Custom, Excise & Service Tax Tribunal
M/S.Magma Fincorp Ltd vs Commissioner Of Service Tax, Kolkata on 3 February, 2016
IN THE CUSTOMS, EXCISE & SERVICE TAX APPELLATE
TRIBUNAL, KOLKATA
EASTERN ZONAL BENCH: KOLKATA
Appeal Nos.S.T. 160 & 188/09
&
Cross Objection No.83/09
(Arising out of Order-in-Original No.61/Commr./ST/Kol/2008-09 dated 31.03.2009 passed by the Commissioner of Service Tax, Kolkata.)
FOR APPROVAL AND SIGNATURE
HONBLE DR. D.M. MISRA, MEMBER(JUDICIAL)
HONBLE SHRI H.K.THAKUR, MEMBER(TECHNICAL)
1. Whether Press Reporters may be allowed to see
the Order for publication as per Rule 27 of the CESTAT
(Procedure) Rules, 1982?
2. Whether it should be released under Rule 27 of the
CESTAT(Procedure) Rules, 1982 for publication in any
Authorative report or not?
3. Whether Their Lordship wishes to see the fair copy
of the Order?
4. Whether Order is to be circulated to the Departmental
Authorities?
M/s.Magma Fincorp Ltd.
Applicant (s)/Appellant (s)
Vs.
Commissioner of Service Tax, Kolkata
Respondent (s)
AND Commissioner of Service Tax, Kolkata Applicant (s)/Appellant (s) Vs. M/s.Magma Sharchi Finance Ltd.
Respondent (s) Appearance:
Shri B.K.Singh, Advocate and Shri Garvit Chauhan, Advocate for the Appellant(s) Shri D.K.Acharya, Spl.Counsel for the Revenue CORAM:
Honble Dr. D.M. Misra, Member(Judicial) Honble Shri H.K.Thakur, Member(Technical) Date of Hearing :- 03.02.2016 Date of Pronouncement :- 03.02.2016 ORDER NO.FO/75221-75222/16 Per Dr. D.M. Misra.
The aforesaid appeals were heard by this Tribunal and order was passed on 11.05.2015, which was challenged by the Appellant before Hon'ble High Court at Calcutta. After hearing both the sides, by Order dt.23.09.20915, the Hon'ble High Court remanded the matter to the Tribunal for hearing the Appeal afresh. Consequently, the Appeals are taken up for hearing and disposal.
2. These Appeals are filed by the assesse-appellant M/s. Magma Finance Corporation Ltd. and also by the Revenue challenging the same Order-in-Original No.61/Commr./ST/Kol/ 2008-09 dated 31.03.2009, passed by the Commissioner of Service Tax, Kolkata.
3. The facts of the case are that pursuant to the visit of the premises of the Appellant on 09.08.2007 by the officers of the service tax department and on completion of investigation, a show cause cum demand notice was issued to the Appellant on 16.10.2007 alleging non-payment of service tax of Rs.4237.49 Lakhs, education cess of Rs.51.45 Lakhs for the period from 01.04.2002 to 31.03.2007. Also, it was alleged that they have collected an amount of Rs.93.00 Lakhs as service tax from their customers which is recoverable under section 11D of Central Excise Act, 1944 as applicable to the Finance Act,1994. On adjudication, the Ld. Commissioner had confirmed the demand of service tax and education cess Rs.4,64,49,133/- and imposed equivalent penalty under section 78 and penalty of Rs.5,000/- under section 77 of the Finance Act, 1994. Besides, he has directed recovery of interest and also the recovery of collected amount of Rs.93.00 Lakhs in terms of section 11D of Central Excise Act read with Section 73A of Finance Act, 1994. Aggrieved by the said order, the assessee-appellant are in Appeal.
4. The Ld. Commissioner has also dropped Service Tax demand of Rs.37,74,26,080/- and education cess of Rs.50,18,780/-. Aggrieved by the same, the Revenue is also in Appeal.
5. The learned Advocate Shri B.K. Singh, reiterating the submissions advanced earlier, submitted that this Tribunal may consider and decide the points of law. He has further pleaded that as the matter is old, sample agreements may be considered for disposal of the case.
5.1 Reiterating their earlier arguments Ld. Advocate Shri B.K.Singh for the Appellant contended that the appellant is a Non-Banking Financial Company(NBFC) engaged in the business of financing of assets including vehicles by way of operating lease, loan and financial agreements. The transaction between the appellant and its customers are broadly of following types:-
a. Financial leasing ( last entered in the year 2001-02) b. Equipment leasing c. Hire Purchase Agreements d. Operating lease agreements e. Hire Purchase Finance Agreements f. Loan against Hypothecation 5.2 The Appellant had also undertaken activity of securitization of assets for the purpose of raising funds for which they have entered into agreements with various banks for sale of their financial assets in terms of the guidelines issued by RBI from time to time. The profit earned out of such sale is accounted by the Appellant in their books of accounts as gain on securitization.
5.3 Referring to the definition of banking and other financial services prescribed at Section 65(12) of the Finance Act, 1994, the Ld. Advocate has submitted that the financial lease agreements entered into by the Appellant involving a total demand of Rs.48.95 Lakhs cannot come under the scope of banking and other financial services. He has submitted that it is not the legislative intent to cover all types of lease, as there has been an accepted distinction between financial lease and operating lease and the services relating to operating lease are not covered under the scope of said definition which applies only to the equipment lease having the character of financial lease distinct from non-operating lease.
5.4 It is contended that whether a lease is a financial lease requires to be decided as per the definition provided in the Finance Act,1994. Financial leasing has been defined to mean a transaction where the lease payment for the leasing contract (in respect of a specific asset provides for the lease and occupation of the assets by the lessee) is calculated to cover the full cost of asset together with interest charges and the lessee is entitled to own or has the option to own the asset, at the end of the lease period after making the lease payments. He has emphasized that unless there is a stipulation in the contract that the equipment shall ultimately be transferred to the customer no service tax is leviable in such cases. Referring to the clause 5 relating to the ownership and clause 31 concerning to assignment of the contracts/agreements, with their customers, he has submitted that ownership of the asset at all times vests with appellant, and in the agreement no where it stipulates that the clients have the option to purchase the asset on expiry of the lease agreement. Also, the agreement clearly states that the clients cannot capitalize the vehicles/assets leased in their balance sheets. From this it is clear that the assets/vehicles provided on lease basis by the appellant are owned by it and the customers/clients do not have the option to purchase the vehicles/asset on expiry of the contract. The customers can only renew the contract for a specified period and can take the goods again on lease from the appellant. These services could be taxable under the category of supply of tangible goods introduced subsequently and made chargeable to service tax but not under banking and other financial services.
5.5 Further disputing the demand of Rs.305.91 lakhs confirmed on hire purchase services, the ld. Advocate has submitted that the appellant are not rendering any activity of hire purchase. It is the submission that the income shown towards hire purchase agreements in effect pertains to agreements which are in the nature of hire purchase finance. In support he has referred to the relevant paragraph of the agreement. Further referring to the definition of hire purchase mentioned at section 2(c) of the Hire Purchase Act, 1972 the ld. Advocate has submitted that hire purchase is a contract where the hirer of the goods has to purchase the goods on payment of periodical installments. It is his submission that a perusal of various agreements termed as hire purchase clearly show that they are in the nature of vehicle financing which is not covered under banking and financial services. He submits that the learned adjudicating authority in the impugned order has dropped the demand on the amounts relating to hire purchase finance agreements. However, he has confirmed demand on the amount shown in the category of hire purchase agreement. He has further submitted that in all these cases the vehicles were owned by the customers, the invoices were in the name of customers, the RTO registration certificate is also issued in the name of customers and name of appellant is only shown as for hypothecation purpose. At the end of the term period, the appellant furnishes Form 34 and Form 35 as prescribed under the Motor Vehicles Act so as to enable the customers to remove the hypothecation charge in the registration certificate. It is his submission that in view of the provisions of Sale of Good Act, 1938 and the Motor Vehicles Act, 1988 since the customer/client is the owner of the vehicle and there is no question of appellant giving further ownership to the customers and there is no option in the agreement for the customer to purchase the vehicle, hence it is in the nature of hire purchase finance only. Further, he submits that in the relevant agreements though it has been mentioned that the appellant is the owner, but in fact, it does not give ownership to the appellant and take away the basic character of the agreements which is mere financing of the vehicles which were purchased by the customers. Such clauses are put in the agreement to ensure that the appellant retain the right to recover the vehicle in case of default in payment by the customers. In support of their submission that financer is not the owner of the vehicle the ld. Advocate placed reliance on the judgement of Honble Rajasthan and Allahabad High Court in the cases of Padma Devi & Ors. Vs. Gurbakhsh Singh & Ors. AIR 1973 Raj 317 and Babu Singh vs. Champa Devi & Ors. AIR 1978 All 90. The Ld.Advocate also placed heavy reliance on the judgments of Honble Apex Court in Sundaram Finance Ltd. v. State of Kerala AIR 1966 SC 1178, and the Tribunal in Kusulava Finance Ltd. v. CCE 2008 (10) STR 150 (Tri-Bang) affirmed by Honble Supreme Court as reported in 2010 (19) STR J75(SC) and Bajaj Auto Finance Ltd. v. CCE 2007 (7) STR 423(Tri-Mum) affirmed by the Supreme court reported at 2008 (10) STR 433(SC). It is his submission that the ratio of these decisions are squarely applicable to the facts of the cases.
5.6 The Ld. Advocate has submitted that no service tax is payable on contracts entered prior to 16.07.2001 involving demand of Rs.108.25 Lakhs. He has submitted that assuming that the Appellant had been undertaking the activity of hire purchase and financial leasing, even then service tax is not payable in respect of hire purchase contract and financial leasing contracts for the contracts entered into prior to 16.07.2001. In this regard he has referred to the Boards clarification issue under letter F. No.BII/I/2000-TRU dated 09.07.2001 and the judgement in the case of Art Leasing v. CCE 2007 (8) STR 162 and LFC Hire Purchase Finance v. CCE 2008 (12) STR 320.
