Hewlett Packard India Sales Private Limited, Bangalore V. DCIT, Bangalore

ITA 683/BANG/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 63796 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 5 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-11-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 02-07-2012
• Assessment Year: misc
• Appeal Filed On: 19-05-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: FARHAT HUSSAIN QURESHI CITII
• Keywords: Capital asset; Business income; Depreciation; Business expenditure; Revenue expenditure; Capital expenditure
• Section: 143(3); 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B BEFORE SMT. P.MADHAVI DEVI , JUDICIAL MEMBER A ND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NO.683/BANG/2010 (ASSESSMENT YEAR: 2004-05) M/S.HEWLETT PACKARD INDIA SALES PVT. LTD. NO.24, SA LARPURIA ARENA, HOSUR MAIN ROAD, ADUGODI, BANGALORE - 30. PAN: AAACC 9862 F VS. APPELLANT DEPUTY COMMISSIONER OF INCOME - TAX, CIRCLE 11(4), BANGALORE. RESPONDENT APPELLANT BY: SHRI SRIRAM SESHADRI, C.A. RESPONDENT BY : SHRI FARH AT HUSSAIN QURESHI, CIT - II DATE OF HEARING: 15 - 10 - 2012. DATE OF PRONOUNCEMENT: 09 - 1 1 - 2012. O R D E R PER SMT. P.MADHAVI DEVI, JM: THIS IS ASSESSEES APPEAL AND IS DIRECTED AGAINST THE ORDER OF THE CIT(A)-LTU, BANGALORE, DATED 13-1-2010 FOR T HE ASSESSMENT YEAR 2004-05. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS O F APPEAL: 1. THE LEARNED CIT(A) HAS ERRED IN PASSING AN ORDER WHICH IS BAD IN LAW AND ON FACTS. ITA NO.683/BANG/2010 PAGE 2 OF 25 2. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONCLUDING THAT THE TRANSACTION OF GIVING THE ASSETS ON LEASE WAS IN THE NATURE OF A HIRE PURCHASE AND THEREFORE HAS ERRED IN LAW AND ON FACTS IN UPHOLDING THE DISALLOWANCE IN RESPECT OF DEPRECIATION ON ASSETS GIVEN ON LEASE BY THE APPELLANT. 3. UNDER THE F ACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) HAS ERRED IN LAW IN NOT CONCLUDING THAT THE CBDT CIRCULAR NO.2 DATED FEBRUARY 9, 2001 WAS BINDING ON THE AO IN THE CONTEXT OF THE DEPRECIATION CLAIMED BY THE APPELLANT FOR THE ASSETS GIVEN ON LEASE. 4. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACT IN NOT DECIDING ON THE GROUND PERTAINING TO EXCLUSION OF AMOUNT OF EXPENDITURE INCURRED IN FOREIGN CURRENCY BY THE APPELLANT FROM THE AMOUNT OF EXPORT TURNOVER FOR THE PURPOSE OF COMPUTATION OF RELIEF UNDER SECTION 10A OF THE ACT. 3. AS REGARDS GROUND NO.4, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ALTERNATE PLEA OF THE A SSESSEE TO THE ABOVE GROUND IS COVERED BY THE DECISION OF THE HON BLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. TATA ELXSI LTD. & OTHERS (205 TAXMAN 321(KAR) WHEREIN IT HAS BEEN HELD THAT WHEN CERTAIN EXPENDITURE IS EXCLUDED FROM THE EXPOR T TURNOVER, THEN THE SAME IS ALSO REQUIRED TO BE EXCLUDED FROM TOTAL TURNOVER FOR THE PURPOSES OF COMPUTING DEDUCTION U/S 10A OF THE OF THE INCOME-TAX ACT, 1961 [HEREINAFTER REFERRED TO AS 'T HE ACT']. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE AO T O EXCLUDE THE EXPENDITURE INCURRED IN FOREIGN CURRENCY BY THE ASS ESSEE FROM BOTH THE EXPORT TURNOVER AS WELL AS TOTAL TURNOVER FOR THE PURPOSES OF COMPUTATION OF DEDUCTION U/S 10A OF THE ACT. THIS GROUND IS ACCORDINGLY REJECTED BUT THE ALTERNATE PL EA IS ALLOWED. ITA NO.683/BANG/2010 PAGE 3 OF 25 4. AS FAR AS GROUND NOS.2 AND 3 ARE CONCERNED, BRI EF FACTS OF THE CASE ARE THAT THE ASSESSEE-COMPANY, WHICH IS ENGAGED IN THE BUSINESS OF MANUFACTURING, TRADING AND MAINTENA NCE OF COMPUTER EQUIPMENT, HAD FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2004-05 ON 31-10-2004 DECLARING A TOTAL INCOME OF RS.1,85,19,01,840/-. SUBSEQUENTLY A REVIS ED RETURN WAS FILED ON 22-12-2005 DECLARING A TOTAL INCOME OF RS.1,90,26,55,700/-. DURING THE ASSESSMENT PROCEED INGS U/S 143(3) OF THE ACT, FROM THE COMPUTATION OF INCOME FROM BUSINESS THE AO OBSERVED THAT THE ASSESSEE HAS ADD ED THE DIFFERENCE IN EMI AND FINANCE CHARGES (BEING THE FI NANCIAL CHARGE ON THE ASSETS GIVEN ON FINANCE LEASE) AMOUNTING TO RS.14,84,88,074/- TO ITS INCOME BUT IT HAS DEDUCTED DEPRECIATION ON THE ASSETS GIVEN ON FINANCE LEASE. THE AO OBSER VED THAT SIMILAR CLAIM WAS MADE IN THE ASSESSMENT YEAR 2002- 03 WHEREIN IT WAS HELD THAT THE ASSESSEE IS PRECLUDED FROM CLA IMING DEPRECIATION AS DEPRECIATION CAN BE ALLOWED ONLY ON CAPITAL ASSETS AND NOT ON ASSETS THE COST OF WHICH HAS BEEN ALLOWE D AS BUSINESS EXPENDITURE. OBSERVING THAT THE FACTS AND CIRCUMSTA NCES ARE EXACTLY THE SAME IN THIS YEAR, THE AO DISALLOWED TH E CLAIM OF DEPRECIATION OF RS.14,84,88,074/- CLAIMED BY THE AS SESSEE ON ASSETS GIVEN ON FINANCE LEASE. 4.1 AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEF ORE THE CIT(A) WHO CONFIRMED THE ORDER OF THE AO FOLLOW ING THE ORDER OF HIS PREDECESSOR FOR ASSESSMENT YEAR 2002-03 HOLD ING THAT THE EQUIPMENT WAS UNDER HIRE-PURCHASE AGREEMENT GIVING THE COLOUR ITA NO.683/BANG/2010 PAGE 4 OF 25 OF FINANCIAL LEASE AND NOT THE SIMPLE LEASE AGREEME NT. AGGRIEVED, THE ASSESSEE IS IN SECOND APPEAL BEFORE US. 4.2 SHRI SRIRAM SESHADRI, LEARNED COUNSEL FOR THE ASSESSEE, WHILE REITERATING THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW SUBMITTED THA T THE ASSESSEE HAD PURCHASED SOME MACHINERY AND HAD GIVEN THE SAME ON LEASE TO VARIOUS COMPANIES UNDER A LEASE AG REEMENT. HE SUBMITTED THAT AS PER VARIOUS TERMS OF THE LEASE AGREEMENT, THE ASSESSEE ALONE REMAINS THE OWNER OF THE EQUIPME NT AND THE LESSEE HAD NO RIGHT OR INTEREST WHATSOEVER OVER THE EQUIPMENT EITHER DURING THE PERIOD OF LEASE OR THEREAFTER. H E HAS DRAWN OUR ATTENTION TO VARIOUS CLAUSES OF