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M/s. Magma Fincorp Ltd. Versus Commissioner of Service Tax, Kolkata And Vice-Versa

2016 (4) TMI 21 - CESTAT KOLKATA

Scope of Banking & other Financial services - Whether the transactions involve financial leasing, equipment leasing and hire purchase where the demands are confirmed and others are operating lease, loan against hypothecation and hire purchase finance, where the demands were dropped - Agreements relating to lease agreements entered prior to and after 16.7.2001, hire purchase agreements before and after 16.7.2001, hire purchase finance agreements, loan-cum hypothecation agreements - Rendered vario .....

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der hire purchase agreement has been retained or conveyed on completion of transaction. Therefore, all the agreements need to be scrutinized along with supported evidences/documents which could not be possible at this appellate stage as all the transaction documents are not enclosed with the agreement; besides these agreements were not examined/scrutinized by the original adjudicating authority even though equipped with enough manpower to undertake such a herculean task. Ascertaining of the fact .....

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ability of Service tax - Whether value representing securitization transaction deducted from the total value as non-taxable service for the period 2002-03 & 2003-04 is correct or not - Appellant also entered into the transaction of securitization, whose value had been rightly deducted from the gross taxable value for the financial year 2002-03 & 2003-04 being in the nature of sale transaction and followed necessary guidelines issued by the RBI, applicable to banks/financial institutions and NBFC .....

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while calculating the service tax liability for the period 2004 - 05, 2005 - 06 and 2006 - 07 - Held that:- the ld. Commissioner has not recorded any observation as to why the said figures be discarded. Any order/finding without reasons is cryptic and it'll be difficult for the appellate authorities to examine the correctness or otherwise of such findings, hence such order cannot be sustained in law. Therefore, the computation for the financial years 2004-05, 2005-06 & 2006-07 are set aside and .....

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stomer- banks which resulted in promoting or marketing of the services provided by the clients (banks), hence fall under clause(ii) i.e. 'promotion or marketing of services provided by the client' of the said definition of BAS - Held that:- the ld.commissioner has not confirmed demand of service tax on the collection commission considering the appellant as a commission agent and the amount received as agency commission but, he has confirmed the demand service tax on such receipts under Clause-(i .....

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ther it is BAS or otherwise. Therefore, this issue also needs to be remitted to the Ld. Adjudicating authority for consideration afresh. In computing the demand under this category the ld. adjudicating authority has discarded the figures of the RBI statement without recording reasons. Therefore, the ld. Commissioner also should record reasons in computing the demand, in the event it is concluded by him that the said service is taxable.

Recovery of ₹ 93.00 Lakhs, collected by the .....

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ollected in lump sum or was shown as deposits in the respective agreements/contracts or Bills raised by the appellants or any other manner during the relevant period. Advancing the bare claim that collection was towards contingency deposit could not lead to any conclusion that these amounts have been collected as deposits, not as representing service tax as alleged by the department since at the initial stage of investigation the said facts were admitted by the Assistant Vice President (AVP) of .....

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f Service tax for the period 2002-03 & 2003-04 - Amounts received towards management fees, penal interest and termination charges - Held that:- by following the decision of the Tribunal in the case of Bank of Baroda Bank of Baroda v. CCE, Jaipur [2014 (3) TMI 653 - CESTAT NEW DELHI] and Small Indistires & Devlopment Bank of India Vs. CCE, Chandigarh [2011 (1) TMI 495 - CESTAT, NEW DELHI], service tax is not payable on the penal interest and prepayment/termination charges. With regard to the Mana .....

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ld be free to decide after analysis of facts/evidences on record and that would be produced in the remand proceeding to arrive at a conclusion on the aspect of limitation and imposition of penalty accordingly. - Appeal disposed of - Appeal Nos. S.T. 160 & 188/09 & Cross Objection No.83/09 - Order No.FO/75221-75222/16 - Dated:- 3-2-2016 - DR. D.M. MISRA, MEMBER(JUDICIAL) AND SHRI H.K.THAKUR, MEMBER(TECHNICAL) For the Petitioner : Shri B.K.Singh, Advocate and Shri Garvit Chauhan, Advocate For th .....

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ant M/s. Magma Finance Corporation Ltd. and also by the Revenue challenging the same Order-in-Original No.61/Commr./ST/Kol/ 2008-09 dated 31.03.2009, passed by the Commissioner of Service Tax, Kolkata. 3. The facts of the case are that pursuant to the visit of the premises of the Appellant on 09.08.2007 by the officers of the service tax department and on completion of investigation, a show cause cum demand notice was issued to the Appellant on 16.10.2007 alleging non-payment of service tax of & .....

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nalty of ₹ 5,000/- under section 77 of the Finance Act, 1994. Besides, he has directed recovery of interest and also the recovery of collected amount of ₹ 93.00 Lakhs in terms of section 11D of Central Excise Act read with Section 73A of Finance Act, 1994. Aggrieved by the said order, the assessee-appellant are in Appeal. 4. The Ld. Commissioner has also dropped Service Tax demand of ₹ 37,74,26,080/- and education cess of ₹ 50,18,780/-. Aggrieved by the same, the Revenue .....

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ng vehicles by way of operating lease, loan and financial agreements. The transaction between the appellant and its customers are broadly of following types:- a. Financial leasing ( last entered in the year 2001-02) b. Equipment leasing c. Hire Purchase Agreements d. Operating lease agreements e. Hire Purchase Finance Agreements f. Loan against Hypothecation 5.2 The Appellant had also undertaken activity of securitization of assets for the purpose of raising funds for which they have entered int .....

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₹ 48.95 Lakhs cannot come under the scope of banking and other financial services . He has submitted that it is not the legislative intent to cover all types of lease, as there has been an accepted distinction between financial lease and operating lease and the services relating to operating lease are not covered under the scope of said definition which applies only to the equipment lease having the character of financial lease distinct from non-operating lease. 5.4 It is contended that .....

