2022 (9) TMI 1062 - AT - Service Tax

Tribunal Upholds Decision: Restructuring Premium Not Taxable

The Tribunal dismissed the appeal, upholding the Commissioner's order that the restructuring premium is not subject to service tax under 'banking and ... Levy of service tax - banking and other financial services - premium on interest restructuring of loan as interest on loans - whether restructuring premium charged by respondent falls under lending or not? - suppression of facts or not - extended period of limitation - HELD THAT:- The respondent was to receive total interest of Rs. 10,800 in next 3 years at the original interest rate of 9% as agreed upon but due to lowering down the interest rate to 6%, respondent will now receive Rs. 07,200 at 6% rate of interest in next 3 years. Therefore, to compensate for the loss of interest that is going to be caused to the respondent for reduction in rate of interest due to interest restructuring, respondent computed net present value of such loss (which comes out to Rs. 03,269.88/-) and collected 50% of the same as premium for interest restructuring while remaining 50% is the benefit gained by the customer due to interest restructuring. The premium so charged by the respondent from its customers due to interest restructuring is nothing but net present value of loss of interest that will be caused to the respondent. It is not possible to accept the contention of the Department that restructuring premium charged by the respondent would fall under ‘lending’ and would be subjected to levy of service tax under ‘banking and other financial services’. Extended period of limitation - HELD THAT:- The extended period of limitation could not have been invoked in the facts and circumstances of the case. The respondent believed that the activities carried on by it was not taxable and the belief of the respondent stands justified by the order of the Commissioner dropping the charges. It also needs to be noted that the respondent had duly disclosed and recorded the information in its books of account. It cannot, therefore, be alleged that it had concealed or suppressed information with an intent to evade payment of service tax. The impugned order passed by the Commissioner, therefore, does not call for any interference in this appeal - appeal dismissed. Issues Involved:1. Whether the restructuring premium charged by the respondent falls under 'lending' and is leviable to service tax under 'banking and other financial services'.2. Whether the restructuring premium is akin to interest on loans and thus not subject to service tax.3. Applicability of the extended period of limitation for the demand of service tax.Detailed Analysis:1. Restructuring Premium and 'Lending':The primary issue revolves around whether the restructuring premium charged by the respondent qualifies as 'lending' under 'banking and other financial services' and is thus subject to service tax. The Department argued that the premium is a consideration for the taxable service provided by the respondent, as it is not directly related to the loan amount and thus not akin to interest. However, the Tribunal noted that the restructuring premium is essentially compensation for the loss of interest income due to the reduction in the interest rate. The Tribunal emphasized that the premium is calculated based on the difference between the higher original interest rate and the lower restructured rate, discounted to its present value. This computation method aligns with the Reserve Bank of India's guidelines for interest restructuring, which supports the respondent's claim that the premium is a form of interest adjustment rather than a separate service charge.2. Nature of Restructuring Premium as Interest:The respondent contended that the restructuring premium should be treated as interest, which is outside the ambit of 'banking and other financial services'. The Tribunal agreed, stating that the premium represents a portion of the interest the respondent would forgo due to the lower interest rate. The Tribunal provided an illustrative example to demonstrate how the premium compensates for the future loss of interest. This example clarified that the premium is not a charge for a separate service but a financial adjustment to account for the reduced interest income. Therefore, the Tribunal concluded that the restructuring premium does not fall under 'lending' and is not subject to service tax.3. Foreclosure Charges and Service Tax:The Department also argued that the restructuring premium is akin to foreclosure charges, which should be subject to service tax. The Tribunal referred to the Larger Bench decision in Repco Home Finance Ltd., which held that foreclosure charges are compensation for the disruption of a service, not for 'lending' services. The Tribunal emphasized that foreclosure charges arise from the termination of a lending service and are not related to the lending activity itself. Thus, even if the restructuring premium were considered similar to foreclosure charges, it would not be subject to service tax.4. Extended Period of Limitation:The Tribunal also addressed the applicability of the extended period of limitation for the service tax demand. The respondent argued that it had a bona fide belief that the restructuring premium was not taxable and had disclosed all relevant information in its books of account. The Tribunal agreed, noting that the respondent's belief was justified by the Commissioner's order dropping the charges. The Tribunal concluded that there was no intent to evade tax, and the extended period of limitation could not be invoked.Conclusion:The Tribunal dismissed the appeal, upholding the Commissioner's order that the restructuring premium is not subject to service tax under 'banking and other financial services'. The Tribunal emphasized that the premium is a form of interest adjustment and not a separate service charge. Additionally, the Tribunal ruled that the extended period of limitation was not applicable in this case.