TaxTMI 
TaxTMI 
2021 (2) TMI 836
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....21/STC-1/SKS/13-14 dated 24.12.2013 passed by the Commissioner of Service Tax, Mumbai - I. 3. The appellant has preferred the appeal on the following substantial questions of law: "a. Whether the Hon'ble Tribunal was correct in holding that the activity is not taxable prior to 01.03.2006 as there was no mechanism provided for bifurcation of value of service from the interest amount ? b. Whether the Hon'ble Tribunal was correct in holding that the period prior to 01.03.2006 is not taxable in the absence of mechanism for bifurcation of Service Income as provided in Notification No.4/2006 - ST ? c. Whether the Hon'ble CESTAT was correct in holding that the period from 01.03.2006 to 31.03.2008 as regular period and imposed penalty u/s 76 when the period from 01.03.2006 to 31.03.2008 is part period of first demand notice ?" 3.1. Today, learned counsel for the appellant has restricted the challenge and modified the substantial question of law as under:- "Whether for the period prior to 01.03.2006, service tax is recoverable on entire interest component collected as equated monthly installments on transactions relating to "Financial Leasing....
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....ent was treated as defacto owner of the vehicle and the customer was merely treated as nominal owner of vehicle and accordingly confirmed the demand partially, amounting to Rs. 62,81,48,000.00, Rs. 5,38,000.00 and Rs. 4,33,000.00 respectively for the periods under consideration in the three show cause notices. 4.4. Respondent assessee filed statutory appeal No.ST/86027 of 2014 before the CESTAT, Mumbai. CESTAT, Mumbai by order dated 29.05.2018 partially allowed the appeal and set aside the entire demand for the period prior to 01.03.2006 and confirmed the demand for the subsequent periods along with penalty under Section 76 of the Finance Act. By the impugned order, CESTAT directed recovery of service tax on one tenth interest component of the equated monthly installments (briefly referred to as "EMI") received by the respondent assessee as tax liability with consequential penalty under Section 76 of the Finance Act, while setting aside the recovery of tax on interest for the period prior to 01.03.2006. 4.5. Civil Appeal No. 12206 of 2018 has been filed by respondent assessee in the Supreme Court under the provisions of Section 35L of the said Act to challenge the judgment an....
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....ple component and interest component. 5.2. Attention of the Court was invited to amendment in section 67 w.e.f. 10.09.2004 whereby "interest on loan" is excluded from value for payment of service tax and notification No.29 of 2004 as amended, which provided exemption to interest on overdraft or cash credit facility and emphasis was placed on notification No.4 of 2006 which exempted 90% amount representing interest; this notification gives the methodology of calculating the interest amount, which is the difference between the installments paid towards repayment of the loan amount and the principal amount contained in such installments; this notification pre-supposes that an EMI comprises of the principal amount and the interest amount and government's intention is to give exemption up to 90% of the interest amount only; respondent, in view of the hire purchase agreement received EMI and since part of the EMI comprises of finance charges which is interest amount received, service tax is due and payable on the same. 6. PER-CONTRA, Ms. Padmavati Patil, learned counsel appearing on behalf of respondent at the outset has opposed the appeal on the ground of maintainability and state....
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....f any collected in respect of lease finance may attract levy of service tax; however this is a one time fee only; (iii) tax liability has been worked out without taking into account the effect of notification No.4/2006-ST dated 01.03.2006 issued under F.No.334/3/2006-TRU which stated that even if service tax is leviable, it has to be recalculated on 10% value (interest) and that too prospectively. 6.2. Respondent assessee has further submitted that :- (i) service tax has already been paid by the assessee on the management fee / processing and documentation charges collected by the respondent; respondent is registered with Reserve Bank of India (RBI) as a Non Banking Finance Company and its main activities are lending/financing against commercial vehicles; respondent regularly pays service tax on the processing/ document charges collected from its customers; service tax on business auxiliary income which forms minor part of its total income is also paid regularly; (ii) being a NBFC company registered with RBI, its major source of income is in the form of interest; its main business is to mobilize / accept deposit / debentures / funds from public / banks....