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riod after making the lease payments. He has emphasized that unless there is a stipulation in the contract that the equipment shall ultimately be transferred to the customer no service tax is leviable in such cases. Referring to the clause 5 relating to the ownership and clause 31 concerning to assignment of the contracts/agreements, with their customers, he has submitted that ownership of the asset at all times vests with appellant, and in the agreement no where it stipulates that the clients h .....

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lease from the appellant. These services could be taxable under the category of supply of tangible goods introduced subsequently and made chargeable to service tax but not under banking and other financial services . 5.5 Further disputing the demand of ₹ 305.91 lakhs confirmed on hire purchase services, the ld. Advocate has submitted that the appellant are not rendering any activity of hire purchase. It is the submission that the income shown towards hire purchase agreements in effect .....

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clearly show that they are in the nature of vehicle financing which is not covered under banking and financial services. He submits that the learned adjudicating authority in the impugned order has dropped the demand on the amounts relating to hire purchase finance agreements. However, he has confirmed demand on the amount shown in the category of hire purchase agreement . He has further submitted that in all these cases the vehicles were owned by the customers, the invoices were in the name .....

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lient is the owner of the vehicle and there is no question of appellant giving further ownership to the customers and there is no option in the agreement for the customer to purchase the vehicle, hence it is in the nature of hire purchase finance only. Further, he submits that in the relevant agreements though it has been mentioned that the appellant is the owner, but in fact, it does not give ownership to the appellant and take away the basic character of the agreements which is mere financing .....

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& Ors. AIR 1978 All 90. The Ld.Advocate also placed heavy reliance on the judgments of Honble Apex Court in Sundaram Finance Ltd. v. State of Kerala AIR 1966 SC 1178, and the Tribunal in Kusulava Finance Ltd. v. CCE 2008 (10) STR 150 (Tri-Bang) affirmed by Hon ble Supreme Court as reported in 2010 (19) STR J75(SC) and Bajaj Auto Finance Ltd. v. CCE - 2007 (7) STR 423(Tri-Mum) affirmed by the Supreme court reported at 2008 (10) STR 433(SC). It is his submission that the ratio of these decisi .....

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he has referred to the Boards clarification issue under letter F. No.BII/I/2000-TRU dated 09.07.2001 and the judgement in the case of Art Leasing v. CCE - 2007 (8) STR 162 and LFC Hire Purchase Finance v. CCE -2008 (12) STR 320. 5.7 Challenging the computation of demand, the Ld. Advocate has submitted that even though the Ld. Commissioner has held that no service tax is payable by appellant on operating lease, hire purchase finance, gains on securitization and loan against hypothecation, howev .....

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y on the appellant. The Ld. Commissioner has only excluded the amount received towards rental by the appellant which is incorrect. He has submitted that when it is clear that the activity of financial lease is in the nature of operating lease and not covered within the scope of banking and financial services, accordingly any amount charged towards the same would not be subjected to service tax. Hence, the amount charged as financial lease is not liable to service tax. Further, the Ld. Advocate h .....

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mount of ₹ 69,52,945/- towards contingency deposits and the total amount of service tax charged on the same ₹ 7,54,689/-. Further he has submitted that the amount of ₹ 93.00 Lakhs has been arrived at by the department by including an amount of ₹ 37,78,823/- twice. Further he has submitted that in terms of section 11D of Central Excise Act, 1944 as applicable to service tax cases, only those amounts which are collected as representing service tax are to be deposited. There .....

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9 Rebutting the arguments advanced by the Ld. Spl. Counsel for the Revenue that securitization transaction is classifiable under section 65(12)(a)(v) or section 65(12)(a)(ix) of the Finance Act, 1994, the Ld. Advocate submitted that the said additional grounds taken by the department at this stage is inadmissible as no such ground was either alleged in the show cause notice nor discussed in the impugned order of the Ld. Commissioner. It is his submission that the show cause notice has only deman .....

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i vs. Toyo Engineering India Ltd.2006(201)ELT 513(SC) * Hindusthan Polymers Co.Ltd. vs. CCE, Guntur 1999(106)ELT 12(SC) * Warner Hindustan Ltd. vs. CCE, Hyderabad 1999(113)ELT 24(SC) * CCE, Nagpur vs. Ballarpur Industries Ltd. 2007(215) ELT 489(SC) * CCE, Bangalore vs. Brindavan Beverages (P) Ltd. 2007(215)ELT 487(SS) * CCE, Bhubaneswr-I vs Champdany Inustries Ltd. 2009(241)ELT 481(SC) * CCE vs. Gas Authority of India Ltd.2008(232)elt 7(SC) 5.10 The Ld. Advocate has further submitted that hire p .....

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nt which stipulates the terms and conditions to be observed by the customer towards re-payment of the finance amount taken from the appellant. The invoices show sale of the vehicle by the dealer in the name of the customer and also the vehicle is registered in the name of the customers. The vehicle is insured by the customer and in case of any default in payment of installment to the appellant, the appellant could only seize the vehicle for the purpose of recovery of the loan amount, therefore, .....

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rchase the goods on payment of periodical installments. In support he has referred to the judgements of Sundaram Finance, Kusalava Finance, Bajaj Auto Finance (supra). 5.11 The ld. Advocate further submits that the Commissioner has rightly dropped the demand on operating lease (Rs.673.20 Lakhs). He has submitted that in the case of operating lease, the vehicles are owned by the appellant and given on lease to the customers. He has submitted that the transaction is in the nature of deemed sale as .....

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ould be leviable to tax under supply of tangible goods brought into effect from 16.05.2008. 5.12 The ld. Advocate further submitted that the ld. Commissioner has correctly dropped the demand relating to gain on securitization i.e ₹ 1,786.48 Lakhs which is not liable to service tax. Explaining the said service, the ld. Advocate has submitted that the appellant enter into loan agreement with customers for financing the purchase of vehicles and other assets. The loans are secured by the asset .....

