Bombay High Court: No Interest on Loan Absenct of the Mechanism for bifurcation of Service prior to March 2006
The coram consisting of Justice Milind Jadhav and Ujjal Bhuyan of the Bombay High Court (HC) upheld the decision of the CESTAT and stated that for the period before 1 March 2006 interest on the loan is not taxable in the absence of a mechanism for bifurcation of service.
The Bombay HC in the case of Commissioner of CGST and Central Excise (Appellant) v. Shriram Transport Finance Company Ltd. (Respondent) held that interest on the loan is not taxable in absence of a mechanism for bifurcation of service before March 2006.
An appeal was filed by the Commissioner of Central Goods and Services Tax under the provisions of Section 35G of the Central Excise Act, 1994 (Act) to challenge the order passed by the Customs, Excise, & Service Tax Appellate Tribunal (CESTAT), Mumbai Bench.
The respondent/ assessee having centralized registration office at Mumbai and claimed to be engaged in the activity of providing services of lending, hire purchase, financial leasing of commercial vehicles under the head "Banking and other Financial Services" as defined under the provisions of Section 65(12)(a)(i) of Chapter V of the Finance Act.
During the audit, it was noticed that the assessee provided services of hire purchase and financial leasing of commercial vehicles but did not pay service tax on the income earned on the said services to the department.
The total amount of service tax on the income not paid was worked out to Rs.5583.05 lakhs for the period 2003-04 to 2007-08. One of the group company M/s. Shriram Investments Limited was alsoengaged in similar activities during the period 2003-04 to 2004-05 and had not paid service tax to the tune of Rs.2094.45 lakhs on the income earned by the company.
M/s. Shriram Investments Limited was merged with the respondent company with effect of 1 April 2005 through an order dated 25 November 2005 passed by the Court.
The Commissioner of Service Tax, Mumbai held that for levy of service tax respondent was treated as defacto owner of the vehicle, and the customer was merely treated as nominal owner of the vehicle and accordingly confirmed the demand partially, amounting to Rs.62,81,48,000; Rs.5,38,000; and Rs.4,33,000 respectively for the periods under consideration in the three show-cause notices.
The assessee filed an appeal before the CESTAT, Mumbai. It partly allowed the appeal and set aside the entire demand for the period before 1 March 2006 and confirmed the demand for the subsequent periods along with penalty under Section 76 of the Finance Act.
An appeal was filed before the HC against the order of the CESTAT.
The HC observed, "It is a 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 that of an operating lease. Therefore, taxability of the service is not in question."
The Court added, "Every consideration for the taxable service is leviable by the charging section unless excluded by the charging section which is Section 66 of the Finance Act read with Section 65(105)(zm) and Section 65(12) thereof."
It clarified that "In computing the value of taxable service mandated by Section 67 of the Finance Act, the law provides exclusion either by explanation or by rules. It is that exclusion that has been claimed by the respondent as its statutory right which is disputed by the Revenue."
The HC observed that "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 finalized 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."
It held, "CESTAT was correct in holding that for the period before 01.03.2006 interest on the loan is not taxable in the absence of a mechanism for bifurcation of service."