Service tax not leviable on Banking and Financial Institution Services prior to 16.07.2001

Paragon Finance Limited Vs Commissioner of Service Tax (CESTAT Kolkata)

CESTAT Kolkata held that no service tax is leviable on Banking and Financial Institution Services prior to 16.07.2001. Accordingly, service tax not leviable on the agreements entered by the assessee with their clients prior to 16.07.2001.

Facts- The assessee, being a non-banking financial company, was primarily engaged in financing operations predominantly lease and hire purchase for various assets. They have rendered such services from in long and received the service charges from their clients, but have not taken service tax registration.

Investigation was conducted wherein some documents were recovered and seized. During the course of scrutiny of documents, it was found that they are having certain agreements with their clients, some of which are titled as hire purchase agreement and lease and hypothecation and loan agreement. It was alleged that the activities undertaken by the assessee fall under the category of lease and higher purchase classifiable under “Banking and Other Financial Service”.

Further, it was alleged that during the period from 2002-03 to 2006-07, the assessee neither discharged the service tax liability nor they disclosed to the Department regarding their activities for providing taxable services under the category of “Banking & Other Financial Services” and wilfully suppressed the fact with the intention to evade payment of service tax.

Conclusion- Held that the service tax has been levied on Banking and Other Financial Services with effect from 16.07.2001. Prior to that, there was no leviable on Banking and Financial Institution Services. Therefore, the agreement, which has been entered by the assessee, with their clients prior to 16.07.2001, when no service tax was leviable, the liability of service tax does not arise against the assessee. In view of this, we hold that the agreement entered by the assesse prior to 16.07.2001, is not liable to be taxed although the assesse has received the payments later on.

FULL TEXT OF THE CESTAT KOLKATA ORDER

2.1 Facts of the case are that the assesse, being a non-banking financial company, was primarily engaged in financing operations predominantly lease and hire purchase for various assets. They have rendered such services from in long and received the service charges from their clients, but have not taken service tax registration.

2.2 Investigation was conducted on 19.07.2007 wherein some documents were recovered and seized. During the course of scrutiny of documents, it was found that they are having certain agreements with their clients, some of which are titled as hire purchase agreement and lease & hypothecation and loan agreement. Therefore, it was alleged that the assesse is engaged in the business of lease and hire purchase of vehicles with their clients and at the time of agreement, the assesse collected a charge called as initial charges, processing fee or documentation charges, which are nothing for a transaction of the value. The higher purchase amount is recovered in equated monthly installment with interest portion shown as finance charges in their clients registered over a period of hire purchase as indicated in the register. It further appears that the agreements, registers and the clients’ files, are maintained by the assessee in the course of business. That the activities undertaken by them fall under the category of lease and higher purchase classifiable under “Banking and Other Financial Service”.

2.3 Further, it was alleged that during the period from 2002-03 to 2006-07, the assesse neither discharged the service tax liability nor they disclosed to the Department regarding their activities for providing taxable services under the category of “Banking & Other Financial Services” and willfully suppressed the fact with the intention to evade payment of service tax.

2.4 In view of this, show-cause notice was issued to the assesse for demand of service tax along with interest and to impose penalty thereon.

2.5 The matter was adjudicated by the adjudicating authority and passed the following order :

(i) The demand of Service Tax amounting to Rs.26,59,528/-and Education Cess amounting to Rs.21,886/- totalling Rs.26,81,414/- (Rupees Twenty Six lakh eighty one thousand four hundred and fourteen) only is hereby confirmed against M/s Paragon Finance Limited “Sikkim House”, 4/1, Middleton Street, Kolkata-700071 under Section 73(2) of the Finance Act, 1994.

(ii) The balance demand of Service Tax amounting to Rs.1,34,39,677/- and Education Cess amounting to Rs.1,51,542/-is hereby dropped.

(iii) M/s Paragon Finance Limited, “Sikkim House”, 4/1, Middleton Street, Kolkata-700071 is hereby directed to pay interest on the amount confirmed under this order at the appropriate rate for delayed payment in terms of Section 75 of the Finance Act, 1994.

