Customs, Excise and Gold Tribunal - Mumbai
Bajaj Auto Finance Ltd. vs Commissioner Of Central Excise on 3 May, 2007
Equivalent citations: 2007[7]S.T.R.423, [2007]9STT569, (2008)13VST134(CESTAT-MUM)
ORDER
Jyoti Balasundaram, Vice President
1. We have heard both sides on the appeal against the order of the Commissioner of Central Excise, Pune, by which he has confirmed service tax demand of Rs. 25,89,31,078/- and education cess of Rs. 16,72,844/- by holding that the appellants who were engaged in the business of hire purchase finance, were liable to service tax under Section 65(10) of Chapter V of the Finance Act, 1994, which covers "banking and other financial services" which inter alia means "financial leasing services including equipment leasing and hire purchase by a body corporate", and penalty of equal amount under Section 78, in addition to Rs. 200/- per day during which failure to pay tax continues, and penalty of Rs. 1,000/-. The period of demand is 16.7.2001 to 31.3.2005.
2. The case of the department is that there is no difference between hire purchase which is admittedly covered under Section 65(10), and hire purchase finance, as in both cases, the hirer enters into agreement with person who provides financial services to the hirer and in lie of such services, the hirer pays certain amount as finance charges/hire purchase charges. We find on scrutiny of the agreement entered into between the hirer and the appellants that the hirer identifies the vehicle that he wishes to purchase from the manufacturer/dealer thereof, makes a part payment to the seller of the vehicle, applies to the appellants for financing the balance, and once the financing is sanctioned, the hirer enters into an agreement with the appellants and provides as security, right of repossession of the vehicle to the appellants in the event of his (hirer) default in payment of instalments to the appellants. The hirer becomes the owner of the vehicle - the title to the vehicle vests with the hirer who is a purchaser and it is in his name that the vehicle stands registered and insured and the appellants are the nominees. The appellants' contention is that there is a fundamental difference between a hire purchase agreement and hire purchase finance agreement, namely that in the case of the former, the title to the goods remains with the hire purchase company which bails the goods to the hirer in return for periodical payments and the title to the goods is transferred to the customer/hirer only if he exercises the option to purchase the same on full payment to the hire purchase company, while in the case of the latter, the title to the goods vests in the purchaser right from the beginning and the hire purchase finance company who has only a right to seize the goods for non-payment of the loan, is not the owner of the goods. This contention requires to be accepted in the light of the apex court's decision in Sundaram Finance Ltd. v. State of Kerala and Anr. (1966) 17 STC 489 in which the distinction between hire purchase and hire purchase financing has been brought out. Paragraphs 10 and 11 of the judgment which are relevant in this regard, are reproduced below:
10. A hire-purchase agreement is normally one under which an owner hires goods to another party called the hirer and further agrees that the hirer shall have an option to purchase the chattel when he has paid a certain sum, or when the hire-rental payments have reached the hire-purchase price stipulated in the agreement. But, there a re variations when a financier is interposed between the owner of the goods and the customer. The agreement, ignoring variations of detail, broadly takes one or the other of two forms: (1) When the owner is unwilling to look to the purchaser of goods to recover the balance of the price, and the financier who pays the balance undertakes the recovery. In this form, goods are purchased by the financier from the dealer, and the financier obtains a hire-purchase agreement from the customer under which the letter becomes the owner of the goods on payment of all the instalments of the stipulated hire and exercising his option to purchase the goods on payment of a nominal price. The decision of this Court, in K.L. Johar & Co. v. Dy. Commercial Tax Officer dealt with a transaction of this character. (2) In the other form of transactions goods are purchased by the customer who in consideration of executing a hire-purchase agreement and allied documents remains in possession of the goods, subject to liability to pay the amount paid by the financier on his behalf to the owner or dealer, and the financier obtains a hire-purchase agreement which gives him a licence to seize the goods in the event of failure by the customer to abide by the conditions of the hire-purchase agreement.
11. The true effect of a transaction may be determined from the terms of the agreement considered in the light of the surrounding circumstances. In each case, the court has, unless prohibited by statute, power to go behind the documents and to determine the nature of the transaction, whatever may be the form of the documents. An owner of goods who purports absolutely to convey or acknowledges to have conveyed goods and subsequently purports to hire them under a hire-purchase agreement is not estopped from proving that the real bargain was a loan on the security of the goods. If there is a bona fide and completed sale of goods, evidenced by documents, anterior to and independent of a subsequent and distinct hiring to the vendor, the transaction may not be regarded as a loan transaction even though the reason for which it was entered into was to raise money. If the real transaction is a loan of money secured by a right of seizure of the goods the property ostensibly passes under the documents embodying the transaction, but subject to the terms of the hiring agreement, which becomes part of the buyer's title, and confer a licence to seize. When a person desiring to purchase goods and not having sufficient money on hand borrows the amount needed from a third person and pays it over to the vendor, the transaction between the customer and the lender will unquestionably be a loan transaction. The real character of the transaction would not be altered if the lender himself is the owner of the goods and the owner accepts the promise of the purchaser to pay the price or the balance remaining due against delivery of goods. But, a hire-purchase agreement is a more complex transaction. The owner under the hire-purchase agreement enters into a transaction of hiring out goods on the terms and conditions set out in the agreement, and the option to purchase exercisable by the customer on payment of all the instalments of hire rises when the instalments are paid and not before. In such a hire-purchase agreement there is no agreement to buy goods, the hirer being under no legal obligation to buy, has an option either to return the goods or to become its owner by payment in full of the stipulated hire and the price for exercising the option. This class of hire-purchase agreement must be distinguished from a transaction in which the customer is the owner of the goods and with a view to finance his purchase he enters into an arrangement which is in the form of a hire-purchase agreement with the financier, but in substance evidences a loan transaction, subject to a hiring agreement under which the lender is given the licence to seize the goods.
3. Although the above decision was in the context of sales tax and the issue was whether the nature of the transaction between the finance company and certain hirers within the State of Kerala was sales within the meaning of the Travancore-Cochin General Sales Tax Act (which stand of the Sales Tax authorities was rejected by the Supreme Court by holding that the agreement was a loan agreement and that no sale was intended so as to attract sales tax), the difference between a hire purchase and a hire purchase finance has been clearly laid down by the Court. The fact that the appellants herein have the right and control over the goods, as seen from the contract between them and their customers, cannot lead us to conclude that they had entered into a hire purchase agreement with their customers for the reason that in all hire purchase finance agreements, terms and conditions giving the finance company control over the goods, exist.
4. In the light of the above discussion, we hold that hire purchase finance, in which the appellants are engaged, is different from hire purchase and that hire purchase finance is not covered under the provisions of Section 65(10) of Chapter V of the Finance Act, 1994, and accordingly set aside the impugned order and allow the appeal.
(Pronounced in Court)