Hire Purchase Agreements and Its Taxability

CS Deepak Pratap Singh

DEFINITION; Hire Purchase is a transaction in which the owner of goods transfers or gives possession of goods on the condition of payment of agreed number of installments. In this case the hirer has option to acquire the good after payment of last installment or on payment of a nominal amount at the end of agreement or contract period.

The activity in relation to delivery of goods on hire purchase or any system of payment by installments is a “ Declared Service” under Section 66E(g) of the Finance Act, 1994.

The property under consideration has been passed to the hirer after fulfillments of all terms of the agreement. If hirer is failed to fulfill any condition of the agreement then owner has right to claim the property under consideration.

In the Hire Purchase Agreement the terms and conditions are such that at the end of agreement the hirer became owner of the property.

It is a vehicle of installment credit system. The essence is bailment of goods by the owner to the hirer and the agreement by which the hirer has option to return the goods at some point of the other.

Hire Purchase Agreement is same as a “Conditional Sale Agreement” the ownership of the goods does not passed until payment of last installment.

In this case the depreciation or amortization on good hired, claimed by the hirer not the owner of the good.

The Article 366(29A) of the constitution has been amended to include “Hire Purchase” in the definition of “Sale”. It is deemed sale.

As in case of Bharat Credit & Investment Co. v. CST 200 AIR SCW 2989 is was decided that sales tax can be levied on full amount paid by the hirer, which would include hire charges also.

In various cases it was decided that the Hire Purchase is taxable under state VAT and CST even though the hirer is not the owner of the goods during the tenure of the Hire Purchase Agreement. The financing company will be the owner of the goods under consideration till fulfillment of all conditions of Hire Purchase Agreement. Even through in this case the essential ingredient of sale i.e. the transfer of good must be for sale is absent. This transaction is considered as deemed sale and same is covered in the definition of “sale” as amended in Article 366(29A) of the Constitution of India.

As decided in case of Charrajit Singh Chadda v. Sudhir Mehra 2001 AIR SCW 3487 it was observed that the “ Hire Purchase Agreement” are executor contracts under which goods are let on hire and hirer has option to purchase in accordance with the terms of the Agreement. In this agreement the hire is simply paying for use of the goods and for an option to purchase them at the end of agreement. If hirer defaults in payment of any installments or as provided in the terms and conditions of the agreement the owner can take possession of the good under consideration.

In the case of KL Johar v. Dy. CTO-AIR 1965 SC 1082 it was held that in Hire Purchase Agreement “ Sale “ takes place only when purchaser exercises the option of purchase after fulfillment of all terms and conditions of the agreement. If provided in the agreement that the owner case take possession in case of default, if the terms provide so.

The contract for hire of good is a contract of bailment; until the hirer has option to exercise his right to purchase the good after that it becomes a sale.

HIRE PURCHASE AND INSTALMENT SALE;

HIRE PURCHASE; In case of Hire Purchase the title in goods does not passed to the buyer till last installment of price paid and thereby option to buy the good is exercised. The payment in hire purchase includes an element of hire charges. The relationship between the hirer and owner is the bailee and bailor.

INSTALLMENT PURCHASE; In this case the title in goods passé immediately to the buyer and payment of installments are only a financial arrangement between buyer and the seller. The relationship between the buyer and seller is debtor and creditor. The lien in the goods remains with the seller till all installments has been paid.

HIRE PURCHASE AND HIRE PURCHASE FINANCE;

HIRE PURCHASE; In this agreement the title of the goods does not passed to the hirer until all installments has been paid and hirer exercised option to buy the good.

HIRE PURCHASE FINANCE; it is done generally by hire purchase finance company, the hirer became owner of the goods. The finance company never becomes owner of the goods. It has only right to seize the good for non payment of installments by the hirer.

The Hire Purchase transaction is taxable under Section 66 of Finance Act, 1994.

(Author can be reached at cs.deepakpsingh@gmail.com)

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