(iv) A penalty of Rs.26,81,414/- (Rupees Twenty Six lakh eighty one thousand four hundred and fourteen) only is imposed against M/s Paragon Finance Limited, “Sikkim House”, 4/1, Middleton Street, Kolkata-700071 under Section 78 of the Finance Act, 1994. If Service Tax along with Education Cess confirmed under this order is paid along with the interest within 1 (one) month from the date of receipt of this order, penalty shall be 25%, if paid within 1 (one) month of receipt of the order.

(v) A penalty of Rs.5,000/- is imposed against M/s Paragon Finance Limited under Section 77 of the Finance Act, 1994.

2.6 Aggrieved from the said order, both sides are in appeal.

3.1 The Ld.Consultant for the assessee submits that the lease can be broadly classified as (a) financial or (b) operating lease. Financial lease is usually long term agreement covering entire economic life of asset. Whole investment including his income is recovered by lessor . Asset is usually maintained by lessee. It is non-concealable contract. Practically, lessee becomes owner though not legally.

3.2 He further submits that in case of operating lease cost of asset is not recovered in one contract of lease. Contract can be cancelled by lessor by giving notice. The option to purchase the asset at the end of the term in case of operating lease is not there.

3.3 He further submits that the loan against hypothecation of asset, it is purely and simply a case of certain amount of money to the borrower on loan. The loan may be given for a short term or long term. During the period of enjoying the loan amount, the borrower is supposed to pay some amount as interest to the lender. Ownership of the asset is always with the borrower., for which, the loan may be taken by him. However, to protect the risk of non-payment of the loan amount, the asset is hypothecated to the lender, who can sale off the asset in case of failure to pay the loan amount by the borrower. On repayment of full amount along with interest as per the terms of the contract, the lien over the asset is released by the lender by deleting the endorsement.

3.4 It is his further contention that initially, the assesse was doing the financing business in the form of financial leasing and hire purchase. However, in the year, 2001, when service tax was imposed on financial lease and hire purchase business, they found that such business together with service tax impact, would be a costlier financing and make them difficult to survive in the competitive market. Therefore, they decided to dis-continue the financing business modes of leasing and hire purchase in the year 2001. They switched over to the mode of simple lending/loan-cum hypothecation business. In all the cases of loan of hypothecation business, the ownership of the asset is not with the assessee. It is always in the name of borrower. The same has been hypothecated in favour of the assessee.

3.5 He further submitted that there is a difference between Hire Purchase Agreement and Hire Purchase Finance Agreement. In case of Hire Purchase Agreement, the title of goods is with the hire purchase company, which bailed it to the hirer in turn for periodical payments and the title is transferred to the customer only, if he exercises the option to purchase the same on full payment to the hire purchase company. But in case of Hire Purchase Finance Agreement, the title of goods vests in the purchaser right from the start and the purchase finance company is merely a fnancier with right to seize the goods for non-payment of loan and is not the owner of the assets.

3.6 He further submitted that the definition only covers Finance Lease Services and Hire Purchase Services, but other multi lease, like, Operating Lease, Hire Purchase Finance and Loan against Hypothecation, are not covered under the said services.

3.7 He further submitted that income from hire purchase is credited to Hire Charges in the profit and loss account and there is no income from Hire Charges during the year 2003-2004 onwards except in respect of agreements entered into prior to 16.07.2001 and that in Ranchi Branch, on which service tax is admittedly paid. It is his submission that after 16.07.2001, no asset is given on hire charge basis.

3.8 He also submitted that without prejudice, the impugned demand in the show-cause notice in its entirety was on the entire income from financing activity, which actually represented the interest income as also confirmed by the Hon’ble Apex Court in the case of Association of Leasing and Financial Service Companies Vs. Union of India and Others reported in 2010 (10) TMI 4 – Supreme Court. Initially, there was no mechanism to bifurcate the service portion from the interest income, which was later on allowed by specifically allowing exemption on 90% of such income w.e.f. 01.03.2006/15.07.2006.