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ts are sold to a bankruptcy remote special purpose vehicle (SPV) in return for an immediate cash payment. The SPV in turn issues securities known as pass through service (PTC) to various investors, who are investing in the portfolio. The cash flow from the unlined pool of assets is used to re-pay the principal and pay the interest on the securities issued by SPV. 5.13 It is his submission that securitization thus follows a two stage process. In the first stage, there is sale of single asset or p .....

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e ld.Advocate submitted that the activity undertaken by the appellant is sale of financial assets and not a service as contended by the department. Further he has submitted that in the present case the activities of the appellant are limited to first stage only i.e. creation of financial assets by giving out loans, creating a portfolio of financial assets and selling the financial assets to SPV. The appellant does not undertake the second stage of the transaction i.e. activity of re-packaging of .....

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h activities which are in the nature of rendering service, separate agreements are entered into for a consideration. He has categorically submitted that during the relevant period, the assesse-appellant had undertaken in respect of securitization transaction only and they did not undertake the activity of collection, recovery, accounting of the installments due from the customers etc. after sale of such securities. The appellant had neither charged nor collected any service charges for the same. .....

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by the Appellant are purely in the nature of sale of financial assets; it is in the nature of sale of portfolio wherein the loan portfolio is sold along with under-lined rights of the same to the bearer of the portfolio. The consideration is received at the point of sale and the difference between the book value of the loan portfolio and the projects consideration is recognized as gain on securitization and is not a service, hence reliance placed by the special counsel for department on the not .....

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specifies the term duty payable. 5.16 Rebutting the grounds set out by the department in their Appeal that on the basis of figures submitted by the appellant the adjudicating authority has accepted it without due verification, hence, the order of the adjudicating authority to the extent it dropped the demand is incorrect, the ld. Advocate submitted that the appellant had provided figures taking it from the audited balance sheet and other financial documents which were duly verified by the chart .....

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ant Parekh v. Commissioner of Customs - 2004 (175) ELT 238(Tri.-Mumbai). 5.17 The ld.Advocate further submitted that the adjudicating authority has erroneously confirmed the demand of service tax of ₹ 58,19,425/- under the category of BAS during the period 2003-2006. It was confirmed against the appellant on the amount received by it as collection commission which is paid by the banks to appellant for recovery of EMIs from various borrowers of such banks. The adjudicating authority while .....

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definition of Business Auxiliary Service as was in existence w.e.f. 01.07.2003 and amended thereafter, the ld. Advocate submitted that the burden of proof that the activities were covered under Business Auxiliary Service rests on the revenue. In support he has referred to the judgement of the Kerala & Madras High Court in the cases of * Heveacrumb Rubber (P) Ltd. vs. Superintendent of Central Excise - 1983 (14) ELT 1685 (Kar.) * Vairavan Thandal vs. Appellate Collector of Customs, Madras- 2 .....

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on, was only liable to pay service tax under BAS. In this regard he has placed reliance on the Notification No.13/2003-ST dated 20.06.2003, wherein the scope of commission agent is also restricted to a person, who causes sale or purchase of goods. It is only w.e.f. 16.06.2005 the scope of the definition of commission agent has been enlarged, so as to include provision or receipt of services for a consideration. Therefore, if at all the appellant were liable to pay service tax as commission agent .....

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from the respective banks and after interview, the customers were assisted in the documentation work; it verifies all the documents of the customers and passes it on to the banks, who on the basis of such verification extend the financial facility to such customers. The appellant is also responsible for the recovery of EMIs from the borrowers. Thus, the appellant is undertaking a host of activities such as evaluation, verification of the customers, processing of transaction, providing operation .....

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gement and consultancy fees is also not liable to service tax under the category of BAS. The said fees were received on account of differential interest. The ld. Commissioner has rightly dropped the demand as the said amount received by the appellant on account of difference in the Fixed Deposit rate and applicable discount rate. The department has failed to establish as to how the aforesaid amount received by the appellant could be taxable under the category of BAS. 5.21 Further, he has submitt .....

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Ltd. (HUDCO) vs. CST Ahemedabad - 2012 (26) STR 531 (Tri.-Ahm) * Small Industries & Development Bank of India vs. CCE, Chandigarh 2011 (23) STR 392 (Tri.-Del.) 5.22 Further he submits that the department itself for the subsequent period i.e. 2005-06 to 2009-10 dropped the demand on this count vide order-in-original No.04 & 05/Commissioner/ST/KOL/2012-13 dated 24.04.2012 on delayed payment charges, re-payment charges and cheque bouncing charges which are similar to management fees, termi .....

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s referred to the various decisions of this Tribunal in the following cases:- * Anantpur Textiles Ltd. v. CCE 1994 (72)ELT 48 (Tri.) * Hindalco Industries Ltd. v. CCE 2003 (161) ELT 346 (Tri.) * Kirloskar Oil Engines Ltd. v. CCE 2004 (178) ELT 998 (Tri.) * Paro Food Products v. CCE, Hyd. 2005 (184) ELT 50 (Tri.-Bang) * UT Ltd. v. CCE 2001 (130) ELT 791(T) 5.24 Further he has submitted that the constitutional validity of the levy on financial leasing including equipment leasing and hire purchase .....

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Leasing and Financial Service Companies v. UOI - 2010 (20) STR 417 (SC). 6. Per contra, Shri D.K.Acharya, ld.Special Counsel for the Revenue has submitted that basic business character and function of the appellant are referred to in the proceedings incorporated in the memorandum of association. He has submitted even in the AGM held on 23.07.2008 as per clause 6, it is mentioned as business of equipment leasing, hiring, hire purchase and asset based finance of all kinds. Hire purchase finance o .....

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r; in case of latter the title to the goods remained with the hire purchase company which bails the goods to the hirer in return of periodical payments. Hire purchase is taxable under banking and financial service defined under section 65(12((iv) of the Finance Act, 1994. He has submitted that in all the agreements under different periods, in their compendium, the appellant is always the owner of the equipment, vehicles leased out: the nomenclature is sometimes changed, for example, sometimes th .....