5.7 Challenging the computation of demand, the Ld. Advocate has submitted that even though the Ld. Commissioner has held that no service tax is payable by appellant on operating lease, hire purchase finance, gains on securitization and loan against hypothecation, however, while calculating the service tax liability under banking and financial services, the Ld. Commissioner has only excluded the amounts towards hire purchase finance, gains on securitization and loan against hypothecation. In other words, the Ld. Commissioner though held that financial lease provided by appellant is in the nature of operating lease, however, the amount charged as management fee and other charges were included by the adjudicating authority in calculating the service tax liability on the appellant. The Ld. Commissioner has only excluded the amount received towards rental by the appellant which is incorrect. He has submitted that when it is clear that the activity of financial lease is in the nature of operating lease and not covered within the scope of banking and financial services, accordingly any amount charged towards the same would not be subjected to service tax. Hence, the amount charged as financial lease is not liable to service tax. Further, the Ld. Advocate has submitted that the demand confirmed by the Ld. Commissioner amounting to Rs.93.00 Lakhs under section 11D of Central Excise Act, 1944 is incorrect inasmuch as only Rs.7,54,689/- is the amount which had been collected by the appellant from their clients as representing service tax under banking and financial services. The balance amount of service tax has been collected by the appellant as contingency deposit. The said details would make it clear that the Appellant had collected an amount of Rs.69,52,945/- towards contingency deposits and the total amount of service tax charged on the same Rs.7,54,689/-. Further he has submitted that the amount of Rs.93.00 Lakhs has been arrived at by the department by including an amount of Rs.37,78,823/- twice. Further he has submitted that in terms of section 11D of Central Excise Act, 1944 as applicable to service tax cases, only those amounts which are collected as representing service tax are to be deposited. Therefore, the amounts which were collected as contingent deposit are not covered under the provisions of section 11D of Central Excise Act, 1944, in support of which the Ld.Advocate referred to the judgement in the case of CCE vs. Mahindra & Mahindra Ltd. 2001 (132) ELT 632.
5.8 It is his submission that if at all any amount that could be recoverable under section 11D of CEA,1944 then it would be only Rs.7,54,659/- and not Rs.93.00 Lakhs as confirmed by the adjudicating authority.
5.9 Rebutting the arguments advanced by the Ld. Spl. Counsel for the Revenue that securitization transaction is classifiable under section 65(12)(a)(v) or section 65(12)(a)(ix) of the Finance Act, 1994, the Ld. Advocate submitted that the said additional grounds taken by the department at this stage is inadmissible as no such ground was either alleged in the show cause notice nor discussed in the impugned order of the Ld. Commissioner. It is his submission that the show cause notice has only demanded service tax on the total financial income shown in the balance sheet of appellant and during the course of adjudication proceeding, the appellant had provided break up of the financial income duly certified by their statutory auditors. On the basis of the said break up, the Ld. Commissioner dropped the demand considering gain on securitization is in relation to sale of asset. In support he has referred to the decision of this Tribunal in the following cases:-
* Commissioner of Customs, Mumbai vs. Toyo Engineering India Ltd.2006(201)ELT 513(SC) * Hindusthan Polymers Co.Ltd. vs. CCE, Guntur 1999(106)ELT 12(SC) * Warner Hindustan Ltd. vs. CCE, Hyderabad 1999(113)ELT 24(SC) * CCE, Nagpur vs. Ballarpur Industries Ltd. 2007(215) ELT 489(SC) * CCE, Bangalore vs. Brindavan Beverages (P) Ltd. 2007(215)ELT 487(SS) * CCE, Bhubaneswr-I vs Champdany Inustries Ltd. 2009(241)ELT 481(SC) * CCE vs. Gas Authority of India Ltd.2008(232)elt 7(SC) 5.10 The Ld. Advocate has further submitted that hire purchase finance agreement and hypothecation (Rs.598.46 Lakhs) are not covered under the scope of banking and financial services. It is his submission that the customers entered into contract only for the purpose of receiving finance from the appellant and the customers identifies the supplier and pass certain portion of the purchase amount directly to the supplier and receives financing facility for balance amount from the appellant. Thereafter, the appellant and the customers enter into agreement which stipulates the terms and conditions to be observed by the customer towards re-payment of the finance amount taken from the appellant. The invoices show sale of the vehicle by the dealer in the name of the customer and also the vehicle is registered in the name of the customers. The vehicle is insured by the customer and in case of any default in payment of installment to the appellant, the appellant could only seize the vehicle for the purpose of recovery of the loan amount, therefore, the transaction is in the nature of financing only. He further submits that it is a settled legal position that the definition of banking and financial services would cover only hire purchase and not the transactions which are in the nature of hire purchase finance. Referring to the definition of hire purchase agreement prescribed at section 2(c) of the Hire Purchase Act, 1972, the ld.Advocate submits that the hire purchase contract is a contract where the hirer of the goods has the option to purchase the goods on payment of periodical installments. In support he has referred to the judgements of Sundaram Finance, Kusalava Finance, Bajaj Auto Finance (supra).
5.11 The ld. Advocate further submits that the Commissioner has rightly dropped the demand on operating lease (Rs.673.20 Lakhs). He has submitted that in the case of operating lease, the vehicles are owned by the appellant and given on lease to the customers. He has submitted that the transaction is in the nature of deemed sale as provided under Article 366(29A) of Constitution of India. The 46th amendment to the Constitution of India empowers the states to levy sales tax/VAT on transaction in the nature of right to use goods which were earlier not excisable to sales tax as such transaction are not covered by the definition of sale as provided in Sale of Goods Act, 1930. The appellant has been paying sales tax/VAT under the respective state laws. In the event it is chargeable to Service Tax then the present transaction would be leviable to tax under supply of tangible goods brought into effect from 16.05.2008.
5.12 The ld. Advocate further submitted that the ld. Commissioner has correctly dropped the demand relating to gain on securitization i.e Rs.1,786.48 Lakhs which is not liable to service tax. Explaining the said service, the ld. Advocate has submitted that the appellant enter into loan agreement with customers for financing the purchase of vehicles and other assets. The loans are secured by the asset purchased by the customers. The outstanding amount (principal of loan) given by the appellant is shown as assets in the balance sheet of the appellant and such performing assets (loans) are pulled together into a portfolio and the portfolio is sold to banks/financial institutions. This is a transaction of securitization. He has submitted that RBI has issued guidelines which is applicable to banks/financial institutions and NBFCs. The guidelines defines securitization as a process for which assets are sold to a bankruptcy remote special purpose vehicle (SPV) in return for an immediate cash payment. The SPV in turn issues securities known as pass through service (PTC) to various investors, who are investing in the portfolio. The cash flow from the unlined pool of assets is used to re-pay the principal and pay the interest on the securities issued by SPV.
5.13 It is his submission that securitization thus follows a two stage process. In the first stage, there is sale of single asset or polling and sale of poll assets to a bankruptcy remote special purpose vehicle in return for an immediate cash payment and in the second stage re-packaging and selling the interest representing schemes on incoming cash flows from the assets or poll of assets from the third party customers tradable debt securities. The first stage of transaction happens between originator and SPV and second stage between SPV and investor. Further, referring to the different dictionary meaning of securitization, the ld.Advocate submitted that the activity undertaken by the appellant is sale of financial assets and not a service as contended by the department. Further he has submitted that in the present case the activities of the appellant are limited to first stage only i.e. creation of financial assets by giving out loans, creating a portfolio of financial assets and selling the financial assets to SPV. The appellant does not undertake the second stage of the transaction i.e. activity of re-packaging of financial assets into salable securities which is done by the SPV and purchasing banks/financial institution as contended by the special counsel for the department.
5.14 He has further submitted that after sale of the financial assets there is a service element which could either be done by the buyer himself or the buyer may appoint either the seller of the securities or a third party to undertake activities of collection, recovery, accounting of the installments due from the customers. For such activities which are in the nature of rendering service, separate agreements are entered into for a consideration. He has categorically submitted that during the relevant period, the assesse-appellant had undertaken in respect of securitization transaction only and they did not undertake the activity of collection, recovery, accounting of the installments due from the customers etc. after sale of such securities. The appellant had neither charged nor collected any service charges for the same. The appellant submits that in respect of the securitization agreement entered into for the subsequent periods, it has entered into with separate service agreement for a separate consideration on which service tax has been discharged. In the present case the securitization transaction has resulted into against profit on the securitized portfolio which are not liable to be taxed on account of any service activities.
5.15 The ld. Advocate further submitted that the aforesaid transactions conducted by the Appellant are purely in the nature of sale of financial assets; it is in the nature of sale of portfolio wherein the loan portfolio is sold along with under-lined rights of the same to the bearer of the portfolio. The consideration is received at the point of sale and the difference between the book value of the loan portfolio and the projects consideration is recognized as gain on securitization and is not a service, hence reliance placed by the special counsel for department on the note regarding securitization that there is an element of servicing by ignoring the sale transaction in the first stage, is not correct. He further submits that the department has not categorically challenged the findings of the ld. Commissioner on securitization by holding it to be a sale transaction. The appellant has been paying stamp duty on sale transaction of loan pools under the Bombay Stamp Act, 1958 and specifically covers the securitization transaction under the category of conveyance and specifies the term duty payable.
5.16 Rebutting the grounds set out by the department in their Appeal that on the basis of figures submitted by the appellant the adjudicating authority has accepted it without due verification, hence, the order of the adjudicating authority to the extent it dropped the demand is incorrect, the ld. Advocate submitted that the appellant had provided figures taking it from the audited balance sheet and other financial documents which were duly verified by the chartered accountant and these documents were also verified by the authorities before passing the order by the ld. Commissioner. Hence, it is incorrect to say that these figures were not verified by the department. Further he submits that in the event the department does not accept these figures as correct, the burden lies on the department to prove the same by introducing evidences. In support, he has referred to the decision of this Tribunal in the case of Rajendra Jagannath Parekh and Ajay Shashikant Parekh v. Commissioner of Customs 2004 (175) ELT 238(Tri.-Mumbai).
