In re Inland Financial saervices Pvt Ltd (GST AAR Maharashtra)
The Maharashtra Authority for Advance Ruling held that the leasing of electric two-wheelers by Inland Financial Services Pvt. Ltd. under a 48-month Vehicle Lease Agreement was classifiable as financial and related services under SAC 9971, rather than leasing or rental services without an operator under SAC 9973. The Authority examined the contractual arrangement and concluded that the transaction was, in substance, a financial lease involving the transfer of the right to use identified electric vehicles, effective possession and control, and substantial risks and responsibilities to the lessee. Accordingly, the Authority held that the transaction was covered by Serial No. 15(i) of Notification No. 11/2017-Central Tax (Rate), dated 28 June 2017, as amended by Notification No. 20/2019-Central Tax (Rate), dated 30 September 2019. The applicable GST rate was held to be the same as that applicable to the supply of like goods involving transfer of title in goods. The applicant’s claim for classification under SAC 9973 was therefore rejected.
The applicant, M/s Inland Financial Services Private Limited, was registered under the CGST Act, 2017 and Maharashtra GST Act, 2017 and was engaged in the business of renting and leasing electric vehicles, including electric bikes, without operators. It had entered into a Vehicle Lease Agreement dated 19 August 2022 with M/s Techsion Private Limited, Bhubaneswar, Odisha, for supplying electric vehicles on lease. The applicant sought an advance ruling on whether the transaction could be classified under Heading 9973, covering leasing or rental services without an operator, in terms of Serial No. 17(viia) or 17(viii) of Notification No. 11/2017-Central Tax (Rate), as amended by Notification No. 20/2019-Central Tax (Rate).
The applicant explained that before 1 October 2019, Notification No. 11/2017-Central Tax (Rate) contained separate entries concerning rental services of transport vehicles with or without operators and leasing or rental services of goods. Following the amendment introduced through Notification No. 20/2019-Central Tax (Rate), the classification and applicable rate structure were modified. Heading 9966 was restricted to rental services of transport vehicles with operators, while Heading 9973 covered leasing or rental services without operators. The applicant contended that because it supplied electric vehicles without providing drivers or operators, its transaction should fall under Heading 9973 and attract the GST rate prescribed under the relevant entry.
The applicant relied on the Karnataka Appellate Authority for Advance Ruling decision in In re Yulu Bikes Pvt. Ltd., Order No. KAR/AAAR/03/2021, dated 2 February 2021. In that matter, the Appellate Authority held that renting e-bikes and bicycles without an operator was classifiable under SAC 9973 and that Serial No. 17(viia) of Notification No. 11/2017-Central Tax (Rate), as amended, applied. The applicant submitted that its own business involved leasing electric vehicles without operators and that the same classification principle should therefore govern its supplies.
The jurisdictional officer also considered the arrangement to be leasing of electric vehicles without operators. After examining the Vehicle Lease Agreement, the officer observed that the electric vehicles remained the property of the lessor throughout the lease period and that the lessee was not entitled to mortgage, hypothecate or sell them. The officer also noted that the agreement did not involve transfer of title in the vehicles. On that basis, the officer concluded that the appropriate classification was under Serial No. 17(viia) or 17(viii) of Notification No. 11/2017-Central Tax (Rate), as amended.
The Authority, however, undertook an independent examination of the complete contractual arrangement. It noted that the applicant, as lessor, was engaged in providing electric vehicles to the lessee for commercial use. The lessee, M/s Techsion Private Limited, operated a business involving marketplace services for leasing or renting electric vehicles to businesses and retail customers through its platform. The Vehicle Lease Agreement permitted the lessee to use the electric vehicles for its business operations over a specified contractual period of 48 months.
The Authority examined the financial and operational obligations contained in the agreement. The lessee was required to make periodic lease rental payments of Rs. 1,727 per electric vehicle, excluding GST, subject to the agreement’s terms. The vehicles remained legally owned by the lessor, and the lessee was prohibited from transferring ownership or creating unauthorised third-party interests. Nevertheless, the lessee enjoyed possession and use of the vehicles throughout the lease period and assumed significant obligations relating to their operation, maintenance and protection.
Under the agreement, the lessee was responsible for maintaining the electric vehicles in proper working condition, undertaking repairs, bearing running expenses, maintaining statutory documents and ensuring compliance with applicable legal requirements. The lessee was also responsible for insurance-related obligations and for indemnifying the lessor against specified liabilities, losses, claims and damages arising during the lease period. The agreement prohibited unauthorised transfer or subleasing of the vehicles and provided for their return to the lessor upon termination unless the contractual purchase option was exercised.
