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TMI Blog2021 (2) TMI 836X X X X Extracts X X X X X X X X Extracts X X X X ..... ives 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 lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue of service from the interest amount ? b. Whether the Hon ble Tribunal was correct in holding that the period prior to 01.03.2006 is not taxable in the absence of mechanism for bifurcation of Service Income as provided in Notification No.4/2006 ST ? c. Whether the Hon ble CESTAT was correct in holding that the period from 01.03.2006 to 31.03.2008 as regular period and imposed penalty u/s 76 when the period from 01.03.2006 to 31.03.2008 is part period of first demand notice ? 3.1. Today, learned counsel for the appellant has restricted the challenge and modified the substantial question of law as under:- Whether for the period prior to 01.03.2006, service tax is recoverable on entire interest component collected as equated monthly installments on transactions relating to Financial Leasing Services including equipment leasing and hire-purchase , in absence of any mechanism to bifurcate the processing or management charges 4. Before we advert to the submissions made by the learned counsel for the parties, it will be apposite to refer to the relevant facts briefly. 4.1. Respondent M/s. Shriram Transport Finance Company Limited i.e. the assessee having ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed statutory appeal No.ST/86027 of 2014 before the CESTAT, Mumbai. CESTAT, Mumbai by order dated 29.05.2018 partially allowed the appeal and set aside the entire demand for the period prior to 01.03.2006 and confirmed the demand for the subsequent periods along with penalty under Section 76 of the Finance Act. By the impugned order, CESTAT directed recovery of service tax on one tenth interest component of the equated monthly installments (briefly referred to as EMI ) received by the respondent assessee as tax liability with consequential penalty under Section 76 of the Finance Act, while setting aside the recovery of tax on interest for the period prior to 01.03.2006. 4.5. Civil Appeal No. 12206 of 2018 has been filed by respondent assessee in the Supreme Court under the provisions of Section 35L of the said Act to challenge the judgment and order of CESTAT dated 29.05.2018 to the extent of recovery of tax on one tenth of the interest component of the EMI from 01.03.2006 and levy of penalty under Section 76 of the Finance Act. This Civil Appeal is pending for decision. 4.6. Appellant has restricted the challenge in the present appeal to the extent of setting aside of the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on notification No.4 of 2006 which exempted 90% amount representing interest; this notification gives the methodology of calculating the interest amount, which is the difference between the installments paid towards repayment of the loan amount and the principal amount contained in such installments; this notification pre-supposes that an EMI comprises of the principal amount and the interest amount and government s intention is to give exemption up to 90% of the interest amount only; respondent, in view of the hire purchase agreement received EMI and since part of the EMI comprises of finance charges which is interest amount received, service tax is due and payable on the same. 6. PER-CONTRA, Ms. Padmavati Patil, learned counsel appearing on behalf of respondent at the outset has opposed the appeal on the ground of maintainability and stated that appeal against the impugned order lies to the Supreme Court under the provisions of Section 35L. She submitted that irrespective of the nature of the transaction whether it is a loan transaction or lease finance or hire purchase finance, the respondent being a loan company recovered from the customer EMI comprising of the principal am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that too prospectively. 6.2. Respondent assessee has further submitted that :- (i) service tax has already been paid by the assessee on the management fee / processing and documentation charges collected by the respondent; respondent is registered with Reserve Bank of India (RBI) as a Non Banking Finance Company and its main activities are lending/financing against commercial vehicles; respondent regularly pays service tax on the processing/ document charges collected from its customers; service tax on business auxiliary income which forms minor part of its total income is also paid regularly; (ii) being a NBFC company registered with RBI, its major source of income is in the form of interest; its main business is to mobilize / accept deposit / debentures / funds from public / banks /FIs against interest payments and utilize the same for its financial activity and collect interest; the income is only differential interest between interest received on its financing activity and interest paid on its sourcing of fund; and majority of its financing was made only to commercial vehicle owners; (iii) its financing activity meant lending money to customers to buy comme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es deposits or which lends in any manner. These activities are regulated by RBI under the 1934 Act. Thus, all NBFCs which carry on these activities as part of their business come within the purview of being financial institutions. Under Section 45-IA, no NBFC shall carry on the business of a non-banking financial institution without obtaining a certificate of registration from RBI. Under Section 45-JA the RBI is authorized in public interest to issue directions to NBFCs relating to income recognition, accounting standards, deployment of funds etc. and the NBFCs shall be bound to follow the policy so determined or directions so issued. 8.3. Accordingly, under notification dated 02.01.1998 bearing No. 114, the deposit taking activities of NBFCs was sought to be regulated. Under the said notification, there is classification of NBFCs. Vide Clause 5 it has been clarified that several instances have come to the notice of RBI where NBFCs conducting their business as loan companies claim themselves to be equipment leasing/hire-purchase finance companies with the intention to avail of higher borrowing limits and thus an NBFC having not less than 60% of its assets and deriving not less t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an undertake equipment leasing, hire-purchase business and financial services. These are not direct lending activities. However, RBI treats them as services or facilities. The financial facilities are extended by way of equipment leasing or hire-purchase finance subject to approval of RBI [See Taxmann's RBI Instructions for Banking Operations 7th Edition; page 224]. 8.6. The significance of the above circulars and guidelines is to show that the activities undertaken by NBFCs of equipment leasing and hire-purchase finance are facilities extended by NBFCs to their customers; that, they are financial services rendered by NBFCs to their customers and that they fall within the meaning of the words banking and other financial services which is sought to be brought within the service tax net under Section 66 of the Finance Act, 1994. 8.7. One more aspect needs to be highlighted. With the application of AS-19, the leased assets are required to be shown as receivables and not as fixed assets which further shows that equipment leasing and hire-purchase finance are financial facilities which thereby funds projects presented by the customers to banks and other financial instituti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (72) of Section 65 and collected in such manner as may be prescribed. 8.11. Section 67 of the Finance Act, 2001 deals with valuation of taxable services for charging service tax. The relevant portion of Section 67 is quoted herebelow: 67. Valuation of taxable services for charging service tax- For the purposes of this Chapter, the value of any taxable service shall be the gross amount charged by the service provider for such service rendered by him. 9. In the backdrop of the above statutory provisions, we find that respondent is engaged in the business of lease and equipment finalizing which is squarely covered by the definition of banking and other financial service in Section 65(12) of the Finance Act. It is well settled position that hire purchase is a loan by which the hirer obtains goods from a seller and the banking and financial institution finances the purchase of goods with the title firmly rest with the hirer and the financing institution being vested with the right to acquire possession of the said goods in the event of default in payment of contracted amount / equated monthly installments. A contract for hire purchase is substantially different from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase activity such as the respondent engages in. The decision in the above case makes it unambiguously clear that barring operating lease alone which is considered to be entirely a sale, consideration for all other lease and hire purchase transactions are squarely liable to tax except on principal amount recovered. 12.1. The relevant findings in paragraph Nos.20 and 21 in the judgment in Association of Leasing and Financial Service Companies (supra) are extracted as under :- 20. .. A hire-purchase agreement partakes of the nature of a contract of bailment with an element of sale added to it. However, if the intention of the financing party in obtaining the hire-purchase and the allied agreements is to secure the return of the loan advanced to its customer the transaction would be merely a financing transaction. [See page 75]. The point which needs to be restated is that the funding activity undertaken by the financing party which could be in the form of loan or equipment leasing or hire- purchase financing, would be exigible to service tax if such activity falls in the category of banking and other financial services under Section 65(12) of the Finance Act, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the head equipment leasing , it is explained that it is a form of long-term financing. In a finance lease, it is the lessee who selects the equipment to be supplied by the dealer or the manufacturer, but the lessor [finance company] provides the funds, acquires the title to the equipment and allows the lessee to use it for its expected life. During the period of the lease the risk and rewards of ownership are transferred to the lessee who bears the risks of loss, destruction and depreciation or malfunctioning. The bailment which underlies finance leasing is only a device to provide the finance company with a security interest [its reversionary right]. If the lease is terminated prematurely, the lessor is entitled to recoup its capital investment [less the realizable value of the equipment at the time] and its expected finance charges [less an allowance to reflect the return of the capital] [para 32.057]. In the case of hire-purchase agreement the periodical payments made by the hirer is made up of : (a) consideration for hire (b) payment on account of purchase 21. To sum up, NBFCs essentially are loan companies. They basically conduct their business as loan companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustomers which comes within the meaning of the expression taxable services as defined in Section 65(105) (zm). The taxable event under the impugned law is the rendition of service. The impugned tax is not on material or sale. It is on activity/ service rendered by the service provider to its customer. Equipment Leasing/ Hire-Purchase finance are long term financing activities undertaken as their business by NBFCs. As far as the taxable value in case of financial leasing including equipment leasing and hire-purchase is concerned, the amount received as principal is not the consideration for services rendered. Such amount is credited to the capital account of the lessor/ hire-purchase service provider. It is the interest/ finance charge which is treated as income or revenue and which is credited to the revenue account. Such interest or finance charges together with the lease management fee/ processing fee/ documentation charges are treated as considerations for the services rendered and accordingly they constitute the value of taxable services on which service tax is made payable. In fact, the Government has given exemption from payment of service tax to financial leasing services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipal question which arose for determination was in respect of the nature of the transaction by which mobile phone connections are enjoyed. The question was whether such connections constituted a sale or a service or both. If it was a sale then the States were legislatively competent to levy sales tax on the transaction under Entry 54, List II of the Seventh Schedule to the Constitution. If it was service then the Central Government alone had the legislative competence to levy service tax under Entry 97, List I and if the nature of the transaction partook of the character of both sale and service, then the moot question would be whether both the legislative authorities could levy their separate taxes together or only one of them. It was held that the subject transaction was a service and, thus, the Parliament had legislative competence to levy service tax under Entry 97, List I. In para 88 of the said judgment, this Court observed that No one denies the legislative competence of the States to levy sales tax on sales provided that the necessary concomitants of a sale are present in the transaction and the sale is distinctly discernible in the transaction. This does not however allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ratio to the facts of the present case CESTAT has correctly concluded in paragraph Nos.13 and 15 to 18 of the impugned order which is extracted as under :- 13. 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 nonpayment of contracted amount. This differs substantially from operating lease. Therefore, the taxability of the service is not in question. The decisions of the Tribunal that have held otherwise did not have the benefit of wisdom of the judgment of the Hon ble Supreme Court in re Association of Leasing and Financial Service Company and are, therefore, per incuriam. 15. The issue is whether that statutory exclusion can be denied. We hold that no statutory exclusion can be denied. However, we take note that with the inclusion of financial and equipment leasing in the definition of the activity in relation to which taxability arises, it was the decision of the Hon ble Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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