5.17 The ld.Advocate further submitted that the adjudicating authority has erroneously confirmed the demand of service tax of Rs.58,19,425/- under the category of BAS during the period 2003-2006. It was confirmed against the appellant on the amount received by it as collection commission which is paid by the banks to appellant for recovery of EMIs from various borrowers of such banks. The adjudicating authority while confirming the demand on this count has held that the appellant is acting as collection agents for the banks and is promoting and marketing the services of such banks. He has submitted that the ld. Commissioner has failed to consider the actual activities undertaken by the appellant. The allegations in the show cause notice in this regard is vague as no particular sub-heading under which the activity of collection commission is held to be liable to service tax has been alleged. Referring to the definition of Business Auxiliary Service as was in existence w.e.f. 01.07.2003 and amended thereafter, the ld. Advocate submitted that the burden of proof that the activities were covered under Business Auxiliary Service rests on the revenue. In support he has referred to the judgement of the Kerala & Madras High Court in the cases of * Heveacrumb Rubber (P) Ltd. vs. Superintendent of Central Excise 1983 (14) ELT 1685 (Kar.) * Vairavan Thandal vs. Appellate Collector of Customs, Madras 2000 (125) ELT 94 (Mad.) * Audo Viso Corporation vs. Collector of Customs 1991 (53) ELT 3 5.18 Further, without prejudice to their earlier submission it was submitted that if an agent promote services of various banks even then no service tax is payable by the appellant up to 15.06.2005. Referring to the definition of commission agent as specified under the category of BAS, the ld.Advocate submits that only commission agents who dealt in the sale or purchase of excisable goods, for a consideration, was only liable to pay service tax under BAS. In this regard he has placed reliance on the Notification No.13/2003-ST dated 20.06.2003, wherein the scope of commission agent is also restricted to a person, who causes sale or purchase of goods. It is only w.e.f. 16.06.2005 the scope of the definition of commission agent has been enlarged, so as to include provision or receipt of services for a consideration. Therefore, if at all the appellant were liable to pay service tax as commission agent, then it would be only w.e.f. 16.06.2005 due to the extended meaning of commission agent in the Finance Act, 2005.
5.19 Further, the Ld. Adv. has submitted that the services that were provided by the appellant would be liable to service tax only from 01.05.2005 under the category of Business support Service. The appellant is neither acting as a commission agent, nor is promoting and marketing services of the banks. The scope of service relates to interviewing of the customers, who seek finance from the respective banks and after interview, the customers were assisted in the documentation work; it verifies all the documents of the customers and passes it on to the banks, who on the basis of such verification extend the financial facility to such customers. The appellant is also responsible for the recovery of EMIs from the borrowers. Thus, the appellant is undertaking a host of activities such as evaluation, verification of the customers, processing of transaction, providing operational assistance to the banks, collecting EMIs etc., hence, such services are squarely covered under the category of Business support Service which has been brought into force from 01.05.2006. In support he has referred to the judgement of the Tribunal in the following cases:-
* Fifth Avenue v. CST 2009 (15) STR 387(Tri.Chen).
* Wings Group of Companies v. CCE 2008(12) STR 287(Tri.Bang) * S.R.Kalyanakrishnan v. CCE 2008 (9) STR 255(Tri-Bang) 5.20 The ld. Advocate further submitted that management and consultancy fees is also not liable to service tax under the category of BAS. The said fees were received on account of differential interest. The ld. Commissioner has rightly dropped the demand as the said amount received by the appellant on account of difference in the Fixed Deposit rate and applicable discount rate. The department has failed to establish as to how the aforesaid amount received by the appellant could be taxable under the category of BAS.
5.21 Further, he has submitted that the ld. adjudicating authority has confirmed the demand on management fees, penal interest and termination charges. The ld. Advocate submits that penal interest is in the nature of penalty and involves no provision of service, accordingly no service tax is payable. In support, he refers to the Circular F.No.137/1/2008-TRU dated 29.2.2008. Also he has referred to the decision of this Tribunal * Bank of Baroda vs. CCE, Jaipur-I 2014 (35) STR 359(Tri-Del.) * Housing & Dev. Corporation Ltd. (HUDCO) vs. CST Ahemedabad 2012 (26) STR 531 (Tri.-Ahm) * Small Industries & Development Bank of India vs. CCE, Chandigarh 2011 (23) STR 392 (Tri.-Del.) 5.22 Further he submits that the department itself for the subsequent period i.e. 2005-06 to 2009-10 dropped the demand on this count vide order-in-original No.04 & 05/Commissioner/ST/KOL/2012-13 dated 24.04.2012 on delayed payment charges, re-payment charges and cheque bouncing charges which are similar to management fees, termination charges.
5.23 The ld. Advocate has further submitted that the ld.adjudicating authority has wrongly invoked the extended period of limitation and imposed penalty under section 78 of the Finance Act. He submits that the extended period cannot be invoked in the present case since all the activities undertaken by the appellant were reflected in their annual reports for the relevant period and the financial statements are public documents which are available in public domain. In support he has referred to the various decisions of this Tribunal in the following cases:-
* Anantpur Textiles Ltd. v. CCE 1994 (72)ELT 48 (Tri.) * Hindalco Industries Ltd. v. CCE 2003 (161) ELT 346 (Tri.) * Kirloskar Oil Engines Ltd. v. CCE 2004 (178) ELT 998 (Tri.) * Paro Food Products v. CCE, Hyd. 2005 (184) ELT 50 (Tri.-Bang) * UT Ltd. v. CCE 2001 (130) ELT 791(T) 5.24 Further he has submitted that the constitutional validity of the levy on financial leasing including equipment leasing and hire purchase had been challenged by the association in the Honble High Court of Madras even though the appellant sought registration under banking and financial service in the year 2001, however, they did not pay service tax as the issue was pending before the Honble High Court. Since they have not suppressed any information from the department with intent to evade payment of service tax therefore extended period is not applicable as has been affirmed by the Honble Apex Court in the case of Association of Leasing and Financial Service Companies v. UOI 2010 (20) STR 417 (SC).
6. Per contra, Shri D.K.Acharya, ld.Special Counsel for the Revenue has submitted that basic business character and function of the appellant are referred to in the proceedings incorporated in the memorandum of association. He has submitted even in the AGM held on 23.07.2008 as per clause 6, it is mentioned as business of equipment leasing, hiring, hire purchase and asset based finance of all kinds. Hire purchase finance or operating lease other than financial leasing are not shown therein. He has further submitted that as per the Honble Supreme Courts judgement in Sundaram Finances case the fundamental difference between hire purchase finance agreement and hire purchase agreement is that in case of the former the title to the goods vests on the purchaser right from the beginning and the hire purchase finance company has the right to seize the goods in case of default in non-payment of the loan by the purchaser; in case of latter the title to the goods remained with the hire purchase company which bails the goods to the hirer in return of periodical payments. Hire purchase is taxable under banking and financial service defined under section 65(12((iv) of the Finance Act, 1994. He has submitted that in all the agreements under different periods, in their compendium, the appellant is always the owner of the equipment, vehicles leased out: the nomenclature is sometimes changed, for example, sometimes the client of the appellant hiring and taking on lease from the appellant, is shown as trustee of the hired article; the appellant is always the owner and not a single agreement has been cited by the appellant where the appellants client has been shown as the owner or becomes the owner at the end of the leased period. Therefore, all these cases without any exception are of hire purchase variety of financial leasing. Even the so called operating lease or finance leasing or hire purchase, not a single case is of the type of hire purchase finance. Rebutting the argument of the ld. advocate for the appellant that out of the four conditions necessary to be satisfied to come under the scope of banking and financial service, the fourth conditions is not satisfied i.e. the lessee is entitled to own and has that option to own the asset at the end of lease period after making lease payment, submitted that these argument is flawed because entitlement or option by their very nature is optional and not compulsory. In any case, this clause was inserted by an amendment to the Finance Act from 01.06.2007 i.e. after the period of dispute hence not applicable to the present case.
6.1 On the issue of securitization, the ld. Special Counsel cited the authority (Dr.Frederic S Mishkin, Ex-Executive Vice President of Federal Reserve Bank of New York) and strongly argued that it is a financial service. Citing an example in consonance with the said meaning, the ld.Special Counsel has submitted that M a NBFC gives an asset based loan to real estate sectors, namely to : (i) Promotor-A Rs.5.00 Crores, (ii) Promotor-B Rs.10.00 Crores,(iii) Promotor-C Rs.1.50 Crores. The terms of repayment comprising the principal + interest in ten years are: (i) Rs.50.00 Lakhs + Rs.5.00 Lakhs (per annum), (ii) Rs.1.00 Crore + Rs.10.00 Lakhs (per annum) and (iii) Rs.1.50 Crores + Rs.15.00 Lakhs (per annum), respectively. Ms loan is asset backed or mortgaged backed and hence an asset, but not a liquid asset. M decides to convert Rs.30.00 Crore loan into 100 securities of Rs.30.00 Lakhs each and sells the securities to 100 parties with the terms that annual installment payment equals to Rs.3.00 Lakhs + Rs.30,000/- (principal + interest) for 10 years period. The NBFC M however, provides the service of collecting the principal + interest from three real estate promoters and distribution of annual installment to 100 holders of securities against service charges, thus securitization is a financial service.
6.2 He submits that major component of service tax demand, that is, nearly Rs.18.00 Crores is on this account of securitization service. Refuting the argument that gain on account of securitization is not a taxable service and the appellant did not create the securities, but sold the asset bagged loans or actionable claims to IDBI, who created the security and sold the same, it is his submission that this argument is not plausible because of the fact that if the appellant did not create and sale securities, gain on securitization would be a gain for IDBI and not to the appellant. Another inconsistency is that gain on securitization of the appellant is claimed for two financial years i.e. 2002-03 and 2003-04 and not for any other year during the period of dispute. It is unlikely that such a structural change in their business and resultant income would have taken place for two financial years and the structure before and after that was almost the same. It is his submission that this is very unlikely and would have invited special comments of the auditors and also their licensing authority i.e. RBI. Besides the act of securitization which is converting actionable claims into marketable securities is normally associated with the service of realizing periodical installments of principal + interest of loan (claim) and on that service the tax would be due. On the issue of penal interest for fore-closure of loan, the ld. Special Counsel though fairly accepted that in subsequent years, the ld. adjudicating authority has accepted the plea of the appellant and dropped the demand, however, the said issue is debatable and ought to be examined. Further, he has submitted that at no point of time he has introduced any additional grounds as argued by the advocate for appellant; on the contrary whatever have been mentioned in their Appeal have been argued before this Tribunal. He has further submitted that the Ld. Commissioner without specifying any reasons rejected the figures adopted from the RBI statement in arriving at the gross taxable value for the financial years2004 to 2006-07, hence the Order is bad in law.
7. Heard both sides at length and perused the records. The appellant M/s Magma Financial corporation are a Non Banking Financial Company (NBFC) registered with the Reserve Bank of India. During the relevant period, the appellant had rendered various financial services and received financial income, which the Department alleged to fall under the taxable category of banking and other financial services as defined under section 65(12) and also some receipts as Business Auxiliary Services falling under section 65(19) of the Finance Act,1994. Consequently, demand notices were issued to the appellant on the basis of the income shown in the respective balance sheet for the said period. The assesse-appellant disputed the said demand contending that the services rendered by them do not fall under the category of banking and financial services, and business auxiliary services, therefore, no service tax was required to be paid in rendering those non-taxable services.
