Lease of Tinting Machines Constitutes Deemed Sale — CESTAT Mumbai Quashes Service Tax Demand Against Asian Paints

Background and Context

Asian Paints Limited, a leading manufacturer of paints and varnishes classified under Chapter Headings 3208 and 3209 of the Schedule to the Central Excise Tariff Act, 1985, found itself in a prolonged dispute with revenue authorities over the taxability of lease rentals collected from its dealer and distributor network. The company, registered as a Large Taxpayer Unit (LTU) with LTU Mumbai, leased out computerized tinting machines — technically described as Automated Colour Dispensers along with Gyro shakers, UPS units, and cap sealing machines — to its dealers for the purpose of blending base paints with colour shades as per customer requirements.

The controversy originated during an EA-2000 audit conducted by the department in April/May 2008, when auditors discovered that the assessee had been collecting lease rental charges from dealers without discharging service tax on such receipts. The department's position was that the leasing of these computerized colour mixing machines to paint and hardware outlets amounted to a taxable service — first under the category of "Banking and Other Financial Services" covering "leasing services including equipment leasing" for the pre-negative list period, and subsequently under Section 66E of the Finance Act, 1994 as a "declared service" being "transfer of goods by way of hiring, leasing, licensing etc. without transfer of right to use such goods" for the post-negative list period.

Demand History and Adjudication Timeline

The department initiated show cause cum demand proceedings by issuing multiple notices spanning the entire period from April 2005 to March 2015:

  • SCN dated 30.03.2010 — covering April 2005 to June 2009 under Section 73(2) of the Finance Act, 1994, along with interest and proposed penalties under Section 77 and Section 78
  • Subsequent SCNs dated 17.06.2010, 09.03.2011, 07.02.2012, 06.12.2012, 08.08.2013, 20.10.2014, and 27.04.2015 — covering successive periods up to March 2015

The original adjudicating authority consolidated all these proceedings and passed Order-in-Original No. 52 to 59/CGST-MW/ADC/AS/ASIAN PAINTS/20-21 dated 27.02.2021, confirming the entire demand along with interest and penalties under Section 77 and Section 78 of the Finance Act, 1994.

On appeal, the Commissioner (Appeals), CGST & Central Excise, Mumbai-III partially modified the original order vide Order-in-Appeal No. DL/GST/COM/MUM/A-III/67/2022 dated 13.07.2022. The Commissioner (Appeals) observed that the lease agreement entered into by the assessee did not involve collection of management fees, processing fees, or monthly EMIs, and therefore did not constitute a financial lease liable to service tax as "leasing services including equipment leasing" under the pre-negative list regime. Accordingly, service tax demands for the period prior to 01.07.2012 were set aside. However, demands for the post-negative list period (01.07.2012 to 31.03.2015) were upheld, along with interest and penalties. Aggrieved by this partial confirmation, Asian Paints Limited preferred an appeal before CESTAT Mumbai.

The singular issue placed for determination before the Tribunal was:

Whether the activity of leasing tinting machines by the assessee to its dealers and distributors, and collection of lease rental charges therefor, constitutes a taxable "declared service" under Section 66E of the Finance Act, 1994 during the post-negative list period, or whether it amounts to a "deemed sale" under Article 366(29A)(d) of the Constitution of India, thereby attracting VAT and excluding service tax liability.

Submissions of the Assessee

The representative of Asian Paints Limited advanced the following principal contentions:

Five-Point Test — Compliance with Supreme Court's Criteria

The assessee argued that the lease agreement executed with its distributors satisfied all five conditions laid down by the Hon'ble Supreme Court in Bharat Sanchar Nigam Limited Vs. Union of India — 2006 (2) S.T.R. 161 (S.C.) for determining whether a transaction constitutes a transfer of the right to use goods: