2014 (7) TMI 155 - AT - Service Tax

Rate of service tax - Hire purchase - Demand on lease agreement entered into before the levy of service tax - Held that - 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. In our view, the same logic is applicable to the present case also. When the Hire purchase contract is entered, the taxable event occurs. We agree with the appellants that the installment payments are only obligations of the hirer. The finding of the Commissioner(Appeals) that the appellant continues to provide service during the payment of installments is not correct. Therefore, the rate of Service Tax will be the rate prevailing on the date on which the contract is entered into. Consequently, 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 contacts entered prior to that date - Following decision of Art Leasing Ltd. vs. CCE 2007 (6) TMI 217 - CESTAT, BANGALORE - Decided in favour of assessee.

Summary

Issues:
Interpretation of service tax liability for lease finance company pre-2004.
Applicability of service tax rates on lease agreements entered into before specific dates.

Issue 1: Interpretation of service tax liability for lease finance company pre-2004

The appellant, a lease finance company providing finance lease under Banking and Finance Service, appealed against a demand for unpaid service tax. The contention was that the appellant had paid service tax at rates of 5% and 8%, while the revenue claimed it should have been paid at 8% and 10.2% as per prevailing rates. The appellant cited a Tribunal decision in Art Leasing Ltd. vs. CCE 2007 (8) STR 162, which held that for hire purchase contracts, the service tax rate is based on the rate prevailing at the time of contract entry. The revenue argued that the service tax rate is based on the rate at which lease rentals are paid. However, the Tribunal, in the case of Art Leasing Ltd., held that the taxable event occurs at the time of contract entry, and the rate of service tax should be based on that date. Consequently, the demand for the differential amount applying a higher rate was deemed inapplicable for contracts entered into before the specific date. The Tribunal allowed the appeal and set aside the impugned order based on the precedent set by the Art Leasing Ltd. case.

Issue 2: Applicability of service tax rates on lease agreements entered into before specific dates

The Tribunal referred to the CBEC clarification that for hire purchase contracts entered before a certain date, with installments received after a specific date, there is no service tax liability. The Tribunal extended this logic to the present case, emphasizing that the taxable event occurs at the time of entering into the contract. It was noted that installment payments are obligations of the hirer, and the service provider does not continue to provide services during these payments. Therefore, the rate of service tax should be based on the date of contract entry. The Tribunal concluded that the demand for the differential amount based on a higher rate was not applicable for contracts entered into before the specified date. As a result, the impugned order was set aside, and the appeal was allowed based on the principles established in the Art Leasing Ltd. case.

This detailed summary provides a comprehensive analysis of the legal judgment regarding the interpretation of service tax liability for a lease finance company and the applicability of service tax rates on lease agreements entered into before specific dates, as addressed by the Appellate Tribunal CESTAT MUMBAI.