8. The Ld. Advocate has contended that the appellant had been rendering the services, namely, (i)Financial leasing (which was last entered in the year 2001-02), (ii)equipment leasing, (ii)Hire Purchase Agreements, (iii) Operating lease agreements, (iv)Hire Purchase Finance Agreements, and (v) Loan against Hypothecation.
9. The ld. Commissioner after discussing the meaning of banking and other financial services as prescribed under section 65(12) of the Finance Act,1994 and the explanation inserted to the said provision with effect from 01.06.2007, Boards circular dt. 09.07.2001 and 28.02.2007, the judgements of the Honble apex court in Federation of the Hotel and Restaurant Association of India Vs. union of India (1989) 3 SCC 634, Gannon Dunkerleys case 1993 1KTR-178 & Builders Association case(1993 1KTR 169 concluded that financial leasing , equipment leasing, and hire purchase services are taxable under the category of banking and other financial services with effect from 16.07.2001; whereas, operating lease, loan against hypothecation, and hire purchase finance are not taxable under the said category of banking and other financial services.
10. Banking and other financial services, as prescribed under section 65(12), as was in force, at the relevant time, reads as:
65(12) banking and other financial services means
(a) the following services provided by a banking company or a financial institution including a non-banking financial company or any other body corporate , namely :
(i) financial leasing services including equipment leasing and hire-purchase by a body corporate;
(ii) credit card services;?
(iii) merchant banking services;
(iv) securities and foreign exchange (forex) broking,
(v) asset management including portfolio management, all forms of fund management, pension fund management, custodial, depository and trust services, but does not include cash management
(vi) advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisitions and advice on corporate restructuring and strategy;
(vii) provision and transfer of information and data processing;
(viii) banker to an issue services; and
(b) foreign exchange broking provided by a foreign exchange broker, other than those covered under sub-clause (a).]
11. The following explanation has been added with effect from 01.06.2007 reads as:
[Explanation. For the purposes of this item, financial leasing means a lease transaction where
(i) contract for lease is entered into between two parties for leasing of a specific asset;
(ii) such contract is for use and occupation of the asset by the lessee;
(iii) the lease payment is calculated so as to cover the full cost of the asset together with the interest charges; and
(iv) the lessee is entitled to own, or has the option to own, the asset at the end of the lease period after making the lease payment;]
12. On levy of service tax on banking and other financial services with effect from 16.07.2001, its scope has been clarified by the Board under F.No. BII/I/2000 TRU, dated 09.07.2001 as:
2.Financial services covered under the tax net are specifically mentioned in the definition itself.
2.1 Financial leasing including equipment leasing and hire purchase:
2.1-1 In case of-financial leasing including equipment leasing and hire-purchase, the service is taxable only if it is rendered by a body corporate. The term body corporate' has the meaning assigned to it in clause (7) of section 2 of the Companies Act, 1956. Briefly, body corporate means a private limited, public limited company or a Government company. Such companies should be either a banking company or a financial institution or non-banking financial company to come under the tax net. In other words individuals, proprietorship or partnership firms will not come under the tax net. The leasing or hire-purchase may be of motor vehicles, machinery and equipment or other goods.
2.1-2 In the case of leasing or hire purchase, it is understood that the general business practice is as follows: The service provider enters into a leasing or hire-purchase agreement with the lessee or hire-purchaser. At the time of entering into the agreement, they collect a charge called lease management fee or processing fee or documentation charges or by any other name, which is usually a percentage of the transaction value. The lease rental or hire purchase amount is recovered in `equated monthly instalments (EMI) over the period of lease or hire-purchase as indicated in the agreement through post dated cheques and no separate bills are raised for the monthly recovery. Every agreement bears a unique number.
21-3 The EMIs consist of recovery of principal amount (towards the original cost of the equipment) and finance/ interest charges. The allocation between the principal and the finance/ interest charges are known to and agreed upon by both the parties. The customer repayment schedule contains the details of the EMIs with the break up for the principal and the interest. In respect of leasing and hire-purchase, the amount recovered as principal is not the consideration for services rendered but is credited to the capital account of the lessor/hire purchase service provider. The interest/ finance charges is the revenue or income and is credited to the revenue account. Such interest or finance charges together with the lease Management fee/processing fee /documentation charges is the consideration for the services rendered and, therefore, they constitute the value of taxable service, and service tax is payable on this value. Accordingly it is clarified that service tax in the case of financial leasing including equipment leasing and hire purchase will be leviable only on the lease management fee/processing fee/documentation charges (recovered at the time of entering into the agreement) and on the finance/ interest charges (recovered in equated monthly instalments) and not on the principal amount.
2.1-4 A question has been raised whether lease or hire-purchase agreements entered into prior to the imposition of levy (prior to 16-7-2001) would be leviable to service tax. In this regard, it is clarified that such agreements entered into prior to 16-7-2001 will not be liable to service tax, provided the property/goods has also been received by the lessee prior to 16-7-2001.
13. On insertion of the explanation to the meaning of banking and other financial services, board has issued a circular dated 28/2/2007 clarifying the meaning and scope of finance leasing, which says:
7.6?Banking and other financial service :
(i)..
(ii)
(iii) The term financial leasing is explained as a lease transaction fulfilling the following conditions, namely :-
(a) a contract for leasing of a specific asset is entered into between two parties,
(b) the contract is for use and occupation of the specific asset,
(c) the lease payments are calculated so as to cover the full cost of the asset together with the interest charges, and
(d) the lessee is entitled to own or has the option to own, the asset at the end of the lease period after completing the lease payment;
7.6.1?International Accounting Standards Committee defines financial lease as lease that transfers substantially all the risks and rewards incidental to ownership of an asset, title may or may not eventually be transferred. Financial lease is a way of purchasing an asset with the help of the loan and the lessee uses the asset. Risks and rewards incidental to ownership of an asset is also with the lessee. All lease transactions particularly sale and lease back transactions are to be examined carefully on the basis of this clarification.
14. Both sides have placed heavy reliance on the judgement of the Hoble Supreme Court in Sundaram Finance Ltds case(supra). The special Counsel Shri D.K.Acharya for the revenue argued that the services rendered by the appellant even though claimed as financial leasing, equipment leasing, operating lease, loan against hypothecation, but in fact the arrangement between the appellant and its customers are nothing but in the nature of financial leasing & hire purchase which are specifically covered under the definition of banking and other financial services. The plea of Ld. Advocate for the appellant, on the other hand is that the services rendered by them are not in the nature of either finance leasing or hire purchase, and hence not taxable under the category of banking and other financial services.
15. The facts of Sundaram Finances case(supra) on which both sides placed reliance, are recorded at para 14 of the majority opinion as below: .
14. The facts of the case are that On September 29, 1958, the Sales Tax Officer, 1st Circle, Ernakulam, issued a notice calling upon the appellants to file returns of their turnover from sales in the course of business and to secure registration as dealers under the Travancore-Cochin General Sales Tax Act, 11 of 1125 M.E., and to furnish details of the transactions of sale with parties in the State of Kerala in the years 1955-56, 1956-57 and 1957-58. A similar notice was issued by the Sales Tax Officer on March, 3, 1962, in respect of the transactions within the State for the years 1958-59 and 1959-60. The appellants contended that they were not liable to be assessed under the Act. They contended that they were mere financiers and that they did not enter into any transactions of sale of goods with parties within the State of Kerala and that they were not "dealers" within the meaning of the Act. The Sales Tax Officer by orders dated March 25, 1962, and July 6, 1962, held that the transactions between the appellants and certain parties within the State of Kerala were sales within the meaning of the Act and the appellants were dealers liable to be assessed under the Act. The Sales Tax Officer accordingly reiterated his demand upon the appellants to file returns of their turnover in respect of sales for the five years in question along with details of all transactions in the State and "to produce evidence to prove the correctness and completeness of their returns".
16. Their Lordships after consideration of the arguments advanced by both sides observed as;
24. The true effect of a transaction may be determined from the terms of the agreement considered in the light of the surrounding circumstances. In such 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 become 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 arises 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 agreements must be distinguished from transactions 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 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.
17. After analysing the evidence on record, the conclusion arrived at has been recorded as:
28. In the light of these principles the true nature of the transactions of the appellants may now be stated. The appellants are carrying on the business of financiers : they are not dealing in motor vehicles. The motor vehicle purchased by the customer is registered in the name of the customer and remains at all material times so registered in his name. In the letter taken from the customer under which the latter agrees to keep the vehicle insured, it is expressly recited that the vehicle has been given as security for the loan advanced by the appellants. As a security for repayment of the loan, the customer executes a promissory note for the amount paid by the appellants to the dealer of the vehicle. The so-called "sale letter" is a formal document which is not made effective by registering the vehicle in the name of the appellants and even the insurance of the vehicle has to be effected as if the customer is the owner. Their right to seize the vehicle is merely a licence to ensure compliance with the terms of the hire-purchase agreement. The customer remains qua the world at large the owner and remains in possession, and on condition of performing the covenants has a right to continue to remain in possession. The right of the appellants may be extinguished by payment of the amount due to them under the terms of the hire-purchase agreement even before the dates fixed for payment. The agreement undoubtedly contains several onerous covenants, but they are all intended to secure to the appellants recovery of the amount advanced. We are accordingly of the view that the intention of the appellants in obtaining the hire-purchase and the allied agreements was to secure the return of loans advanced to their customers, and no real sale of the vehicle was intended by the customer to the appellants. The transactions were merely financing transactions.The appeals will therefore be allowed with costs in this Court and the High Court. One hearing fee.
18. Needless to emphasize, in considering the applicability of the ratio of the aforesaid judgement, and also the Boards Circular to the facts of the present case, it is necessary to understand the true nature of the agreements/contracts entered into between the appellant and their customers. We do not receive any assistance from the impugned order as the ld. Adjudicating authority has not referred to any of the agreements/contracts between the appellant and its customers, but only on the basis of interpretation/analysis of the provisions and circulars arrived at the conclusion on the taxability/non-taxability of various services rendered by the appellant. During the course of argument before this Tribunal, the appellant had referred to sample copies of agreements relating to lease agreements entered prior to and after 16.7.2001, hire purchase agreements before and after 16.7.2001, hire purchase finance agreements, loan-cum hypothecation agreements.
19. For the period prior to 16.07.2001 only one sample contract is submitted. The said agreement dt. 22.03.2000 was between the appellant and M/s Shiva Cement Limited, for lease of equipment valued at Rs.7,85,241/-, described at schedule-I of the agreement, was manufactured and supplied by M/s Thermax Ltd. In schedule-II the period of lease was shown as 24 months and lease rent as Rs.37,325/-per month. In schedule-III the due date of the payment of 24 instalments of Rs.37,325/- each had been mentioned. From the said agreement it is clear that for the equipment valued at Rs.7,84,241/-, the customer agreed to pay a total amount of Rs.8,95,800/- in 24 equal monthly instalments of Rs.37,325/-. It is necessary to refer to the some of the relevant clauses of the said agreement which are reproduced as below:
01. The Lessor hereby leases and the Leasee hereby takes on lease the Equipment described in the FIRST SCHEDULE on the terms and conditions stated hereunder. The Lessee shall pay promptly and regularly the instalments to the Lessor in the manner set out in Schedule II and Schedule III to this Agreement.
02.DELIVERY OF EQUIPMENT The Equipment will be delivered by the supplier to the Lessee and it is agreed that the risk in respect of the Equipment shall be to the account of the Lessee at the time of clearing the Equipment from the premises of the supplier to the Lessees premises and the Lessee shall accordingly bear responsibility for any damage prior to or during delivery. The delivery and freight charges from the premises of supplier shall be to the account of the Lessee. It is hereby agreed that notwithstanding any delay in delivery caused for reasons beyond the control of the Lessor, the Lessee shall be liable to pay the lease amount from the date of commencement of the lease and the Lessor shall not be liable for any loss caused to the Lessee by reason of delayed delivery and all charges and obligations of the Lessee shall commence and be enforceable as if delivery had been effected on that date in view of and in consideration of the Lessor having entered into appropriated the Equipment for lease to the Lessee.
03.ACCEPTANCE OF THE EQUIPMENT The Lessor shall not be responsible for any direct, indirect or consequential loss to the Lessee or to any other third party arising from any delay in delivery and/or installation of the Equipment either by the action of the manufacturer or otherwise.
04.RENT PAYMENTS Subject to right of the Lessor to vary rent as provided hereinafter, the Lessee shall during the said term (in addition to other considering payable in respect of this lease) punctually pay to the Lessor at its Registered Office on the respective due dates, free of any other deduction whatever, as rent for the Equipment, the sum of money specified in the SECOND SCHEDULE to this Agreement.
05.OWNERSHIP The property in the Equipment shall at all times remain solely and exclusively that of the Lessor and the Lessee shall have no right, title or interest therein except as Lessee and the Lessee shall not try to sell, hypothecate, sub-lease or subject the Equipment to any form of hailment. The Lessee irrevocably undertakes that at no time during the course of the lease agreements tenure, which tenure/period is non-cancellable will the Lessee attempt to capitalize the Equipment on the Lessees Balance Sheet, since the Lessee and Lessor irrevocably agrees the ownership of the Equipment, undisputedly rests with the Lessor.
14.SURRENDER Upon the earlier termination of this Lease Agreement in the event of one such proposal from the Lessee and the Lessor Agreement, at its sole discretion, to such proposasl of premature termination of the Lease Agreement, then the Lessee shall deliver to the Lessor the Equipment at such place as the Lessor may specify in good repair, condition and working order, ordinary wear and tear resulting from proper use thereof alone excepted together with such preclosure amount as the Lessor directs the Lessee to pay. Such preclosure amount, being immediately payable, shall comprise of the overdues under the agreement, any other costs and expenses realizable by the Lessor from the Lessee and the discounted value (rate of discounting at the sole discretion of the Lessor) of all future instalments.
15. DETERMINATION In case the Lessee shall during the continuance of this Agreement do or suffer any of the following acts or things :-
(a) fail to pay within the stipulated time any of the lease rentals, interest or other amounts payable under this Agreement or under any other Agreement with the Lessor, whether demanded or not ;
(b) die, become insolvent or compound with creditors ;
(c) in the opinion of the Lessor, substantial change in Lessees ownership takes place ;
(d) the Lessee being a limited company shall pass a resolution for voluntary winding-up or suffer a petition for winding up presented against it or if receiver be appointed to its undertakings;
(e) pledge or mortgage or hypothecate or sell or attempt to pledge or sell or part with possession of or otherwise alienate or transfer the Equipment;
(f) do or suffer any act or thing whereby or in consequence of which the Equipment may be distrained, or taken in execution under legal process, or by any public authority;
(g) fail to keep the Equipment comprehensively insured during the period of the Agreement ;
(h) fail to pay to the Government or any public authority any taxes or charge due in respect of the Equipment ;
(i) remove any of the Equipment to any other place without prior written permission of the Lessor ;
(j) break or fail to perform or observe any conditions on his/its part herein contained ;
(k) in the opinion of the Lessor (which shall be conclusive and binding on the Lessee) there shall be or arise any danger or possibility of the Lessors not receiving or recovering the full amount due to the Lessor under this Agreement or of Lessors being unable to exercise any or all of the powers or rights or enforce any or all of the benefits conferred upon it by this Agreement whether by reason of any act, deed or omission on the part of the Lessee or by reason of any circumstance or occurance whatsoever beyond the power and control of the Lessor (expressly including any ordinance and legislation by or under the authority of the Central or any State Government or other body or persons entitled to legislate); and
(l) fails to furnish to the Lessor the information rightfully required by it or any of the information submitted by the Lessee is found to be false.
then on occurance of any such event, the rights of the Lessee under this Agreement shall forthwith stand determined IPSO FACTO without any notice to the Lessee and the entire overdue amount receivable from the Lessee together with all future lease rentals for the balance of the said term without any abatement shall thereupon become due and payable immediately by the Lessee and the Lessor may without prejudice to any of its rights hereunder forthwith terminate the lease agreement created hereby. The Lessor and/or the Bank/Financial Institutions shall thereupon, without prejudice to its monetary claim, be entitled to enter the premises of the Lessee and take possession of the Equipment situated in any land or house or place or wherever it may then be, and to sue for all overdue and future instalments together with interest due on the defaulted instalments, damages for breach of Agreement, other charges/expenses realizable from the lessee and all costs occasioned by the Lessees default.
In the event of the Lease Agreement being determined as aforesaid before its full term expires, the Lessee shall forthwith deliver to the Lessor all Certificates and Policies of Insurance and all other documents relating to the said Equipment.
20.FINANCE CHARGES The Lessee shall also be liable to pay Finance Charges @ 2.25% per month to the Lessor on the amount disbursed by the Lessor under this agreement. Such finance charges shall be paid immediately on demand for the period from the date of payment by the Lessor for the purchase of the Equipment till the date of commencement of this agreement as detailed in Schedule II of this agreement.
24.TERMINATION It is agreed between the Lessor and the Lessee that the period of lease agreed to between the Lessor and the Lessee is non-cancellable. The lease cannot be cancelled unilaterally by the Lessee for any reason whatsoever until the period indicated in the schedule is over and the Lessee has completed payments of all contracted lease rentals.
27.COLLATERAL SECURITY The monthly payment of lease rentals for the Equipment shall be secured by delivery to the Lessor of a Demand Promissory Note to be executed by the Lessee for the value of Rs.8,95,800/-(Rupees Eight Lacs Ninety Five Thousand only).
20. Four sample copy of agreement for the period after 16.07.2001 have been enclosed. The first agreement was entered into between the appellant and its customer Mr. Rais Ahamad on 10.04.2006 titled as Agreement of Lease. The Schedule-I to the said agreement mentions the cost of the equipment/vehicle i.e. Mahindra Pick-Up as Rs.4,08,248/-, Schedule-II mentions the period of lease as 47 months and lease rent as Rs.8,561/- and Schedule-III shows the period of lease from 01.04.2006 to 28.02.2010, number of installment as 47 and each installment as Rs.10,253/-. Also, the delivery order enclosed there with reflects that it was addressed to M/s Dehradun Premier Motors Pvt.Ltd., wherein the cost of vehicle was shown as Rs.4,08,248/-, margin money paid directly as Rs.53,506/-, the loan amount to the customer as Rs.3,65,000/- and the arrangement between the appellant and the customer was shown as a loan-cum-hypothecation facility. On going through the said agreement it is noticed that more or less the stipulations contained in the earlier agreement(supra) are similar to the present one except minor variations here and there. It is shown that the appellant is providing an operating lease of various types of consumer durables, equipments etc. 20.1 The second agreement is dated 06.02.2006 shows that it was between the appellant and one Shri Arjun Mondal, the title of the agreement is agreement of lease. In Schedule I, the description of the vehicle was shown as Ambassador Classic-2000 and its cost as Rs.4,00,791/-, In schedule-II the period of lease as 36 months, the lease rent for 35 months was Rs.8,661/- and for 36th month it was Rs.8,670/- and in Schedule-III the period is mentioned along with the total installment payable as Rs.9,744/- for 35 months and Rs.9,754/- for 1 month. The promissory note attached to the said agreement was for a sum of Rs.3,50,794/-. In the letter addressed by the appellant dated 14.01.2006 to the manager, Austin Distributors Pvt.Ltd., Kolkata, whereby it is mentioned that the appellant agreed to finance Shri Arjun Mondal, the amount of Rs.3.00 Lakhs out of the cost of Rs.4,00,791/-. Also, it is mentioned that the margin money of Rs.1,00,000/- had been received by the said dealer. The invoice raised as sold to Magma Leasing Ltd.A/C Shri Arjun Mondal, which was also in the body of the agreement it is inter alia mentioned as operating lease.
20.2 The third agreement of lease dated 31.01.2006 between the appellant and Tarmani Mahakud submitted reflects at Schedule-I, under the column description as multi-utility vehicle Bolero DX Mahindra, its cost as Rs.4,95,776/- and period of lease as 35 months. Schedule-III of the said agreement shows the period as from 01.03.2006 to 01.12.2008, payment of the amount in 34 installments of Rs.12,441/- and 1 installment of Rs.12,441/-. A Promissory note was also enclosed along with the agreement for a sum of Rs.4,34,285/- in favour of the appellant by Tarmani Mahakud.
20.3 The fourth agreement enclosed is dated 30.01.2006 between Shri Pawan Kr.Singh and the appellant whereby the appellant had extended finance of Rs.5,44,000/- against the cost of vehicle of Rs.7,23,366/- and the period of lease 46 months. In Schedule-III the installments are also reflected. In the letter addressed to Shri Motors, Faridabad, Haryana, it is mentioned the customer of the appellant approached for a loan-cum-hypothecation facility.
