Activity in relation to delivery of goods on instalments - Service Tax Practice Manual / Ready Reckoner - Service Tax

Chapter 7 Activity in relation to delivery of goods on instalments Effective date: 1.7.2012 Scope of Declared Service - Section 66E (g) Activities in relation to delivery of goods on hire purchase or any system of payment by instalments. Analysis: It is important to note here that only activities in relation to delivery of goods on hire purchase or any system of payment by instalments covered in this entry. Higher charges amount or instalments are not covered here as these are already subjected to state level VAT by treating these as deemed sale transaction. If there is any activity in relation to delivery of such goods, it will be covered here. For example a hire purchase agreement contains some separate charges for documentation, front end charges, administrative charges, terminal charges etc. All these charges will be covered in this entry. However in terms of Notification No. 26/2012 - ST, dated 20-06-2012 , services in relation to financial leasing including hire purchase are taxed on a value equal to 10% of such transactions. Also by explanation to this notification, it was clarified that amount charged represents interest i.e. difference between the instalments paid towards repayment of the lease amount and the principal amount contained in such instalments. Further it was clarified that such abatement is available only for interest portion and not for all other charges. Clarification by the Board (Taxation Guide - Guidance Note -6 - Exemptions dated 20.06.2012) 6.5.1 Is the delivery of goods on hire purchase of any system of payment by instalments taxable? No. The delivery of goods on hire purchase or any system of payment on instalment is not chargeable to service tax because as per Article 366(29A) of the Constitution of India such delivery of goods is deemed to be a sale of goods.(For guidance on this aspect please refer to point no. 2.7 of this Guide) However activities or services provided in relation to such delivery of goods are covered in this declared list entry. 6.5.2 What is the scope of the phrase delivery of goods on hire-purchase or any system of payment by instalments ? Section 2 of the Hire Purchase Act, 1972 defines a hire purchase agreement as an agreement under which goods are let out on hire and under which the hirer has the option to purchase them in accordance with the terms of the agreement and includes an agreement under which- (i) possession of goods is delivered by the owner thereof to a person on condition that such person pays the agreed amount in periodical installments, and(ii) the property in the goods is to pass to such person on the payment of the last of such installments, and (iii) such person has a right to terminate the agreement at any time before the property so passes. As per the Sales of Goods Act by Mulla (Seventh Edition. Page 14) delivery is voluntary dispossession in favour of another and that in all cases the essence of delivery is that the deliverer, by some apt and manifest act, puts the deliveree in the same position of control over thing, either directly or through a custodian, which he held himself immediately before the act . The nature of such arrangements has been explained by the Supreme Court in the case of Association of Leasing Financial Service Companies Vs Union Of India [2010 (10) TMI 4 - SUPREME COURT OF INDIA] . The relevant extract in para 20 of the said judgment is reproduced below: 20. According to Sale of Goods Act by Mulla [6th Edition] a common method of selling goods is by means of an agreement commonly known as a hire-purchase agreement which is more aptly described as a hiring agreement coupled with an option to purchase, i.e., to say that the owner lets out the chattel on hire and undertakes to sell it to the hirer on his making certain number of payments Key ingredients of the deemed sale category of delivery of goods on hire-purchase or any system of payment by instalments , therefore are - Transfer of possession (and not just of custody) The hirer has the option or obligation to purchase the goods in accordance with the terms of the agreement. 6.5.3 What is the difference between a normal hiring agreement and a hire-purchase agreement? In a mere hiring agreement the hirer has no option to purchase the goods hired and the risks and rewards incidental to ownership of goods remain with the owner and are not transferred to the hirer. In a hire-purchase agreement the hirer has an option or an obligation to purchase goods. 6.5.4 Are finance leases , operating leases and capital leases covered as delivery of goods on hire purchase or any system of payment of instalments ? Such leases would be covered only if the terms and conditions of such leases have the ingredients as explained above. Normally in an operating lease the lease is for a term shorter than property s useful life and the lessor is typically responsible for taxes and other expenses on the property. The lessee does not have an option to purchase the property at the end of the period of lease. Such arrangements do not qualify as delivery of goods on hire purchase or any system of payment of instalments . On the other hand financial leases or capital leases strongly resemble security arrangements and are entered into for financing the asset. The lessee pays maintenance costs and taxes and has the option of purchasing the lease end. Such arrangements resemble a hire-purchase agreement and would fall under the said deemed sale category. The essence of this deemed sale category is that the arrangement under which the goods are delivered should be in the nature of a financing arrangement wherein the lessee pays maintenance costs and taxes and has the option of purchasing the asset so delivered at lease end. It may, however, be pointed out that in case an operating lease has elements of transfer of right to use then the same would be covered in the other deemed sale category pertaining to transfer of right to use any goods 6.5.5 If delivery of goods on hire purchase or any system of payment on instalment is deemed to be sale of goods. What are the activities in relation to such delivery which are covered in the declared service? It has been held by Supreme Court in the case of Association of Leasing Financial Service Companies Vs Union Of India [2010 (10) TMI 4 - SUPREME COURT OF INDIA] . that in equipment leasing/hire purchase agreements, there are two different and distinct transactions, viz., the financing transaction and the equipment leasing/hire-purchase transaction and that the financing transaction, consideration for which was represented by way of interest or other charges like lease management fee, processing fee, documentation charges and administrative fees ,which is chargeable to service tax. Therefore, such financial services that accompany a hire purchase agreement fall in the ambit of this entry of declared services. 6.5.6 Is service tax leviable on the entire quantum of interest and other charges received in relation to a hire purchase? No. In terms of the exemption notification relating to such activities, service tax is leviable only on 10% of the amount representing interest plus other charges explicitly charged as mentioned above.