According to Section 65B (22) “declared service” means any activity carried out by a person for another person for consideration and declared as such under section 66E.
According to Section 66E (g) activities in relation to delivery of goods on hire purchase or any system of payment by instalments; shall constitute declared service.
According to Section 65B (25) “goods” means every kind of movable property other than actionable claim and money; and includes securities, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.
The delivery of goods on hire purchase or any system of payment by instalments is not taxable. The delivery of goods on hire purchase or any system of payment on instalment is not chargeable to service tax because as per Article 366(29A) of the Constitution of India such delivery of goods is deemed to be a sale of goods. However activities or services provided in relation to such delivery of goods are covered in this declared list entry.
General scope of the phrase ‘delivery of goods on hire-purchase or any system of payment by instalments’ is as under:
Section 2 of the Hire Purchase Act, 1972 defines a “hire purchase agreement” as
‘an agreement under which goods are let out on hire and under which the hirer has the option to purchase them in accordance with the terms of the agreement and includes an agreement under which-
(i) possession of goods is delivered by the owner thereof to a person on condition that such person pays the agreed amount in periodical instalments, and
(ii) the property in the goods is to pass to such person on the payment of the last of such instalments, and
(iii) such person has a right to terminate the agreement at any time before the property so passes.’
As per the Sales of Goods Act, delivery is ‘voluntary dispossession in favour of another’ and that ‘in all cases the essence of delivery is that the deliverer, by some apt and manifest act, puts the deliveree in the same position of control over thing, either directly or through a custodian, which he held himself immediately before the act’.
The nature of such arrangements has been explained by the Supreme Court in the case of Association of Leasing & Financial Service Companies v. Union Of India [STO 2010 SC 712]. The relevant extract in para 20 of the said judgment is reproduced below:
According to Sale of Goods Act, a common method of selling goods is by means of an agreement commonly known as a hire-purchase agreement which is more aptly described as a hiring agreement coupled with an option to purchase, i.e., to say that the owner lets out the chattel on hire and undertakes to sell it to the hirer on his making certain number of payments.”
Key ingredients of the deemed sale category of ‘delivery of goods on hire-purchase or any system of payment by instalments’, therefore are-
• Transfer of possession (and not just of custody)
• The hirer has the option or obligation to purchase the goods in accordance with the terms of the agreement.
Frequently Asked Questions
1. If delivery of goods on hire purchase or any system of payment on installment is deemed to be sale of goods what are the activities in relation to such delivery which are covered in the declared service?
It has been held by Supreme court in the case of Association of Leasing & Financial Service Companies v. Union of India [STO 2010 SC 712] that in equipment leasing/hire-purchase agreements there are two different and distinct transactions, viz., the financing transaction and the equipment leasing/hire-purchase transaction and that the financing transaction, consideration for which was represented by way of interest or other charges like lease management fee, processing fee, documentation charges and administrative fees, which is chargeable to service tax. Therefore, such financial services that accompany a hire-purchase agreement fall in the ambit of this entry of declared services.
2. Is service tax leviable on the entire quantum of interest and other charges received in relation to a hire purchase?
No. In terms of the exemption notification relating to such activities, service tax is leviable only on 10% of the amount representing interest plus other charges explicitly charged as mentioned above
3. Are ‘finance leases’, ‘operating leases’ and ‘capital leases’ covered as ‘delivery of goods on hire purchase or any system of payment of instalments’?
Such leases would be covered only if the terms and conditions of such leases have the ingredients as explained above. Normally in an ‘operating lease’ the lease is for a term shorter than property’s useful life and the lessor is typically responsible for taxes and other expenses on the property. The lessee does not have an option to purchase the property at the end of the period of lease. Such arrangements do not qualify as ‘delivery of goods on hire purchase or any system of payment of instalments’.
On the other hand ‘financial leases’ or ‘capital leases’ strongly resemble security arrangements and are entered into for financing the asset. The lessee pays maintenance costs and taxes and has the option of purchasing the lease end. Such arrangements resemble a hire-purchase agreement and would fall under the said ‘deemed sale’ category. The essence of this deemed sale category is that the arrangement under which the goods are ‘delivered’ should be in the nature of a financing arrangement wherein the lessee pays maintenance costs and taxes and has the option of purchasing the asset so delivered at lease end.
It may, however, be pointed out that in case an ‘operating lease’ has elements of transfer of ‘right to use’ then the same would be covered in the other ‘deemed sale’ category pertaining to ‘transfer of right to use any goods’