2015 (12) TMI 1356 - AT - Service Tax

Demand of service tax - Banking and Other Financial Services - whether the hire purchase service rendered by the appellant prior to 16.08.2002 was covered under the scope of BOFS as defined under section (65) (10)/(12) - Held that - as evident that to be covered under BOFS prior to 16.08.2002 the hire purchase service had to be rendered by such body corporate which was a banking company or a financial institution including a non-banking financial company. As per section 65 (11) ibid banking company has the meaning assigned to it in clause (a) of section 45 A of the Reserve Bank of India Act, 1934 - appellant does not qualify to be called non-banking financial company. So, it is established that the appellant is not a banking company nor a financial institution including a non-banking financial company and therefore the service rendered by it prior to 16.08.2002 was not covered under BOFS because prior to that date financial leasing services including equipment leasing and hire purchase by a body corporate were covered under BOFS only if such body corporate satisfied the requirement of being a banking company or a financial institution including a non-banking financial company. All the hire purchase agreements in respect of which the demand has been confirmed under BOFS were entered into prior to 16.08.2002 and that this assertion was made even before the primary adjudicating authority and has not been contested in the primary adjudication order. CBEC vide circular No.B11/1/2001-TRU, dated 09.07.2001 issued at the time of introduction of levy of service tax BOFS in para 2.1.4 clarified that the hire purchase agreements entered into prior to the imposition of levy i.e. 16.07.2001 will not be chargeable to service tax provided the goods are also delivered prior to 16.07.2001. - in respect of hire purchase agreements entered into by the appellant prior to 16.08.2002 where the vehicles were also delivered prior to 16.08.2002 were not liable to service tax under BOFS. Ld. advocate for the appellant fairly conceded that (i) while all the hire purchase agreements in respect of which the service tax demand of ₹ 39 lakhs has been confirmed were entered prior to 16.08.2002, but he could not confirm whether all the vehicles thereunder were also delivered prior to 16.08.2002 (ii) in respect of such hire purchase agreements where the vehicles were delivered on or after 16.08.2002 the service tax under BOFS would be leviable and for that purpose the case may have to be remanded to the primary adjudicating authority for verification and computation. - service tax is leviable under BOFS in those cases where even if the hire purchase agreements were entered into prior to 16.08.2002, the delivery of vehicles took place on or after 16.08.2002. In the ordinary course it may have been possible for an assessee to have bona fides belief about the non-leviability of service tax, the fact that the appellant did not provide the information in spite of being asked to do so several times evidently tantamount to suppression of facts which as per Section 73 ibid is sufficient for invocation of extended period. We however need not dwell on this issue in greater detail as the impugned demand has not been found to be sustainable except to the extent of such hire purchase agreements where the delivery of vehicle took place after 16.08.2002 which the appellant has also conceded and this demand is likely to be very small. Penalty under Section 78 ibid will get attracted but in the wake of the decision of Gujarat High Court in the case of Ratnamani Metals & Tubes - 2013 (12) TMI 1397 - GUJARAT HIGH COURT , the appellant will be eligible for reduced (25%) of the mandatory penalty as this option had not been expressly given to the appellant earlier. - Decided partly in favour of assessee.

Issues Involved:
1. Service tax demand on hire purchase income.
2. Service tax on interest earned on loans.
3. Applicability of service tax on hire purchase agreements entered before 16.08.2002.
4. Inclusion of interest income in the assessable value for service tax.
5. Invocation of extended period due to suppression of facts.
6. Penalty under Section 78 of the Finance Act, 1994.

Detailed Analysis:

1. Service Tax Demand on Hire Purchase Income:
The appellant, a manufacturer of motor vehicles, also provided financial leasing services but failed to pay service tax, resulting in a demand of Rs. 51,14,445/-. The demand includes Rs. 39 lakhs related to hire purchase income. The appellant contended that all hire purchase agreements were entered into before 16.08.2002, and thus, were not liable to service tax under the "Banking and Other Financial Services" (BOFS) as defined in Section 65(10)/(105)(zm)/(zp) of the Finance Act, 1994.

2. Service Tax on Interest Earned on Loans:
The appellant argued that the Rs. 12,14,445/- demand pertains to service tax on interest earned from loans, which should not be included in the taxable value. They cited the explanation added in 2004 to Section 67 of the Finance Act, 1994, and CBEC Circular No. 80/10/2004-ST, dated 17.09.2004, which clarified that interest income is excluded from the taxable value.

3. Applicability of Service Tax on Hire Purchase Agreements Entered Before 16.08.2002:
The Tribunal examined whether the hire purchase services rendered before 16.08.2002 were covered under BOFS. According to the legal provisions effective from 2001, only services provided by a banking company, financial institution, or non-banking financial company were taxable. The appellant, not being any of these entities, was not liable for service tax on agreements entered before 16.08.2002. However, if the delivery of vehicles under these agreements occurred after 16.08.2002, service tax would be applicable. This was conceded by the appellant and requires remand for verification and computation.

4. Inclusion of Interest Income in the Assessable Value for Service Tax:
The Tribunal noted that the adjudicating authority's view that the exclusion of interest from taxable value only applied prospectively was incorrect. Circulars are clarificatory and do not impose mandatory provisions. The insertion of clause (viii) to Explanation 1 to Section 67 was deemed clarificatory with retrospective effect. The Tribunal cited precedents, including Thermax Ltd. Vs. CCE, Pune, and Karur Vysya Bank Ltd. Vs. Commissioner, confirming that interest on loans should not be included in the assessable value for service tax.

5. Invocation of Extended Period Due to Suppression of Facts:
The Department argued that the appellant's failure to provide information during the investigation amounted to suppression of facts, justifying the invocation of the extended period under Section 73 of the Finance Act, 1994. The Tribunal acknowledged this but noted that the demand was not sustainable except for specific hire purchase agreements where vehicle delivery occurred after 16.08.2002.

6. Penalty Under Section 78 of the Finance Act, 1994:
The Tribunal held that the penalty under Section 78 would apply to the sustainable demand. However, as per the Gujarat High Court's decision in Ratnamani Metals & Tubes, the appellant is eligible for a reduced penalty of 25% if the demand, interest, and reduced penalty are paid within 30 days of communication.

Order:
1. The demand of Rs. 12,14,445/- on interest income is set aside.
2. The demand related to hire purchase agreements is set aside except for agreements entered on or after 16.08.2002 and those entered before 16.08.2002 with vehicle delivery after this date.
3. The case is remanded to the primary adjudicating authority for computation of the demand as per the above conditions.
4. The penalty under Section 78 shall be equal to the computed demand, with a reduced penalty option of 25% if paid within 30 days.

The appeal is disposed of on these terms.

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