3.9 He also relied upon the decision of the Hon’ble Bombay High Court in the case of Sriram Transport Finance Company Limited reported in 2021 (2) TMI 836-Bombay High Court, wherein it was held by the Hon’ble High Court that no service tax can be levied on such financing activities before 01.03.2006. He also relied on the CBEC Instruction F.No.11/1/2001-TRU dated 9^th July, 2001, which clarified that as per Hire Purchase Agreement entered prior to 16.07.2001, the imposition of levy were not liable to service tax provided the property/goods has also been received by the lease prior to 16.07.2001.

4. On the other hand, the ld.A.R. for the Revenue opposes the contentions of the ld.Consultant for the assesse and submitted that the claim of the assesse is wrong that after 16.07.2001, they have entered into hire purchase and financial leasing transactions, which are liable to service tax under Banking and other Financial Services. The assesse has used the terms hire-purchase, financial leasing and loan cum hypothecation interchangeably only to conceal the nature of the business. It is evident from the record that the assessee conducted hire purchase transactions even after 16.07.2001. He also submitted that the decision of Sriram Transport (cited supra) is not applicable to the facts of the present case as the assessee is showing interest/finance charges/hire charges, separately in their profit and loss account. Therefore, the entire demand proposed in the show-cause notice is to be confirmed.

5. Heard the parties and considered the submissions.

6. On careful consideration the submissions made from both sides, the following issues emerge:

(1) Whether for the activity undertaken by the assessee of hire purchase and financial lease agreement entered prior to 16.07.2001 and amount received thereafter, are liable to service tax or not ?

(2) Whether prior to 01.03.2006, when there was no mechanism for bifurcation of service, income as provided in Notification No.4/2006, demand of service tax, is sustainable or not ? and

(3) Whether in the facts and circumstances of the case, penalty is imposable on the assessee or not ?

Issue No.(1)

7.1 We find that the service tax has been levied on Banking and Other Financial Services with effect from 16.07.2001. Prior to that, there was no leviable on Banking and Financial Institution Services. Therefore, the agreement, which has been entered by the assessee, with their clients prior to 16.07.2001, when no service tax was leviable, the liability of service tax does not arise against the assessee.

7.2 In view of this, we hold that the agreement entered by the assesse prior to 16.07.2001, is not liable to be taxed although the assesse has received the payments later on. Therefore, Issue No.(1) is answered in favour of the assessee.

Issue No.(2)

8. We find that the assesse has come up before the Hon’ble High Court of Bombay in the case of Sriram Transport (cited supra), wherein the Hon’ble High Court has observed as under :

”12. However the decision of the Apex Court in the case of Association of Leasing and Financial Service Companies Vs. Union of India 2001 (20) STR 417 (SC) is relevant. In this case the Apex Court has ousted the challenge to the vires of the levy of service tax on financial lease and hire purchase activity such as the respondent engages in. The decision in the above case makes it unambiguously clear that barring operating lease alone which is considered to be entirely a sale, consideration for all other leaseand hire purchase transactions are squarely liable to tax except on principal amount recovered.

12.1 The relevant findings in paragraph Nos.20 and 21 in the judgment in Association of Leasing and Financial Service Companies (supra) are extracted as under :-

”20.  …………. . A hire-purchase agreement partakes of the nature of a contract of bailment with an element of sale added to it. However, if the intention of the financing party in obtaining the hire-purchase and the allied agreements is to secure the return of the loan advanced to its customer the transaction would be merely a financing transaction. [See page 75]. The point which needs to be restated is that the funding activity undertaken by the financing party which could be in the form of loan or equipment leasing or hire- purchase financing, would be exigible to service tax if such activity falls in the category of “banking and other financial services” under Section 65(12) of the Finance Act, 1994. The financial transaction was earlier out of the tax net. In the process there are two different and distinct transactions, viz., the financing transaction and the equipment leasing/hire-purchase transaction. The former is exigible to service tax under Section 66 of Finance Act, 1994(as amended) whereas the latter would be exigible to local sales tax/VAT. Funding or financing the transaction of equipment leasing and hire-purchase covers two different and distinct transactions. The activity of funding or financing by NBFC who is in the business of financing by giving loans, or equipment leasing or hire-purchase finance falls in the category of financial services rendered by NBFCs to their customers. It is an activity in relation to the hire-purchase or lease transaction.