21. The Appellant have submitted 5 (five) numbers of hire purchase agreements entered into before 16.07.2001.First agreement dated 27.04.2001 was between Shri Harish Kumar and the Appellant. The title of the agreement is Hire Purchase Agreement. The description of the Appellant and the hirer and other particulars mentioned in the said agreement strongly relied by the ld.Advocate is reproduced below:-
WHEREAS the Company is a financial institution providing funds, inter alia, for hire purchase of vehicles, and other assets to individuals/business concerns/other entities.
WHEREAS the Hirer has approached the Company for obtaining finance and has agreed to acquire/purchase; has acquired/purchased; holds; the vehicles, more fully described in Schedule-I hereunder, hereinafter referred to as Hired Article on the terms and conditions as laid down and stipulated in the proforma of this Agreement provided to the Hirer by the Company and the Company has agreed by its scheme of operation duly accepted by the Hirer to provide funds to the Hirer, for the said purpose.
WHEREAS the Hirer has identified the vehicle and the supplier/dealers thereof and the parties agree and understand that all types of produce warrants as to running and maintenance of the vehicle are that of the vehicle manufacturer/supplier/dealer only and no claim of whatsoever nature will be against the Financier.
WHEREAS the Hirer has agreed to deposit Post Dated Cheques with the Company at its Registered Office at 24, Park Street, Calcutta 700016 towards security for payment of monthly/quarterly hire charges and undertakes to ensure encashment of the same on the respective due dates.
WHEREAS the Hirer has agreed to hold the Hired Article in Trust for the Company, subject to user right and not to deal with the same in the manner specified in Clause 3(1) hereof until the entire amounts due under this Agreement are duly paid to the Company on the terms and conditions more particularly set out hereunder.
The term Bankers wherever appearing hereinafter shall mean Allahabad Bank having Head Office at 2, Netaji Subhas Road, Kolkata-700001 and branch at 19, Nelli Sengupta Sarani, Kolkata-700087.
The main conditions which need to be referred to are 01. HIRED ARTICLE AND TENURE The Company shall provide funds for acquisition of the Hired Articles set out in the Schedule I hereto and the Hirer shall hold the same in trust for the Company from the date of commencement of this Agreement regardless of the date of physical delivery of the Hired Article for the period as slated in Schedule-II hereof subject only to Hirers user rights upon the terms and condtions, herein contained.
The Hirer shall not be entitled to make any claim whatsoever on the Company in respect of the Hired Article and/or relating to its specifications and/or its condition and/or in any other manner whatsoever.
The Annexures hereto shall form an integral part of this Agreement.
03. HIRERS WARRANTIES
c) LOCATION Keep the Hired Article at the Hirers said premises and shall permit the Company and/or its agent at all times to enter upon any premises at which the Hired Article is kept/parked for the purpose of verification and also repossessing the Hired Article under the provisions of Clause 15 of this Agreement, and shall not under any circumstances change the location of the Hired Article, without express approval of the Company.
06 RELEASE OF PROPERTY If the event the hiring continues for the full period referred to in Schedule-III hereof and the following sums of money been punctually paid:-
a. all instalments due under this Agreement;
b. other sums of money due hereunder; then in such event the Company shall release and relinquish all its rights and interest in the Hired Article. Until such payments, the Company shall continue to have all rights and interests created by the these presents over the Hired Article together with any accession, improvements and additions made thereto by the Hirer as clearly provided in Clause 3(l) of this Agreement and rights of the Hirer shall be subject to the beneficial rights of the Company and the Hirer shall be deemed to be holding the Hired Article in trust for the Company.
The Company shall be at liberty to hypothecate the Hired Article in favour of the Bankers until the Hirer shall pay the entire amount due hereunder.
09. COLLATERAL SECURITY The monthly/quarterly payment of hire charges for the Hired Article shall be secured by the delivery to the Company of a Promissory Note to be executed by the Hirer for the value of Rs.3,29,040/- (Rupees Three lakh Twenty Nine Thousand and Forty only).
15. DETERMINATION J) In the sole opinion of the Company (which shall be conclusive and unchallengably binding on the Hirer) there is or shall arise, any danger or possibility of the Company not receiving or recovering the full amount or amounts due to it under this Agreement or of its being unable to exercise any or all the powers or rights or enforce any or all of the benefits conferred upon it by this Agreement whether by reason of any act, deed, or omission on the part of the Hirer or by reason of any circumstance or occurance whatsoever beyond the power and control of this Hirer;
k) change of management either due to ownership or control;
21.1 In the Schedule-I to the said agreement, the cost of asset, namely Maruti Alto Alex was mentioned as Rs.2,90,400/-. In the Schedule-II besides cost of asset, initial payment was shown as Rs.30,400/-, amount financed as Rs.9,60,000/-, financial charges Rs.69,040/- and the total amount payable in installments was Rs.3,29,040/- and monthly installment was Rs.9,140/-. Schedule-III reflects payment schedule and amount of 30 installments @ Rs.9,140/- per month. Promissory Note has been executed by Shri Harish Kumar in favour of the Appellant for an amount of Rs.3,29,040/-. A copy of the invoice issued by D.D.Motors in favour of Shri Harish Kumar dated 27.04.2001 was also enclosed wherein the total price of the asset was shown as Rs.2,90,400/-
21.2 The second agreement was dated 13.03.2001 between Mr.Tariq Khursheed reflecting the same conditions. In Schedule-I the description of the asset was shown as Mahindra Sawari and the cost of asset as Rs.3,93,117/-. In Schedule-II besides cost of asset initial payment was shown as Rs.1,18,117/-, the amount financed Rs.2,75,000/-, financial charges Rs.72,586/- and the total amount payable in installments was Rs.3,47,586/-, comprising of 11 installments of Rs.14,521/-, 12 installments Rs.1,135/- and another 12 installments of Rs.5,767/-. The Schedule-III of the said agreement reflects the due date of installment and the amount of installment. A promissory note for Rs.3,47,585/- was executed by the customer Mr.Tariq Khursheed in favour of the Appellant dated 13.03.2001. A letter of the Appellant dated 13.03.2001 addressed to Amit Auto Sales intimating that the Appellant could extend finance to Mr.Tariq Khursheed. Also the invoice of Amit Auto Sales dated 12.03.2001 was enclosed showing the total cost of the vehicle as Rs.3,93,117.00.
21.3 The third agreement is between Mr.Surinder Singh and the Appellant dated 14.06.2000 on some conditions. The cost of the vehicle in Schedule-I was shown as Rs.3,10,000/- and initial payment in Schedule-II was shown as Rs.1,00,000/- amount financed Rs.2,10,000/- and financial charges as Rs.85,580/- and payable in 36 installments of Rs.8,155/-. Schedule-III shows the period and the installments. The 4th Agreement is between Shri Rakesh Bhutoria and the Appellant dated 28.06.1999. Schedule-I shows the cost of asset Maruti Standard Car as Rs.1,89,224/-, in Schedule-II besides cost of asset initial payment Rs.47,224/-, amount financed Rs.1,42,000/- with financial charges Rs.39,831/- and the total amount payable in 36 installments was Rs.1,81,831/- having 1 installment of Rs.5,081/- and 35 installment as Rs.5,050/-. Schedule-III mentions total number of installments with due date and the amount of installment. Promissory Note for a amount of Rs.1,81,831/- was executed by the customer in favour of the Appellant dated 28.06.1999. Also an invoice of Jalan Distributor in favour of the customer Shri Rakesh Bhutoria dated 01.07.1999 was enclosed wherein the cost of the vehicle as shown as Rs.1,90,229/-.
22. There are 4(four) numbers of agreements enclosed for the period after 16.07.2001 claimed as Hire Purchase Agreement. The first Agreement is dated 24.09.2001 between Mr.Sarwanand Yadav and the Appellant. In the Schedule-I description and cost of the asset was mentioned as Omni and Rs.2,33,734/- respectively. Initial payment was Rs.5,734/-, amount financed as Rs.1,83,000/-, financial charge is Rs.66,984/-. The total amount financed was Rs.2,49,984/- which were payable in 48 installments of Rs.5,208/-. A promissory note was executed in favour of the Appellant for Rs.2,44,984/- by the customer.
22.1 The second agreement is dated 06.01.2003 between the Appellant and Mrs.Barnali Dey. In Schedule-I, the description of the asset is shown as 1 number of Tata Sumo value and its cost as Rs.5,64,000/- in schedule-II the said cost of the asset, initial payment was shown as Rs.1,94,000/-, amount financed as Rs.3,70,370/- and financial charges is Rs.98,000/- The total amount of Rs.4,68,000/- payable in 36 installments of 13,000/- each. Schedule-III shows the due dates and the amount installment payable. A promissory note is issued in favour of the Appellant by the said Mrs.Barnali Dey for Rs.4,68,000/-. Copy of invoices was issued in the name of Mrs.Barnali Dey to M/s.K.V. Motors Pvt.Ltd. for Rs.5,67,050/-. The third and fourth agreement is between Shri Ashish Mehrotra and the Appellant dated 13.07.2002 and Mr.Birender Sah and the appellant more or less on the same terms and conditions relating to the asset/vehicle HM-Porter cost of which is shown as Rs.2,55,000/- and HM-RTV cost of which was shown as Rs.5,12,305/-. The total financial amount was Rs.2,60,150/- and payable in 33 installments of Rs.6,550/- in the former case and in the second case it was Rs.4,38,912/- payable in 36 installments of Rs.12,192/-. Promissory note was executed with the respective customer for Rs.2,15,350/- and Rs.4,12,918/- in favour of the Appellant respectively.
23. Also there are four numbers of hire purchase finance agreement have been submitted by the Appellant. The first hire purchase finance agreement is dated 07.08.2003 between one Rajpal Singh and the Appellant. The conditions of the agreements which is as follows:-
CONDITIONS OF THE AGREEMENT It is hereby agreed and declared by the parties as under:
a) The Hirer/s shall always remain liable to repay the Financed Amount as mentioned the Schedule if hereto along with finance charges thereon and all other charges payable under this agreement irrespective of MAGMA taking possession of the said Asset(s) which would form part of the security of MAGMA for recovery of its dues. The said Asset(s) shall be held by the Hirer/s for and on behalf of MAGMA and in trust for MAGMA.
b) for the purpose of accruing re-payment of the Financed Amount and all the sums payable hereunder, the Hirer/s hereby transfers/shall be deemed to have transferred the right to possess and use the said asset(s) to MAGMA.
c) The Hirer/s has examined (or caused to be examined) the said Asset(s) and satisfied himself as to its operation, condition and running. No warranty and responsibility is implied on the part of MAGMA in respect of the said Asset(s) in any manner whatsoever. No liability, claim or action shall be levied against MAGMA, whether by the Hirer/s or by any other person or authority, in respect of the said Asset(s).
