2013 (8) TMI 527 - AT - Service Tax

CENVAT credit - Rule 6(3) - trading activity - leasing services - assesse took credit of service tax paid on input services which were common to both taxable services and non-taxable activities - whether the non-taxable part of the interest on loans received by the applicant will get added in either or both of the factors, namely, E & F as described in Rule 6 3 (b) (iii) - Held that - Our prima facie interpretation is that hire purchase, loan against leasing and hypothecation are taxable services and the value of these taxable services is only to the extent of amount charged over and above the principal and interest. Of course determining such value can be difficult because there can be a dispute as to what is the interest amount. Calling an amount as interest may not by itself be sufficient to legally recognize the amount as interest. The exemption prima facie only says that the service tax calculated on ninety per cent of an amount, forming or representing as interest is exempt. This implies that the value of the service is calculated as 10% of interest charged for levying tax. But the notification does not imply that rest of the interest is value of service. If the value of the service is more than 10% of the interest that amount can be quantified and such factor will enter F as part of taxable service. Only such an approach can be consistent with provision in Rule 6 (2) (iv) of Service Tax (Determination of Value) Rules, 2006 and the notification. The activity was the trading activity and Cenvat credit cannot be taken on input services used for such activity relying upon Association of Leasing & Financial Service Companies Vs. UOI 2010 (10) TMI 4 - SUPREME COURT OF INDIA - Parliament is competent to charge service tax on leasing services and interest received can be a good measure of the value of service the order had taken note of the fact that the Union of India was trying to charge tax only on 10% of the interest which was found to be quite a reasonable measure for charging tax. We propose to arrive at the ratio E/F by including 10% of the interest on services like Hire purchase, Leasing and loan in both the factors E and F and excluding the balance from both the factors. Waiver of pre- deposit - whether the items of income was to be excluded from both the factors E and F as argued by assessed at this stage or was to be included in both the factors as argued by Revenue Held that - Credit can be taking only if it is either a taxable service or an exempted service - trading was not either the most reasonable conclusion was that credit could not have been taken at all the issue as to whether any credit has been taken on any of the input service attributable to the impugned incomes needs to be examined pre-deposit ordered partly.

Summary

Issues Involved:
1. Amount of CENVAT credit to be reversed under Rule 6 (3A) (b) (iii) of Cenvat Credit Rules, 2004.
2. Inclusion of non-taxable interest on loans in the formula for calculating CENVAT credit reversal.
3. Classification of certain incomes as either taxable or non-taxable for the purpose of CENVAT credit reversal.

Detailed Analysis:

1. Amount of CENVAT Credit to be Reversed:
The primary issue in the appeal is the determination of the amount of CENVAT credit to be reversed as per Rule 6 (3A) (b) (iii) of Cenvat Credit Rules, 2004. The applicant, a Non-Banking Financial Company, did not maintain separate accounts for input services used for both taxable and exempted services. The rule prescribes a formula for provisional reversal of credit every month and final determination at the end of the financial year. The appeal focuses on the provisional reversal for each month.

2. Inclusion of Non-Taxable Interest on Loans:
The core dispute is whether the non-taxable portion of interest on loans should be included in the factors "E" and "F" of the formula in Rule 6 (3A) (b) (iii). The Revenue argued that the full amount of interest, including the non-taxable portion, should be included, resulting in a high percentage of exempted services. The applicant contended that only fully exempted services should be considered as exempted services, and since they pay tax on 10% of the interest income, the service should be considered taxable. Therefore, no part of the interest on loans should enter factor "E," but the full value should enter factor "F."

3. Classification of Certain Incomes:
The applicant provided a detailed breakdown of various incomes and argued that certain incomes, such as bill discounting, sale of assets, dividend income, income on investments, miscellaneous income, and secretarial income, should not be considered as receipt of either taxable or non-taxable income. They claimed that excluding these figures from factor "E" would significantly reduce the ratio of credit to be reversed.

Judgment Analysis:

Provisional Reversal Calculation:
The Tribunal examined the arguments and noted that Rule 6 (2) (iv) of Service Tax (Determination of Value) Rules, 2006, states that interest on loans shall not form part of the value of any taxable service. Thus, interest cannot enter into factor "F" as the value of taxable service. The Tribunal disagreed with both the Revenue's and the applicant's arguments and concluded that 90% of the interest should be excluded from both "E" and "F."

Exemption Notification Interpretation:
The Tribunal referred to Notification No. 04/2006-ST, which exempts 90% of the interest from service tax. They interpreted that the value of the taxable service is only the amount charged over and above the principal and interest. This interpretation aligns with Rule 6 (2) (iv) and the notification. Thus, 10% of the interest amount is considered taxable and added to factor "F," while the remaining 90% is excluded from both "E" and "F."

Inclusion of Other Incomes:
The Tribunal considered the inclusion of other incomes and concluded that credit could only be taken if it relates to either taxable or exempted services. The Tribunal proposed a provisional ratio of 26.40% for the reversal of credit, considering 10% of the interest on services like hire purchase, leasing, and loan in both factors "E" and "F." The applicant had already reversed credit adopting a factor of 18.74%, so the balance to be reversed was 7.66%, amounting to approximately Rs. 28 lakhs.

Conclusion:
The Tribunal directed the applicant to deposit Rs. 28 lakhs within six weeks and report compliance. Subject to this pre-deposit, there would be a waiver of pre-deposit of the balance dues and a stay on the collection of such dues during the pendency of the appeal. The final determination of the issues would be adjudicated during the final hearing.