In this connection, as and by way of illustration we need to give an illustration which brings out the distinction between a “finance lease” and “operating lease”. A finance lease transfers all the risks and rewards incidental to ownership, even though the title may or may not be eventually transferred to the lessee. In the case of “finance lease” the lessee could use the asset for its entire economic life and thereby acquires risks and rewards incidental to the ownership of such assets. In substance, finance lease is a financial loan from the lessor to the lessee. On the other hand an operating lease is a lease other than the finance lease. Accounting of a “finance lease” is under AS-19, which as stated above, is mandatory for NBFCs. It is a completely different regime. According to Chitty on Contract, a hire-purchase agreement is a vehicle of instalment credit. It is an agreement under which an owner lets chattels out on hire and further agrees that the hirer may either return the goods and terminate the hiring or elect to purchase the goods when the payments for hire have reached a sum equal to the amount of the purchase price stated in the agreement or upon payment of a stated sum. The essence of the transaction is bailment of goods by the owner to the hirer and the agreement by which the hirer has the option to return the goods at some time or the other [See para 36.242, 36.243]. Further, in the bailment termed “hire” the bailee receives both possession of the chattel and the right to use it in return for remuneration to be paid to the bailor [See para32.045]. Further, under the head “equipment leasing”, it is explained that it is a form of long-term financing. In a finance lease, it is the lessee who selects the equipment to be supplied by the dealer or the manufacturer, but the lessor [finance company] provides the funds, acquires the title to the equipment and allows the lessee to use it for its expected life. During the period of the lease the risk and rewards of ownership are transferred to the lessee who bears the risks of loss, destruction and depreciation or malfunctioning. The bailment which underlies finance leasing is only a device toprovide the finance company with a security interest [its reversionary right]. If the lease is terminated prematurely, the lessor is entitled to recoup its capital investment [less the realizable value of the equipment at the time] and its expected finance charges [less an allowance to reflect the return of the capital] [para 32.057]. In the case of hire-purchase agreement the periodical payments made by the hirer is made up of :

(a) consideration for hire

(b) payment on account of purchase

21. To sum up, NBFCs essentially are loan companies. They basically conduct their business as loan companies. They could be in addition thereto in the business of equipment leasing, hire purchase finance and investment. Because NBFCs are basically loan companies, they are required to show the assets leased as “receivables” in their balance sheets. That, the activities of hire-purchase finance/ equipment leasing undertaken by NBFCs come under the category of “para banking”. That, in substance a finance lease, unlike an operating lease, is a financial loan(assistance/facility) by the lessor to the lessee. That, in the bailment termed “hire” the bailee receives both possession of the chattel and the right to use it in return for remuneration.

On the other hand, equipment leasing is long term financing which helps the borrower to raise funds without outright payment in the first instance. Here the “interest” element cannot be compared to consideration for lease/hire which is in the nature of remuneration (consideration) for hire. Thus, financing as an activity or business of NBFCs is different and distinct from operating lease/hire -purchase agreements in the classical sense. The elements of the finance lease or loan transaction are quite different from those in equipment leasing/hire-purchase agreements between owner (lessor) and the hirer (lessee). There are two independent transactions and what the impugned tax seeks to do is to tax the financial facilities extended to its customers by the NBFCs under Section66 of the 1994 Act (as amended) as they come under “banking and other financial services” under Section 65(12) of the said Act. “The finance lease” and “the hire-purchase finance” thus squarely come under the expression “financial leasing services” in Section 65(12) of the Finance Act, 1994(as amended).”

12.2 The Apex Court has further concluded the question of law raised by the appellant in paragraphNos.37 and 39 of the said judgment which are extracted as under :-

”37. 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 services” 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 whichis 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 taxis 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 dated9.7.2001 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 instalments 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 transactions 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 theState 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.

38. ……

39. …….. . As stated above, what is challenged in this case is the service tax imposed by Section66 of the Finance Act, 1994 (as amended) on the value of taxable services referred to in Section65(105)(zm) read with Section 65(12) of the said Act, insofar as it relates to financial leasing services including equipment leasing and hire-purchase as beyond the legislative competence of Parliament by virtue of Article 366(29A) of the Constitution. In short, legislative competence of the Parliament to impose service tax on financial leasing services including equipment leasing and hire-purchase is the subject matter of challenge.

