2021 (2) TMI 836 - HC - Service Tax

Classification of services - Banking and other Financial Services or otherwise? - entire interest component collected as equated monthly installments on transactions relating to Financial Leasing Services including equipment leasing and hire-purchase - absence of any mechanism to bifurcate the processing or management charges - period prior to 01.03.2006 - HELD THAT - Explanation 1 to section 67 of the Finance Act prior to 18.04.2006 contained a specific exclusion vide sub clause (viii) excluding interest on loans. Though section 67 was substituted by Finance Act 2006 w.e.f. 18.04.2006, the corresponding Service Tax Determination of Value Rules 2006 vide rule 6(2)(iv) again excluded interest on loan from the purview of valuation of taxable services. However, the Board vide circular No.80/10/2004-ST dated 17.09.2004 clarified that interest on loan would stand excluded. Respondent has been discharging service tax regularly on processing charges and also filing returns regularly. Respondent gives loan to its customers / borrowers for the purpose of hire purchase agreement for purchasing the vehicles and this lending is in the nature of a loan. Since it is in the nature of loan consequently interest on loans stands excluded from the value of taxable services. Board circular dated 09.07.2001 referred to by the appellant in fact supports the case of the respondent. In view of the settled law and in exercise of the legislative and rule making power once parliament has excluded interest on loans from the purview of taxable service, it is not open to the authority to hold that the exemption notifications would not apply. Further in view of the decision of the Apex Court in the case of Association of Leasing and Financial Service Companies and Bajaj Auto Finance Ltd. 2010 (10) TMI 4 - SUPREME COURT and 2008 (4) TMI 39 - SC ORDER re-affirming the legal position that the respondent is not liable to pay service tax in respect of the interest on loan advanced as the same stands excluded from the purview of the taxable services, we find no reason to interfere with the impugned order. CESTAT was correct in holding that for the period prior to 01.03.2006 interest on loan is not taxable in the absence of mechanism for bifurcation of service. Therefore, recovery of service tax on interest for the period to 01.03.2006 is without authority of law as there is a presumption of attributing the entire amount to interest in the absence of any mechanism to isolate the processing or management cost even if that were collected by way of equated monthly installments - CESTAT has returned a clear finding that hire purchase is but loan and that hirer obtains goods from the seller and the banking and financial institution finalised the purchase of the goods with the title firmly resting with the hirer with the financial institution vested with the right to acquire possession of the goods through judicial intervention - appellant has not been able to show any illegality or perversity in the aforesaid findings rendered by the CESTAT. There are no error or infirmity in the view taken by the CESTAT qua the ground raised by the appellant. No question of law, much less any substantial question of law as pleaded by the appellant arises from the order of the CESTAT - appeal dismissed.

Summary

Issues Involved:
1. Taxability of services prior to 01.03.2006 due to lack of bifurcation mechanism.
2. Applicability of service tax on interest component for financial leasing services.
3. Legality of penalties imposed for the period from 01.03.2006 to 31.03.2008.

Detailed Analysis:

1. Taxability of Services Prior to 01.03.2006:
The primary issue was whether service tax is recoverable on the entire interest component collected as equated monthly installments (EMI) on transactions relating to "Financial Leasing Services including equipment leasing and hire-purchase" before 01.03.2006, in the absence of any mechanism to bifurcate the processing or management charges.

Findings:
- The appellant argued that the respondent, as a registered company under the Indian Companies Act, 1956, was obligated to declare the value of services provided and had evaded service tax payment on income from hire purchase and financial leasing.
- The respondent countered that interest on loan was excluded from the taxable value as per Section 67 of the Finance Act and related notifications and circulars.
- The court referred to the Supreme Court's decision in Association of Leasing and Financial Service Companies Vs. Union of India, which clarified that financial leasing and hire-purchase finance fall under "banking and other financial services" and are taxable.
- The court concluded that for the period prior to 01.03.2006, interest on loan is not taxable due to the absence of a mechanism for bifurcation of service, as there is a presumption of attributing the entire amount to interest.

2. Applicability of Service Tax on Interest Component:
The court examined whether service tax could be levied on the interest component of EMIs received by the respondent for financial leasing services.

Findings:
- The court noted that the respondent's main business was lending money for the purchase of commercial vehicles, with the ownership recorded in the customer's name and the respondent as the financier.
- The court referred to circulars and guidelines issued by the Reserve Bank of India (RBI) and the Institute of Chartered Accountants of India (ICAI), which indicated that interest on loans is excluded from the taxable value.
- The court upheld the CESTAT's decision that only processing or management fees could be subjected to tax, and not the interest component, which is excluded by statutory provisions.

3. Legality of Penalties Imposed for the Period from 01.03.2006 to 31.03.2008:
The court addressed whether the CESTAT was correct in imposing penalties under Section 76 of the Finance Act for the period from 01.03.2006 to 31.03.2008.

Findings:
- The court noted that the respondent had paid service tax on processing/documentation charges and business auxiliary income, which formed a minor part of its total income.
- The court found that the CESTAT had correctly concluded that hire purchase is essentially a loan transaction, and the interest component is not taxable.
- The court held that the appellant failed to show any illegality or perversity in the CESTAT's findings and that no substantial question of law arose from the CESTAT's order.

Conclusion:
The court dismissed the appeal, upholding the CESTAT's decision that for the period prior to 01.03.2006, interest on loans is not taxable due to the absence of a bifurcation mechanism. It affirmed that the respondent's activities fell under "banking and other financial services" and that only processing or management fees could be taxed, not the interest component. The penalties imposed for the period from 01.03.2006 to 31.03.2008 were deemed appropriate, and the appeal was dismissed with no order as to costs.