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gle case is of the type of hire purchase finance. Rebutting the argument of the ld. advocate for the appellant that out of the four conditions necessary to be satisfied to come under the scope of banking and financial service, the fourth conditions is not satisfied i.e. the lessee is entitled to own and has that option to own the asset at the end of lease period after making lease payment, submitted that these argument is flawed because entitlement or option by their very nature is optional and .....

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a NBFC gives an asset based loan to real estate sectors, namely to : (i) Promotor-A - ₹ 5.00 Crores, (ii) Promotor-B - ₹ 10.00 Crores,(iii) Promotor-C - ₹ 1.50 Crores. The terms of repayment comprising the principal + interest in ten years are: (i) ₹ 50.00 Lakhs + ₹ 5.00 Lakhs (per annum), (ii) ₹ 1.00 Crore + ₹ 10.00 Lakhs (per annum) and (iii) ₹ 1.50 Crores + ₹ 15.00 Lakhs (per annum), respectively. M s loan is asset backed or mortgaged back .....

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es against service charges, thus securitization is a financial service. 6.2 He submits that major component of service tax demand, that is, nearly ₹ 18.00 Crores is on this account of securitization service. Refuting the argument that gain on account of securitization is not a taxable service and the appellant did not create the securities, but sold the asset bagged loans or actionable claims to IDBI, who created the security and sold the same, it is his submission that this argument is no .....

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before and after that was almost the same. It is his submission that this is very unlikely and would have invited special comments of the auditors and also their licensing authority i.e. RBI. Besides the act of securitization which is converting actionable claims into marketable securities is normally associated with the service of realizing periodical installments of principal + interest of loan (claim) and on that service the tax would be due. On the issue of penal interest for fore-closure of .....

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the Ld. Commissioner without specifying any reasons rejected the figures adopted from the RBI statement in arriving at the gross taxable value for the financial years2004 to 2006-07, hence the Order is bad in law. 7. Heard both sides at length and perused the records. The appellant M/s Magma Financial corporation are a Non Banking Financial Company (NBFC) registered with the Reserve Bank of India. During the relevant period, the appellant had rendered various financial services and received fina .....

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o not fall under the category of banking and financial services, and business auxiliary services, therefore, no service tax was required to be paid in rendering those non-taxable services. 8. The Ld. Advocate has contended that the appellant had been rendering the services, namely, (i)Financial leasing (which was last entered in the year 2001-02), (ii)equipment leasing, (ii)Hire Purchase Agreements, (iii) Operating lease agreements, (iv)Hire Purchase Finance Agreements, and (v) Loan against Hypo .....

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e(1993 1KTR 169 concluded that financial leasing , equipment leasing , and hire purchase services are taxable under the category of banking and other financial services with effect from 16.07.2001; whereas, operating lease , loan against hypothecation , and hire purchase finance are not taxable under the said category of banking and other financial services . 10. Banking and other financial services , as prescribed under section 65(12), as was in force, at the relevant time, reads as: 65(12) b .....

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ent, pension fund management, custodial, depository and trust services, but does not include cash management (vi) advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisitions and advice on corporate restructuring and strategy; (vii) provision and transfer of information and data processing; (viii) banker to an issue services; and (b) foreign exchange broking provided by a foreign exchange broker, other than those cover .....

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e lessee is entitled to own, or has the option to own, the asset at the end of the lease period after making the lease payment;] 12. On levy of service tax on banking and other financial services with effect from 16.07.2001, its scope has been clarified by the Board under F.No. BII/I/2000 -TRU, dated 09.07.2001 as: 2.Financial services covered under the tax net are specifically mentioned in the definition itself. 2.1 Financial leasing including equipment leasing and hire purchase: 2.1-1 In case .....

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individuals, proprietorship or partnership firms will not come under the tax net. The leasing or hire-purchase may be of motor vehicles, machinery and equipment or other goods. 2.1-2 In the case of leasing or hire purchase, it is understood that the general business practice is as follows: The service provider enters into a leasing or hire-purchase agreement with the lessee or hire-purchaser. At the time of entering into the agreement, they collect a charge called lease management fee or process .....

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d finance/ interest charges. The allocation between the principal and the finance/ interest charges are known to and agreed upon by both the parties. The customer repayment schedule contains the details of the EMIs with the break up for the principal and the interest. In respect of leasing and hire-purchase, the amount recovered as principal is not the consideration for services rendered but is credited to the capital account of the lessor/hire purchase service provider. The interest/ finance ch .....

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t fee/processing fee/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. 2.1-4 A question has been raised whether lease or hire-purchase agreements entered into prior to the imposition of levy (prior to 16-7-2001) would be leviable to service tax. In this regard, it is clarified that such agreements entered into prior to 16-7-2001 will not be liable to service .....

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xplained as a lease transaction fulfilling the following conditions, namely :- (a) a contract for leasing of a specific asset is entered into between two parties, (b) the contract is for use and occupation of the specific asset, (c) the lease payments are calculated so as to cover the full cost of the asset together with the interest charges, and (d) the lessee is entitled to own or has the option to own, the asset at the end of the lease period after completing the lease payment; 7.6.1 Internat .....

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basis of this clarification. 14. Both sides have placed heavy reliance on the judgement of the Hoble Supreme Court in Sundaram Finance Ltd s case(supra). The special Counsel Shri D.K.Acharya for the revenue argued that the services rendered by the appellant even though claimed as financial leasing, equipment leasing, operating lease, loan against hypothecation, but in fact the arrangement between the appellant and its customers are nothing but in the nature of financial leasing & hire pur .....

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he facts of the case are that On September 29, 1958, the Sales Tax Officer, 1st Circle, Ernakulam, issued a notice calling upon the appellants to file returns of their turnover from sales in the course of business and to secure registration as dealers under the Travancore-Cochin General Sales Tax Act, 11 of 1125 M.E., and to furnish details of the transactions of sale with parties in the State of Kerala in the years 1955-56, 1956-57 and 1957-58. A similar notice was issued by the Sales Tax Offic .....

