TaxTMI 
TaxTMI 
2023 (3) TMI 1072
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....lients, some of which are titled as hire purchase agreement and lease & hypothecation and loan agreement. Therefore, it was alleged that the assesse is engaged in the business of lease and hire purchase of vehicles with their clients and at the time of agreement, the assesse collected a charge called as initial charges, processing fee or documentation charges, which are nothing for a transaction of the value. The higher purchase amount is recovered in equated monthly installment with interest portion shown as finance charges in their clients registered over a period of hire purchase as indicated in the register. It further appears that the agreements, registers and the clients' files, are maintained by the assessee in the course of business. That the activities undertaken by them fall under the category of lease and higher purchase classifiable under "Banking and Other Financial Service". 2.3 Further, it was alleged that during the period from 2002-03 to 2006-07, the assesse neither discharged the service tax liability nor they disclosed to the Department regarding their activities for providing taxable services under the category of "Banking & Other Financial Services" and will....
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....ease. Contract can be cancelled by lessor by giving notice. The option to purchase the asset at the end of the term in case of operating lease is not there. 3.3 He further submits that the loan against hypothecation of asset, it is purely and simply a case of certain amount of money to the borrower on loan. The loan may be given for a short term or long term. During the period of enjoying the loan amount, the borrower is supposed to pay some amount as interest to the lender. Ownership of the asset is always with the borrower., for which, the loan may be taken by him. However, to protect the risk of non-payment of the loan amount, the asset is hypothecated to the lender, who can sale off the asset in case of failure to pay the loan amount by the borrower. On repayment of full amount along with interest as per the terms of the contract, the lien over the asset is released by the lender by deleting the endorsement. 3.4 It is his further contention that initially, the assesse was doing the financing business in the form of financial leasing and hire purchase. However, in the year, 2001, when service tax was imposed on financial lease and hire purchase business, they found that su....
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....cally allowing exemption on 90% of such income w.e.f. 01.03.2006/15.07.2006. 3.9 He also relied upon the decision of the Hon'ble Bombay High Court in the case of Sriram Transport Finance Company Limited reported in 2021 (2) TMI 836-Bombay High Court, wherein it was held by the Hon'ble High Court that no service tax can be levied on such financing activities before 01.03.2006. He also relied on the CBEC Instruction F.No.11/1/2001-TRU dated 9th July, 2001, which clarified that as per Hire Purchase Agreement entered prior to 16.07.2001, the imposition of levy were not liable to service tax provided the property/goods has also been received by the lease prior to 16.07.2001. 4. On the other hand, the ld.A.R. for the Revenue opposes the contentions of the ld.Consultant for the assesse and submitted that the claim of the assesse is wrong that after 16.07.2001, they have entered into hire purchase and financial leasing transactions, which are liable to service tax under Banking and other Financial Services. The assesse has used the terms hire-purchase, financial leasing and loan cum hypothecation interchangeably only to conceal the nature of the business. It is evident from the recor....
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....one 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 the loan advanced to its customer the transaction would be merely a financing transaction. [See page 75]. The point which needs to be restated is that the funding activity undertaken by the financing party which could be in the form of loan or equipment leasing or hire- purchase financing, would be exigible to service tax if such activity falls in the category of "banking and other financial services" under Section 65(12) of the Finance Act, 1994. The financial transaction was earlier out of the tax net. In the process there are two different and distinct tr....
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.... 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 investment [less the realizable value of the equipment at the time] and its expected finance charges [less an allowance to reflect the return of the capital] [para 32.057]. In the case of hire-purchase agreement the periodical payments made by the hirer is made up of : (a) consideration for hire (b) payment on account of purchase 21. To sum up, NBFCs essentially are loan companies. They basically conduct their business as loan companies. They could be in addition thereto in the business of equipment leasing, hire purchase finance and ....
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.... 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/ finance charge which is treated as income or revenue and which is credited to the revenue account. Such interest or finance charges together with the lease management fee/ processing fee/ documentation charges are treated as considerations for the services rendered and accordingly they constitute the value of taxable services on which service tax is made payable. In fact, the Government has given exemption from payment of service tax to financial leasing services including equipment leasing and hire-purchase on that portion of taxable value comprisi....
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....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 taxes together or only one of them. It was held that the subject transaction was a service and, thus, the Parliament had legislative competence to levy service tax under Entry 97, List I. In para 88 of the said judgment, this Court observed that "No one denies the legislative competence of the States to levy sales tax on sales provided that the necessary concomitants of a sale are present in the transaction and the sale is distinctly discernible in the transaction. This does not however allow the State to entrench upon the Union List and tax services....
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....as 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 held otherwise did not have the benefit of wisdom of the judgment of the Hon'ble Supreme Court in re Association of Leasing and Financial Service Company and are, therefore, per incuriam. 15. The issue is whether that statutory exclusion can be denied. We hold that no statutory exclusion can be denied. However, we take note that with the inclusion of financial and equipment leasing in the definition of the activity in relation to which taxability arises, it was the decision of the Hon'ble Supreme Court in re Association of Leasing an....
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.... 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 agreement for purchasing the vehicles and this lending is in the nature of a loan. Since it is in the nature of loan consequently interest on loans stands excluded from the value of taxable services. Board circular dated 09.07.2001 referred to by the appellant in fact supports the case of the respondent. In view of the settled law and in exercise of the legislative and rule making power once parliament has excluded interest on loans from the purview of taxable service, it is not open to the authority to hold that the exemption notifica....