NBFCs Not Liable To Pay Interest Tax On Interest Component Paid Under Hire-Purchase Agreement - Supreme Court
A Supreme Court bench of Justice Sanjiv Khanna and Justice MM Sundresh has confirmed that Non-Banking Finance Companies are not liable to pay interest tax on the interest component included in the hire-purchase instalments paid under the hire-purchase agreement.
Counsel EMS Anam appeared for the Appellant-Assesse whereas Counsel Anil Katiyar appeared for Respondent-Revenue..
In this case, the common question that arose for consideration was: Whether the assessee is liable to pay tax under the Interest-Tax Act, 1974, on the interest component included in the hire-purchase instalments paid under the hire-purchase agreement?
The Appellants were non-banking finance and leasing companies registered with the RBI. Some of the Appellants had been reclassified as hire-purchase finance companies.
On appeal, the Income Tax Appellate Tribunal (ITAT) had accepted the plea of the Appellants that they were not liable to pay interest tax on the interest component embedded in the hire-purchase instalment.
The ITAT referred to 1998 Circular issued by the Central Board of Direct Taxes and observed that the hire-purchase agreement is a composite transaction and has elements of bailment and sale. Relying on the terms and conditions of the hire-purchase agreement, the ITAT held that hire-purchase agreements are distinguishable from loans and advances.
Aggrieved, the Revenue approached the High Court and was granted relief.
On appeal before the Supreme Court, the Court observed that "A hire-purchase agreement has two elements – an element of bailment and an element of sale. The element of sale fructifies when the option to purchase is exercised by the intending purchaser after fulfilling the terms of the agreement. Till then, the goods are given on hire. One can argue that in a hire-purchase, an element of interest is inbuilt, but what is payable is the hire amount and not interest per see."
The Apex Court also deemed it important to distinguish between a financial lease and an operating lease and held that the services rendered in the former case would be taxable, whereas the latter would fall out of the tax net.
The Court relied on the case of Association of Leasing and Financial Service Companies v. Union of India and Others, where it was observed that non-banking financial companies are essentially loan companies, but they could, in addition thereto, be in the business of equipment leasing, hire purchase finance and investment. In case of bailment termed as “hire”, the bailee receives both possession of the chattel and the right to use it in return for remuneration. On the other hand, equipment leasing is long-term financing which helps the borrower to raise funds without outright payment in the first instance.
The Court noted that the "interest” element cannot be compared to consideration for lease/hire, which is in the nature of remuneration (consideration) for hire.
Consequently, the Apex Court allowed the appeals.
Cause Title: M/s. Muthoot Leasing and Finance Limited & another v. Commissioner of Income Tax