2023 (5) TMI 302 - AT - Service Tax

Foreclosure charges, default penalties and loan insurance admin fees in personal loans held not taxable; demands set aside.

Foreclosure charges levied on premature loan termination were held not taxable under BOFS in s.65(12) of the Finance Act, 1994, following the Tribunal's ... Non payment of service tax - Banking and other financial services - foreclosure charges - penal charges - insurance administration fees - period from 01.07.2003 to 30.03.2008 - Invocation of extended period of limitation - suppression of facts or not - interest - penalty. Whether the foreclosure charges charged by the banks and non-banking financial companies on premature termination of loan is subject to levy of service tax under BOFS as defined under section 65 (12) of the Finance Act, 1994? - HELD THAT:- The larger bench of the Tribunal in the case of COMMISSIONER OF SERVICE TAX, CHENNAI VERSUS M/S REPCO HOME FINANCE LTD. [2020 (7) TMI 472 - CESTAT CHENNAI] has considered the issue and has held that such charges are not liable to service tax - the demand on foreclosure charges cannot sustain. Service tax on penal charges, which are recovered from the customers when the customer defaults in making timely payment of the sums as agreed in the loan agreement and in the case of dishonor of cheque by the customer - HELD THAT:- The collection of penal charges arises on account of a separate cause of action which is independent of lending services rendered by the appellant. Here, decision in the case of M/S. ROHAN MOTORS LIMITED VERSUS COMMISSIONER OF CENTRAL EXCISE, DEHRADUN [2020 (12) TMI 1014 - CESTAT NEW DELHI] referred, wherein it has been held by the Tribunal that the demand of service tax on the amount collected on account of bouncing of cheques is not sustainable as such amount is penal in nature and is not towards consideration for any service. In the following cases, the Tribunal has held that the amounts collected as penalty/penal charges penal charges are not chargeable to service tax as the same are not ‘consideration’ under the finance Act, NORTHERN COALFIELDS LTD. VERSUS COMMISSIONER CGST, CE & CUSTOMS - JABALPUR [2023 (1) TMI 934 - CESTAT NEW DELHI] and M/S MAGMA FINCORP LTD VERSUS COMMISSIONER OF SERVICE TAX, KOLKATA, COMMISSIONER OF SERVICE TAX VERSUS M/S. MAGMA SHARCHI FINANCE LTD [2015 (6) TMI 442 - CESTAT KOLKATA] - thus the demand of service tax on penal charges is not sustainable in law and is set aside. Demand of service tax on insurance administration fees under the category of business auxiliary service - HELD THAT:- For a transaction to be covered under the taxable category of BAS, the service rendered must be auxiliary to some business activity of the service recipient has held by this Tribunal in the case of SUKHMANI SOCIETY FOR CITIZEN SERVICES VERSUS C.C.E & S.T., CHANDIGARH [2016 (9) TMI 588 - CESTAT CHANDIGARH] wherein it has been held that business auxiliary services would become chargeable to service tax only if the service is rendered in relation to business of recipient. Further, it is found that in the present case the borrowers are individuals who are availing personal loans and these loans have not been availed for any business or commercial purpose and hence the service provided by the appellant is not classifiable under business auxiliary service. This issue is also decided against the Revenue and in favour of the appellant. Invocation of extended period of limitation - HELD THAT:- Since there were divergent views of the Tribunal and the issue was referred to the larger bench for final disposal clearly shows that the issue involves interpretation of law and hence extended period cannot be invoked - Reliance placed upon the decision in the case of M/S. BHARTI AIRTEL LTD VERSUS C.C.E. -BANGALORE-I [2021 (4) TMI 306 - CESTAT BANGALORE] - Besides this the department could not establish any fraud, collusion, willful misstatement or suppression of facts on the part of the appellant to invoke extended period of limitation. Interest - Penalty - HELD THAT:- Demand of interest is not maintainable since the demand of tax itself is not sustainable. Similarly, the penalty is also not imposable when the tax demand is not sustainable. Appeal allowed. Issues Involved:1. Service tax liability on foreclosure charges.2. Service tax liability on penal charges.3. Service tax liability on insurance administration fees.4. Invocation of extended period of limitation.Summary:1. Service Tax on Foreclosure Charges:The appellants challenged the demand for service tax on foreclosure charges under 'Banking and Other Financial Services' (BOFS). The Tribunal referred to the larger bench decision in *Repco Home Finance Ltd.*, which held that foreclosure charges are not subject to service tax as they are damages for breach of contract and not for any service rendered. The Tribunal followed this decision and set aside the demand on foreclosure charges.2. Service Tax on Penal Charges:The appellants argued that penal charges for late payment and cheque dishonor are independent of lending services and should not be taxed under BOFS. The Tribunal agreed, citing *Rohan Motors Ltd.* and other cases, which held that such charges are penal in nature and not consideration for any service. The demand for service tax on penal charges was set aside.3. Service Tax on Insurance Administration Fees:The appellants contended that insurance administration fees should not be classified under Business Auxiliary Services (BAS) as the services were not auxiliary to any business activity of the client. The Tribunal agreed, referencing *Sukhmani Society for Citizen Services* and other cases, which held that BAS applies only if the service is related to the business of the recipient. The demand for service tax on insurance administration fees was set aside.4. Invocation of Extended Period of Limitation:The appellants argued against the invocation of the extended period of limitation, stating that the issue involved interpretation of law. The Tribunal agreed, citing *Bharti Airtel Ltd.*, and noted that the department failed to establish fraud, collusion, or willful misstatement. Consequently, the invocation of the extended period was deemed unjustified, and the related demands were set aside.Conclusion:The Tribunal set aside the impugned orders, allowing the appeals with consequential relief as per law. The demands for service tax on foreclosure charges, penal charges, and insurance administration fees were all found unsustainable. The invocation of the extended period of limitation was also rejected.