THE LEASE AGREEMENT TO DEMONSTRATE THAT THE LESSEE IS A MERE BAILEE OF THE LESSOR AND THAT IT DOES NOT HAVE ANY PROPRIETARY RIGHT, TITLE OR INTEREST IN THE EQUIPMENT OR ANY PART THEREOF AND THAT THE LESSEE S HALL INSTALL, USE AND OPERATE THE EQUIPMENT CORRECTLY AND MAINTAI N THE SAME IN GOOD WORKING CONDITION AND REPAIR IT AT OWN COST AND COMPLY WITH STATUTORY OPERATIONS AND OTHER REQUIREMENTS OF LAW. HE SUBMITTED THAT AS PER CLAUSE 11 OF THE LEASE AGREEM ENT, THE LESSEE SHALL NOT MAKE ANY ALTERATION, ADDITION OR I MPROVEMENT TO THE EQUIPMENT OR CHANGE THE CONDITION THEREON WITHO UT THE PRIOR CONSENT OF THE LESSOR AND THAT THE LESSEE SHALL PRE SERVE THE LESSORS RIGHTS DURING THE PERIOD OF LEASE. HE HAS DRAWN OUR ATTENTION TO CLAUSE 18 OF THE LEASE AGREEMENT VIZ., THE CLAUSE ON THE TERMINATION OF LEASE WHICH STIPULATES THAT THE LESSOR SHALL BE ENTITLED TO TERMINATE THE LEASE WITHOUT ANY NOTICE EXCEPT AS ITA NO.683/BANG/2010 PAGE 5 OF 25 SPECIFIED IN CLAUSE 18.1.2 AND AT ANY TIME AFTER TH E OCCURRENCE OF SUCH EVENT AND THAT AS PER CLAUSE 18.2 THE LESSOR S HALL, WITHOUT ANY NOTICE, BE ENTITLED TO REMOVE AND RE-POSSESS TH E EQUIPMENT AND FOR THAT PURPOSE BY ITSELF, ITS SERVANTS OR AGE NTS ENTER UPON THE PREMISES OF THE LESSEE. AS PER CLAUSE 20.5 OF THE LEASE AGREEMENT, ON EXPIRY OF THE LEASE PERIOD OF THE EQU IPMENT GRANTED THERETO, THE LEASE MAY BE RENEWED BY THE LE SSOR FOR A FURTHER PERIOD AND ON SUCH TERMS AND CONDITIONS AS MAY BE MUTUALLY AGREED UPON, PROVIDED THE LESSEE GIVES A L ESSOR A NOTICE IN WRITING IN THAT BEHALF OF SIX CALENDAR MO NTHS PRIOR THERETO. THUS, ACCORDING TO THE LEARNED COUNSEL FO R THE ASSESSEE, THROUGHOUT THE PERIOD OF LEASE AND THEREAFTER, OWNE RSHIP AND TITLE OF THE EQUIPMENT RESTS WITH THE ASSESSEE AND THEREFORE BY MERE NOMENCLATURE GIVEN TO THE TRANSACTION AS A FIN ANCIAL LEASE, IT DOES NOT BECOME A FINANCE LEASE. HE SUBMITTED T HAT IT WAS IN FACT OPERATING LEASE AGREEMENT AND THEREFORE THE AS SESSEE HAS RIGHTLY CLAIMED DEPRECIATION ON THE EQUIPMENT LEASE D OUT BY IT. 4.3 THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTE D THAT AS PER AS 19 PRESCRIBED BY THE INSTITUTE OF CHARTER ED ACCOUNTANTS, IN THE CASE OF FINANCIAL LEASE, THE LE SSEE WAS ENTITLED TO CLAIM DEPRECIATION AND THEREFORE, THE A SSESSEE HAD TREATED THE LEASE AS FINANCE LEASE IN ITS BOOKS OF ACCOUNT AND AS PER THE COMPANIES ACT, HAS NOT CLAIMED DEPRECIATION ON THE LEASED ASSETS BUT FOR THE PURPOSES OF THE INCOME TA X ACT, THE ASSESSEE HAS CLAIMED DEPRECIATION ON THE LEASED ASS ETS IN COMPLIANCE WITH THE CBDT CIRCULAR NO.9 OF 1943 WHIC H ITA NO.683/BANG/2010 PAGE 6 OF 25 DISTINGUISHES A LEASE AGREEMENT FROM A HIRE PURCHAS E AGREEMENT AND HAVE OBSERVED THAT DEPRECIATION ON SUCH LEASED EQUIPMENT IS ALLOWABLE TO THE LESSOR. 4.4 THE LEARNED COUNSEL FOR THE ASSESSEE HAS DRAWN OUR ATTENTION TO THE DECISION OF THE HONBLE SUPREME CO URT IN THE CASE OF CIT VS. SHAAN FINANCE (P) LTD. (231 ITR 308) TO DEMONSTRATE THAT THE ASSESSEES LEASE AGREEMENT CAN NOT BE TERMED AS A HIRE-PURCHASE AGREEMENT. HE ALSO DREW OUR ATTENTION TO CIRCULAR NO.2 OF 2001 OF THE CBDT WHIC H SPECIFIES THAT IN THE CASE OF LEASES, THE LESSOR ALONE IS ENT ITLED TO CLAIM DEPRECIATION. HE SUBMITTED THAT THE YEAR IN QUESTI ON BEFORE US IS PREVIOUS YEAR 2003-04 RELEVANT TO ASSESSMENT YEAR 2 004-05 AND THEREFORE THE CIRCULAR NO.2 OF 2001 IS APPLICABLE. HE HAS DRAWN OUR ATTENTION TO THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF SHAKTI RAJ FILMS DISTIBUTORS VS. CIT (213 ITR 20) WHEREIN THE HONBLE HIGH COURT, WHILE DEALING WITH THE ALLOWANCE OF INVESTMENT ALLOWANCE U/S 32A OF THE ACT, HAS HEL D THAT CIRCULAR NO.2 OF 2001 IS APPLICABLE AND BINDING ON THE DEPAR TMENT. HE SUBMITTED THAT THE SPECIAL BENCH OF THE TRIBUNAL AT MUMBAI, IN THE CASE OF INDUS IND BANK LTD. VS. ADDL.CIT (ITA NOS.6566/MUM/2002 & ITA NO.606/MUM/2003 DATED 14-3- 2012) HAS DEALT WITH THE ISSUE OF DEPRECIATION ON ASSETS LEASED IN THE EVENT OF THE TRANSACTION BEING HELD AS A FINANCIAL LEASE AND SUBMITTED THAT THE HONBLE SPECIAL BENCH HAS HELD T HE ISSUE IN FAVOUR OF THE REVENUE BY HOLDING THAT IN THE CASE O F FINANCIAL LEASE, IT IS THE LESSEE WHO IS ENTITLED TO DEPRECIA TION AND NOT THE ITA NO.683/BANG/2010 PAGE 7 OF 25 LESSOR. HE SUBMITTED THAT FOR COMING TO THIS CONCL USION, THE TRIBUNAL HAS ONLY FOLLOWED THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF ASEA BROWN BOVERY LTD. VS. INDUSTRIAL FINANCE CORPORATION OF INDIA (154 TAXMAN 512) BUT ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE, THE SPECIAL B ENCH OF THE TRIBUNAL HAS NOT CONSIDERED THE CIRCULAR NO.2 OF 20 01. THEREFORE, THE SPECIAL BENCH DECISION CANNOT BE APPLIED TO THE FACTS OF THE CASE BEFORE US. HE HAS ALSO DRAWN OUR ATTENTION TO THE DIRECT TAXES CODE 2010 TO DEMONSTRATE THAT THE TERM FINAN CE LEASE HAS BEEN DEFINED THEREIN AND THEREFORE, ACCORDING T O HIM, FINANCE LEASE HAS NOT BEEN SPECIFICALLY CONSIDERED BY THE 1 961 ACT. THEREFORE IN THE ABSENCE OF SPECIFIC DEFINITION, IT WOULD BE UNFAIR TO CHARACTERIZE THE LEASE UNDER CONSIDERATION AS A FINANCE LEASE. IN SUPPORT OF HIS CONTENTION, HE PLACED RELIANCE UP ON THE OBSERVATION OF THE HONBLE SUPREME COURT IN THE CAS E OF VODAFONE INTERNATIONAL HOLDINGS B.V. (341 ITR 1)(SC). 5. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUPPORTED THE ORDER OF THE CIT(A) AND SUBMITT ED THAT THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F SHAAN FINANCE (P) LTD. , (SUPRA) IS DISTINGUISHABLE ON FACTS AS IT RELATES TO ALLOWANCE OF INVESTMENT ALLOWANCE AND NOT TO DEP RECIATION ON LEASED ASSETS. HE SUBMITTED THAT THE APPLICABILITY OF CBDT CIRCULAR IS TO BE CONSIDERED ON A CASE TO CASE BASI S DEPENDING UPON THE FACTS OF EACH CASE AND CANNOT BE APPLIED B LINDLY TO ALL CASES OF LEASES. HE SUBMITTED THAT AS POINTED OUT BY THE AO, THE ASSESSEE HAS CLAIMED THE ENTIRE EXPENDITURE IN THE RELEVANT ITA NO.683/BANG/2010 PAGE 8 OF 25 ASSESSMENT YEAR ITSELF AND THEREFORE THE SAME CANNO T BE TREATED AS CAPITAL EXPENDITURE AND ALLOWED DEPRECIATION THE REON DURING THE RELEVANT ASSESSMENT YEAR. HE HAS ALSO DRAWN OU R ATTENTION TO CLAUSE 15.4 REFERRED TO BY THE CIT(A) TO DEMONST RATE THAT THE ASSESSEE HAS PURCHASED THE EQUIPMENT AT THE REQUEST OF THE LESSEE AND AS PER SAID CLAUSE IF THE LESSEE FAILS T O TAKE DELIVERY OF THE SAME, THE LESSEE IS REQUIRED TO MAKE PAYMENT OF THE ENTIRE COST OF THE EQUIPMENT. THUS ACCORDING TO HIM, IT I S A CLEAR CASE OF FINANCIAL LEASE AND NOT OPERATING LEASE AS CLAIM ED BY THE ASSESSEE. IN THE REJOINDER, THE LEARNED COUNSEL FOR THE ASSES SEE SUBMITTED THAT CLAUSE 15.4 IS ONLY A SAFEGUARD TO E NSURE THAT AFTER PURCHASE OF THE EQUIPMENT, THE LESSEE SHALL N OT BACK OUT OF THE LEASE AGREEMENT. HE HAS DRAWN OUR ATTENTION TO CLAUSES 8.2 AND 11 OF THE LEASE AGREEMENT TO DEMONSTRATE THAT T HE ASSESSEE ALONE IS THE OWNER OF THE EQUIPMENT DURING AND AFTE R THE LEASE PERIOD. 6. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDE RED THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, W E FIND THAT THE BASIC ISSUE BEFORE US IS WHETHER THE LEASE OF THE E QUIPMENT IS A HIRE-PURCHASE AGREEMENT OR A FINANCIAL LEASE OR A S IMPLE OPERATING LEASE. THE HONBLE SUPREME COURT, IN THE CASE OF SHAAN FINANCE (P) LTD., (SUPRA) HAS BROUGHT OUT THE FOLLOWING BASIC DISTINCTIONS BETWEEN AN AGREEMENT OF HIRE OF MACHINERY AND AN HIRE-PURCHASE AGREEMENT: ITA NO.683/BANG/2010 PAGE 9 OF 25 I) WHEN THE MACHINERY IS GIVEN ON HIRE BY THE OWNER TO THE HIRER ON PAYMENT OF HIRE CHARGES, THE INCOME DERIVED BY THE OWNER IS BUSINESS INCOME AND THE OWNER IS ALSO ENTITLED TO DEPRECIATION ON THE MACHINERY SO HIRED OUT. II) THE HIRER WHO PA YS HIRE CHARGES IS ALSO ENTITLED TO CLAIM IT AS REVENUE EXPENDITURE AS HE HAS NO OWNERSHIP ON THE NEW ASSET. III) THE TRANSACTION OF HIRE IS THEREFORE A BAILMENT OF MACHINERY. IV) THERE IS NO EXTINGUISHMENT OF ANY RIGHT OF THE OWNER IN THE MACHINERY BUT IT IS MERELY A LICENSE GIVEN TO THE HIRER TO USE FOR A TEMPORARY PERIOD THE MACHINERY SO HIRED. V) IN CONTRA - DISTINCTION TO THE ABOVE, IN THE CASE OF HIRE-PURCHASE AGREEMENT, THE EQUIPMENT SHALL EVENTUALLY BECOME THE PROPERTY OF THE HIRER OR CONFER ON THE HIRER AN OPTION TO PURCHASE THE EQUIPMENT. VI) THE PERIODICAL PAYMENTS MADE BY THE HIRER SHOULD, FOR TAX PURPOSES, BE REGARDED AS MADE UP OF (A) CONSIDERATION FOR HIRE TO BE ALLOWED AS DEDUCTION IN THE ASSESSMENT AND (B) PAYMENT ON ACCOUNT OF PURCHASE TO BE TREATED AS CAPITAL OUTLAY, DEPRECIATION BEING ALLOWED TO THE LESSEE ON THE INITIAL VALUE. VII) THUS HIRE PURCHASE AGREEMENT HAS TWO ELEMENTS (1) ELEMENT OF BAILMENT AND (2) ELEMENT OF SALE. ITA NO.683/BANG/2010 PAGE 10 OF 25 IN THE ABSENCE OF THE ELEMENT OF SALE, THE AGREEMENT CANNOT BE TREATED AS TRANSFER AND THE OWNERSHIP PASSING ON TO THE LESSEE. 6.1 THE HONBLE SUPREME COURT IN THE CASE OF ASEA BROWN BOVERY LTD. (SUPRA) HAS LAID OUT THE FOLLOWING FEATURES OF THE FINANCIAL LEASE: I) THE FINANCE LEASE IS A TRANSACTION THE P RIMARY PURPOSE OF WHICH IS FINANCING OF THE PURCHASE BY THE FINANCIER. II) THE PURCHASE OF ASSET OR EQUIPMENT IS BY THE BORROWER AND FOR ALL PRACTICAL PURPOSES, THE BORROWER BECOMES THE OWNER OF THE PROPERTY IN AS MUCH AS IT IS THE BORROWER WHO CHOOSES THE PROPERTY TO BE PURCHASED, TAKE DELIVERY, ENJOYS THE USE AND OCCUPATION OF THE PROPERTY, BEARS THE WEAR AND TEAR, MAINTAINS AND OPERATES THE MACHINERY/EQUIPMENT, UNDERTAKES INDEMNITY AND AGREES TO BEAR THE RISK OF LOSS OR DAMAGE, IF ANY. III) THE BORRO WER IS THE ONE WHO GETS THE PROPERTY INSURED AND REMAINS LIABLE FOR PAYMENT OF TAXES AND OTHER CHARGES AND INDEMNITY. IV) HE CANNOT RECOVER FROM THE LESSOR ANY OF THE ABOVE MENTIONED EXPENSES. V) THE PERIOD OF LEASE EXTENDS OVER AND COVERS THE ENTIRE LIFE OF THE PROPERTY FOR WHICH IT MAY REMAIN USEFUL DIVIDED EITHER INTO ONE TERM OR DIVIDED INTO TWO TERMS WITH CLAUSE FOR RENEWAL AND THE LEASE IS ITA NO.683/BANG/2010 PAGE 11 OF 25 NON - CANCELLABLE. 6.2 NOW, WE HAVE TO EXAMINE WHETHER THE LEASE AGREEMENT ENTERED INTO BY THE ASSESSEE FALLS WITHIN EITHER OF THE ABOVE CATEGORIES. FROM THE COPY OF ONE OF THE LEAS E AGREEMENTS FILED BEFORE US AT PAGE 20 OF THE PAPER BOOK, WE FI ND THAT THE ASSESSEE IS REQUIRED TO ENTER INTO A SUPPLEMENTARY LEASE SCHEDULE AFTER THE LEASE OF THE EQUIPMENT AND EACH SUCH SUPPLEMENTARY LEASE SCHEDULE SHALL BE DEEMED TO FOR M AN INTEGRAL PART OF THE AGREEMENT AS IF THE SAME WERE ANNEXED TO THE LEASE AGREEMENT. 6.3 FOR PROPER APPRECIATION OF THE FACTS OF THE CAS E, THE RELEVANT CLAUSES OF THE LEASE AGREEMENT ARE REPRODU CED HEREUNDER: LEASE AGREEMENT LESSOR: HEWLETT-PACKARD INDIA LTD LESSEE: PATHNET INDIA PRIVATE LIMITED . . . . . . . . . . WHEREAS THE LESSEE HAS REQUESTED THE LESSOR TO PURC HASE THE EQUIPMENT (HEREINAFTER REFERRED TO AS THE EQUI PMENT) MORE PARTICULARLY DESCRIBED IN LEASE SUMMARY SCHEDU LE HERETO AND SUPPLEMENTARY LEASE SCHEDULES ATTACHED/T O BE ATTACHED HERETO. AND WHEREAS THE LESSEE HAS OFFERED TO TAKE ON LEASE THE EQUIPMENT SO PURCHASED BY THE LESSOR. AND WHEREAS THE LESSOR HAS AGREED TO PURCHASE AND L ET ON LEASE THE EQUIPMENT TO THE LESSEE UPON AND SUBJECT TO THE FOLLOWING TERMS AND CONDITIONS. NOW THIS AGREEMENT WITNESSETH AND IT IS HEREBY AGREED BY THE PARTIES HERETO AS UNDER: ITA NO.683/BANG/2010 PAGE 12 OF 25 1.1 THE LESSOR HEREBY AGREES TO LET AND THE LESSEE HERE BY AGREES TO TAKE ON LEASE THE EQUIPMENT FROM THE LESS OR UPON THE TERMS AND CONDITIONS MENTIONED IN LEASE SUMMARY SCHEDULE HERETO. AS AND WHEN THE EQUIPMENT IS LEASED TO THE LESSEE, THE LESSEE SHALL FURTHER EXECUTE FROM TIME TO TIME SUPPLEMENTARY LEA SE SCHEDULES IN FAVOUR OF LESSOR PERTAINING TO THE EQUIPMENT AND DISBURSAL MADE BY THE LESSOR IN RELAT ION THERETO. EACH SUCH SUPPLEMENTARY LEASE SCHEDULE SH ALL BE DEEMED TO FORM AN INTEGRAL PART OF THIS AGREEMEN T AS IF THE SAME WERE ANNEXED HERETO OR SET OUT HEREI N IN EXTENSO. 