23.1 In Schedule-I to the said agreement the description of the asset were shown as Ashok Leyland and the cost of the asset is Rs.9,18,747/-. In Schedule-II, the amount financed was shown as Rs.8,09,100/- and financial charges for 3 years as Rs.1,48,800/-. Insuranc premium for 2nd and 3rd Year is Rs.37,200. The total amount payable in 31 installment is Rs.32,100/- each. A promissory note was executed by Shri Rajpal Singh for an amount of Rs.9,95,100/-. In the letter dated 07.08.2003 addressed by the Appellant to M/s.Ashok Leyland Ltd. discloses that the customer Shri Manish Kumar was extended a loan/hypothecation facility of Rs.8,09,100/-.
24. Similar hire purchase finance agreement was executed on 15.02.2006 between Jasminder Singh and the Appellant and Saminder Singh and Appellant dated 13.02.2006. In the former case the description of the goods was shown as Tata 2515 and the cost of the asset is Rs.6.00 Lakhs, total financial amount of Rs.6.00 Lakhs is payable in 35 installments. The last agreement is between Shri Santosh Mahapur and Shri Nishikant Mahapur and the appellant whereby in Schedule-I, the description of the asset is shown as Tata 8K/1613 and the cost of the asset is shown as Rs.10,96,348/-. The amount financed as Rs.8,17,289/-, financial charges Rs.2,20,668/-, insurance charges for second and third year as Rs.37,835/-. The total amount of Rs.10,75,792/- was payable in 47 installments and the period and the installments are shown therein.
25. There are two numbers of agreements titled as vehicle loan cum hypothecation agreement are enclosed. The first agreement was dated 17.05.2004 between M/s.Santosh Pargal & Co. and the Appellant. In Schedule-I the cost of vehicle was mentioned as Rs.3,87,000/- loan amount as Rs.3,25,000/-, payable in the 32 installments of Rs.12,643/- during the period 01.07.2004 to 01.02.2007. A promissory note for Rs.4,04,576/- had been issued in favour of the Appellant by the customer. The second agreement was between the Appellant and Mr.Rajkumr & Mr.Bajrang Agarwal dated 21.05.2004t. In the schedule the description of the asset was shown as M/s.Tata Model LPT 2513 and cost of the said asset as Rs.9,74,857/-, loan amount as Rs.8,42,000/- payable in 47 installments during the period 01.07.2004 and 01.04.2008.
26. From the ratio laid down by the Honble Supreme Court in Sundaram Finance Ltd.s case, it is crystal clear that the effect of transaction be determined from the terms of the agreement considered in the light of surrounding circumstances and the court has power to go behind the documents and to determine the nature of transaction whatever may be the form of the documents. An attempt has been made by us to analyze the true nature of the transaction between the Appellant and its customers from the agreements/documents placed before us. Broadly, we find that in almost all the cited agreements/contacts, the Appellant had been approached by the respective customers for procuring/purchasing a vehicle, (except agreement dated 22.03.2000 between the Appellant and M/s.Shiva Cement Ltd. which relate to lease of equipment). We find that the customers were required to pay the amount/value shown in the schedule-II of the agreements in monthly installments for the period specified in schedule-III agreed between the appellant and the customers. We find that most of these transactions are not supported with purchase and allied documents by which it could be ascertained as to the true intention of the parties in advancing/purchasing the equipment/vehicle. Even though theoretically it has been argued that the equipment/vehicle was purchased by the appellant and thereafter leased to the customers against lease rent, but examining such agreements, we noticed that some amount was initially paid, thereafter, the remaining amount was paid by the appellant to the dealer and the initial payment is described as down payment, margin money, etc., but it is not clear in all cases as who had paid this initial payment. In the event such margin money is paid by the customer, and from other attendant circumstances it could not be said that the arrangement is as an operating lease and the asset is owned by the Appellant. Similar impediments, also encountered, in equipment leasing. As already noted above even though the ld. Commissioner has recorded finding on the aspect of demand of Service Tax on the services of financial leasing, equipment leasing and hire purchase as taxable service while dropping the demand on operating lease, loan against hypothecation and hire purchase finance, but failed to discuss any of the agreements/documents to ascertain the true colour of the transaction between the appellant and its customers. Also, we find that even though the demand is spread over a period of five years i.e. from April 2002 to March, 2007, however, agreements for all these years had not been enclosed. In absence of complete facts supported by documents indicating the nature of true transaction between the appellant and its customers, it would certainly be difficult to arrive at a conclusion, whether the claim of the appellant that their transactions involve financial leasing, equipment leasing and hire purchase, where the commissioner confirmed the demand and others are operating lease, loan against hypothecation and hire purchase finance, where the demands were dropped. The Honble Supreme Court in Sundaram Finances case has categorically laid down that the nature of transaction culled out from the documents and surrounding circumstances are the decisive factors in arriving at a conclusion whether the ownership of the goods under hire purchase agreement has been retained or conveyed on completion of transaction. Therefore, all these agreements need to be scrutinized along with supported evidences/documents which could not be possible at this appellate stage as all the transaction documents are not enclosed with the agreement; besides these agreements were not examined/scrutinized by the original adjudicating authority even though equipped with enough manpower to undertake such a herculean task. In the result, we are of the firm opinion that ascertaining of the facts are vital to application of the principle of law, in the interest of justice this aspect need to be remitted to the ld. Commissioner for verification of the facts in detail and ascertain the true nature of transaction between the appellant and its customers during the period under dispute and arrive at the conclusion whether the transaction/services falls within the scope of taxable services of banking and other financial services defined at Section 65(12) of Finance Act, 1994.
27. The next important issue needs determination is whether value representing securitization transaction deducted from the total value as non-taxable service for the period 2002-03 & 2003-04 is correct or other wise. The claim of the appellant is that in addition to providing aforesaid services they also entered into the transaction of securitization, whose value had been rightly deducted from the gross taxable value for the financial year 2002-03 & 2003-04 being in the nature of sale transaction. It is their contention that they have followed necessary guidelines issued by the RBI, applicable to banks/financial institutions and NBFCs in this regard. Referring to those guidelines, and explaining the nature of transaction, the ld.advocate has submitted that securitization follow a two stage process. In the first stage, there has been sale of single asset or polling and sale of poll assets to a bankruptcy remote Special Purpose Vehicle (SPV) in return for an immediate cash payment. The second stage involves re-packaging and selling the interest representing schemes on incoming cash flows from the asset or pool of assets from the third party customers tradable that securitization. It was their contention that the first stage of transaction happens between originator and SPV and the second stage between SPV and investor. The ld.advocate categorically claimed that the activity undertaken by the Appellant is sale of financial assets and not a service that alleged by department is their activities are limited to the first stage only i.e. creation of financial assets by giving out loans, creating a portfolio of financial assets and selling the financial assets to SPV. He has categorically submitted that the appellant does not undertake the second stage of the transaction i.e. activity of re-packing of financial assets into salable securities which is done by the SPV and purchasing banks/financial institutions. The ld. advocatge however fairly accepted that after sale of the financial assets there is a service element which can either be performed by the buyer himself or the buyer may appoint either the seller of the securities or a third party to undertake activities of collection, recovery, accounting of the installments due from the customers. He has submitted that for such activities which are in the nature of servicing separate agreements are entered into for a consideration. It is his categorical submission that during the relevant period the appellant had undertaken only the securitization transaction and they did not undertake services of collection, recovery, accounting, installments due from the customers. However, for the subsequent periods, the Appellant had entered into separate servicing agreements for separate consideration on which service tax has been discharged. The grievance of the Revenue, on the other hand is that without due verification of any of the facts the ld.Commissioner has simply allowed the deduction on account of securitization, hence the same is bad in law.
28. The Ld. Spl. Counsel Shri D.K.Acharaya referring to the meaning of securitization mentioned at page 286 of The Economics of Money Banking and Financial Markets(fifth edition) By Fredric S. Mishkin contended that the process of securitization involves rendering financial services. It reads as:
SECURITIZATION. An important example of a financial innovation arising from improvements in both transaction and information technology is securitization, one of the most important financial innovations in the past two decades. Securitization is the process of transforming otherwise illiquid financial assets (such as residential mortgages), which have typically been the bread and butter of banking institutions into marketable capital market securities. As we have seen improvements in the ability to acquire information have made it easier to sell marketable capital market securities. IN addition, with low transaction costs because of improvements in computer technology, financial institutions find that they can cheaply bundle together a portfolio of loans (such as mortgages) with varying small denominations (often less than 4100,000), collect the interest and principal payments on the mortgages in the bundle, and then pass them through (pay them out) to third parties. By dividing the portfolio of loans into standard ized amounts, the financial institution can then sell the claims to these interest and principal payments to third parties as securities. The standardized amounts of these securitized loans make them liquid securities, and the fact that they and made up of a bundle of loans helps diversify risk, making them desirable. The financial institution selling the securitized loans make a profit by servicing the loans (collecting the interest and principal payments and paying them out) and charging a fee to the third party for this service.
29. There after through an example narrated in his submissions recorded above, he has argued that securitization could also involve rendering of the service and the Ld. Commissioner has simply deducted the value shown against securitization for the respective years without verification of the facts whether it was a sale or service by analyzing the respective agreements.
30. From the submissions advanced by both sides we find that the securitization as narrated by the ld. Advocate, taking cue from the RBI guidelines, is claimed by the Appellant to have been limited to the first stage, however, whether it involved the second stage of rendering service has not been scrutinized/examined by the ld. Commissioner before deducting the said securitization amount from the gross taxable value for two financial years considering the same as non-taxable under the Finance Act,1944. Therefore, in our opinion the true transaction of securitization contracts entered into with respective Banks/customers ought to be examined before arriving at any conclusion whether the amount claimed by the appellant is the result of a sale transaction or service as argued by the revenue, and accordingly are leviable to service tax or otherwise. Therefore, this aspect also needs to be remitted to the Ld. Commissioner for consideration afresh.
31. it is also the grievance of the revenue in the appeal filed against the impugned order that while calculating the service tax liability for the period 2004 05, 2005 06 and 2006 07, the adjudicating authority had rejected the RBI statement figures, without recording any reasoning in this regard. The total taxable value as mentioned and in the show cause notice for 2004-05 was Rs. 8910.56 lakhs, 2005 -06 was Rs.14143.14 lakhs, and 2006-07 was Rs.8356.04 lakhs, whereas, the Commissioner, the reduced the value to Rs.494.55 lakhs, 137.93 lakhs and Rs.39,37,000/- respectively.