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....n" means any non-banking institution which carries on as its business an activity inter alia of financing, whether by way of making loans or advances or otherwise. Thus, Section 45-I(c) treats financing as an activity. Under Section 45-I(f), an NBFC is defined to mean a financial institution which is a company; a non-banking institution which is a company and which as a matter of business receives deposits or which lends in any manner. These activities are regulated by RBI under the 1934 Act. Thus, all NBFCs which carry on these activities as part of their business come within the purview of being financial institutions. Under Section 45-IA, no NBFC shall carry on the business of a non-banking financial institution without obtaining a certificate of registration from RBI. Under Section 45-JA the RBI is authorized in public interest to issue directions to NBFCs relating to income recognition, accounting standards, deployment of funds etc. and the NBFCs shall be bound to follow the policy so determined or directions so issued. 8.3. Accordingly, under notification dated 02.01.1998 bearing No. 114, the deposit taking activities of NBFCs was sought to be regulated. Under the said not....
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....t depositors but also the customers [See Section 45-I(c) (iii) (i)]. The above activities are financing activities encompassed under Section 45- I(c)(i) which in turn constitutes "rendition of services to its customer(s)" which is the taxable event under Section 65 (105) (zm) of the Finance Act, 1994 (as amended). Apart from NBFCs, even banks through their subsidiaries with the approval of RBI can undertake equipment leasing, hire-purchase business and financial services. These are not direct lending activities. However, RBI treats them as services or facilities. The financial facilities are extended by way of equipment leasing or hire-purchase finance subject to approval of RBI [See Taxmann's RBI Instructions for Banking Operations 7th Edition; page 224]. 8.6. The significance of the above circulars and guidelines is to show that the activities undertaken by NBFCs of equipment leasing and hire-purchase finance are facilities extended by NBFCs to their customers; that, they are financial services rendered by NBFCs to their customers and that they fall within the meaning of the words "banking and other financial services" which is sought to be brought within the service tax n....
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....r financial services;" 8.10. Section 66 of the Finance Act, 2001 deals with charge of service tax, the relevant portion whereof reads as under : "66. Charge of service tax- (1) On and from the date of commencement of this Chapter, there shall be levied a tax (hereinafter referred to as the service tax), at the rate of five per cent of the value of the taxable services referred to in sub-clauses (a), (b) and (d) of clause (72) of Section 65 and collected in such manner as may be prescribed." 8.11. Section 67 of the Finance Act, 2001 deals with valuation of taxable services for charging service tax. The relevant portion of Section 67 is quoted herebelow: "67. Valuation of taxable services for charging service tax- For the purposes of this Chapter, the value of any taxable service shall be the gross amount charged by the service provider for such service rendered by him." 9. In the backdrop of the above statutory provisions, we find that respondent is engaged in the business of lease and equipment finalizing which is squarely covered by the definition of 'banking and other financial service' in Section 65(12) of the Finance Act. It is well settled position t....
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....harging the liabilities, obligations and duties imposed under the Motor Vehicles Act and the Rules framed thereunder and for no other purpose. 12. However the decision of the Apex Court in the case of Association of Leasing and Financial Service Companies Vs. Union of India 2001 (20) STR 417 (SC) is relevant. In this case the Apex Court has ousted the challenge to the vires of the levy of service tax on financial lease and hire purchase activity such as the respondent engages in. The decision in the above case makes it unambiguously clear that barring operating lease alone which is considered to be entirely a sale, consideration for all other lease and hire purchase transactions are squarely liable to tax except on principal amount recovered. 12.1. The relevant findings in paragraph Nos.20 and 21 in the judgment in Association of Leasing and Financial Service Companies (supra) are extracted as under :- "20. ................. A hire-purchase agreement partakes of the nature of a contract of bailment with an element of sale added to it. However, if the intention of the financing party in obtaining the hire-purchase and the allied agreements is to secure the return of t....
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....the agreement or upon payment of a stated sum. The essence of the transaction is bailment of goods by the owner to the hirer and the agreement by which the hirer has the option to return the goods at some time or the other [See para 36.242, 36.243]. Further, in the bailment termed "hire" the bailee receives both possession of the chattel and the right to use it in return for remuneration to be paid to the bailor [See para 32.045]. Further, under the head "equipment leasing", it is explained that it is a form of long-term financing. In a finance lease, it is the lessee who selects the equipment to be supplied by the dealer or the manufacturer, but the lessor [finance company] provides the funds, acquires the title to the equipment and allows the lessee to use it for its expected life. During the period of the lease the risk and rewards of ownership are transferred to the lessee who bears the risks of loss, destruction and depreciation or malfunctioning. The bailment which underlies finance leasing is only a device to provide the finance company with a security interest [its reversionary right]. If the lease is terminated prematurely, the lessor is entitled to recoup its capital inve....