Legislative competence was not the issue before this Court in the Bharat Sanchar Nigam Limited’s case. In that case, the principal question which arose for determination was in respect of the nature of the transaction by which mobile phone connections are enjoyed. The question was whether such connections constituted a sale or a service or both. If it was a sale then the States were legislatively competent to levy sales tax on the transaction under Entry 54, List II of the Seventh Schedule to the Constitution. If it was service then the Central Government alone had the legislative competence to levy service tax under Entry 97, List I and if the nature of the transaction partook of the character of both sale and service, then the moot question would be whether both the legislative authorities could levy their separate taxes together or only one of them. It was held that the subject transaction was a service and, thus, the Parliament had legislative competence to levy service tax under Entry97, List I. In para 88 of the said judgment, this Court observed that “No one denies the legislative competence of the States to levy sales tax on sales provided that the necessary concomitants of a sale are present in the transaction and the sale is distinctly discernible in the transaction. This does not however allow the State to entrench upon the Union List and tax services by including the cost of such service in the value of the goods”. The principle of law in para 88 squarely applies to the present case. As stated above, we are concerned with “financial leasing services” which are sought to be taxed under Section 65(12)(a)(i). The taxable event is indicated in Section 65(105)(zm). As stated above, the impugned provision operates qua an activity of funding/ financing of equipment/asset under equipment leasing under which a lessee is free to select, order, take delivery and maintain the asset. The lessor (NBFC) arranges the finances.

It accepts the invoice from the vendor (supplier) and pays him. Thus, the lessor (NBFC) renders financial services to its customer(s) and what is taxed under the impugned provision is the income, by way of finance/ interest charges in addition to management fees/ documentation charges, whichis earned by the financier (lessor). The taxable event is the service which is rendered by the finance company to its customer(s). The value of taxable service under Section 67 is income by way of interest/finance charges (measure of tax) which is not determinative of the character of the levy. Thus, Section 67 of the Finance Act, 1994 seeks to tax financial services rendered by the appellant(s) with reference to the income which the appellant(s) earns by way of interest/ finance charges. In the circumstances and for the reasons given hereinabove, the question of splitting up of transactions, as contended on behalf of the appellant(s), does not arise. As held hereinabove, equipment leasing and hire-purchase finance constitute long term financing activity. Such an activity was not the subject matter of the discussion in the Bharat Sanchar Nigam Limited’s case. The service tax in the present case is neither on the material nor on sale. It is on the activity of financing/funding of equipment/ asset within the meaning of the words “financial leasing services” in Section 65(12)(a)(i).”

12.3 While relying on the above decision and the decisions of the Apex Court in the case of Commissioner of Central Excise & Service Tax, New Delhi Vs. M/s. Lease Plan India Ltd. (finalorder No.50113-20116/2018 dated 10th January 2018 in Appeal No. ST/51947-51950/2014) and Commissioner of Income Tax Vs. Sirpur Paper Mills (1999) 237 ITR 4, and applying the ratio to the facts of the present case CESTAT has correctly concluded in paragraph Nos.13 and 15 to 18 of the impugned order which is extracted as under :-

”13.  It is now well settled in law that hire purchase is but a loan: that the hirer obtains goods from a seller and the banking and financial institution finances the purchase of goods with the title firmly resting with the hirer and the institution vested with right to acquire possession of the goods, through judicial intervention, in the event of non-payment of contracted amount. This differs substantially from operating lease. Therefore, the taxability of the service is not in question. The decisions of the Tribunal that have held otherwise did not have the benefit of wisdom of the judgment of the Hon’ble Supreme Court in re Association of Leasing and Financial Service Company and are, therefore, per incuriam.

15. The issue is whether that statutory exclusion can be denied. We hold that no statutory exclusion can be denied. However, we take note that with the inclusion of financial and equipment leasing in the definition of the activity in relation to which taxability arises, it was the decision of the Hon’ble Supreme Court in re Association of Leasing and Financial Services Companies that settled the transactions, such as that of the appellant, within the scope of coverage as loans instead.

