Custom, Excise & Service Tax Tribunal
Karur Vysya Bank Ltd vs Cce, Trichy on 29 January, 2015
IN THE CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL SOUTH ZONAL BENCH AT CHENNAI ST/306/2008 (Arising out of Order-in-Original No. 4/2008 (ST) dated 27.11.2008, passed by the Commissioner of Central Excise, Trichy). Karur Vysya Bank Ltd. : Applicant Vs. CCE, Trichy : Respondent
Appearance Shri N. Quadir Hoseyn, Adv., For the applicant Shri M. Rammohan Rao, AC (AR) For the respondent CORAM Honble Shri D.N, PANDA, Judicial Member Honble Shri R. PERIASAMI, Technical Member FINAL ORDER No. 40087 / 2015 Date of Hearing/Decision: 28.01.2015 Per: D.N. Panda Ld. Counsel submits that it is the interest income of the Bank that has been taxed in the present adjudication even though there were no service charges received in this regard. According to law if any taxable service is provided and consideration received therefrom, that is only exigible to service tax. Therefore the adjudication is ill-founded which has taxed interest income without provision in that regard in the Finance Act, 1994 (hereinafter referred to as the Act).
2. Revenue seriously opposes above proposition of the appellant on the ground that the hypothecation is also a banking service. Even leasing of the equipments and the goods shall be covered by the banking and financial services. Therefore, any amount received other than the recovery of principal amount shall be liable to service tax reading provision of section 65(105)(zm) combinedly with section 65 (105)(12) of the Act. He further submits that loan and hypothecation are different. Therefore any consideration received from hypothecation is taxable by the above said taxing entry.
2. Heard both sides and perused the adjudication order.
3. Ld. Adjudicating Authority in para-4 of his order has framed the issue which is whether the noticee is liable to pay service tax on the interest received on hypothecation loan. To decide the issue, he has also discussed character of the term loan in the said paragraph. He says that the term loan is legally different from financial lease, hire purchase and hire purchase transactions, which are not loan or advance. Therefore, interest received in the name of loan transaction for purchase of vehicles, machineries is to be treated as finance charges received from hire purchase/financial lease and not on loan for the reason that the services rendered are not just giving loan but services of hire purchase/financial leasing provided. He further says that during the period 14.05.2003 to 30.11.2007, interest received constitutes the gross value of taxable service provided and liable to service tax. Accordingly, he imposed service tax with the consequence under law to follow.
4. Adjudication order reveals that emphasis of the adjudicating Commissioner was to tax interest received by the appellant from hypothecation of vehicles/machineries and other equipments for the above period constituting the taxable value.
5. We are conscious that Finance Act, 1994 is not the law of Income Tax to tax interest income but the consideration relating to services provided shall only be subject matter of taxation by Finance Act, 1994. The object of section 105 of the Act, is appreciable from the beginning phraseology employed in section 65(105), which reads as taxable services means the service provided are to be provided. This presupposes that the service to be taxable should have been provided or to be provided, notified to be taxable. Consideration received towards such provision of service becomes taxable under the provisions of the Act. The law also provides that the gross amount charged by an assessee may constitute several receipts. But, only that part of the consideration, which relates to provision of taxable services is brought by scope of taxation. Accordingly such fundamental concept of law is exhibited by section 67 of the Act stating that prior to 18.2.2007, interest on loan is specifically excluded by an explanation appearing thereunder. Service Tax Rule also mandates exclusion of interest on loan while determining the value of the taxable service.