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....he above decisions to the present case, on examination of the impugned legislation in its entirety, we are of the view that the impugned levy relates to or is with respect to the particular topic of "banking and other financial services" which includes within it one of the several enumerated services, viz., financial leasing services. These include long time financing by banks and other financial institutions (including NBFCs). These are services rendered to their customers which comes within the meaning of the expression "taxable services" as defined in Section 65(105) (zm). The taxable event under the impugned law is the rendition of service. The impugned tax is not on material or sale. It is on activity/ service rendered by the service provider to its customer. Equipment Leasing/ Hire-Purchase finance are long term financing activities undertaken as their business by NBFCs. As far as the taxable value in case of financial leasing including equipment leasing and hire-purchase is concerned, the amount received as principal is not the consideration for services rendered. Such amount is credited to the capital account of the lessor/ hire-purchase service provider. It is the interest....
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....inancial leasing services including equipment leasing and hire-purchase as beyond the legislative competence of Parliament by virtue of Article 366(29A) of the Constitution. In short, legislative competence of the Parliament to impose service tax on financial leasing services including equipment leasing and hire-purchase is the subject matter of challenge. Legislative competence was not the issue before this Court in the Bharat Sanchar Nigam Limited's case. In that case, the principal question which arose for determination was in respect of the nature of the transaction by which mobile phone connections are enjoyed. The question was whether such connections constituted a sale or a service or both. If it was a sale then the States were legislatively competent to levy sales tax on the transaction under Entry 54, List II of the Seventh Schedule to the Constitution. If it was service then the Central Government alone had the legislative competence to levy service tax under Entry 97, List I and if the nature of the transaction partook of the character of both sale and service, then the moot question would be whether both the legislative authorities could levy their separate....
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....tivity of financing/funding of equipment/ asset within the meaning of the words "financial leasing services" in Section 65(12)(a)(i)." 12.3. While relying on the above decision and the decisions of the Apex Court in the case of Commissioner of Central Excise & Service Tax, New Delhi Vs. M/s. Lease Plan India Ltd. (final order No.50113-20116/2018 dated 10th January 2018 in Appeal No. ST/51947-51950/2014) and Commissioner of Income Tax Vs. Sirpur Paper Mills (1999) 237 ITR 4, and applying the ratio to the facts of the present case CESTAT has correctly concluded in paragraph Nos.13 and 15 to 18 of the impugned order which is extracted as under :- "13. It is now well settled in law that hire purchase is but a loan: that the hirer obtains goods from a seller and the banking and financial institution finances the purchase of goods with the title firmly resting with the hirer and the institution vested with right to acquire possession of the goods, through judicial intervention, in the event of nonpayment of contracted amount. This differs substantially from operating lease. Therefore, the taxability of the service is not in question. The decisions of the Tribunal that have he....
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....nking companies undertaking such leases or hire-purchase through subsidiaries and by the categorization of non-banking financial companies, in accordance with instructions of Reserve Bank of India, as leasing or hire-purchase entities on the basis of prescribed parameters. There is, therefore, a distinction between the interest earned by a bank and the disaggregation of equated monthly installments earned by a financial institution engaged in financial leasing and hire-purchase." 12.4. Explanation 1 to section 67 of the Finance Act prior to 18.04.2006 contained a specific exclusion vide sub clause (viii) excluding interest on loans. Though section 67 was substituted by Finance Act 2006 w.e.f. 18.04.2006, the corresponding Service Tax Determination of Value Rules 2006 vide rule 6(2)(iv) again excluded interest on loan from the purview of valuation of taxable services. However, the Board vide circular No.80/10/2004-ST dated 17.09.2004 clarified that interest on loan would stand excluded. Respondent has been discharging service tax regularly on processing charges and also filing returns regularly. Respondent gives loan to its customers / borrowers for the purpose of hire purchase a....