Quantification of proportionate reversal and inclusion of interest amount in the formula.

Case:- SUNDARAM FINANCE LTD Vs COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX LTU, CHENNAI

Citation:- 2013-TIOL-1181-CESTAT-MAD

Brief facts:-Applicant is a Non-Banking Financial Company, inter alia, engaged in financing purchase of commercial vehicles, cars, houses against hypothecation of such assets as also providing software solutions, business process outsourcing etc. The applicant availed the benefit of CENVAT credit scheme in respect of input services used for providing their output services some of which were taxable and some of which were exempt. Such input services related to both taxable services and exempted services. Applicant had not maintained any such accounts as required under Rule 6 (2) of Cenvat Credit Rules, 2004.

The dispute involved in the present appeal is about the amount of CENVAT credit to be reversed in terms of Rule 6 (3A) (b) (iii) in circumstances as stated above. This provision prescribes a formula for provisional reversal of credit during every month in respect of Cenvat credit attributable to exempted service to be reversed in such circumstances. There is another clause that is 6 (3A) (c) (iii) for finally determining the amount to be reversed at the end of every financial year. The principle underlying in both the provisions are essentially the same, though the latter makes use of final figures of a financial year. This appeal is dealing with provisional reversal for each month. Rule 6 (b) (iii) reads as under:

(b) the manufacturer of goods or the provider of output service shall, determine and pay, provisionally, for every month, -

(iii) the amount attributable to input services used in or in relation to manufacture of exempted goods [and their clearance up to the place of removal] or provision of exempted services (provisional) = (E/F) multiplied by G, where E denotes total value of exempted services provided plus the total value of exempted goods manufactured and removed during the preceding financial year, F denotes total value of [output) and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the preceding financial year, and G denotes total CENVAT credit taken on input services during the month;

In the present appeal, the amount to be reversed for the period Oec'09 to Sept'10 is under dispute. There is no mention of any inputs involved in the dispute. So, it is obvious that dispute relates to input services only and Rule 6 (3A) (b) (iii) can be suitably constructed for easy understanding.

The major line of business of the applicant is giving loan against hypothecation of vehicles. Such service is taxable under the category of "banking and financial services" as defined at section 65 (12) and made taxable by Section 65 (105)(zm) of the Finance Act, 1994.

There is a provision under Rule 6 of Service Tax (Determination of Value) Rules, 2006 to the effect that interest on loans would not form part of the value of any service rendered.

Now the issue to be determined is whether the non taxable part of the interest on loans received by the applicant will get added in either or both of the factors, namely, "E"&"F" as described in Rule 6 3 (b) (iii) reproduced above.

Revenue was of the view that full amount of interest on loans including the non taxable portion (which is 90%) should be included in both "E"&"F" of the above formula which would result in a situation where about 95% of the total value of their services is exempted service. This result should be very obvious because major income of the applicant company is from interest on loans. Based on such reasoning, the Revenue issued a Show Cause Notice. After adjudication a demand of Rs.2,79,35,273/- is confirmed against the applicant for the period Oec'09 to Sept'10 along with interest and penalty under Section 76.

Aggrieved by the above said order, the applicant has filed this appeal along with a stay petition for waiver of pre-deposit of dues for admission of appeal.

Appellant’s contention:- The counsel for applicant relies on definition of "exempted services" as given in rule 2 (e) of Cenvat Credit Rules, 2004 which is reproduced below:

(e) "exempted services" means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of the Finance Act;

They submit that a service is to be considered as 'exempted service' only if it is fully exempted from tax. It is not disputed that the applicant is paying service tax on leasing services, hire purchase etc. though after availing some partial exemption. In fact they are paying tax on 10% of the interest income in view of exemption under Notification 04/2006-ST. Therefore, according to him, the service has to be considered as taxable service and, therefore, no part of interest on loan should enter in factor “E” above, but full value of interest will enter in factor “F” as part of the value of the taxable service and consequently the ratio E/F would be around 18.74% only according to their calculation.

