By TIOL News Service

CHENNAI, APR 09, 2015: THE adjudicating authority held that appellant is liable to pay service tax on the interest received on hypothecation loan.

The appellant is before the CESTAT against this order and submits that it is the interest income of the Bank that has been taxed even though there were no service charges received in this regard. It is further submitted that only if any taxable service is provided and consideration is received therefrom, that is only exigible to service tax.

The AR opposedthe said proposition of the appellant on the ground that the hypothecation is also a banking service; that even leasing of the equipment and the goods shall be covered by the entry Banking and Financial services and, therefore, any amount received other than the recovery of principal amount shall be liable to service tax if the provision of section 65(105)(zm) is read combined with section 65 (105)(12) of the FA, 1994.

The Bench observed -

"5. We are conscious that Finance Act, 1994 is not the law of Income Tax to tax interest income but the consideration relating to services provided shall only be subject matter of taxation by Finance Act, 1994. The object of section 105 of the Act is appreciable from the beginning phraseology employed in section 65(105), which reads as taxable services means the service provided or to be provided. This presupposes that the service to be taxable should have been provided or to be provided, notified to be taxable. Consideration received towards such provision of service becomes taxable under the provisions of the Act. The law also provides that the gross amount charged by an assessee may constitute several receipts. But, only that part of the consideration, which relates to provision of taxable services is brought by scope of taxation. Accordingly such fundamental concept of law is exhibited by section 67 of the Act stating that prior to 18.2.2007, interest on loan is specifically excluded by an explanation appearing thereunder. Service Tax Rule also mandates exclusion of interest on loan while determining the value of the taxable service."

The Bench extracted paragraphs 22 and 37 from the order of the apex Court in the case of Association of Leasing & Financial Service Companies - 2010-TIOL-87-SC-ST-LB and further observed -

"8. The financial leasing services and hire purchase of vehicles/machineries squarely falls under the explanation of financial leasing services as defined under Section 65(12) of the Finance Act, 1994. But from the reading of the aforesaid provisions of law and judgment of the Apex Court, it can held that the service tax is the tax on an activity carried out and consideration received for carrying out such activity is only taxable by the Act. Interest being a consideration for the liquidity forgone by the Bank due to lending of the fund, that is not brought within the purview of the Finance Act, 1994 for taxation in absence of any consolidated service charges included in such interest receipt and discernible. No evidence in this regard came to record."

The appeal was allowed.

(See 2015-TIOL-635-CESTAT-MAD)