Service tax valuation in financial leasing excludes principal equipment cost and applies only to service-related charges

In financial leasing and hire-purchase transactions, the principal amount recovered toward the original cost of equipment is not consideration for taxable service and is excluded from service tax valuation. Only lease management fee, processing fee, documentation charges, and the finance or interest component form the taxable consideration. A demand raised on the entire principal amount was contrary to the Board circular, so service tax could not be sustained on that basis and the matter required re-quantification in line with the circular.

---

---

Issues: Whether, in the case of financial leasing services, service tax was leviable on the entire principal amount recovered from clients or only on the lease management fee, processing fee, documentation charges, and finance or interest charges.

Analysis: The circular issued by the Board clarified that in leasing and hire-purchase transactions, the principal amount recovered towards the original cost of equipment is not consideration for the service and is not part of the taxable value. Only the lease management fee, processing fee, documentation charges, and the finance or interest component constitute the consideration for taxable service. The demand in the present case had been confirmed on the entire principal amount, which was contrary to the circular.

Conclusion: The service tax could not be sustained on the principal amount, and the matter was required to be re-quantified in accordance with the Board circular.

---