2007 (9) TMI 33 - AT - Service Tax

Banking and Other financial service - Appellant contended that they not liable to pay service tax under said service on the ground that their prime business of manufacturing not of leasing and leasing only their own product - Held that appellant not liable for service tax

Summary

Issues:
1. Whether the appellants' leasing and hire purchase activities are subject to service tax under the category of "Banking and other Financial Services."
2. Whether the interest charged by the appellants on the leased equipment is liable for service tax.
3. Whether the payment of sales tax on the leased equipment exempts the appellants from service tax liability.

Analysis:

Issue 1:
The case involved the question of whether the appellants' leasing and hire purchase activities fell under the taxable service category of "Banking and other Financial Services." The lower authorities had confirmed a service tax demand based on this classification. The appellants argued that their main business was manufacturing industrial equipment, and the occasional leasing of their own products did not align with professional financial institutes' practices. The Tribunal noted that the appellants primarily dealt with their own manufactured goods and were not professional lessors for other products. The Ministry of Finance Circular was relied upon to support the service tax demand. However, the Tribunal found that the inclusion of interest in the taxable service value was questionable as interest did not constitute consideration for a service. The insertion of an explanation in the Finance Act clarified that interest on loans would not form part of taxable service value, rendering the service tax demand unsustainable.

Issue 2:
The dispute also centered around whether the interest charged by the appellants on the leased equipment was subject to service tax. The Tribunal analyzed the nature of interest and its treatment under the Finance Act. It was highlighted that interest on loans was specifically excluded from taxable service value by the Finance Act's explanation. The Tribunal concluded that interest, in this case, did not qualify as consideration for a service and, therefore, the service tax demand based on interest charges was not sustainable.

Issue 3:
Additionally, the appellants argued that since they had paid sales tax on the leased equipment, service tax should not be levied. They cited a Supreme Court ruling and a Tribunal case to support their position. The Tribunal agreed that if sales tax had been paid on goods, service tax could not be levied on the same transaction. Relying on the legal precedents, the Tribunal held that the payment of sales tax on the leased equipment exempted the appellants from service tax liability in this case.

In conclusion, the Tribunal set aside the service tax demand, interest, and penalties imposed by the lower authorities, allowing the appeal with consequential relief. The judgment clarified the treatment of interest in taxable services and affirmed that sales tax payment on goods could exempt transactions from service tax liability.