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ransactions between the appellants and certain parties within the State of Kerala were sales within the meaning of the Act and the appellants were dealers liable to be assessed under the Act. The Sales Tax Officer accordingly reiterated his demand upon the appellants to file returns of their turnover in respect of sales for the five years in question along with details of all transactions in the State and "to produce evidence to prove the correctness and completeness of their returns". .....

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nveyed goods and subsequently purports to hire them under a hire-purchase agreement is not estopped from proving that the real bargain was a loan on the security of the goods. If there is a bona fide and completed sale of goods, evidenced by documents, anterior to and independent of a subsequent and distinct hiring to the vendor, the transaction may not be regarded as a loan transaction, even though the reason for which it was entered into was to raise money. If the real transaction is a loan of .....

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action. The real character of the transaction would not be altered if the lender himself is the owner of the goods and the owner accepts the promise of the purchaser to pay the price or the balance remaining due against delivery of goods. But a hire-purchase agreement is a more complex transaction. The owner under the hire-purchase agreement enters into a transaction of hiring out goods on the terms and conditions set out in the agreement, and the option to purchase exercisable by the customer o .....

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iew to finance his purchase he enters into an arrangement which is in the form of hire-purchase agreement with the financier, but in substance evidences a loan transaction, subject to a hiring agreement under which the lender is given the licence to seize the goods 17. After analysing the evidence on record, the conclusion arrived at has been recorded as: 28. In the light of these principles the true nature of the transactions of the appellants may now be stated. The appellants are carrying on t .....

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e for the amount paid by the appellants to the dealer of the vehicle. The so-called "sale letter" is a formal document which is not made effective by registering the vehicle in the name of the appellants and even the insurance of the vehicle has to be effected as if the customer is the owner. Their right to seize the vehicle is merely a licence to ensure compliance with the terms of the hire-purchase agreement. The customer remains qua the world at large the owner and remains in posses .....

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ng the hire-purchase and the allied agreements was to secure the return of loans advanced to their customers, and no real sale of the vehicle was intended by the customer to the appellants. The transactions were merely financing transactions.The appeals will therefore be allowed with costs in this Court and the High Court. One hearing fee. 18. Needless to emphasize, in considering the applicability of the ratio of the aforesaid judgement, and also the Boards Circular to the facts of the present .....

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ellant. During the course of argument before this Tribunal, the appellant had referred to sample copies of agreements relating to lease agreements entered prior to and after 16.7.2001, hire purchase agreements before and after 16.7.2001, hire purchase finance agreements, loan-cum hypothecation agreements. 19. For the period prior to 16.07.2001 only one sample contract is submitted. The said agreement dt. 22.03.2000 was between the appellant and M/s Shiva Cement Limited, for lease of equipment va .....

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ly instalments of ₹ 37,325/-. It is necessary to refer to the some of the relevant clauses of the said agreement which are reproduced as below: 01. The Lessor hereby leases and the Leasee hereby takes on lease the Equipment described in the FIRST SCHEDULE on the terms and conditions stated hereunder. The Lessee shall pay promptly and regularly the instalments to the Lessor in the manner set out in Schedule II and Schedule III to this Agreement. 02.DELIVERY OF EQUIPMENT The Equipment will b .....

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used for reasons beyond the control of the Lessor, the Lessee shall be liable to pay the lease amount from the date of commencement of the lease and the Lessor shall not be liable for any loss caused to the Lessee by reason of delayed delivery and all charges and obligations of the Lessee shall commence and be enforceable as if delivery had been effected on that date in view of and in consideration of the Lessor having entered into appropriated the Equipment for lease to the Lessee. 03.ACCEPTANC .....

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egistered Office on the respective due dates, free of any other deduction whatever, as rent for the Equipment, the sum of money specified in the SECOND SCHEDULE to this Agreement. 05.OWNERSHIP The property in the Equipment shall at all times remain solely and exclusively that of the Lessor and the Lessee shall have no right, title or interest therein except as Lessee and the Lessee shall not try to sell, hypothecate, sub-lease or subject the Equipment to any form of hailment. The Lessee irrevoca .....

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sl of premature termination of the Lease Agreement, then the Lessee shall deliver to the Lessor the Equipment at such place as the Lessor may specify in good repair, condition and working order, ordinary wear and tear resulting from proper use thereof alone excepted together with such preclosure amount as the Lessor directs the Lessee to pay. Such preclosure amount, being immediately payable, shall comprise of the overdues under the agreement, any other costs and expenses realizable by the Lesso .....

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ith creditors ; (c) in the opinion of the Lessor, substantial change in Lessees ownership takes place ; (d) the Lessee being a limited company shall pass a resolution for voluntary winding-up or suffer a petition for winding up presented against it or if receiver be appointed to its undertakings; (e) pledge or mortgage or hypothecate or sell or attempt to pledge or sell or part with possession of or otherwise alienate or transfer the Equipment; (f) do or suffer any act or thing whereby or in co .....

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rein contained ; (k) in the opinion of the Lessor (which shall be conclusive and binding on the Lessee) there shall be or arise any danger or possibility of the Lessors not receiving or recovering the full amount due to the Lessor under this Agreement or of Lessors being unable to exercise any or all of the powers or rights or enforce any or all of the benefits conferred upon it by this Agreement whether by reason of any act, deed or omission on the part of the Lessee or by reason of any circu .....

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termined IPSO FACTO without any notice to the Lessee and the entire overdue amount receivable from the Lessee together with all future lease rentals for the balance of the said term without any abatement shall thereupon become due and payable immediately by the Lessee and the Lessor may without prejudice to any of its rights hereunder forthwith terminate the lease agreement created hereby. The Lessor and/or the Bank/Financial Institutions shall thereupon, without prejudice to its monetary clai .....

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e shall forthwith deliver to the Lessor all Certificates and Policies of Insurance and all other documents relating to the said Equipment. 20.FINANCE CHARGES The Lessee shall also be liable to pay Finance Charges @ 2.25% per month to the Lessor on the amount disbursed by the Lessor under this agreement. Such finance charges shall be paid immediately on demand for the period from the date of payment by the Lessor for the purchase of the Equipment till the date of commencement of this agreement as .....