2.1 THE LESSEE SHALL PAY TO THE LESSOR LEASE RENTALS AS SET OUT IN LEASE SUMMARY SCHEDULE AND MORE SPECIFICALLY MENTIONED IN SUPPLEMENTARY LEASE SCHEDULES ATTACHED/TO BE ATTACHED HERETO WITHOUT ANY DEMAND FROM THE LESSOR. ALL PAYMENTS OF LEASE RENTALS HEREUNDER, SHALL BE MADE BY THE LESSEE TO THE LESSO R WITHOUT ANY DEDUCTION OR ABATEMENT WHATSOEVER, AND SHALL BE PAID TO THE LESSOR AT THEIR OFFICE AT NEW DELHI BY DEMAND DRAFT PAYABLE AT NEW DELHI OR AT SUCH OTH ER PLACES AS THE LESSOR MAY SPECIFY FROM TIME TO TIME AND PAYMENT MADE BY POST SHALL BE AT THE RISK OF THE LESSEE. 2.4 THE LESSEE IRREVOCABLY AGREES AND DECLARES THAT THE LEASE RENTAL CHARGES SHALL BE INCREASED IN CORRELAT ION TO INCREASE IN TAXES WHETHER SALES TAX OR EXCISE, AND ANY OTHER RELIEF OR CONSEQUENTIAL CHARGES THAT MAY BE L EVIED ON OR IN CONNECTION WITH THE LEASE OF THE EQUIPMENT UNDER THIS AGREEMENT AT ANY TIME HEREAFTER. 3.2 THE LESSEE HAS OBTAINED ALL CONSENTS, LICENSES, APPROVALS ETC. AS ARE NECESSARY FOR OR IN CONNECTI ON WITH THE EXECUTION, VALIDITY AND ENFORCEABILITY OF THIS LEASE AND FOR THE STORAGE, INSTALLATION, USE AND OPERATION OF THE EQUIPMENT AND UNDERTAKES TO KEEP THEM EFFECTIVE AND IN FORCE DURING THE PERIOD OF TH IS LEASE AND TILL THE EQUIPMENT IS DELIVERED BACK TO T HE LESSOR IN GOOD ORDER AND CONDITION SUBJECT TO FAIR WEAR AND TEAR. 3.3 UNDER THE APPLICABLE PROVISIONS OF THE INCOME-TAX ACT,1961 AND THE RULES MADE THERE-UNDER AND THE RELEVANT FINANCE ACT AS PREVALENT AT PRESENT, THE L ESSEE WOULD HAVE BEEN ENTITLED AND COULD HAVE CLAIMED DEPRECIATION AT THE RATES PRESCRIBED THERE-UNDER IF IT HAD BOUGHT THE EQUIPMENT AND WAS USING AND OPERATING TH E SAME AS THE OWNER THEREOF. 3.4 THE LESSEE SHALL NOT BE LIABLE FOR FAIR AND NORMAL WEAR AND TEAR OF THE EQUIPMENT AND THE BURDEN OF DEPRECIATION RESULTING FROM ANY SUCH FAIR WEAR AND TEAR SHALL FALL UPON THE LESSOR WHO SHALL BE ENTITLED TO CLAIM ITA NO.683/BANG/2010 PAGE 13 OF 25 FROM THE REVENUE ALL CAPITAL ALLOWANCES IN RESPECT OF THE EQUIPMENT. 4. DURING THE SUBSISTENCE OF THIS LEASE AND TILL T HE EQUIPMENT IS DELIVERED BACK TO THE LESSOR IN GOOD O RDER AND CONDITION SUBJECT TO FAIR WEAR AND TEAR, THE LE SSEE SHALL KEEP THE EQUIPMENT AT ALL TIMES IN ITS POSSES SION AND CONTROL AT THE LOCATION DESCRIBED IN SUPPLEMENT ARY LEASE SCHEDULES HERETO AND IT SHALL NOT BE REMOVED OR SUBLET OR ASSIGNED THERE-FROM WITHOUT THE PRIOR WRI TTEN CONSENT OF THE LESSOR. THE LESSEE SHALL NOT AFFIX OR CAUSE TO BE AFFIXED PERMANENT THE EQUIPMENT TO ANY IMMOVABLE PROPERTY. 5. THE LESSEE SHALL AFFIX A NAME PLATE OR OTHER MA RK ON THE EQUIPMENT IDENTIFYING THE SOLE AND EXCLUSIVE OWNERSHIP THEREOF OF THE LESSOR AND NOT ALLOW OR PE RMIT THE SAME TO BE REMOVED OR DEFACED. OWNERSHIP 6. THE LESSEE ACKNOWLEDGES, CONFIRMS AND DECLARES THAT IT HOLDS THE EQUIPMENT AS A MERE BAILEE OF THE LESSOR AND THAT IT SHALL NOT HAVE ANY PROPRIETARY RIGHT, TITLE OR INTEREST IN THE EQUIPMENT OR ANY PART THEREOF AND S HALL AT ALL TIMES, PROTECT AND DEFEND AS BAILEE/LICENSEE OF THE EQUIPMENT, THE LESSORS ABSOLUTE AND PARAMOUNT RIGH T AND TITLE THERETO AND SHALL NOT AT ANY TIME, ADVANCE OR MAKE ANY CLAIM ADVERSE TO OR IN DEROGATION OF THE LESSORS ABSOLUT E AND PERMANENT OWNERSHIP RIGHT AND TITLE. 7. THE LESSEE SHALL INSTALL, USE AND OPERATE THE E QUIPMENT CAREFULLY AND MAINTAIN THE SAME IN GOOD WORKING CONDITION AND REPAIR AT ITS OWN COST AND EXPENSES I N CONFORMITY WITH THE INSTRUCTIONS OR OPERATIONAL MAN UALS GIVEN BY THE MANUFACTURER AND/OR THE LESSOR AND COMPLY WITH ALL STATUTORY OPERATION AND OTHER REQUIREMENTS OF LAW, RULES, REGULATIONS, MAINTENANC E AND DIRECTIONS AS APPLICABLE TO THE STORAGE OR/AND REPAIRS, INSTALLATION GOVERNING USE AND OPERATION O F THE EQUIPMENT IN THAT BEHALF, AND ENSURE THAT THE EQUIPMENT IS OPERATE BY SUITABLY TRAINED PERSONNEL FOR THE PURPOSE FOR WHICH IT IS DESIGNATED AND NOT TO D O OR OMIT TO BE DONE ANYTHING BY WHICH THE WARRANTIES A ND PERFORMANCE GUARANTEE GIVEN BY THE MANUFACTURER WOULD BE INVALIDATED OR BECOME UNENFORCEABLE WHOLLY OR PARTLY. INSURANCE 8.1 IMMEDIATELY AFTER SIGNING OF THE LEASE THE LESS EE SHALL INSURE THE EQUIPMENT IN THE JOINT NAMES OF THE LESS OR AND THE LESSEE WITH THE LESSORS NAME AS THE OWNER AND LOSS PAYEES FULL REPLACEMENT VALUE OR MARKET VA LUE WHICHEVER IS HIGHER WITH SUCH INSURANCE COMPANY AS ITA NO.683/BANG/2010 PAGE 14 OF 25 MAY BE MUTUALLY AGREED BETWEEN THE LESSEE AND THE LESSOR, AGAINST ALL RISKS INCLUDING TRANSIT, ERECTI ON, TESTING, FIRE, RIOT, LIGHTING, EXPLOSION. EARTHQUAK E, STRIKE, STORM, TEMPEST FLOODS. MALICIOUS DAMAGE, AI R CRASH THEFT, BURGLARY, CIVIL COMMOTION AND SUCH OTH ER RISKS INCLUDING THIRD PARTY UNLIMITED LIABILITY) AS THE LESSOR MAY REQUIRE AND PAY ALL INSURANCE PERMIT AND RENEW THE INSURANCE POLICIES FROM TIME TO TIME AND HAND OVER THE ORIGINAL INSURANCE POLICIES AND PREMI A RECEIPTS TO THE LESSOR AND MAINTAIN SUCH INSURANCE IN FULL EFFECT AND NOT DO OR OMIT TO DO OR BE DONE OR PERMIT OR SUFFER ANY ACT, DEED OR THING WHICH MIGHT OR COULD PREJUDICIALLY OR AFFECT ANY SUCH INSURANCE. 