The result of the arguments on opposite sides as summarized in para 2 of the impugned order is reproduced below:

(Value Rs. in lakhs)

Factor	2009-2010	Percentage of credit to be reversed as per Applicant	Percentage of credit to be reversed as per Revenue
E	Total value of exempted services Provided	22924	116625
	Total value of exempted services provided	99408	5707
F	Total value of exempted and taxable services provided	12232	12232
E/F	Total value of exempted and taxable services provided	18.74 %	95.34 %

They also submits that the applicant have reversed CENVAT credit as per the above understanding (i.e. 18.74%) which is in full compliance with law and the argument of Revenue is not sustainable.

During the hearing for stay petition the Counsel gave a further breakup of the incomes received during the year 2009-10 and claimed that the amount already reversed by them is higher than what is required because they claim that incomes on the following items cannot be considered to be receipt of either taxable or non-taxable income:

S.NO.	INCOME TYPE	AMOUNT INVOLVED IN RS LAKHS
1	Bill discounting	185.47
2	Saleof Assets	122.14
3	Dividend Income	2197.65
4	Income on Investments	6207.04
5	Miscellaneous Income	378.02
6	Secretarial	0.03
	Total	9096.35

According to the Counsel if the above figures are kept out of factor “E” for the reason that these incomes do not relate to any type of services, the ratio of credit to be reversed will come down to 7.44% much lower than 18.74% reversed by them. So it is argued that the appeal should be admitted without any further pre-deposit.

Respondent’s Contention:- The Ld. A. R. for Revenue reiterated the arguments in the impugned order. It was followed up with written submissions dated 12-03-2013. The thrust of the argument is that the applicant submits that interest will not form part of value of service as far an exempt service is concerned but says that it will form part of value for taxable service which is inherently contradictory to provisions in Rule 6 (supra). Further he points out that the Commissioner's order regarding securitization holds only that Rs. 425.10 lakhs out of Rs. 2934 lakhs received as income is taxable. Whereas the applicant is claiming that the Commissioner held that Rs. 2934.07 is value of taxable service which is not a factually correct submission. He further submits that the stand taken by the applicant in this application is contrary to stand in other appeals filed by them especially in the matter of securitization.

Reasoning of Judgement:- Rule 6 (2) (iv) of Service Tax (Determination Value) of Rules provides that interest on loans shall not form part of value of any taxable service. So prima facie interest cannot enter into factor "F" as value of taxable service. Further prima facie we are of the view that a service cannot be considered as both taxable and non taxable at the same time. So the exempted portion of interest cannot enter factor "E" as value of exempted service. This interpretation will have the effect of keeping 90% of interest out of both E and F for services like hire-purchase, leasing and hypothecation. That is to say, we are at this prima facie stage, disagreeing with the argument of the Revenue that it will form part of both "E" and "F" and the argument of the applicant that it will enter only factor "F" in the formula. An Issue can arise as to how this interpretation can be consistent with exemption under Notification 4/2006-ST and definition at Rule 2(e) of Cenvat Credit Rules, 2004. Notification No.04/2006-ST dt. 01-03-2006 provides as under:

"In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994) (herein referred to as the Finance Act), the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable service, specified in sub-clause (zm) of clause (105) of section 65 of the Finance Act, that is to say the financial leasing services including equipment leasing and hire-purchase as defined in item (i) of sub-clause (a) of clause (12) of section 65 of the Finance Act, provided or to be provided to any person, from so much of the service tax leviable thereon under section 66 of the said Finance Act, as is equivalent to the service tax calculated on ninety per cent of an amount, forming or representing as interest, i.e. the difference between the instalment paid towards repayment of the lease amount and the principal amount contained in such instalment paid.

Explanation. - This exemption shall not apply to any amount, other than an amount forming or representing as interest, charged by the service provider such as lease management fee, processing fee, documentation charges and administration fee."

