Activities in relation to delivery of goods on hire purchase or any system of payment by installments under Declared services [Section 66E] :
Hire-purchase is different from the normal purchase because in a mere hiring agreement, the hirer has no option to purchase the goods hired and the risks and rewards incidental to ownership of goods remain with the owner and are not transferred to the hirer, while in a hire purchase agreement the hirer has an option or an obligation to purchase goods.
Although the delivery of goods on hire purchase or any system of payment on installment 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 have been covered in this declared list entry. Consequently, they shall be deemed to be services.
(a) Key ingredients of delivery of goods on hire-purchase or any system of payment by installments: Key ingredients of the deemed sale category of “delivery of goods on hire-purchase or any system of payment by installments‟ 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.
| Hire purchase agreement is 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 installments, and (ii) the property in the goods is to pass to such person on the payment of the last of such installments, and (iii) such person has a right to terminate the agreement at any time before the property so passes [Section 2 of the Hire Purchase Act, 1972]. |
(b) Whether “finance leases‟, “operating leases‟ and “capital leases‟ covered as “delivery of goods on hire purchase or any system of payment of installments‟ : Such leases would be covered only if the terms and conditions of such leases have the ingredients as explained in (a) 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 installments‘.
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‘.
(c) Activities in relation to such delivery which are covered in the declared service : 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.