8.2 IN THE EVENT OF ANY CLAIM ARISING UNDER ANY SUCH INSURANCE, THE LESSEE SHALL GIVE TO THE LESSOR IMMEDIATE WRITTEN INTIMATION THEREOF AND COMPLY WIT H INSTRUCTIONS OF THE LESSOR IN CONNECTION THEREWITH AND TAKE ALL STEPS, ACTIONS AND PROCEEDINGS AS MAY BE NECESSARY AND REQUIRED BY THE LESSOR, RECEIVE ANY MONIES PAYABLE IN RESPECT THEREOF FOR AND ON BEHALF OF IN TRUST FOR THE LESSOR AND HAND OVER THE SAME TO T HE LESSOR IMMEDIATELY UPON RECEIPT CLAIMING ANY PART THEREOF ON ANY ACCOUNT WHATSOEVER AND GENERALLY GIV E EFFECTUAL RECEIPT AND DISCHARGES AND ACT FOR AND ON BEHALF OF THE LESSOR FOR THE BENEFIT AND TRUST OF T HE LESSOR AS THE LESSOR MAY DIRECT. 8.3 NOTWITHSTANDING ANYTHING HEREIN CONTAINED IN 8. 2 ABOVE THE LESSOR MAY AT ITS OPTION AGREE THAT THAT ANY INSURANCE RECEIPTS RECOVERABLE UNDER THE S AID INSURANCE SHALL BE APPLIED AT THE OPTION OF THE LES SOR: (I) IN MAKING GOOD THE DAMAGE, OR (II) IN REPLACING THE EQUIPMENT TO WHICH THE TERMS OF THIS LEASE SHALL APPLY PROVIDED THAT IN THE EVENT OF IRREPARABLE LOSS OR DAMAGE TO THE EQUIPMENT AS A WHOLE THE LESSOR SHALL BE ENTITLED TO TERMINATE THIS LEASE AND TO RETAIN A NY INSURANCE RECEIPTS BY THE LESSOR IN RESPECT OF THER EOF. WITHOUT PREJUDICE TO THE AFORESAID RIGHTS OF THE LE SSOR IN EVENT OF SUCH TERMINATION THE LESSOR SHALL ALSO BE ENTITLED TO RECOVER FROM THE LESSEE ALL SUMS COMPUT ED IN THE MANNER SET OUT IN CLAUSE 18.2 HEREOF. 8.4 IN THE EVENT OF FAILURE OF THE LESSEE TO INSURE THE EQUIPMENT OR TO PAY THE INSURANCE PREMIA AS ABOVE T HE LESSEE HEREBY AGREES THAT THE LESSOR MAY INSURE THE EQUIPMENT AND/OR PAY THE INSURANCE PREMIA AS ABOVE AND THE LESSEE SHALL FORTHWITH ON RECEIPT OF A NOTI CE OF DEMAND FROM THE LESSOR REIMBURSE ALL SUMS SO PAID B Y THEM TOGETHER WITH SERVICE CHARGES THEREON AT THE R ATE OF 21% PER ANNUM FROM THE DATE OF SUCH PAYMENT BY ITA NO.683/BANG/2010 PAGE 15 OF 25 THE LESSOR. PAYMENT OF SALES TAX RATES AND OTHER CHARGES 9.1 THE LESSEE SHALL DURING THE PERIOD OF THIS LEAS E AND TILL THE EQUIPMENT IS DELIVERED BACK TO THE LESSOR IN GO OD WORKING ORDER AND CONDITION (FAIR WEAR AND TEAR ACCEPTED) BEAR ALL CHARGES AND OTHER DUTIES, TAXES AND PENALTIES AS MAY BE LEVIED FROM TIME TO TIME BY THE GOVERNMENT OR ANY OTHER AUTHORITY PERTAINING TO OR IN RESPECT OF THIS LEASE AND PAY THE SAME ON DEMAND BY THE LESSOR. 9.2 THE LESSEE AGREES THAT THE TRANSACTION COVERED BY THIS LEASE IS NOT UNDERSTOOD TO BE A SALE EXIGIBLE TO TA X UNDER THE EXISTING SALES TAX LAWS. IF HOWEVER, BY REASON OF ANY AMENDMENTS OF ANY LAW, CENTRAL OR STATE, THIS TRANSACTION IS HELD TO BE EXIGIBLE TO T AX, AS A SALE OR OTHERWISE EITHER IN WHOLE OR IN PART, OR AN Y IN PART, OR ANY INPUT OR MATERIAL OR EQUIPMENT USED O R SUPPLIED IN EXECUTION OF OR IN CONNECTION WITH THE LEASE ARE ELIGIBLE TO TAX, THE LESSEE SHALL PAY SUCH TAX IMMEDIATELY UPON THE SAME COMING PAYABLE OR REIMBURSE THE SAME TO THE LESSOR IN ADDITION TO THE LEASE RENTALS PAYABLE TINDER THIS AGREEMENT. 9.3 IF THE LESSEE SHALL NOT PAY THE MONIES REFERRED TO IN 9.1 AND 9.2 ABOVE, THE LESSOR MAY PAY THE SAME AND THE LESSEE SHALL REIMBURSE ALL SUMS SO PAID TOGETHE R WITH SERVICE CHARGES THEREON AT THE RATE OF 21% PE R ANNUM FROM THE DATE OF PAYMENT TILL SUCH REIMBURSEMENT. 9.4 THE LESSEE SHALL PUNCTUALLY AND DULY PAY OR CAU SE TO BE PAID ALL RATES, TAXES, LICENSE FEES, SURCHARGES, REGISTRATION CHARGES AND OTHER OUTGOINGS PAYABLE IN RESPECT OF THE EQUIPMENT STORAGE, INSTALLATION, US E OR OPERATION THEREOF OR OF THE PREMISES WHERE THE SAME IS KEPT AND ON DEMAND PRODUCE TO THE LESSOR ALL RECEIP TS AND OTHER EVIDENCE OF SUCH PAYMENTS. INSPECTION 10. THE LESSEE SHALL PERMIT THE LESSOR, THE LESSOR S BANKERS AND ALL PERSONS AUTHORISED BY THE LESSOR OR HIS BANKERS AT ALL REASONABLE TIMES WITH PRIOR NOTICE I N WRITING (IMMEDIATELY IN CASE OF AN EMERGENCY AS CONSTRUED BY THE LESSOR TO INSPECT, VIEW, AND EXAMI NE THE STATE AND CONDITION OF THE EQUIPMENT AND FOR TH E PURPOSE PERMIT ENTRY IN THE PREMISES WHERE THE EQUIPMENT STORED OR LYING AND BEAR THE COST OF SUCH INSPECTION AND OUT OF POCKET EXPENSES TO ANY SUCH PERSON AUTHORISED BY THE LESSOR OR HIS BANKER FORTH WITH PAY THE SAME TO THE LESSOR OR HIS BANKER AND FORTHW ITH PAY THE SAME TO THE LESSOR ON RECEIPT OF A NOTICE O F DEMAND ON HIS BEHALF. . ADDITION/ALTERATION ITA NO.683/BANG/2010 PAGE 16 OF 25 11. THE LESSEE SHALL NOT MAKE ANY ALTERATION, ADDITION OR IMPROVEMENT, TO THE EQUIPMENT OR CHANGE THE CONDITION THEREOF WITHOUT THE PRIOR WRITTEN CONSENT (SUCH CONSENT NOT TO BE UNREASONABLY WITHHELD) OF T HE LESSOR AND ALL SUCH ADDITIONS IMPROVEMENTS AND ATTACHMENTS OF ANY NATURE WHATSOEVER, WHEN MADE TO THE EQUIPMENT BY THE LESSEE (WHETHER AT ITS OWN COS T OR NOT AND WHETHER WITH OR WITHOUT THE APPROVAL OF THE LESSOR) SHALL BELONG TO THE LESSOR AND BE DEEMED TO BE PART OF THE EQUIPMENT AND SHALL BE SUBJECT TO TH E TERMS AND CONDITIONS OF THIS LEASE. 15.2 IN THE EVENT THAT THE LESSEE SHALL REFUSE, FAI L OR BE UNABLE FOR ANY REASON TO ACCEPT DELIVERY AND INSTALLATION OF THE EQUIPMENT OTHER THAN FOR REASON OF THE MANUFACTURER FAILING TO SUPPLY THE SAME IN SATISFACTORY ORDER AND CONDITION, THE LESSOR SHALL BE ENTITLED TO TERMINATE THIS LEASE AT ANY TIME WITHIN ONE MONTH THEREAFTER, BY A NOTICE IN WRITING TO THE LES SEE AND THE LESSEE SHALL ON DEMAND, PAY TO THE LESSOR A L COSTS OF THE EQUIPMENT TOGETHER WITH A SERVICE CHAR GE THEREON AT THE RATE OF 21$ PER ANNUM AND EXPENSES INCURRED BY THE LESSOR FOR INSURING, TRANSPORTATION , STORING AND MAINTAINING THE EQUIPMENT AND FOR ITS DISPOSAL AND/OR LEASE TO THIRD PARTY OR IN OTHER MA NNER WHATSOEVER WITHOUT PREJUDICE TO THE LESSORS REMEDI ES FOR DAMAGES FOR BREACH OF CONTRACT. WITHOUT PREJUDI CE TO THE AFORESAID RIGHT OF THE LESSOR, IN THE EVENT OF SUCH TERMINATION, THE LESSOR SHALL ALSO BE ENTITLED TO RECOVER FROM THE LESSEE AND THE LESSEE SHALL BE LIA BLE TO PAY TO THE LESSOR ALL SUMS COMPUTED IN THE MANNE R SET OUT IN CLAUSE 18.2 HEREOF. 