2015 (2) TMI 525 - AT - Service Tax

Levy of tax on interest income - Hypothecation - banking and financial services - No provision under Finance Act, 1994 to tax interest income - Held that - The financial leasing services and hire purchase of vehicles/machineries squarely falls under the explanation of financial leasing services as defined under Section 65(12) of the Finance Act, 1994. But from the reading of the aforesaid provisions of law and judgment of the Apex Court, it can held that the service tax is the tax on an activity carried out and consideration received for carrying out such activity is only taxable by the Act. Interest being a consideration for the liquidity forgone by the Bank due to lending of the fund, that is not brought within the purview of the Finance Act, 1994 for taxation in absence of any consolidated service charges included in such interest receipt and discernable. No evidence in this regard came to record. - Decided in favour of assessee.

Summary

Issues:
Whether interest income of a bank can be taxed under the Finance Act, 1994 without provision in that regard.
Whether hypothecation amounts received by a bank are liable to service tax under specific provisions of the Act.

Analysis:
The judgment by the Appellate Tribunal CESTAT Chennai involved a dispute regarding the taxation of interest income of a bank and the amounts received through hypothecation transactions. The appellant argued that interest income should not be taxed as there were no service charges received, which are the only amounts exigible to service tax under the Finance Act, 1994. On the other hand, the revenue contended that hypothecation amounts are part of banking services and should be subject to service tax under relevant provisions of the Act.

The Adjudicating Authority framed the issue of whether the bank is liable to pay service tax on interest received from hypothecation loans. The Authority differentiated between term loans and financial leases, stating that interest on loans for the purchase of vehicles and machinery should be treated as finance charges from hire purchase or financial leasing services. The Authority imposed service tax on interest received during a specific period from hypothecation transactions of vehicles and machinery.

The Tribunal analyzed the provisions of the Finance Act, 1994, emphasizing that only consideration related to services provided is subject to taxation under the Act. It highlighted that interest on loans was specifically excluded before a certain date and that Service Tax Rules mandate the exclusion of interest on loans while determining taxable service value. The Tribunal referred to a Supreme Court judgment explaining the nature of service tax as a value-added tax based on the activity rendered by service providers to consumers.

The Supreme Court judgment further clarified the taxability of financial leasing services, stating that service tax is levied on activities and services rendered, not on material or sale. It explained that interest or finance charges, along with other fees, constitute the value of taxable services subject to service tax. The Tribunal concluded that interest income, being a consideration for liquidity forgone by the bank, is not taxable under the Finance Act, 1994 unless consolidated service charges are included, which was not evident in this case. Therefore, the appeal was allowed based on the legal and factual findings presented.

In summary, the judgment delved into the intricacies of service tax applicability on interest income and hypothecation amounts received by banks, interpreting relevant provisions of the Finance Act, 1994 and citing legal precedents to support the decision to allow the appeal.