Whether service tax is payable on interest on loan?

PJ/CASE LAW/2015-16/2780

Case:-SHRIRAM TRANSPORT FINANCE CO. LTD. VERSUS COMMISSIONER OF CUS. & C. EX.

Citation:-2015 (37) S.T.R. 491 (Tri. - Mumbai)

Brief Facts:-The facts of the case are that the appellant is Non-banking Finance Company and engaged in the activity of providing services of hire purchase and financial leasing of commercial vehicles. The service provided by the applicant having three components
(a) Principal amount
(b) Interest amount
(c) Processing/Management fees.
The applicant is paying Service Tax on processing/management fees of the service provided by them. They are not paying Service tax on the principal and interest amount. Revenue is of the view that as the applicant is engaged in financial leasing service, therefore, as per Notification No. 4/2006, dated 1-3-2006, the applicant is entitled for 90% exemption of the interest charges by them and remaining 10% collected by them is includible in the taxable service. Therefore three show cause notices were issued for the impugned period. The adjudication took place and the ld. Commissioner confirmed the demand of Service Tax along with interest and penalties were also loaded on the applicants. The applicant is praying for waiver of pre-deposit of the impugned demands.

Appellant contentions:-The learned Counsel for the applicant submits that as per decision of Leasing & Financial Service Companies v. Union of India reported in 2010 (20) S.T.R. 417 (S.C.), the Hon'ble Apex Court has held that applicants are nothing but a company engaged in the business of financing loan and as per Finance Act, 1994, explanation of Section 67 of the Act, interest on loan is not includible in taxable service. He further submits that in 2006, Service Tax Valuation Rules were introduced and as per Rule 6(2)(iv) of the said Rules, the interest on loan was not includible in taxable service. Therefore, the applicants are not required to pay Service Tax on interest components as demanded by the ld. Commissioner in the impugned order. Therefore waiver of pre-deposit be granted.

Respondent contentions:-The ld. AR strongly opposed the contention of the ld. Counsel and submits that the applicant is engaged in the activity of financial leasing service and the Notification No. 4/2006; dated 1-3-2006 clearly provides exemption upto 90% of the interest collected by them. Therefore as per the notification, they are required to pay Service Tax on 10% of interest collected by them. Therefore, for the impugned demands, the applicant is directed to make pre-deposit at this stage.

Reasoning of Judgment:- On perusal of the decision of the Hon'ble Apex Court in the case of Association of Leasing & Financial Service Companies v. Union of India (supra), various provisions of Finance Act and Service Tax Rules, prima facie we do agree with the contention of the Id. Counsel for the applicant that applicant is engaged in the activity of giving loan for earning interest through leasing the vehicles under financial leasing services. As per explanation to Section 67 of the Finance Act, 1994, interest on loan is exempted from Service Tax is not to be included in the taxable service and same has been followed by Rule 6(2)(iv) of the Service Tax Valuation Rules, 2004 (sic). In these circumstances, prima facie we find that applicants have made out a case for complete waiver of pre-deposit. Therefore, we waive the requirement of pre-deposit of entire amount of Service Tax, interest and penalty and stay recovery thereof during the pendency of the appeals.

Decision:-Stay granted.

Comment:-The crux of the case is that as per explanation to section 67 of the finance Act 1994, interest on loan is exempted from the service tax and it is not included in the taxable service. This is also substantiated by the rule 6(2)(iv) of the service tax valuation rules,2004. Hence, unconditional stay was granted for service tax demand for interest on loan.

Prepared By:- Anash Kachaliya

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PJ/CASE LAW/2015-16/2780

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