15.3 THE LESSOR SHALL NOT BE RESPONSIBLE FOR ANY DI RECT, INDIRECT OR CONSEQUENTIAL LOSS TO THE LESSEE OR THI RD PARTY ARISING FROM ANY DELAY ITS DELIVERY AND/OR INSTALLATION OF THE EQUIPMENT EITHER BY THE ACTION OF THE MANUFACTURER OR OTHERWISE HOWEVER OR BY REASON OF ANY DELAY IN THE COMMENCEMENT OF THE LEASE. LESSEES CONFIRMATION REGARDING PURCHASE OF EQUIPMENT 16. THE LESSEE ACKNOWLEDGE REPRESENTS, DECLARES, AGREES AND CONFIRMS THAT: 16.1. THE EQUIPMENT IS OF THE REQUIRED SIZE, DESIGN , CAPACITY AND MANUFACTURE, SUITABLE FOR ITS PURPOSE AND IS AS SELECTED BY THE LESSEE RELYING ENTIRELY O N ITS OWN JUDGMENT AND NOT ON THE STATEMENTS OR REPRESENTATION, IF ANY, MADE BY THE LESSOR OR ITS AGENTS OR SERVANTS. 16.2. THE LESSOR IS NOT THE MANUFACTURER OR DEALER OR SUPPLIER OF THE EQUIPMENT AND THAT THE ESSENTIAL FUNCTION OF THE LESSOR IN THIS LEASE IS TO PURCHASE ITA NO.683/BANG/2010 PAGE 17 OF 25 THE EQUIPMENT SELECTED BY THE LESSEE FROM THE MANUFACTURER OR DEALER OR SUPPLIER DESIGNATED BY THE LESSEE. 16.3. THE LESSOR HAS NOT AT ANY TIME MADE, NOR DOES IT HEREBY MAKE ANY REPRESENTATION, WARRANTY, WHATSOEVER WITH RESPECTS TO THE MERCHANTABILITY, QUALITY, CONDITION, SUITABILITY, DURABILITY, UTILIT Y OR FITNESS FOR THE PURPOSE USE, OPERATION OR PERFORMANCE OF THE EQUIPMENT. 16.4. ANY LIABILITY THAT THE LESSOR MIGHT OTHERWISE INCUR AND ANY RIGHT OR IMMUNITY THE LESSOR MIGHT OTHERWISE POSSESS OR CLAIM IN RESPECT OF ANY CONDITION, WARRANTY OR REPRESENTATION RELATING TO T HE EQUIPMENT OR TO ITS MERCHANTABILITY, QUALITY, CONDITION, CONDITION, DURABILITY, SUITABILITY OR FI TNESS FOR THE PURPOSE, WHETHER SUCH CONDITION OR WARRANTY OR REPRESENTATION IT EXPRESS OR IMPLIED AND WHETHER ARISING UNDER THE LEASE OR IN THE COURSE OF NEGOTIATIONS IN WHICH THE LESSEE OR ITS REPRESENTATIVES MAY HAVE BEEN CONCERNED, PRIOR TO THIS LEASE, ARE HEREBY EXPRESSLY EXCLUDED. 16.5. THE LESSOR SHALL IN NO WAY BE LIABLE OR RESPO NSIBLE TO THE LESSEE FOR ANY LIABILITY, CLAIM, LOSS, DAMAG E OR EXPENSES OF ANY KIND OR NATURE WHATSOEVER ARISING FROM THE TRANSPORTATION AND DELIVERY OF THE EQUIPMENT, LEASE OF THE EQUIPMENT IT STORAGE, INSTALLATION, USE OR OPERATION OR ITS FAILURE TO OP ERATE OR PERFORM OR OTHERWISE HOWSOEVER. TERMINATION 18.1. ON THE OCCURRENCES OF ANY OF THE EVENTS SPECI FIED BELOW, THE LESSOR SHALL BE ENTITLED WITHOUT PREJUDI CE TO ANY OTHER RIGHTS OR REMEDIES WHICH THE LESSOR MAY HAVE UNDER THIS LEASE OR OTHERWISE IN LAW AND NOTWITHSTANDING ANY SUBSEQUENT ACCEPTANCE OF LEASE RENTALS, TO TERMINATE THIS LEASE, WITHOUT ANY NOTIC E EXCEPT AS SPECIFIED IN 18.1.2 HEREOF AND AT ANY TIM E AFTER THE OCCURRENCE OF SUCH EVENT. 18.1.1. IF THE LESSEE FAILS TO PAY THE LEASE RENTALS ON THE DATES AND IN THE MANNER STIPULATED IN THE SUPPLEMENTARY LEASE SCHEDULE(S) OR OTHER SUMS PAYABLE HEREUNDER WITHIN 10 DAYS OF THEIR BECOMING DUE, WHETHER DEMANDED OR NOT. 18.1.2. IF THE LESSEE FAILS OR NEGLECTS TO OBSERVE OR PERFO RM OR COMMITS OR ALLOWS TO BE COMMITTED A BREACH OF ANY OF THE TERMS, CONDITIONS, PROVISIONS OR STIPULATIONS OF THIS LEASE ON ITS PART TO BE OBSERV ED AND PERFORMED (OTHER THAN FAILURE TO PAY ANY SUM HEREUNDER WHEN DUE AND PAYABLE) AND IF SUCH BREACH IS REMEDIABLE, FAILS TO REMEDY THE SAME WITHIN FOURTEEN DAYS OF NOTICE BY THE LESSOR ITA NO.683/BANG/2010 PAGE 18 OF 25 SPECIFYING SUCH DEFAULT AND REQUIRING SUCH DEFAULT TO BE REMEDIED. 18.1.3. IF ANY REPRESENTATION OR WARRANTY MADE OR DEEMED TO BE MADE BY THE LESSOR IN PURSUANT TO THIS LEASE IS OR PROVES TO HAVE BEEN INCORRECT IN ANY MATERIAL RESPECT OR BECOME INCORRECT IN MATERIAL RESPECT. 18.1.4 IF THE LESSEE BEING A LIMITED COMPANY PASSES ANY RESOLUTION FOR WINDING UP OR ALLOWS A PETITION FOR WINDING UP PRESENTED AGAINST IT OR IF A RECEIVER IS APPOINTED FOR THE WHOLE PART OF THE ASSETS, PROPERTIES OR UNDERTAKING OF THE LESSEE OR COMPOUNDS WITH OR ENTERS INTO ANY COMPOSITION WITH ITS CREDITORS. 18.1.5. IF THE LESSEE DOES OR SUFFERS ANY ACT OR THING OR OMITS TO DO OR SUFFER ANY ACT OR THING WHEREBY OR I N CONSEQUENCE OF WHICH THE EQUIPMENT MAY BE OR IS LIKELY TO BE DISTRACTED, ENDANGERED, ATTACHED OR TAKEN IN EXECUTION UNDER ANY LEGAL PROCESS OR PUBLI C AUTHORITY 18.1.6. IF THE LESSEE BY ANY ACT OR COMMISSION GIVEN TO THE LESSOR REASONABLE GROUNDS TO CONSIDER THAT LESSORS RIGHTS MAY BE PREJUDICED OR BE IN JEOPARDY. 