Interest on inter-company loans is not service charges; service tax demand on lending receipts was set aside.

Interest received on loans advanced to a subsidiary was held not to be service charges under banking and other financial services. The records and letters before the authorities showed the receipt was interest, and the adjudicating authority produced no evidence to recharacterise it as consideration for a taxable service. In the absence of material establishing a taxable service, interest on lending was not exigible to service tax, so the demand, interest and penalties were set aside in favour of the assessee.

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Issues: Whether the amount received by way of interest on loans advanced to the subsidiary company was liable to service tax as service charges under the category of banking and other financial services.

Analysis: The appellant's records and letters placed before the authorities showed that the amount reflected in the balance sheet was interest. The adjudicating authority did not dislodge those documents or record any evidence to show that the receipt was in the nature of service charges. In the absence of material to treat the amount as consideration for a taxable service, and following the view that interest received on lending is not exigible to service tax, the demand could not be sustained.

Conclusion: The amount received was interest and not service charges, and no service tax was payable on it. The demand, interest, and penalties were unsustainable and were set aside in favour of the assessee.

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