2011 (2) TMI 305 - AT - Service Tax

Demand - financial leasing services - Board circular being F. No. B.11/1/2001-TRU dated 09.7.2001 - service tax in case of Financial Leasing Services is leviable only on Lease Management fee/ Processing Fee and documentation charges and on the finance/ interest charges and not on the principal amount. Inasmuch as admittedly the service tax stands confirmed on the entire principle amount we set aside the impugned order and remand the matter to original adjudicating authority for quantifying the service tax in terms of the above circular of the Board - Petition is disposed of

Summary

Issues:
1. Applicability of service tax on financial leasing services.
2. Interpretation of circular regarding service tax calculation.
3. Quantum of penalty.

Analysis:

Issue 1: Applicability of service tax on financial leasing services
The appellants had already paid the entire amount of service tax and penalty. The condition of pre-deposit of interest was dispensed with, and both sides consented to proceed with the appeal. The service tax was confirmed against the appellants concerning financial leasing services. The advocate acknowledged the service tax liability but argued that the tax amount was calculated incorrectly. The advocate cited a Board circular stating that service tax should be levied only on specific charges related to services, not on the entire principal amount. The Tribunal noted the circular's provisions and directed the original adjudicating authority to quantify the service tax based on the circular, remanding the matter for reevaluation.

Issue 2: Interpretation of circular regarding service tax calculation
The Board circular clarified that service tax on financial leasing services should be imposed on lease management fees, processing fees, documentation charges, and finance/interest charges, excluding the principal amount. The circular emphasized that the principal amount is not payment for services rendered but is credited to the lessor's capital account. In contrast, finance/interest charges, along with other specified fees, constitute the taxable service value. The Tribunal upheld the circular's interpretation, highlighting that service tax should not be levied on the principal amount but only on the designated charges related to services provided in financial leasing agreements.

Issue 3: Quantum of penalty
Given the incorrect calculation of service tax on the entire principal amount, the impugned order was set aside, and the matter was remanded for the reevaluation of the service tax and penalty. The Tribunal decided to dispose of the stay petition and appeal in the mentioned manner, ensuring that the correct application of service tax on financial leasing services in accordance with the Board circular is upheld.

In conclusion, the judgment clarified the correct methodology for calculating service tax on financial leasing services, emphasizing the exclusion of the principal amount from the taxable value. The Tribunal's decision to remand the matter for reevaluation based on the Board circular's provisions ensures the accurate determination of service tax and penalty in this case.