18.1.7. FAILING OR NEGLECTING TO OBSERVE, PERFORM, ADHERE T O AND COMPLY WITH EACH AND EVERY ONE OF AND ALL THE TERMS AND CONDITIONS OF THIS AGREEMENT AND ON ;ITS PART TO BE OBSERVED, PERFORMED, ADHERED OR COMPLIED WITH THEN ON OCCURRENCE OF ANY OF THE SAID EVENTS THE LESSOR SHALL BE ENTITLED WITHOUT PREJUDI CE TO ANY OF ITS OTHER PREVIOUSLY ACCRUED RIGHTS OR REMEDIES HEREUNDER OR UNDER ANY PROVISION OF LAW, TO TERMINATE THE LEASE OF THE EQUIPMENT BY NOTICE, IN WRITING, TO THE LESSEE AND TO EXERCISE ALL OR AN Y OF THE POWERS AND RIGHTS, REMEDIES, ACTS AS THE LESSOR MAY, IN ITS ABSOLUTE DISCRETION THINK FIT. 18.2 ON THE TERMINATION OF THIS LEASE PURSUANT TO C LAUSE 18.1 ABOVE 18.2.1 THE LESSOR SHALL, WITHOUT ANY NOTICE, BE ENT ITLED TO REMOVE AND REPOSSESS THE EQUIPMENT AND FOR THAT PURPOSE BY ITSELF, ITS SERVANTS OR GENTS ENTER UPON ANY LAND, BUILDING OR PREMISES WHERE THE EQUIPMENT IS SITUATED OR IS REASONABLY BELIEVED BY THE LESSOR TO BE SITUATED FOR THE TIME BEING AND DETACH AND DISMANTLE THE SAME AND THE LESSOR SHALL NOT BE RESPONSIBLE FOR ANY DAMAGE WHICH MAY BE CAUSED BY ANY SUCH DETACHMENT OR REMOVAL OF THE EQUIPMENT. ITA NO.683/BANG/2010 PAGE 19 OF 25 18.2.2 WITHOUT PREJUDICE TO AND IN ADDITION TO THE LESSORS RIGHTS PROVIDED IN CLAUSE 18.2.1 HEREIN ABOVE, THE LESSOR SHALL ALSO BE ENTITLED TO RECOVER FROM THE LESSEE THE FOLLOWING AMOUNTS VIZ. (I) (II) (III) THE ENTIRE AMOUNT OF THE LEASE RENTALS FOR THE FIX ED PERIOD OF THE LEASE COMPUTED IN THE MANNER SET OUT IN THE SUPPLEMENTARY LEASE SCHEDULE ON THE FOOTING AND IF THE LEASE HAD NOT BEEN TERMINATED TO THE END AND INTENT THAT THE LESSEE SHALL PAY TO THE LESSOR NOT ONLY ARREARS OF LEASE RENTALS UP TO THE DATE OF TERMINATION OF THE LEASE BUT ALSO SUCH FURTHER AMOUNT FOR THE UNEXPIRED RESIDUE OF THE TERM WHICH THE LESSEE WOULD HAVE TO PAY TO THE LESSOR THE LEASE CONTINUED. THE COST OF ALL REPAIRS AND MAINTENANCE OF THE EQUIPMENT TO RENDER AND MAINTAIN IT IN GOOD WORKING ORDER AND CONDITION AND ALL COSTS, CHARGES AND EXPENSES INCURRED BY THE LESSOR IN REPOSSESSING THE EQUIPMENT AND IN ENDORSING ITS REMEDIES HOWEVER OCCASIONED. THE PARTIES HERETO AGREE AND RECORD THAT THE AMOUNT TO THE PAID BY THE LESSEE T O THE LESSOR AS AFORESAID HAVE BEEN BONA FIDE AND SATISFACTORILY ESTIMATED TO BE THE PROPER AND REASONABLE AMOUNT THAT MAY BE SUFFERED BY THE LESSOR AS AND WHEN BY WAY OF LIQUIDATED DAMAGES. NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN CONTAINED, IN THE EVENT OF SUCH THE LESSOR SHALL ALSO BE ENTITLED TO SELL, RELEASE OR OTHERWISE DISP OSE OF THE EQUIPMENT IN SUCH MANNER AS THE LESSOR MAY THINK FIT AND THE LESSOR SHALL NOT BE BOUND TO ACCOUNT TO THE LESSEE ANY MANNER WHATSOEVER. 18.3.1. UPON TERMINATION OF THIS LEASE BY EFFLUX OF TIME OR OTHERWISE THE LESSEE SHALL AT ITS OWN COST AND EXPENSES, FORTHWITH DELIVER OR CAUSE TO BE DELIVERE D TO THE LESSOR THE EQUIPMENT SUCH TIME AND PLACE AS MAY BE DIRECTED BY THE LESSOR IN GOOD REPAIR, ORDER AND CONDITION (SUBJECT TO NORMAL WEAR AND TEAR0. 19. IN THIS AGREEMENT, UNLESS THE CONTEXT OTHER WISE SO REQUIRES, THE FOLLOWING EXPRESSIONS SHALL HAVE THE FOLLOWING MEANINGS, VIZ. . . . . . . . . (F) SUPPLEMENTARY LEASE SCHEDULE THE SUPPLEMENTARY LEASE SCHEDULE OR SCHEDULES, WHICH MAY NOW OR FROM TIME TO TIME TO BE INCORPORATED HEREUNDER AS AN INTEGRAL PART OF THIS LEASE. LEASE SHALL MEAN AND INCLUDE THE PERSON(S), NAMED HEREIN AND HIS HEIR SUCCESSORS AND ASSIGNEES ITA NO.683/BANG/2010 PAGE 20 OF 25 LESSORS SHALL MEAN AND INCLUDE HEWLETT-PACKARD INDIA LTD. AND THEIR SUCCESSORS/ASSIGNEE. . . . . . . . . . . . . . . . 20. GENERAL . . . . . . . . . . . . 20.5 ON THE EXPIRY OF THE LEASE PERIOD OF THE EQUIP MENT GRANTED HERETO, THE LEASE MAY BE RENEWED BY THE LESSOR FOR A FURTHER PERIOD AND ON SUCH TERMS AND CONDITIONS AS MAY BE MUTUALLY AGREED UPON PROVIDED THE LESSEE GIVES THE LESSOR A NOTICE IN WRITING ON THAT BEHALF OF SIX CALENDAR MONTHS PRIOR THERETO. SCHEDULE I REFERRED T O HEREINABOVE ORDER NO. NAME OF SUPPLIER INVOICE NO. & ASSET LOCATION & DESCRIPTION INVOICE VALUE AMOUNT FINANCED HEWLETT-PACKARD INDIA LTD. CHANDIWALLA ESTATE MAA ANANDMAL MARG KALKAJI NEW DEHI-100019 PATHNET INDIA PVT. LTD. PLOT NO.31, SECTOR 18, UDYOG VIHAR, GURGAON, HARYANA. INR 8,304,659 RUPEES EIGHTY THREE LACS FOUR THOUSAND SIX HUNDRED AND FIFTY NINE ONLY INR 8,304,659 RUPEES EIGHTY THREE LACS FOUR THOUSAND SIX HUNDRED AND FIFTY NINE ONLY LEASE SUMMARY SCHEDULE 1. LESSOR HEWLETTE-PACKARD INDIA LTD. 2. LESSEE PATHNET INDIA PVT. LTD. 3. DESCRIPTION OF EQUIPMENT HEWLETTEE-PACKARD EQUIP MENT 4. LEASE TENOR 36 MONTHS 5. LEASE VALUE RS.8,304,659 6. LEASE MANAGEMENT FEES 0% 7. LEASE RENTALS 12 RENTALS (RUPEES 32.39 PMPT) RS.806,964 THE PMPT RATE INDICATES THE TOTAL RENTAL CHARGE PER MONTH FOR EVERY RS.1000/- FINANCED. THE RENTALS ARE QUARTERLY IN ADVANCE AND SHALL COMMENCE FROM THE DATE OF DELIVERY OF THE EQUIPMENT 8. SECURITY DEPOSIT NIL 9. REPAIR AND MAINTENANCE INSURANCE ETC. LESSEES RESPONSIBILITY. INSURANCE POLICY TO BE ENDORSED WITH HEWLETT- PACKARD INDIA LT., AS LESS PAYEE. 10. SALES TAX ON LEASE RENTALS TO BE PAID BY THE LESSEE AS APPLICABLE. 11 PAYMENT TERMS THE LESSEE SHALL PROVIDE POST DATED CHEQUES COVERING THE RENTALS ITA NO.683/BANG/2010 PAGE 21 OF 25 PAYABLE FOR FOUR QUARTERS ON AN ANNUAL BASIS COMMENCING FROM THE START OF THE LEASE. ADDITIONALLY THE LESSEE SHALL PROVIDE CORPORATE GUARANTEE FROM GRIBBLES PULHOLOGY VIE PTE LTD.FOR THE VALUE OF THE LEASE. 12. SERVICE CHARGES (FOR DELAYED PAYMENTS) @1.75% PER MONTH SHALL BE CHARGED FROM THE DUE DATE TO THE DATE OF RECEIPT OF RENTAL. 7. FROM THE ABOVE CLAUSES OF THE LEASE AGREEMENT, W E FIND THAT IT DEMONSTRATES THE BROADER UNDERSTANDING BETW EEN BOTH THE PARTIES I.E. LESSOR AND THE LESSEE WHILE THE SUPPLE MENTARY LEASE SCHEDULE 1 AND 2 SPECIFY THE EFFECTIVE DATE, LEASE PERIOD AND THE LEASE RENTALS OF THE SPECIFIC EQUIPMENT. AS PER TH E BROADER TERMS OF THE LEASE AGREEMENT, LESSOR ALONE SHALL REMAIN THE OWNER OF THE ASSET BUT AS SEEN FROM THE SUPPLEMENTARY LEASE SCHEDULE THE LEASE PERIOD IS FOR A PERIOD OF 36 MONTHS AND THE L EASE RENTAL IS DECIDED AT THE RATE OF PER MONTH PER THOUSAND FINAN CED. THE LESSEE IS RECEIVER OF THE EQUIPMENT AND IS ENTITLED TO PUT TO USE THE SAME. THE LESSEE ALSO HOLDS THE LESSOR HARMLES S AGAINST NON- PERFORMANCE OF THE EQUIPMENT, IF ANY, AND FURTHER A GREES TO LOOK SOLELY TO THE MANUFACTURER FOR THE PURPOSES OF GUAR ANTEE AND WARRANTIES