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livery to the Lessor of a Demand Promissory Note to be executed by the Lessee for the value of ₹ 8,95,800/-(Rupees Eight Lacs Ninety Five Thousand only). 20. Four sample copy of agreement for the period after 16.07.2001 have been enclosed. The first agreement was entered into between the appellant and its customer Mr. Rais Ahamad on 10.04.2006 titled as Agreement of Lease. The Schedule-I to the said agreement mentions the cost of the equipment/vehicle i.e. Mahindra Pick-Up as ₹ 4 .....

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as ₹ 3,65,000/- and the arrangement between the appellant and the customer was shown as a loan-cum-hypothecation facility. On going through the said agreement it is noticed that more or less the stipulations contained in the earlier agreement(supra) are similar to the present one except minor variations here and there. It is shown that the appellant is providing an operating lease of various types of consumer durables, equipments etc. 20.1 The second agreement is dated 06.02.2006 shows .....

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; 9,754/- for 1 month. The promissory note attached to the said agreement was for a sum of ₹ 3,50,794/-. In the letter addressed by the appellant dated 14.01.2006 to the manager, Austin Distributors Pvt.Ltd., Kolkata, whereby it is mentioned that the appellant agreed to finance Shri Arjun Mondal, the amount of ₹ 3.00 Lakhs out of the cost of ₹ 4,00,791/-. Also, it is mentioned that the margin money of ₹ 1,00,000/- had been received by the said dealer. The invoice raised a .....

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nt of the amount in 34 installments of ₹ 12,441/- and 1 installment of ₹ 12,441/-. A Promissory note was also enclosed along with the agreement for a sum of ₹ 4,34,285/- in favour of the appellant by Tarmani Mahakud. 20.3 The fourth agreement enclosed is dated 30.01.2006 between Shri Pawan Kr.Singh and the appellant whereby the appellant had extended finance of ₹ 5,44,000/- against the cost of vehicle of ₹ 7,23,366/- and the period of lease 46 months. In Schedule-II .....

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r particulars mentioned in the said agreement strongly relied by the ld.Advocate is reproduced below:- WHEREAS the Company is a financial institution providing funds, inter alia, for hire purchase of vehicles, and other assets to individuals/business concerns/other entities. WHEREAS the Hirer has approached the Company for obtaining finance and has agreed to acquire/purchase; has acquired/purchased; holds; the vehicles, more fully described in Schedule-I hereunder, hereinafter referred to as Hi .....

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turer/supplier/dealer only and no claim of whatsoever nature will be against the Financier. WHEREAS the Hirer has agreed to deposit Post Dated Cheques with the Company at its Registered Office at 24, Park Street, Calcutta - 700016 towards security for payment of monthly/quarterly hire charges and undertakes to ensure encashment of the same on the respective due dates. WHEREAS the Hirer has agreed to hold the Hired Article in Trust for the Company, subject to user right and not to deal with the s .....

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s for acquisition of the Hired Articles set out in the Schedule I hereto and the Hirer shall hold the same in trust for the Company from the date of commencement of this Agreement regardless of the date of physical delivery of the Hired Article for the period as slated in Schedule-II hereof subject only to Hirers user rights upon the terms and condtions, herein contained. The Hirer shall not be entitled to make any claim whatsoever on the Company in respect of the Hired Article and/or relating .....

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not under any circumstances change the location of the Hired Article, without express approval of the Company. 06 RELEASE OF PROPERTY If the event the hiring continues for the full period referred to in Schedule-III hereof and the following sums of money been punctually paid:- a. all instalments due under this Agreement; b. other sums of money due hereunder; then in such event the Company shall release and relinquish all its rights and interest in the Hired Article. Until such payments, the Com .....

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until the Hirer shall pay the entire amount due hereunder. 09. COLLATERAL SECURITY The monthly/quarterly payment of hire charges for the Hired Article shall be secured by the delivery to the Company of a Promissory Note to be executed by the Hirer for the value of ₹ 3,29,040/- (Rupees Three lakh Twenty Nine Thousand and Forty only). 15. DETERMINATION J) In the sole opinion of the Company (which shall be conclusive and unchallengably binding on the Hirer) there is or shall arise, any danger .....

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the Schedule-I to the said agreement, the cost of asset, namely Maruti Alto Alex was mentioned as ₹ 2,90,400/-. In the Schedule-II besides cost of asset, initial payment was shown as ₹ 30,400/-, amount financed as ₹ 9,60,000/-, financial charges ₹ 69,040/- and the total amount payable in installments was ₹ 3,29,040/- and monthly installment was ₹ 9,140/-. Schedule-III reflects payment schedule and amount of 30 installments @ ₹ 9,140/- per month. Promisso .....

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3,93,117/-. In Schedule-II besides cost of asset initial payment was shown as ₹ 1,18,117/-, the amount financed ₹ 2,75,000/-, financial charges ₹ 72,586/- and the total amount payable in installments was ₹ 3,47,586/-, comprising of 11 installments of ₹ 14,521/-, 12 installments ₹ 1,135/- and another 12 installments of ₹ 5,767/-. The Schedule-III of the said agreement reflects the due date of installment and the amount of installment. A promissory note fo .....

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cost of the vehicle in Schedule-I was shown as ₹ 3,10,000/- and initial payment in Schedule-II was shown as ₹ 1,00,000/- amount financed ₹ 2,10,000/- and financial charges as ₹ 85,580/- and payable in 36 installments of ₹ 8,155/-. Schedule-III shows the period and the installments. The 4th Agreement is between Shri Rakesh Bhutoria and the Appellant dated 28.06.1999. Schedule-I shows the cost of asset Maruti Standard Car as ₹ 1,89,224/-, in Schedule-II besides .....