6. The Apex Court while dealing with the case of Association of Leasing & Financial Service Companies Vs. UOI reported in 2010 (20) STR 417(SC), in para-22 of the judgment has categorically held the nature of services tax is as under:
Nature and character of service-tax
22.?In All India Federation of Tax Practitioners case (supra), this Court explained the concept of service tax and held that service tax is a Value Added Tax (VAT for short) which in turn is a destination based consumption tax in the sense that it is levied on commercial activities and it is not a charge on the business but on the consumer. That, service tax is an economic concept based on the principle of equivalence in a sense that consumption of goods and consumption of services are similar as they both satisfy human needs. Today with the technological advancement there is a very thin line which divides a sale from service. That, applying the principle of equivalence, there is no difference between production or manufacture of saleable goods and production of marketable/saleable services in the form of an activity undertaken by the service provider for consideration, which correspondingly stands consumed by the service receiver. It is this principle of equivalence which is inbuilt into the concept of service tax under the Finance Act, 1994. That service tax is, therefore, a tax on an activity. That, service tax is a value added tax. The value addition is on account of the activity which provides value addition, for example, an activity undertaken by a chartered accountant or a broker is an activity undertaken by him based on his performance and skill. This is from the point of view of the professional. However, from the point of view of his client, the chartered accountant/broker is his service provider. The value addition comes in on account of the activity undertaken by the professional like tax planning, advising, consultation etc. It gives value addition to the goods manufactured or produced or sold. Thus, service tax is imposed every time service is rendered to the customer/client. This is clear from the provisions of Section 65(105)(zm) of the Finance Act, 1994 (as amended). Thus, the taxable event is each exercise/activity undertaken by the service provider and each time service tax gets attracted. The same view is reiterated broadly in the earlier judgment of this Court in Godfrey Phillips India Ltd. v. State of U.P. [(2005 (2) SCC 515] in which a Constitution Bench observed that in the classical sense a tax is composed of two elements : the person, thing or activity on which tax is imposed. Thus, every tax may be levied on an object or on the event of taxation. Service tax is, thus, a tax on activity whereas sales tax is a tax on sale of a thing or goods. [Emphasis supplied].
7. In the above judgment Honble Court has also explained the nature of financial leasing service and taxability thereof in para 37 thereof as under:
Applying the above decisions to the present case, on examination of the impugned legislation in its entirety, we are of the view that the impugned levy relates to or is with respect to the particular topic of banking and other financial service, which includes within it one of the several enumerated services, viz., financial leasing services. These include long time financing by banks and other financial institutions (including NBFCs). These are services rendered to their customers which comes within the meaning of the expression taxable services as defined in Section 65(105)(zm). The taxable event under the impugned law is the rendition of service. The impugned tax is not on material or sale. It is on activity/service rendered by the service provider to its customer. Equipment Leasing/Hire-Purchase finance are long term financing activities undertaken as their business by NBFCs. As far as the taxable value in case of financial leasing including equipment leasing and hire-purchase is concerned, the amount received as principal is not the consideration for services rendered. Such amount is credited to the capital account of the lessor/hire-purchase service provider. It is the interest/finance charge which is treated as income or revenue and which is credited to the revenue account. Such interest or finance charges together with the lease management fee/processing fee/documentation charges are treated as considerations for the services rendered and accordingly they constitute the value of taxable services on which service tax is made payable. In fact, the Government has given exemption from payment of service tax to financial leasing services including equipment leasing and hire-purchase on that portion of taxable value comprising of 90% of the amount representing as interest, i.e., the difference between the instalment paid towards repayment of the lease amount and the principal amount in such instalments paid (See Notification No. 4/2006 Service Tax dated 1-3-2006). In other words, service tax is leviable only on 10% of the interest portion. (See also Circular F. No. B.11/1/2001-TRU dated 9.7.2001 in which it has been clarified that service tax, in the case of financial leasing including equipment leasing and hire-purchase, will be leviable only on the lease management fees/processing fees/ documentation charges recovered at the time of entering into the agreement and on the finance/interest charges recovered in equated monthly instalment and not on the principal amount). Merely because for valuation purposes inter alia finance/interest charges are taken into account and merely because service tax is imposed on financial services with reference to hiring /interest charges, the impugned tax does not cease to be service tax and nor does it become tax on hire-purchase/leasing transaction under Article 366 (29A) read with Entry 54, List II. Thus, while State Legislature is competent to impose tax on sale by legislation relatable to Entry 54 of List II of Seventh Schedule, tax on the aspect of the services, vendor not being relatable to any entry in the State List, would be within the legislative competence of the Parliament under Article 248 read with Entry 97 of List I of Seventh Schedule to the Constitution.
8. The financial leasing services and hire purchase of vehicles/machineries squarely falls under the explanation of financial leasing services as defined under Section 65(12) of the Finance Act, 1994. But from the reading of the aforesaid provisions of law and judgment of the Apex Court, it can held that the service tax is the tax on an activity carried out and consideration received for carrying out such activity is only taxable by the Act. Interest being a consideration for the liquidity forgone by the Bank due to lending of the fund, that is not brought within the purview of the Finance Act, 1994 for taxation in absence of any consolidated service charges included in such interest receipt and discernable. No evidence in this regard came to record.
9. In view of the above discussions of the position of law and fact finding, the appeal is allowed.
(Order pronounced and dictated in the open Court)
(R. PERIASAMI) (D.N. PANDA)
TECHNICAL MEMBER JUDICIAL MEMBER
BB
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