The Authority considered these contractual provisions significant because they demonstrated that the transaction involved more than a short-term rental arrangement. It identified several features characteristic of a financial lease, including a defined long-term lease period, periodic rental payments, exclusive use of identified assets by the lessee, transfer of substantial operational responsibilities, and the possibility of acquisition of the vehicles at the end of the lease period. Although legal ownership remained with the lessor, the lessee obtained extensive rights of use and assumed responsibilities associated with the assets.
In distinguishing a financial lease from an operating lease, the Authority considered the nature of the transaction, ownership and possession of the assets, duration of the lease, recovery of asset cost, and allocation of risks and responsibilities. It observed that a financial lease ordinarily involves substantial transfer of the risks and rewards associated with ownership, even where legal title continues with the lessor. By contrast, an operating lease generally involves temporary use of assets while the lessor retains substantial control and ownership-related responsibilities. The Authority held that the present arrangement more closely resembled a financing arrangement involving the acquisition and use of equipment through instalment payments.
The Authority rejected the applicant’s contention that the absence of an operator was sufficient to place the transaction under SAC 9973. It held that classification could not be determined solely by whether the lessor provided an operator. The substance of the agreement, the allocation of rights and obligations, and the transfer of possession and effective control were equally relevant. The Authority therefore examined whether the transaction involved a transfer of the right to use goods for consideration.
For this purpose, the Authority referred to Bharat Sanchar Nigam Ltd. v. Union of India, (2006) 3 SCC 1, in which the Supreme Court discussed the essential attributes of a transaction involving transfer of the right to use goods under Article 366(29A)(d) of the Constitution of India. The Authority considered whether identified goods were available for delivery, whether the parties had agreed upon the identity of the goods, whether the transferee had a legal right to use them, whether such use excluded the transferor during the relevant period, and whether the transferor was prevented from transferring the same right to others during that period.
Applying these principles, the Authority found that the Vehicle Lease Agreement identified the electric vehicles to be delivered and provided the lessee with the legal right to use them throughout the contractual period. The lessor could not assign, pledge, mortgage, lend or otherwise part with possession of the vehicles during the subsistence of the agreement in a manner inconsistent with the lessee’s contractual rights. The lessee enjoyed exclusive possession and effective control and bore significant operational obligations. The Authority therefore concluded that the conditions relevant to a transfer of the right to use goods were satisfied.
The Authority further observed that the 48-month lease period represented a substantial part of the economic life of the vehicles and that the contractual payments were structured to recover the cost of the assets along with the financing component. The lessee also assumed responsibilities for maintenance, insurance and other risks and rewards associated with the vehicles. The existence of an option to acquire the assets at the end of the lease period further supported the conclusion that the arrangement had the characteristics of a financial lease.
The Authority accordingly held that the transaction was covered by Serial No. 15(i) of Notification No. 11/2017-Central Tax (Rate), concerning financial and related services, rather than Serial No. 17 concerning ordinary leasing or rental services without an operator. The Authority observed that the relevant entry covered transfer of the right to use goods for any purpose, whether or not for a specified period, for cash, deferred payment or other valuable consideration. It concluded that the financial leasing arrangement fell within this description and that the applicable GST rate was the same as that applicable to the supply of like goods involving transfer of title.
The Authority also referred to the decision of the Odisha Appellate Authority for Advance Ruling in In re True Solar Pvt. Ltd., where a similar arrangement involving long-term leasing of electric vehicles without operators was classified under SAC 9971 as financial leasing services. The Authority considered that decision consistent with its interpretation of the present agreement.
The Authority distinguished the Karnataka Appellate Authority’s ruling in In re Yulu Bikes Pvt. Ltd.. It observed that the Yulu Bikes case involved short-term rental of electric bikes and bicycles to customers, with charges based on the duration of use. By contrast, the applicant had entered into a long-term Vehicle Lease Agreement with a business entity, involving a substantially different allocation of rights, responsibilities and economic risks. Consequently, the classification adopted in Yulu Bikes did not govern the applicant’s financial leasing arrangement.
Cases Discussed
Bharat Sanchar Nigam Ltd. v. Union of India — (2006) 3 SCC 1 (Supreme Court). The Authority relied on the principles concerning transfer of the right to use goods, including identification of goods, legal right of use, exclusive possession and effective control. The linked TaxGuru article discusses the Supreme Court decision.
In re Yulu Bikes Pvt. Ltd. — Karnataka AAAR, Order No. KAR/AAAR/03/2021, dated 2 February 2021. The applicant relied on this ruling to support classification under SAC 9973. The Authority distinguished it because Yulu Bikes concerned short-term rentals charged according to usage, whereas the applicant’s transaction involved long-term financial leasing.
In re True Solar Pvt. Ltd. — Odisha Appellate Authority for Advance Ruling. Referred to for the classification of long-term leasing of electric vehicles without operators as financial leasing services under SAC 9971.
