Leasing of Oxygen Plant Equipment by Praxair India Not a Financial Lease, Not Taxable as Financial Service: CESTAT [Read Order]

The dispute arose from an agreement dated 15.02.2005 between Praxair India and M/s Swil Ltd., under which Praxair undertook the construction, operation, and maintenance of an oxygen plant. While the company had paid service tax on the operation and maintenance charges, it did not pay tax on the lease rental received for the plant equipment.

The Revenue contended that the lease fell within the ambit of financial leasing services and demanded service tax on the lease rent, which was confirmed by the adjudicating authority along with penalties.

Challenging the order, Praxair argued that the lease was an operating lease rather than a financial lease. It submitted that the agreement did not transfer ownership or any purchase option to the lessee, nor did the lease payments cover the full cost of the asset with interest, a key requirement for financial leases.

In support, the appellant pointed to the express contractual clause that ownership of the equipment remained with Praxair and that Swil Ltd. could not claim any title unless the full cost was paid upfront.

The Tribunal observed that for a lease to be categorized as a financial lease, it must satisfy conditions such as transfer of ownership, a purchase option for the lessee, lease payments covering full asset cost with interest, and transfer of risks and rewards.

Referring to Indian Accounting Standards and rulings from the Supreme Court, including Asea Brown Boveri Ltd. and NOIDA v. Anand Sonabadra, the Tribunal reiterated that lease classification depends on the substance over form. In Praxair's case, none of the criteria for financial leasing were fulfilled.

Further, the bench of P A Augustian (Judicial member) and R. Bhagya Devi (Technical member) noted that in Praxair's own earlier case decided in 2018, a similar issue was adjudicated in its favour, where it was conclusively held that the equipment leasing arrangement was an operating lease and did not fall under financial leasing services. The earlier decision, having attained finality, was binding on the current case as well.

Accordingly, the CESTAT concluded that Praxair's activity of leasing the oxygen plant did not qualify as a financial lease and thus fell outside the purview of taxable services under the category of "Banking and Other Financial Services." The appeal was allowed, and the demand, along with penalties, was quashed.

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