2013 (11) TMI 299 - AT - Service Tax

Interest Charges - Banking and other financial services Hire purchase contract - Whether or not interest-charges on EMI collected as Documentation and Service Charges at the time of entering into hire purchase agreements, is chargeable under Banking and other financial services Held that - The provisions of Explanation 1 (viii) to Sec. 67 of the Finance Act 1944, read with CBEC Circular No. 80/10/2004-ST dt. 17/09/2004, interest on loans is not required to be included in the gross value of the services provided during the period thus demand of service tax with respect to interest on loans is not required to be included in the gross taxable value for calculating the service tax. Rate of service tax on EMI payment Held that - Following Art Leasing Ltd. Vs. Commissioner of C.EX., Cochin 2007 (6) TMI 217 - CESTAT, BANGALORE - The Banking and Financial Services came under the service tax net w.e.f. 16.07.2001 - at that time, CBEC issued clarification to the effect that in respect of Hire Purchase Contracts entered prior to 16.07.2001 and installments of which were received after 16.07.2001, there is no Service tax liability - When the Hire Purchase contract is entered, the taxable event occurs - the demand of differential amount applying the higher rate, which came into effect from 14.05.2003, will not be applicable in respect of the contracts entered prior to that date - The rate of service tax, prevailing on the date on which contract is entered into will be applicable and not the higher rates made effective the subsequent Finance Act periods during which EMIs are continued to be paid decided in favour of assessee.

Summary

Issues:
1. Whether interest charges on Equated Monthly Installments (EMI) collected as 'Documentation and Service Charges' are chargeable under Banking and other financial services.
2. What service tax rate is applicable when services are contracted in a period with a lower rate but enhance over the entire EMI period.

Analysis:
1. The appellant argued that they are not providing Banking and Financial Services exempted under Notification No. 25/2004(ST) and as per the Finance Act 1994, interest on loans is not included in the gross amount charged. They also cited CBEC Circular No. 80/10/2004-ST stating that interest on loans is not part of gross valuation under Sec. 67. The appellant stopped recovering documentation charges from a certain date. Case laws were cited to support their argument.

2. The issue of the applicable service tax rate was raised, contending that subsequent rate changes should not apply to contracts entered into at a lower rate. The appellant relied on a case where it was held that the rate of service tax at the time of contract entry should be applied, not higher rates introduced later. The judgment emphasized that the taxable event occurs when the contract is entered into, and installment payments are obligations of the hirer, not ongoing services provided by the appellant. Therefore, the rate prevailing at the contract date should apply.

3. The Revenue defended the original authority's decision. However, the Tribunal found that interest on loans should not be included in the taxable value for service tax calculation during the period in question. Additionally, the rate of service tax applicable to EMI payments should align with the rate in force at the time of contract initiation, not subsequent rate changes. The Tribunal allowed the appeal based on these findings, setting aside the previous order and providing consequential relief.

This judgment clarifies the treatment of interest charges on EMIs and the determination of the applicable service tax rate, ensuring that tax liabilities are correctly assessed based on the relevant provisions and contract dates.