By TIOL News Service

KOLKATA, JUNE 15, 2015: THE assesse-appellant 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.

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 service tax 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.

The Commissioner has 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.

Both sides have referred to the judgement of the Apex Court in Sundaram Finance Ltd's case. The special Counsel 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' and specifically covered under the definition of 'banking and other financial services', whereas the plea of Advocate for the appellant 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.

The Tribunal observed, “Needless to emphasize, in considering the applicability of the ratio of the aforesaid judgement, and also the Board's 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 find 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 forum, the appellant had submitted 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.”

The Tribunal further noted,

From the ratio laid down by the Hon'ble 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 customer's 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 Hon'ble Supreme Court in Sundaram Finance's 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.

Whether value representing securitization transaction deducted from the total value as non-taxable service for the period 2002-03 & 2003-04 is correct.: 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.

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.

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.

The Tribunal also set aside the computation for the financial years 2004-05, 2005-06 & 2006-07 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.

Whether "collection commission" should be chargeable to service tax under the category of 'Business Auxiliary Service'(BAS). The 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 Tribunal found that the 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. It is necessary to examine/scrutinize the transaction to ascertain whether it is BAS or otherwise. Therefore, this issue needs to be remitted to the Adjudicating authority for consideration afresh. Tribunal also found that in computing the demand under this category the adjudicating authority has discarded the figures of the RBI statement without recording reasons. Therefore, the Commissioner is directed to record reasons in computing the demand, in the event it is concluded by him that the said service is taxable.

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. 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 to be remanded for consideration afresh.

The Tribunal concluded, "Since most of the issues raised by the assesse and the revenue are remanded for reconsideration, hence, 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."

Tribunal summarised its findings as:

(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"

(See 2015-TIOL-1128-CESTAT-KOL)