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an invoice of Jalan Distributor in favour of the customer Shri Rakesh Bhutoria dated 01.07.1999 was enclosed wherein the cost of the vehicle as shown as ₹ 1,90,229/-. 22. There are 4(four) numbers of agreements enclosed for the period after 16.07.2001 claimed as Hire Purchase Agreement . The first Agreement is dated 24.09.2001 between Mr.Sarwanand Yadav and the Appellant. In the Schedule-I description and cost of the asset was mentioned as Omni and ₹ 2,33,734/- respectively. Initial .....

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₹ 5,64,000/- in schedule-II the said cost of the asset, initial payment was shown as ₹ 1,94,000/-, amount financed as ₹ 3,70,370/- and financial charges is ₹ 98,000/- The total amount of ₹ 4,68,000/- payable in 36 installments of 13,000/- each. Schedule-III shows the due dates and the amount installment payable. A promissory note is issued in favour of the Appellant by the said Mrs.Barnali Dey for ₹ 4,68,000/-. Copy of invoices was issued in the name of Mrs.Ba .....

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case and in the second case it was ₹ 4,38,912/- payable in 36 installments of ₹ 12,192/-. Promissory note was executed with the respective customer for ₹ 2,15,350/- and ₹ 4,12,918/- in favour of the Appellant respectively. 23. Also there are four numbers of hire purchase finance agreement have been submitted by the Appellant. The first hire purchase finance agreement is dated 07.08.2003 between one Rajpal Singh and the Appellant. The conditions of the agreements which is .....

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and in trust for MAGMA. b) for the purpose of accruing re-payment of the Financed Amount and all the sums payable hereunder, the Hirer/s hereby transfers/shall be deemed to have transferred the right to possess and use the said asset(s) to MAGMA. c) The Hirer/s has examined (or caused to be examined) the said Asset(s) and satisfied himself as to its operation, condition and running. No warranty and responsibility is implied on the part of MAGMA in respect of the said Asset(s) in any manner what .....

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amount payable in 31 installment is ₹ 32,100/- each. A promissory note was executed by Shri Rajpal Singh for an amount of ₹ 9,95,100/-. In the letter dated 07.08.2003 addressed by the Appellant to M/s.Ashok Leyland Ltd. discloses that the customer Shri Manish Kumar was extended a loan/hypothecation facility of ₹ 8,09,100/-. 24. Similar hire purchase finance agreement was executed on 15.02.2006 between Jasminder Singh and the Appellant and Saminder Singh and Appellant dated 13. .....

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8377; 2,20,668/-, insurance charges for second and third year as ₹ 37,835/-. The total amount of ₹ 10,75,792/- was payable in 47 installments and the period and the installments are shown therein. 25. There are two numbers of agreements titled as vehicle loan cum hypothecation agreement are enclosed. The first agreement was dated 17.05.2004 between M/s.Santosh Pargal & Co. and the Appellant. In Schedule-I the cost of vehicle was mentioned as ₹ 3,87,000/- loan amount as S .....

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stallments during the period 01.07.2004 and 01.04.2008. 26. From the ratio laid down by the Honble Supreme Court in Sundaram Finance Ltd.s case, it is crystal clear that the effect of transaction be determined from the terms of the agreement considered in the light of surrounding circumstances and the court has power to go behind the documents and to determine the nature of transaction whatever may be the form of the documents. An attempt has been made by us to analyze the true nature of the t .....

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ly installments for the period specified in schedule-III agreed between the appellant and the customers. We find that most of these transactions are not supported with purchase and allied documents by which it could be ascertained as to the true intention of the parties in advancing/purchasing the equipment/vehicle. Even though theoretically it has been argued that the equipment/vehicle was purchased by the appellant and thereafter leased to the customers against lease rent, but examining such .....

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, also encountered, in equipment leasing. As already noted above even though the ld. Commissioner has recorded finding on the aspect of demand of Service Tax on the services of financial leasing, equipment leasing and hire purchase as taxable service while dropping the demand on operating lease, loan against hypothecation and hire purchase finance, but failed to discuss any of the agreements/documents to ascertain the true colour of the transaction between the appellant and its customers. Also, .....

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commissioner confirmed the demand and others are operating lease, loan against hypothecation and hire purchase finance, where the demands were dropped. The Hon ble Supreme Court in Sundaram Finance s case has categorically laid down that the nature of transaction culled out from the documents and surrounding circumstances are the decisive factors in arriving at a conclusion whether the ownership of the goods under hire purchase agreement has been retained or conveyed on completion of transactio .....

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inciple of law, in the interest of justice this aspect need to be remitted to the ld. Commissioner for verification of the facts in detail and ascertain the true nature of transaction between the appellant and its customers during the period under dispute and arrive at the conclusion whether the transaction/services falls within the scope of taxable services of banking and other financial services defined at Section 65(12) of Finance Act, 1994. 27. The next important issue needs determination is .....

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ollowed necessary guidelines issued by the RBI, applicable to banks/financial institutions and NBFCs in this regard. Referring to those guidelines, and explaining the nature of transaction, the ld.advocate has submitted that securitization follow a two stage process. In the first stage, there has been sale of single asset or polling and sale of poll assets to a bankruptcy remote Special Purpose Vehicle (SPV) in return for an immediate cash payment. The second stage involves re-packaging and sell .....

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tage only i.e. creation of financial assets by giving out loans, creating a portfolio of financial assets and selling the financial assets to SPV. He has categorically submitted that the appellant does not undertake the second stage of the transaction i.e. activity of re-packing of financial assets into salable securities which is done by the SPV and purchasing banks/financial institutions. The ld. advocatge however fairly accepted that after sale of the financial assets there is a service eleme .....

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on and they did not undertake services of collection, recovery, accounting, installments due from the customers. However, for the subsequent periods, the Appellant had entered into separate servicing agreements for separate consideration on which service tax has been discharged. The grievance of the Revenue, on the other hand is that without due verification of any of the facts the ld.Commissioner has simply allowed the deduction on account of securitization, hence the same is bad in law. 28. Th .....