32. In their submission, the appellant supporting the said finding of the Commissioner argued that the Department in its appeal could not place any material to negate the said findings. We do not see merit in the said contention of the appellant, in as much as, while rejecting the computation of the Department based on figures submitted to RBI, the ld. Commissioner has not recorded any observation as to why the said figures be discarded. Any order/finding without reasons is cryptic and itll be difficult for the appellate authorities to examine the correctness or otherwise of such findings, hence such order cannot be sustained in law. The Honble Supreme Court in the case of Asst. Commr. Commerical Tax Dept. Vs. Shukla Brothers 2010 (254) ELT 6(SC) laying emphasis on reasons in an Order observed as:
12.?At the cost of repetition, we may notice, that this Court has consistently taken the view that recording of reasons is an essential feature of dispensation of justice. A litigant who approaches the Court with any grievance in accordance with law is entitled to know the reasons for grant or rejection of his prayer. Reasons are the soul of orders. Non-recording of reasons could lead to dual infirmities; firstly, it may cause prejudice to the affected party and secondly, more particularly, hamper the proper administration of justice. These principles are not only applicable to administrative or executive actions, but they apply with equal force and, in fact, with a greater degree of precision to judicial pronouncements. A judgment without reasons causes prejudice to the person against whom it is pronounced, as that litigant is unable to know the ground which weighed with the Court in rejecting his claim and also causes impediments in his taking adequate and appropriate grounds before the higher Court in the event of challenge to that judgment. Now, we may refer to certain judgments of this Court as well as of the High Courts which have taken this view.
33. Therefore, the computation for the financial years 2004-05, 2005-06 & 2006-07 are set aside and the adjudicating authority is directed to record a detailed finding supported by reasons in discarding the RBI statement figures and adopting the figures submitted before him.
34. The next issue for determination is whether collection commission should be chargeable to service tax under the category of Business Auxiliary Service(BAS). The ld. Commissioner while confirming the said amount under the taxable service BAS as defined under Sec.65(12) observed that it was received towards the services rendered by the Appellant in relation to collection of EMI from the borrowers on behalf of the several Banks and providing financial service to the banks in disbursement of loan by the customer- banks which resulted in promoting or marketing of the services provided by the clients (banks), hence fall under clause(ii) i.e. promotion or marketing of services provided by the client of the said definition of BAS. The ld. advocate countering the said observation submitted that the collection commission cannot fall under the scope of BAS brought into force w.e.f. 01.07.2003. It is their contention that commission agent involved in the sale and purchase of excisable goods are only liable to pay service tax under BAS and if at all any liability arises as commission agent then it would be after 16.06.2005. In support he has referred to the decision of this Tribunal in the case of S.R. Kalyankrishan Vs.CCE 2008 (9) STR 255 (Tri.-Bang.).
35. From the impugned order we find that the ld.commissioner has not confirmed demand of service tax on the collection commission considering the appellant as a commission agent and the amount received as agency commission but, he has confirmed the demand service tax on such receipts under Clause-(ii) of the Definition of BAS as defined under 65(19) of the Finance act, 1994. It reads as under :-
business auxiliary service means any service in relation to
(i) ..
(ii) promotion or marketing of service provided by the client;
(iii) ..
(iv)
(v)..
(vi)
(vii)
36. We find that taxability of similar nature of services rendered by auto dealers/financial companies are considered by this Tribunal in the case of Bridgestone Financial Services vs. Commissioner of Service Tax, Bangalore 2007 (8) STR 505(Tri.-Ban.) and other cases leading to conflicting views. The issue has been referred of Larger Bench in Pagaria Auto Centre vs. CCE, Aurangabad 2014 (33) STR 506(Trb.LB). Resolving the conflict, it is observed as:
20.?On a consideration of the apparent conflict of opinion in the decisions mentioned in the order of reference and the other decisions which were cited at bar, it is clear that no uniform principle emerges as would guide determination of whether a particular transaction involving an interface between an automobile, dealer and bank or financial institution would per se amount to BAS. The identification of the transaction and its appropriate classification as the taxable BAS or otherwise must clearly depend upon a careful analysis of the relevant transactional documents. Only such scrutiny and analysis would ensure rational classification of the transaction.
37. After analysis of the agreement/transaction documents following the principle laid down in Pagaria Auto centres case, the Tribunal in a subsequent case viz. Atamaram Auto Enterprises Vs. commissioner of central excise, Kanpur 2015(37) STR 405(Tri.-Del.) held that such services are taxable being in the nature of promoting or marketing services provided by the Banks under the heading of Business Auxiliary services.
38. In the present case, we find that the Ld. Commissioner has without scrutiny of the agreements/contracts with the client Banks, arrived at the conclusion that the service rendered by the Appellant are in the nature of promoting the business of client-banks and hence classifiable under BAS. As held in Pagaria Auto centres case, it is necessary to examine/scrutinize the transaction to ascertain whether it is BAS or otherwise. Therefore, this issue also needs to be remitted to the Ld. Adjudicating authority for consideration afresh. We also find that in computing the demand under this category the ld. adjudicating authority has discarded the figures of the RBI statement without recording reasons. Therefore, the ld. Commissioner also should record reasons in computing the demand, in the event it is concluded by him that the said service is taxable.
39. The next issue needs determination is recovery of Rs.93.00 Lakhs, collected by the Appellant representing the said amount as service tax, under section 11D of the Central Excise Act, 1944 as applicable to Service Tax matters. It is the contention of the Applicant that only an amount of Rs.7,54,689/- was collected by the Applicant representing service tax and the amount of Rs.69,52,945/- was collected as contingency deposit. Further, it is argued that that the amount of Rs.93.00 Lakhs had been arrived by the department erroneously by considering the amount of Rs.37,78,823/- twice. The adjudicating authority on the other hand observed that even though such claims have been made, but not supported by any evidence. We find merit in the said finding. It has not been substantiated by the appellant as to how the said contingency deposits had been collected from the customers, that is, whether it was collected in lump sum or was shown as deposits in the respective agreements/contracts or Bills raised by the appellants or any other manner during the relevant period. Advancing the bare claim that collection was towards contingency deposit could not lead to any conclusion that these amounts have been collected as deposits, not as representing service tax as alleged by the department since at the initial stage of investigation the said facts were admitted by the Assistant Vice President (AVP) of the appellant. Thus, it is necessary to lead more evidences by the appellant to substantiate their claim that the amount of Rs.69,52,945/- which was collected from the customers/clients were nothing, but contingency deposits and not service tax. In the interest of justice, therefore, the Appellant be provided a further fair chance to produce before the adjudicating evidence in favour of the said claim. So this issue has also needs be remanded for consideration afresh.
40. In confirming the demand, for the period 2002-03 & 2003-04, the ld. adjudicating authority included in the gross taxable value, the amounts received towards management fees, penal interest and termination charges. He has not recorded any finding in relation to management fees, however on the penal interest and termination charges, he has observed that the said service cannot be excluded from the value as the amounts were collected as interest component of the loan. We find that for the period 2005-06( Oct.2005 to Mar.2006) to 2009-10, the ld. Commissioner vide Order-in-Original No.04 & 05 /Commr./ST/Kol/2012-13 dt. 24.04.2012, dropped a total demand of Rs.22,85,29,000/- on the delayed payment charges, cheque bouncing charges, pre-payment charges. The Department has not filed any appeal against the said order. Besides, we find that the Tribunal in the case of Bank of Baroda Bank of Baroda v. CCE, Jaipur 2014 (35) STR359(Tri.-Del.) & Small Indistires & Devlopment Bank of India Vs. CCE, Chandigarh 2011 (23) STR 392 (Tri-Del.) held that penal interest, prepayment charges are not be leviable to service tax under the category of banking and financial services. Following these decisions were of the view that service tax is not payable on the penal interest and prepayment/termination charges. With regard to the Management fees the Ld. Commissioner is directed to record a detailed finding supported with reasons on its leviability to service tax.
41. Since most of the issues raised by the assesse and the revenue are remanded for reconsideration, hence, in our considered view, it would be inappropriate to record any observation on the applicability of extended period and penal provisions at this stage when the facts are not clear. The adjudicating authority would be free to decide after analysis of facts/evidences on record and that would be produced in the remand proceeding to arrive at a conclusion on the aspect of limitation and imposition of penalty accordingly.
Our findings on the issues are summarized as below:
(I) The terms of the contract relating to all the agreements claimed to be financial lease, equipment lease, operating lease, hire purchase agreement, hire purchase finance agreements and loan cum hypothecation agreements be analysed/examined along with other relevant documents/evidences to ascertain the true nature of transaction between the appellant and its customers so as to arrive at a conclusion whether the said services fall within the scope of Banking & other Financial services.
(II) The securitization agreements/contracts between the appellant and its customer banks be examined/scrutinized to ascertain whether the transaction is that of a sale or a service, accordingly, its deductibility from the gross taxable value or otherwise.
(III) In the event various services rendered are held to be taxable, detail findings and reasons in computing the value either from RBI statements or from any other source for the years 2004 05, 2005-06 & 2006-07 be recorded.
(IV) The transactions between the Appellant and clients(banks) be scrutinized to ascertain the collection commission received by the Appellant whether would fall under the scope of Business Auxiliary service(BAS).
(V) The Appellant be allowed to furnish further evidences in support of their claim that demand of Rs.93.00 lakh is the result of computation error, the amount of Rs. 69,52,945/- is collected as contingency deposit and not service tax.
(VI) The demand on penal interest and termination charges are liable to be dropped and the transaction relating to collection of Management Fees be scrutinized and reasons be recorded for its leviablity or otherwise to service tax under the category of Banking & other Financial services
42. At this stage, both sides pleaded that a time limit may be fixed for completion of the Adjudication proceedings as the matter is quite old. With the consent of both sides, we are of the opinion, that as far as practical, the learned Commissioner should complete the Adjudication proceedings within four months from the date of communication of this order. The learned Advocate for the Appellant assured that all requisite evidences would be submitted as soon as the notice of hearing would be received by them and they would cooperate in the denovo proceeding.
43. Consequently the Appeal and Cross Objection filed by the assesse and the Appeal filed by the Revenue are disposed off on the above terms.
(Operative part of the order was pronounced in the Court.)
SD/ SD/
(H.K.THAKUR) (D.M.MISRA) MEMBER(TECHNICAL) MEMBER(JUDICIAL)
sm
54
Appeal No. S.T.160, 188/09