Our prima facie interpretation is that hire purchase, loan against leasing and hypothecation are taxable services and the value of these taxable services is only to the extent of amount charged over and above the principal and interest. Of course determining such value can be difficult because there can be a dispute as to what is the interest amount. Calling an amount as "interest" may not by itself be sufficient to legally recognize the amount as interest. The exemption prima facie only says that the service tax calculated on ninety per cent of an amount, forming or representing as interest is exempt. This implies that the value of the service is calculated as 10% of interest charged for levying tax. But the notification does not imply that rest of the interest is value of service. If the value of the service is more than 10% of the interest that amount can be quantified and such factor will enter "F" as part of taxable service. Only such an approach can be consistent with provision in Rule 6 (2) (iv) of Service Tax (Determination of Value) Rules, 2006 and the notification. This matter can be adjudicated in more clear terms during final hearing. For the present a balance can be struck if 10% of interest amount is considered as taxable and this is also considered as the value of the service and added in factor "F" and the remaining 90% is kept out of both "E" and "F".

In this context we have considered the decision of the Hon. Apex Court in the case of Association of Leasing & Financial Service Companies Vs. UOI - 2010 (20) S.T.R. 417 (S.C.)where the Hon. Court upheld the principle that the Parliament is competent to charge service tax on leasing services and interest received can be a good measure of the value of service (Refer para 39 of the judgment). However the principle in Rule 6 (2)(iv) of the Service Tax Valuation Rules was not directly in challenge before the court and not discussed. Issue as to whether this provision will apply only to loans given by banks and not hire purchase and hypothecation given by NBFC can be a matter of dispute but not considered in the said decision. The Hon. Court in para 4 of the order had taken note of the fact that the Union of India is trying to charge tax only on 10% of the interest which the Hon Court found to be quite a reasonable measure for charging tax.

There is one more issue about which a prima facie view is to be taken. That is the issue whether the items of income as listed in para 13 above is to be excluded from both the factors “E” and “F” as argued by applicant at this stage or is to be included in both the factors as argued by Revenue. This issue can be a little more complicated than the first issue examined. This is because the law appears to be silent on this issue. At least either side has not argued any provisions of law to deal with the matter. However we propose to deal with this issue taking an example of an assessee who provides taxable service and also does trading in goods and makes use of service of a banking company which input service is common to both the streams of activities. Can it be argued that the assessee can take credit of the entire credit on input service? Prima facie the answer appears to be in the negative because for the reason that credit can be taking only if it is either a taxable service or an exempted service. Since trading is not either the most reasonable conclusion is that credit could not have been taken at all. But the issue as to whether any credit has been taken on any of the input service attributable to the impugned incomes needs to be examined.

It was decided to arrive at the ratio e/f by including 10% of the interest on services like Hire purchase, Leasing and loan in both the factors "E" and "F" and excluding the balance from both the factors. We also take note of the submission of the applicant that Revenue has passed separate order vide LTUC/259/2011-C dated 04-08-11 to the effect that Rs.425.10 lakhs of Securitization is towards value of taxable service and remaining 2508.97 is on account of selling profit. Once these aspects are taken into consideration the factor of E/F works out as 52.81%. In this calculation no allowance for the submission of the applicant on the second issue is given which may not be fully correct. The final position can come out only at the time of final hearing. So, we are inclined to call for reversal of credit reckoning a factor of 26.40% that is only 50% of the percentage as reckoned above. Out of this the applicant has already reversed amount adopting a factor of 18.74%. So the balance to be reversed at this stage is reckoned as 7.66% of credit taken, that is Rs.3,64,69,591/-, which amount works out to approximately to Rs.28 lakhs. So the applicant is directed to deposit the said amount within six weeks and report compliance on 09/05/2013.

Subject to such pre-deposit there shall be waiver of pre-deposit of balance dues arising from the impugned order for admission of the appeal and there shall be stay on collection of such dues during the pendency of the appeal.

Decision:-Stay partly granted.

Comment:- It was concluded that as only 10% interest income is leviable to service tax, 90% of interest should be kept out of both E and F in the formula for services like hire-purchase, leasing and hypothecation and reversal be determined accordingly.

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PJ/Case Law/2013-14/1834

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