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e past two decades. Securitization is the process of transforming otherwise illiquid financial assets (such as residential mortgages), which have typically been the bread and butter of banking institutions into marketable capital market securities. As we have seen improvements in the ability to acquire information have made it easier to sell marketable capital market securities. IN addition, with low transaction costs because of improvements in computer technology, financial institutions find th .....

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uritized loans make them liquid securities, and the fact that they and made up of a bundle of loans helps diversify risk, making them desirable. The financial institution selling the securitized loans make a profit by servicing the loans (collecting the interest and principal payments and paying them out) and charging a fee to the third party for this service. 29. There after through an example narrated in his submissions recorded above, he has argued that securitization could also involve rende .....

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of rendering service has not been scrutinized/examined by the ld. Commissioner before deducting the said securitization amount from the gross taxable value for two financial years considering the same as non-taxable under the Finance Act,1944. Therefore, in our opinion the true transaction of securitization contracts entered into with respective Banks/customers ought to be examined before arriving at any conclusion whether the amount claimed by the appellant is the result of a sale transaction o .....

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he total taxable value as mentioned and in the show cause notice for 2004-05 was ₹ 8910.56 lakhs, 2005 -06 was ₹ 14143.14 lakhs, and 2006-07 was ₹ 8356.04 lakhs, whereas, the Commissioner, the reduced the value to ₹ 494.55 lakhs, 137.93 lakhs and ₹ 39,37,000/- respectively. 32. In their submission, the appellant supporting the said finding of the Commissioner argued that the Department in its appeal could not place any material to negate the said findings. We do not .....

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. Commerical Tax Dept. Vs. Shukla Brothers 2010 (254) ELT 6(SC) laying emphasis on reasons in an Order observed as: 12. At the cost of repetition, we may notice, that this Court has consistently taken the view that recording of reasons is an essential feature of dispensation of justice. A litigant who approaches the Court with any grievance in accordance with law is entitled to know the reasons for grant or rejection of his prayer. Reasons are the soul of orders. Non-recording of reasons could l .....

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the Court in rejecting his claim and also causes impediments in his taking adequate and appropriate grounds before the higher Court in the event of challenge to that judgment. Now, we may refer to certain judgments of this Court as well as of the High Courts which have taken this view. 33. Therefore, the computation for the financial years 2004-05, 2005-06 & 2006-07 are set aside and the adjudicating authority is directed to record a detailed finding supported by reasons in discarding the R .....

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anks and providing financial service to the banks in disbursement of loan by the customer- banks which resulted in promoting or marketing of the services provided by the clients (banks), hence fall under clause(ii) i.e. promotion or marketing of services provided by the client of the said definition of BAS. The ld. advocate countering the said observation submitted that the collection commission cannot fall under the scope of BAS brought into force w.e.f. 01.07.2003. It is their contention tha .....

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commission agent and the amount received as agency commission but, he has confirmed the demand service tax on such receipts under Clause-(ii) of the Definition of BAS as defined under 65(19) of the Finance act, 1994. It reads as under :- business auxiliary service means any service in relation to - (i) …………….... (ii) promotion or marketing of service provided by the client; (iii)………………... (iv) ………&h .....

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ue has been referred of Larger Bench in Pagaria Auto Centre vs. CCE, Aurangabad - 2014 (33) STR 506(Trb.LB). Resolving the conflict, it is observed as: 20. On a consideration of the apparent conflict of opinion in the decisions mentioned in the order of reference and the other decisions which were cited at bar, it is clear that no uniform principle emerges as would guide determination of whether a particular transaction involving an interface between an automobile, dealer and bank or financial i .....

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rises Vs. commissioner of central excise, Kanpur 2015(37) STR 405(Tri.-Del.) held that such services are taxable being in the nature of promoting or marketing services provided by the Banks under the heading of Business Auxiliary services. 38. In the present case, we find that the Ld. Commissioner has without scrutiny of the agreements/contracts with the client Banks, arrived at the conclusion that the service rendered by the Appellant are in the nature of promoting the business of client-banks .....

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asons in computing the demand, in the event it is concluded by him that the said service is taxable. 39. The next issue needs determination is recovery of ₹ 93.00 Lakhs, collected by the Appellant representing the said amount as service tax, under section 11D of the Central Excise Act, 1944 as applicable to Service Tax matters. It is the contention of the Applicant that only an amount of ₹ 7,54,689/- was collected by the Applicant representing service tax and the amount of ₹ 69 .....

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customers, that is, whether it was collected in lump sum or was shown as deposits in the respective agreements/contracts or Bills raised by the appellants or any other manner during the relevant period. Advancing the bare claim that collection was towards contingency deposit could not lead to any conclusion that these amounts have been collected as deposits, not as representing service tax as alleged by the department since at the initial stage of investigation the said facts were admitted by t .....

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ration afresh. 40. In confirming the demand, for the period 2002-03 & 2003-04, the ld. adjudicating authority included in the gross taxable value, the amounts received towards management fees, penal interest and termination charges. He has not recorded any finding in relation to management fees, however on the penal interest and termination charges, he has observed that the said service cannot be excluded from the value as the amounts were collected as interest component of the loan. We find .....

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amp; Devlopment Bank of India Vs. CCE, Chandigarh 2011 (23) STR 392 (Tri-Del.) held that penal interest, prepayment charges are not be leviable to service tax under the category of banking and financial services. Following these decisions were of the view that service tax is not payable on the penal interest and prepayment/termination charges. With regard to the Management fees the Ld. Commissioner is directed to record a detailed finding supported with reasons on its leviability to service tax .....

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sition of penalty accordingly. Our findings on the issues are summarized as below: (I) The terms of the contract relating to all the agreements claimed to be financial lease, equipment lease, operating lease, hire purchase agreement, hire purchase finance agreements and loan cum hypothecation agreements be analysed/examined along with other relevant documents/evidences to ascertain the true nature of transaction between the appellant and its customers so as to arrive at a conclusion whether the .....

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