2007 (6) TMI 217 - AT - Service Tax

Service Tax Rate for Hire Purchase Contracts Determined at Contract Entry, Not Subsequent Changes

ART LEASING LTD. Versus COMMISSIONER OF C. EX., COCHIN

The Tribunal held that for Hire Purchase Contracts, the Service tax rate is determined by the rate at the contract's entry, not by subsequent rate ... Increase in rate of Service Tax from 5% to 8% - held that - Therefore, the rate of Service tax will be the rate prevailing on the date on which the contract is entered into. Consequently, the demand of differential amount applying the higher rate, which came into effect from 14-5-2003, will not be applicable in respect of the contracts entered prior to that date Issues involved: Interpretation of Service tax rate for Hire Purchase Contracts entered before and after a specific date.Analysis:The appellant provided services under a Hire Purchase Scheme and was registered under Section 69 of the Finance Act 1994 for Banking and Other Financial Services. Initially, the Service tax rate was 5%, which was later increased to 8% from 14-5-2003. The Revenue claimed that the appellant should remit tax at the higher rate for contracts entered before the rate change. The original authority and the Commissioner (Appeals) upheld this demand, leading to the appeal. The issue was whether the higher rate applied to contracts entered before the rate change.The Tribunal noted that Banking and Financial Services were brought under the Service tax net from 16-7-2001. A clarification was issued that for Hire Purchase Contracts entered before this date with instalments received after, no Service tax was applicable. The Tribunal applied this logic to the current case, emphasizing that the taxable event occurs when the contract is entered. The Tribunal agreed with the appellant that installment payments were obligations of the hirer, not ongoing services by the appellant. Therefore, the Service tax rate applicable is the one in force at the contract's entry, not the payment dates. Consequently, the demand for the differential amount at the higher rate post-14-5-2003 was deemed inapplicable for contracts entered before that date. The impugned order was set aside, and the appeal was allowed with any necessary consequential relief.In conclusion, the Tribunal's decision clarified that for Hire Purchase Contracts, the Service tax rate is determined by the rate in effect at the contract's entry, not by subsequent rate changes. The judgment provided relief to the appellant by overturning the demand based on the incorrect application of the higher rate to contracts entered before the rate increase date.