A two-judge bench of the Supreme Court has held that the non-banking finance companies are not liable to pay interest tax on the interest component received under the hire-purchase agreement under the Interest Tax Act, 1974.
The assessee, M/S. Muthoot Leasing And Finance Limited and Another, are nonbanking finance and leasing companies registered with the Reserve Bank of India. Some of the appellants – assessees have been reclassified as hire-purchase finance companies. The appellants contended that under a hire-purchase agreement, they hire out a vehicle to the customer and receive hire-purchase instalments, and not interest on loans and advances.
As per the hire-purchase agreements, the hirer must pay rent to the owner during the hiring as per the sums mentioned in the agreement on the dates mentioned therein.
On appeal, the ITAT Relied on the terms and conditions of the hire purchase agreement and a CBDT circular and held that hire-purchase agreements are distinguishable from loans and advances. The hire instalments are something different and more, and not the interest on loans and advances that is chargeable to interest tax. However, the High Court, on further appeal, granted relief to the Revenue.
A bench comprising Justice Sanjiv Khanna and Justice M.M. Sundresh observed that the 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 se,” the Apex Court said.
Moreover, the Apex Court distinguished between financial lease and 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.
“In this context, 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. Here, the “interest” element cannot be compared to consideration for lease/hire, which is in the nature of remuneration (consideration) for hire,” the Apex Court said.
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