2011 (11) TMI 95 - AT - Service Tax

Prepayment and interest reset charges taxable as Banking and Other Financial Services under Section 65, extended limitation upheld

CESTAT, Ahmedabad held that prepayment charges and charges for resetting interest rates levied by the appellant, a lender, are taxable under 'Banking and ... Levy of Service Tax on Prepayment charges and charges for resetting of interest rates under Banking & Other Financial Services. - Extended period of limitation - Whether the prepayment charges and charges levied for resetting the interest rate form a part of the lending process or not - Held that:- Admittedly, the prepayment charges vary from borrower to borrower, according to the appellant themselves. Further, it is collected for premature closure of the loan and it is not the interest factor that is taken into account. It has to be noted that when a borrower makes a prepayment and therefore pays interest separately upto the date of payment, that amount is shown separately as interest and prepayment charges are not collected as interest, but collected as prepayment charges. Further, even though the borrower has already borrowed the money and the process is over, when prepayment is proposed, borrower is expected to make a request which has to be considered by lender, charges worked out and informed and paid along with principal and interest upto the date of payment. Therefore, there is definitely an element of service involved in considering the request of the borrower for prepayment of loan, fixing of prepayment charges, collection of the same and closure of loan. These activities can be definitely in relation to Banking & other Financial services, which includes lending after 10.09.04. Further, when loans are fore-closed, the situation gives rise to the issue of asset liability mis-match for the lender since lender has to find alternative source for deployment of such funds. Prepayment charges are the charges leviable by a bank/lender to offset the cost of such finding such alternative source for deployment of fund and also intended to make exit difficult for the borrower. This shows that prepayment charges can never be considered to be in the nature of interest. In fact, foreclosure by prepayment and reset are relatable to lending and if an application for processing a loan application is chargeable to Service Tax and processing fee charged for foreclosure/prepayment of loan or reset of interest would also be chargeable. In fact, we are unable to see what is the difference between the liability of Service Tax in respect of application of a loan where the processing fee is charged which is independent of loan and over and above the interest, when we see here also it is over and above the interest. The processing fee is charged for considering the various aspects such as credit worthiness of the borrower repaying capacity of the borrower, period of loan vis-a-vis repaying capacity of the borrower, quality of assets of the borrower etc. When the proposal is made for prepayment of loan or resetting, processing the application is involved. Therefore, there is definitely an element of service in prepayment of loan or resetting of interest. As already discussed earlier, the definition covers any activity in relation to lending. Resetting of interest rate can be definitely considered as a service rendered by the appellant in relation to lending and is covered by Service Tax definition. It was submitted by the appellant that resetting charges were not being collected by them after 2004-2005. However, it was submitted by the Department that in the financial year 2005-06, 2006-07, 2007-08, the appellant had changed the head of income from resetting charges to additional interest. We find that this submission was not made before the original adjudicating authority and further we also find that in Para 5 wherein the Service Tax liability has been worked out in the table, in the first year, it has been shown as reset charges whereas in the year 2005-06, it has been shown as additional interest charges. In the year 2006-07 and 2007-08, it has been specifically indicated as additional interest (prepayment). This gives an impression that contrary to the submission made by the Department, the Department's contention was that in the year after 2005-06, the appellant did not collect any reset charges. In any case, in view of the conclusion that we have reached that the service tax is payable on reset charges as well as prepayment charges, we consider that it is not necessary for us to go into this aspect. Extended period of limitation - Whether the demand can be sustained for more than normal limitation period. In this case, the show cause notice was issued on 22.10.08 and the period covered by the show cause notice is 10.9.04 to 31.3.08. - The fact remains that the appellant was required to declare the income received once the las was amended and they were required to seek clarification, if there was doubt. Even if they felt that the activity did not attract Service Tax, ST-3 returns should have been filed/or Department addressed intimating that these services are not liable to tax. In this case, the submission made by the ld. A.R. that plea of bonafide has to be considered in the light of decision of the Tribunal in the case of SPIE CAPAG S.A. Vs CCE [2009 (1) TMI 388 - CESTAT, MUMBAI], is appropriate. In that case, while dealing with the plea of bonafide belief, the Tribunal observed that 'the least that was expected of the appellant to discharge the plea of bonafide belief was to make enquiries from Central Excise authorities or some reputed legal firm regarding dutiability of items manufactured by it.' Therefore, we find ourselves in agreement with the submissions that the appellant could not have interpreted the law according to their understanding without taking sufficient care for their interpretation, is correct. In the absence of any evidence to show that the appellant had intimated the Department or had obtained legal opinion, invocation of extended period on the ground of suppression of facts has to be upheld. Therefore, the demand for extended period for Service Tax and interest thereon has to be upheld. Issues Involved:1. Prepayment charges and reset charges liability under 'Banking and other financial services'.2. Nature of reset charges/prepayment charges as interest.3. Applicability of Service Tax on agreements entered prior to 10.09.2004.4. Invocation of extended period of limitation.5. Invocation of Section 80 for waiver of penalties.Issue-wise Detailed Analysis:1. Prepayment Charges and Reset Charges:The appellant argued that prepayment charges and reset charges are not related to 'Banking and other financial services' and hence not liable for Service Tax. They relied on various cases including the European Court of Justice's decision in Societe thermale d'Eugenie-les-Bains and the Tribunal's decision in the case of SIDBI. However, the Tribunal noted that the definition of 'Banking and other financial services' was expanded by the Finance Act, 2004 to include lending. The Tribunal concluded that prepayment charges and reset charges are services related to lending and thus taxable under 'Banking and other financial services'.2. Nature of Reset Charges/Prepayment Charges as Interest:The appellant contended that reset charges and prepayment charges are additional interest and not liable for Service Tax. The Tribunal disagreed, stating that these charges are for services provided in relation to lending, such as processing prepayment requests or resetting interest rates. The Tribunal emphasized that these charges are not interest but fees for additional services provided to borrowers.3. Applicability of Service Tax on Agreements Entered Prior to 10.09.2004:The appellant argued that charges related to agreements entered before 10.09.2004 should not be taxable. The Tribunal clarified that the charges for prepayment and reset are levied only when the borrower opts for these services, which brings these charges under the taxable scope post-10.09.2004. Therefore, the clarification issued by the Board for hire-purchase agreements does not apply to lending services.4. Invocation of Extended Period of Limitation:The appellant argued against the invocation of the extended period of limitation, citing their status as a wholly owned Government company. The Tribunal noted that being a Government company does not exempt them from compliance with tax laws. The Tribunal found that the appellant did not declare the income received from prepayment and reset charges nor sought clarification from the Department, thus justifying the invocation of the extended period for suppression of facts.5. Invocation of Section 80 for Waiver of Penalties:While upholding the demand for Service Tax and interest, the Tribunal considered the appellant's status as a wholly owned Government company and the acceptance of their accounting treatment by the Income Tax department as reasonable causes. Therefore, the Tribunal invoked Section 80 of the Finance Act, 1994, to set aside the penalties imposed under various sections of the Act.Conclusion:The Tribunal upheld the demand for Service Tax and interest on prepayment charges and reset charges, affirming their classification under 'Banking and other financial services'. The invocation of the extended period of limitation was also upheld. However, penalties were waived under Section 80 of the Finance Act, 1994, considering the appellant's reasonable cause for non-compliance.