16. The consideration for the taxable service rendered by appellant is received as equated monthly installment which is then assigned by appellant as principal and interest. It has been held by the Hon’ble Supreme Court that there are three components that make up consideration for hire purchase – principal, processing / management charges and interest – with taxability devolving onthe letter two. Decisions of the Tribunal have excluded the scope of collection from the last. It is, therefore, clear that only processing / management fees can be subjected to tax.

17. The claim of appellant is that such charges as are subjected to tax have already suffered theburden; the ostensible base for this claim is the compliance on the processing fee collected upfront. Interest is an all encompassing expression used in the banking industry to describe the recompense for lending money besides the recovery of principal along with interest or at some agreed upon point in time. This interest must, to meet the commercial objective of profit, pay for the cost of funds deposited with the financial institution and other overheads. To the extent that the bank or institution is solely in the business of lending, such expenses are a charge on the income and interest earnedis only that.

18. However, while conferring the mantle of lending on hire purchase and leases, other loan operating leases, the Hon’ble Supreme Court in re Association of Leasing and Financial Services added another factor of income, viz., processing or management fee, to interest and principal and held it liable to tax. The judgment also distinguished these loans from normal bank loans by reference to banking companies undertaking such leases or hire-purchase through subsidiaries and by the categorization of non-banking financial companies, in accordance with instructions of Reserve Bank of India, as leasing or hire-purchase entities on the basis of prescribed parameters. There is, therefore, a distinction between the interest earned by a bank and the disaggregation of equated monthly installments earned by a financial institution engaged in financial leasing and hire-purchase.”

12.4. Explanation 1 to section 67 of the Finance Act prior to 18.04.2006 contained a specific exclusion vide sub clause (viii) excluding interest on loans. Though section 67 was substituted by Finance Act 2006w.e.f. 18.04.2006, the corresponding Service Tax Determination of Value Rules 2006 vide rule 6(2)(iv)again excluded interest on loan from the purview of valuation of taxable services. However, the Board vide circular No.80/10/2004-ST dated 17.09.2004 clarified that interest on loan would stand excluded. Respondent has been discharging service tax regularly on processing charges and also filing returns regularly. Respondent gives loan to its customers / borrowers for the purpose of hire purchase agreement for purchasing the vehicles and this lending is in the nature of a loan. Since it is in the nature of loan consequently interest on loans stands excluded from the value of taxable services. Board circular dated09.07.2001 referred to by the appellant in fact supports the case of the respondent. In view of the settled law and in exercise of the legislative and rule making power once parliament has excluded interest onloans from the purview of taxable service, it is not open to the authority to hold that the exemption notifications would not apply. Further in view of the decision of the Apex Court in the case of Association of Leasing and Financial Service Companies and Bajaj Auto Finance Ltd. (supra) re-affirming the legal position that the respondent is not liable to pay service tax in respect of the interest on loan advanced asthe same stands excluded from the purview of the taxable services, we find no reason to interfere with the impugned order.              

13. In view of the above discussions, we hold that CESTAT was correct in holding that for the period prior to 01.03.2006 interest on loan is not taxable in the absence of mechanism for bifurcation of service. Therefore, recovery of service tax on interest for the period to 01.03.2006 is without authority of law as there is a presumption of attributing the entire amount to interest in the absence of any mechanism to isolate the processing or management cost even if that were collected by way of equated monthly installments.”

as there was no mechanism for bifurcation of taxable and non-taxable service rendered by the assessee, in that circumstances, reliance has been made in the case of Sriram Transport (supra). We hold that for the period prior to 01.03.2006, no service tax is payable by the assessee, although the agreements may have been entered post 16.07.2001.

9. We further hold that for the agreement entered after 16.07.2001, the assessee is liable to pay service tax w.e.f. 01.03.2006 in terms of Notification No.4/2006-ST dated 01.03.2006.

Issue No.(3)

10. In the facts and circumstances, we hold that no penalty is imposable on the assessee.

11. In view of the above, we disposed of the appeals filed by both sides. Cross Objection also gets disposed off.

(Pronounced in the open court on 23.03.2023)