2018 (6) TMI 1007 - AT - Service Tax

Taxability - Banking and other financial services - consideration received from lessees and hire-purchasers - scope of Operating Lease - benefit of N/N. 4/2006-ST dated 1st March 2006 - Held that - It is now well settled in law that hire purchase is but a loan that the hirer obtains goods from a seller and the banking and financial institution finances the purchase of goods with the title firmly resting with the hirer and the institution vested with right to acquire possession of the goods, through judicial intervention, in the event of non-payment of contracted amount. This differs substantially from operating lease. Therefore, the taxability of the service is not in question. There is no doubt that interest earned on loans is not chargeable to service tax; this is the law in section 67 of Finance Act, 1994 and Service Tax (Determination of Value) Rules, 2006. Consequently, any income that is in the nature of interest earned by a bank or financial institution cannot be collected. In computing the value of taxable service mandated by section 67 of Finance Act 1994, the law provides exclusion either by Explanation or by Rules; it is that exclusion that has been claimed by appellant as their statutory right? - Held that - The consideration for the taxable service rendered by appellant is received as equated monthly instalment which is then assigned by appellant as principal and interest - only processing/management fees can be subjected to tax. Income from financial lease or hire-purchase is taxable under Finance Act, 1994 as lending activity, that income attributable to interest on lending is not to be included in assessable value, that it was only from 1st March 2006 that ten percent of the income described as interest was attributed to inputs other than borrowing and, hence, includible in assessable value of the financial institutions - The recovery of tax on interest for the period prior to 1st March 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 in the equated monthly instalment or any determination of such in the notice issued to the appellant. Appeal disposed off.

Issues Involved:
1. Taxability of consideration received from lessees and hire-purchasers under 'banking and other financial services' as per Finance Act, 1994.
2. Validity of the adjudicating authority's reliance on the Central Board of Excise & Customs clarification and the Supreme Court decision.
3. Applicability of section 67 of Finance Act, 1994 and Service Tax (Determination of Value) Rules, 2006 to the interest component of equated monthly installments (EMIs).
4. Interpretation of legislative intent and judicial hierarchy in the context of taxability.
5. Exclusion of interest income from taxable value under section 67 and related rules.
6. Validity of the demand for tax and penalties imposed on the appellant.

Detailed Analysis:

1. Taxability of Consideration Received:
The dispute centers on whether the consideration received from lessees and hire-purchasers by the appellant, a provider of 'banking and other financial services,' is taxable under the Finance Act, 1994. The adjudicating authority confirmed the demand for service tax on the finance/interest charge component of the EMIs paid by lessees/hire-purchasers. The appellant argued that the recovery of principal is beyond the scope of taxability and that tax had already been paid on the processing charges.

2. Reliance on CBEC Clarification and Supreme Court Decision:
The adjudicating authority relied on the Central Board of Excise & Customs clarification and the Supreme Court decision in Association of Leasing and Financial Service Companies v. Union of India to hold that service tax liability arises on the finance/interest charge component of the EMIs. The Supreme Court decision was deemed to have ousted the challenge to the vires of the tax levy on financial lease or hire purchase activities.

3. Applicability of Section 67 and Service Tax Rules:
The appellant contended that the consideration for loans, now legally sanctified as such, is interest and should be excluded from taxable value as per section 67 of Finance Act, 1994 and the Service Tax (Determination of Value) Rules, 2006. The Tribunal noted that interest on loans is specifically excluded from taxable value by these provisions.

4. Legislative Intent and Judicial Hierarchy:
The Tribunal emphasized that the legislative intent to exclude interest is apparent in section 67 and the subsequent rules. The decision of the Hon’ble Supreme Court was considered binding, and the Tribunal refrained from speculating on alternative outcomes had different provisions been presented to the Supreme Court.

5. Exclusion of Interest Income:
The Tribunal acknowledged that interest income is excluded from the purview of taxability under section 67 of the Finance Act, 1994, and the Service Tax (Determination of Value) Rules, 2006. The Tribunal referenced decisions in Karur Vysya Bank Ltd and Jayalaxmi Credit Company Ltd, which held that interest income is excluded from taxability.

6. Validity of Demand and Penalties:
The Tribunal concluded that income from financial lease or hire-purchase is taxable as lending activity, but income attributable to interest on lending is not to be included in assessable value. The Tribunal set aside the demand for the period prior to 1st March 2006 due to the lack of a mechanism to isolate the processing or management cost. The demand for the period thereafter was sustained, along with the consequent penalty under section 76 of the Finance Act, 1994.

Conclusion:
The appeal was disposed of by setting aside the demand for the period prior to 1st March 2006 and sustaining the demand for the period thereafter, with the corresponding penalty. The Tribunal upheld the exclusion of interest income from taxable value but confirmed the taxability of processing/management fees. The judgment emphasized adherence to legislative intent and the binding nature of Supreme Court decisions.

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