2024 (2) TMI 618 - AT - Service Tax

Financing agreements where customers own assets from start are loan transactions, not taxable hire purchase services

M/s Poonawalla Fincorp Ltd. (Formerly, Magma ITL Finance Ltd.) Versus Commissioner of Service Tax, Kolkata-II

CESTAT Kolkata held that financing agreements where customers purchase assets in their name and seek financing from the appellant constitute hire purchase ... Levy of service tax - interest on hire purchase finance under “Banking and Other Financial Services” - interest on assignment of receivables under “Recovery Agent’s Service” - dealer discount under “Business Auxiliary Service” - scope of Hire Purchase Agreement and Hire Purchase Finance agreements - HELD THAT:- The Appellant enters into financing agreements with the customers wherein the customers purchase the assets in their name and approach the Appellant for the purpose of financing the same. the ownership of the goods vests with the customers and the Appellant merely finances the purchase of such products by the owner. The ownership solely vests with the customers and there is no clause in the agreement providing the customers an option to purchase the product at the end of payment of all instalments. When a customer who is the owner of the goods enters into an agreement for financing the purchase of such goods, it is in effect a loan transaction and the lender is just given a license to seize the goods in case of breach/ default. In the present case, the ownership of the goods vests with the customers and the Appellant merely finances the purchase of such products by the owner. The ownership solely vests with the customers and there is no clause in the agreement providing the customers an option to purchase the product at the end of payment of all installments. Therefore, by relying on the decision of the Hon’ble Supreme Court in SUNDARAM FINANCE LTD. VERSUS THE STATE OF KERALA AND ANOTHER [1965 (11) TMI 123 - SUPREME COURT] which has been relied upon in BAJAJ AUTO FINANCE LTD VERSUS COMMISSIONER OF C. EX., PUNE [2007 (5) TMI 28 - CESTAT,MUMBAI], it is held that the transaction between the Appellant and its customers is not hire purchase agreements and are merely hire purchase finance agreements which is not under the ambit of service tax as held in the case of Bajaj Finance. The demands of service tax along with interest and penalty confirmed in the impugned order is not sustainable - Appeal allowed. Issues:The issues involved in this case include the demand of service tax on interest for hire purchase finance, the interpretation of hire purchase agreements versus hire purchase finance agreements, and the applicability of service tax on the transactions between the Appellant and its customers.Demand of Service Tax on Interest for Hire Purchase Finance:The appeal was filed against an Order-in-Original confirming the demand of service tax on interest for hire purchase finance under 'Banking and Other Financial Services.' The Appellant argued that the adjudicating authority wrongly equated their service as 'Hire Purchase,' leading to the service tax demand. The Appellant contended that the ownership of goods remained with the customers, and the transactions were hire purchase finance agreements, not hire purchase agreements subject to service tax. The Appellant cited precedents such as the Bajaj Auto Limited case and the decision of the Hon'ble Supreme Court to support their argument.Interpretation of Hire Purchase Agreements vs. Hire Purchase Finance Agreements:The Tribunal differentiated between hire purchase agreements and hire purchase finance agreements based on ownership of goods and payment structures. It was emphasized that in hire purchase finance agreements, the ownership of the goods lies with the customers, and there is no obligation for them to purchase the goods at the end of the payment period. This distinction was supported by legal precedents, including the decision of the Hon'ble Supreme Court in the Sundaram Finance case. The Tribunal concluded that the transactions in this case were hire purchase finance agreements, not subject to service tax.Applicability of Service Tax on Transactions:The Tribunal, based on the legal principles established in previous cases, held that the demands of service tax, interest, and penalty confirmed in the impugned order were not sustainable. It was determined that the transactions between the Appellant and its customers did not fall under hire purchase agreements but were hire purchase finance agreements, exempt from service tax. Therefore, the impugned order was set aside, and the appeal filed by the Appellant was allowed.Separate Judgement:The judgment was pronounced by HON'BLE MR. K. ANPAZHAKAN MEMBER (TECHNICAL) on 08.02.2024.