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2016 (4) TMI 21 - CESTAT KOLKATA

2016 (4) TMI 21 - CESTAT KOLKATA - TMI - 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 .....

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ion whether the ownership of the goods under 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 .....

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12) of Finance Act, 1994.

Leviability 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 .....

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Rejection of RBI statement figures 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 .....

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e 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 - 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 ser .....

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rutinize the transaction to ascertain whether 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.

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the 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 .....

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sideration afresh.

Liability of 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/ter .....

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not clear. The adjudicating authority would 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 .....

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e Appeals are filed by the assesse-appellant 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 .....

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quivalent penalty under section 78 and penalty 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 ₹ 50,18,7 .....

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e business of financing of assets including 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 rais .....

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he Appellant involving a total demand of ₹ 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-o .....

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own the asset, at the end of the lease period 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 .....

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ed period and can take the goods again on 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 t .....

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ious agreements termed as hire purchase 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 .....

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r Vehicles Act, 1988 since the customer/client 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 o .....

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3 Raj 317 and Babu Singh vs. Champa Devi & 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 .....

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into prior to 16.07.2001. In this regard 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 securitizat .....

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y in calculating the service tax liability 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 .....

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ear that the Appellant had collected an amount 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 representi .....

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nfirmed by the adjudicating authority. 5.9 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 .....

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cases:- * Commissioner of Customs, Mumbai 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. A .....

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lant and the customers enter into agreement 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 .....

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e hirer of the goods has the option to purchase 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 trans .....

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ervice Tax then the present transaction would 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 a .....

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ecuritization as a process for which assets 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 .....

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dictionary meaning of securitization, the 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 tra .....

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tallments due from the customers. For such 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 co .....

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that the aforesaid transactions conducted 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 .....

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tion under the category of conveyance and 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 docume .....

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ajendra Jagannath Parekh and Ajay Shashikant 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 suc .....

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ce tax has been alleged. Referring to the 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. .....

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ase of excisable goods, for a consideration, 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 liab .....

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iewing of the customers, who seek finance 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, proce .....

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ld. Advocate further submitted that management 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 cate .....

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ri-Del.) * Housing & Dev. Corporation 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 wh .....

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ilable in public domain. In support he has 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 inclu .....

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Apex Court in the case of Association of 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 fina .....

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n non-payment of the loan by the purchaser; 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 som .....

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nance leasing or hire purchase, not a single 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 opt .....

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ld.Special Counsel has submitted that M 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 .....

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al installment to 100 holders of securities 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 i .....

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or two financial years and the structure 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 is .....

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Tribunal. He has further submitted that 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 var .....

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ding that the services rendered by them do 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 Fina .....

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3 1KTR-178 & Builders Association case(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, .....

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lio management, all forms of fund management, 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 foreig .....

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er with the interest charges; and (iv) the 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 .....

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o come under the tax net. In other words 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 char .....

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ds the original cost of the equipment) and 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 s .....

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l be leviable only on the lease management 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 t .....

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. (iii) The term financial leasing is explained 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 com .....

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tions are to be examined carefully on the 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 na .....

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of the majority opinion as below: . 14. The 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 .....

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, 1962, and July 6, 1962, held that the transactions 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 .....

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tely to convey or acknowledges to have conveyed 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 mo .....

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ender will unquestionably be a loan transaction. 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 .....

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er is the owner of the goods and with a view 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 .....

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n, the customer executes a promissory note 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 .....

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he intention of the appellants in obtaining 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 Boa .....

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y of various services rendered by the appellant. 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 .....

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t of ₹ 8,95,800/- in 24 equal monthly 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.D .....

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notwithstanding any delay in delivery caused 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 Equipm .....

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se) punctually pay to the Lessor at its Registered 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 .....

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, at its sole discretion, to such proposasl 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 c .....

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; (b) die, become insolvent or compound with 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 .....

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observe any conditions on his/its part herein 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 par .....

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r this Agreement shall forthwith stand determined 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 thereupo .....

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d before its full term expires, the Lessee 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 .....

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for the Equipment shall be secured by delivery 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/veh .....

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53,506/-, the loan amount to the customer 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 s .....

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₹ 9,744/- for 35 months and ₹ 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 .....

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d as from 01.03.2006 to 01.12.2008, payment 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 .....

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n of the Appellant and the hirer and other 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 .....

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e vehicle are that of the vehicle manufacturer/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 .....

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AND TENURE The Company shall provide funds 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 resp .....

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of Clause 15 of this Agreement, and shall 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 Hi .....

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e Hired Article in favour of the Bankers 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 H .....

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her due to ownership or control; 21.1 In 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 installme .....

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Sawari and the cost of asset as ₹ 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 am .....

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dated 14.06.2000 on some conditions. The 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 & .....

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of the Appellant dated 28.06.1999. Also 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 .....

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umber of Tata Sumo value and its cost as ₹ 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 .....

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allments of ₹ 6,550/- in the former 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. .....

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by the Hirer/s for and on behalf of MAGMA 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 respec .....

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and 3rd Year is ₹ 37,200. The total 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 a .....

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₹ 8,17,289/-, financial charges ₹ 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 .....

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nt as ₹ 8,42,000/- payable in 47 installments 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 .....

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he schedule-II of the agreements in monthly 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 customer .....

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ned by the Appellant. Similar impediments, 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 betwee .....

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ment leasing and hire purchase, where the 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 retaine .....

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facts are vital to application of the principle 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 ne .....

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. It is their contention that they have followed 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 se .....

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eir activities are limited to the 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. 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 .....

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ertaken only the securitization transaction 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 securitizat .....

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ost important financial innovations in the 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 t .....

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es. The standardized amounts of these securitized 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 tha .....

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er, whether it involved the second stage 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 appell .....

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recording any reasoning in this regard. The 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 materi .....

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Supreme Court in the case of Asst. Commr. 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 .....

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ble to know the ground which weighed with 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 .....

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the borrowers on behalf of the several Banks 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. .....

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ommission 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-(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)……………&h .....

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ses leading to conflicting views. The issue 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 a .....

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subsequent case viz. Atamaram Auto Enterprises 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 o .....

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he ld. Commissioner also should record reasons 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 .....

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ency deposits had been collected from the 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 invest .....

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ue has also needs be remanded for consideration 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 a .....

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TR359(Tri.-Del.) & Small Indistires & 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 .....

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sion on the aspect of limitation and imposition 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 .....

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