para C or termination due to default of the lease purchase terms, the lessee shall return each container as to which the lease shall have a hired to lessor at the depots to be nominated by the lessor (Para D of the agreement).

f. The replacement value for each container damaged beyond economic repair, lost or destroyed shall be U.S $ 25,000/-.

g. Rent clause The rent described in Paragraph C of the Lease shall be due for each Container from and including the day of delivery to the lessee up to and including the day the Container is returned to Lessor pursuant to the terms of the Lease and in accordance with Paragraph 4 below.

h. Return clause: The Lessee may return the Containers pursuant to the provisions of the Lease. The Lessee shall be responsible for all shipping and transportation to nominated Lessor depot. Such costs shall be borne by the Lessee.

i. In the event of default the agreement stipulates that the lessor shall retake possession of the containers.

j. Inspection and Testing clause: The lessor or its authorized representatives shall inspect the containers at any reasonable time from time to time,

k. Ownership clause: The ownership of the Containers shall at all times remain with the Lessor. The Lessee shall have quiet possession during the term of the Lease.

vii. A plain reading of the relevant terms of the contract clearly indicate the consensus ad idem or the meeting of minds between the parties to the contract that the agreement is prima facie for lease. There is no fixed lease term but the contract only mentions minimum lease period which may extend beyond such minimum period.

There is no binding obligation for purchase of the goods at the end of the lease term. The agreement does not confer any title upon the lessee but a mere option to purchase based on fulfilment of certain conditions.

Clearly the agreement does not fulfill the conditions mandated under Entry 1 (c) of Schedule II to the CGST Act i.e.,

a. The agreement should leave no scope for uncertainty regarding the transfer of property.

b. The agreement should not provide for an option to purchase the goods at the end of the lease period but shall make it an obligation on the part of contracting parties to necessarily transfer such property.

c. The agreement which shall not leave any option for return of the goods.

d. The terms in the copies of agreements submitted by the applicant it is amply clear that the leasee may or may not take final possession of the goods.

As per the statutes there is a binding obligation on the parties to the agreement to complete the sale i.e. Transfer of title as well as property whereas in the present case there is no such obligation but there is an option for the lessee to either purchase the goods or return them to the lessor. There is even a clause in the agreement as to the (condition and) place where the goods can be returned on termination of the lease

Where there is such an option available to the lessee, the transaction does not fall under entry 1(c) of Schedule II to the CGST Act, 2017

In k L Jahar & Co, Vs Dy. Commercial Tax Officer, AIR 1965 SC 1083 it has been held that a hire purchase agreement is distinct from a sale in which the price is to be paid Iater by instalments, In the case of sale in which the price is to be paid by installment, the property passes as soon as the sale is made even though the price has not been fully paid and may later be paid by installments. The distinguishing feature of a hire purchase agreement is that the property does not pass when the agreement is made but only passes when the option is finally exercised after complying with all the terms of the agreement

The terms of the agreement clearly indicate that the property in goods passes to the applicant only when he exercises the option failing which the property has to be returned back to the lessor at a specific deposed indicated by him. Therefore during the period of lease the transaction remains a service and the moment the option to purchase the goods is exercised by the applicant it becomes the transaction of sale. Hence the transaction made by the applicant does not fall under Entry 1 (c) of Schedule II to the CGST Act.

Advance Ruling

5. In view of the observations stated above, the following ruling is issued

(S. V. Kasi Visweshwar Rao)
ADDL. COMMISSIONER (State Tax )

B. Raghu Kiran
ADDL. COMMISSIONER (Central Tax)

[Under Section 100(1) of the CGST/TGST Act, 2017, any person aggrieved by this order can prefer an appeal before the Telangana State Appellate Authority for Advance Ruling, Hyderabad, within 30 days from the date of receipt of this Order]