WITH RESPECT TO THE SAID EQUIPMENT. IT WAS ALSO COVENANT THAT IRRESPECTIVE OF THE PERFORMANCE OF TH E SAID EQUIPMENT, THE LESSEE AGREES UNCONDITIONALLY TO HON OUR THE TERMS OF THE SUPPLEMENTARY LEASE SCHEDULE AND CONFIRMS TH AT IT WILL CONTINUE TO MAKE THE LEASE RENTAL PAYMENT IN THE NO RMAL COURSE OF ITS BUSINESS. IT ALSO SPECIFIED THAT THE LESSEE HAS MADE THE SELECTION OF THE EQUIPMENT AND ITS SUPPLIER IN ITS SOLE DISCRETION ITA NO.683/BANG/2010 PAGE 22 OF 25 AND THAT SCHEDULE 2 SPECIFIES THAT THE REPAIR AND M AINTENANCE, INSURANCE ETC., SHALL REMAIN THE RESPONSIBILITY OF THE LESSEE AND THE SALES TAX OR LEASE RENTALS IS ALSO TO BE PAID B Y THE LESSEE. FROM THE COPY OF THE SCHEDULE 1 TO THE SUPPLEMENTAR Y LEASE SCHEDULE, WE FIND THAT INVOICE VALUE OF THE EQUIPME NT IS RS.83,04,659/- AND THE AMOUNT FINANCED BY THE ASSES SEE IS ALSO RS.83,04,659/- WHEREAS THE LEASE RENTALS PAID BY TH E ASSESSEE OVER A PERIOD OF LEASE IS RS.96,83,568 (12 X 8,06,9 64) I.E. FAR ABOVE THE VALUE OF THE ASSET ITSELF. THUS IT CAN B E SEEN THAT THE ASSESSEE HAS, IN FACT, FINANCED THE PURCHASE OF THE EQUIPMENT AND IT IS NOT A MERE OPERATING LEASE AS CLAIMED BY THE ASSESSEE. IN THE CASE OF FINANCE LEASE, THOUGH THE ASSESSEE I.E. THE LESSOR IS THE OWNER OF THE EQUIPMENT DURING THE PERIOD OF LEA SE, THE LESSEE ALONE IS THE POSSESSOR AND ENJOYER OF THE EQUIPMENT WITH ALL THE REWARDS AND RISKS INVOLVED THEREIN. AS OBSERVED BY THE HONBLE SUPREME COURT IN THE CASE OF ASEA BROWN BOVERY LTD. (SUPRA), PERIOD OF LEASE MAY EXTEND OVER AND COVERS THE ENTI RE LIFE OF THE PROPERTY FOR WHICH IT REMAINS USEFUL DIVIDED EITHER INTO ONE TERM OR DIVIDED INTO TWO TERMS WITH A CLAUSE FOR RENEWAL . IN EITHER CASE, THE LEASE IS NON-CANCELLABLE. IN THE CASE BE FORE US ALSO, THE LEASE IS NOT CANCELLABLE AS IS FOUND FROM CLAUSE 15 .3 WHEREIN IT IS STIPULATED THAT THE LESSOR SHALL NOT BE RESPONSIBLE FOR ANY DIRECT, INDIRECT OR CONSEQUENTIAL LOSS TO THE LESSEE OR THI RD PARTY ARISING FROM ANY DELAY IN DELIVERY AND/OR INSTALLATION OF T HE EQUIPMENT EITHER BY THE ACTION OF THE MANUFACTURER OR OTHERWI SE HOWEVER OR BY REASON OF ANY DELAY IN THE COMMENCEMENT OF THE L EASE. IT IS ITA NO.683/BANG/2010 PAGE 23 OF 25 ALSO NOTICED THAT THE EQUIPMENT IS SELECTED BY THE LESSEE RELYING ENTIRELY ON ITS OWN JUDGMENT AND NOT ON THE STATEME NTS OR REPRESENTATIONS, IF ANY, MADE BY THE LESSOR OR ITS AGENT OR SERVANTS AND ALL THE LIABILITIES THAT THE LESSOR MI GHT OTHERWISE INCUR AND ANY RIGHT OR IMMUNITY, THE LESSOR MIGHT O THERWISE POSSESS OR CLAIM IN RESPECT OF ANY CONDITION, WARRA NTY OR REPRESENTATION RELATING TO THE EQUIPMENT OR TO ITS MERCHANTABILITY, QUALITY, CONDITION, DURABILITY, SUITABILITY OR FITN ESS FOR THE PURPOSE OF WHETHER SUCH CONDITION OR WARRANTY OR REPRESENTA TION IS EXPRESSED OR IMPLIED WHETHER ARISING UNDER A LEASE OR IN THE COURSE OF NEGOTIATION IN WHICH THE LESSEE OR ITS RE PRESENTATIVES MAY HAVE BEEN CONCERNED PRIOR TO THIS LEASE ARE EXP RESSLY EXCLUDED. THUS, IT IS CLEAR THAT RISK AND LOSS RE LATING TO THE EQUIPMENT LIE WITH THE LESSEE AND NOT WITH THE LESS OR. THUS, WE ARE OF THE OPINION THAT THOUGH THE LEASE AGREEMENT STATES THAT THE LESSOR IS THE OWNER AND INTEREST-HOLDER OF THE EQUIPMENT, IT IS, IN FACT, THE LESSEE WHO IS THE DE FACTO OWNER AND U SER OF THE PROPERTY AND WOULD ALSO BEAR ALL RISKS AND LOSS OF THE EQUIPMENT ALONG WITH REGULAR REPAIR AND MAINTENANCE AND ALSO BENEFIT FROM THE EXCLUSIVE RIGHT OF POSSESSION AND USE OF THE EQ UIPMENT. THEREFORE, THE TERMS OF THE CONTRACT BETWEEN THE LE SSOR AND LESSEE HAVE TO BE EXAMINED TO DETERMINE THE OWNER O F THE ASSET AND NOT LEGAL OWNERSHIP OVER THE ASSET FOR CLAIMING THE DEPRECIATION. IN VIEW OF THE SAME, WE HOLD THAT T HE AGREEMENT BETWEEN THE ASSESSEE AND THE LESSEE IS A FINANCE LE ASE AND AS HELD BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CA SE OF INDUS IND ITA NO.683/BANG/2010 PAGE 24 OF 25 BANK (SUPRA), DEPRECIATION ON LEASED ASSET IN THE CASE O F FINANCIAL LEASE IS ALLOWABLE TO THE LESSEE AND NOT TO THE LES SOR. THE LEARNED COUNSELS RELIANCE UPON THE CLAUSES OF THE DIRECT T AXES CODE (DTC) AND THE DEFINITION GIVEN THERE-UNDER ON FINA NCE LEASE IS NOT RELEVANT TO THE FACTS OF THE CASE AS OBSERVED B Y THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF INDUS IND BANK LTD. (SUPRA). INSOFAR AS THE ASSESSEES SUBMISSION THAT CIRCULAR NO.2 OF 2001 IS APPLICABLE TO THE FACTS OF THE CASE BEFORE US AND I S BINDING ON THE REVENUE, WE FIND THAT THE SAID CIRCULAR IS ISSUED I N RELATION TO THE EFFECT OF PUBLICATION OF ACCOUNTING STANDARDS ON AL LOWABILITY OF DEPRECIATION AND IT HAS BEEN OBSERVED BY THE CBDT T HAT UNDER THE IT ACT, IN ALL LEASING TRANSACTIONS, THE OWNER OF T HE ASSET IS ENTITLED TO THE DEPRECIATION IF THE SAME IS USED IN THE BUSINESS U/S 32 OF THE ACT AND THAT THE OWNERSHIP OF THE ASSET I S DETERMINED BY THE TERMS OF CONTRACT BETWEEN THE LESSOR AND LES SEE AND THAT BY ITSELF THE ACCOUNTING STANDARD WILL HAVE NO IMPL ICATION ON THE ALLOWANCE OF DEPRECIATION OF ASSET UNDER THE PROVIS IONS OF THE ACT. THEREFORE, IN OUR OPINION, THE REVENUE HAS NOT CONT RAVENED THE CIRCULAR AS IT HAS EXAMINED THE TERMS OF THE CONTRA CT TO DETERMINE THE OWNER. 8. IN THE RESULT, THE ASSESSEES APPEAL IS DISMISSE D. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH NOVEMBER, 2012 . SD/- SD/- (JASAN P. BOAZ ) ACCOUNTANT MEMBER (SMT.P.MADHAVI DEVI ) JUDICIAL MEMBER EKS ITA NO.683/BANG/2010 PAGE 25 OF 25 COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) CONCERNED 4. CIT 5. DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY INCOME-TAX APPELLATE TRIBU NAL, BANGALORE