2008 (5) TMI 67 - AT - Service Tax

Whether the revised rate of 8% would be applicable even to those cases where the hire purchase agreement was entered prior to 14-5-2003 when the rate of service tax was 5% - held that in respect of hire purchase contract, the rate of tax applicable is the rate prevailing on the day the contract is entered into - higher rate is not applicable for contract entered prior to the hike - demand of differential amount applying the higher rate not justified

Summary

Issues:
- Interpretation of Service Tax rate applicability in hire purchase agreements entered before and after a rate increase.

Detailed Analysis:

The appeal before the Appellate Tribunal CESTAT, Bangalore was against Order-in-Appeal No. 71/2006-ST, challenging the applicability of the revised Service Tax rate on hire purchase agreements. The appellants, engaged in hire purchase services, were registered under "Banking and Other Financial Services" and had been paying tax at 5%. The issue revolved around whether the enhanced rate of 8% would apply to agreements entered before the rate increase on 14-5-2003. The department argued for the application of the higher rate even for agreements entered prior to the rate change, based on the continuous provision of services post-rate increase.

During the hearing, the appellants cited a previous Tribunal ruling in the case of Art Leasing Ltd., which held that the tax rate applicable to hire purchase contracts is the rate prevailing at the time of contract entry, not the rate at the time of payment. The Tribunal agreed with this interpretation, emphasizing that the taxable event occurs at the contract's initiation. They rejected the department's argument that ongoing service provision justifies applying the higher rate. Citing CBEC's clarification on pre-Service Tax hire purchase contracts, the Tribunal ruled that the rate in effect at the contract's initiation should apply, not the rate at subsequent payment dates.

Consequently, the Tribunal allowed the appeal, setting aside the lower order and granting consequential relief as necessary. The decision clarified that for hire purchase agreements entered before the rate increase on 14-5-2003, the higher rate of 8% would not be applicable, aligning with the principle that the tax rate is determined at the contract's inception.