2023 (8) TMI 473 - AT - Service Tax

Service Tax Exemption for Penal Interest & Bounce Charges Upheld

The Tribunal held that penal interest and bounce charges collected by the appellants are not subject to service tax under Section 66E(e) of the Finance ... Levy of Service tax - declared services or not - penal interest and bouncing charges - penal interest or delayed payment charges in case of late payment of EMI or delay in payment of periodical instalments of loan/advance repayments - bouncing charges i.e., charges recovered for bouncing of repayment instruments such as dishonour of cheque/ECS or any other electronic or clearing mandate given by the customers/borrowers - Section 66E(e) of the Finance Act, 1994 read with Section 174 (2) CGST Act, 2017. Penal interest or delayed payment charges in case of late payment of EMI or delay in payment of periodical instalments of loan/advance repayments - HELD THAT:- From the perusal of the case records it transpires that the appellants are engaged in the business of financing including lending of loans and advances. As a consideration for lending/financing, the appellants charge interest from their customers/ borrowers at a particular rate, for the period for which such loan is taken. The principal and interest amount on such loan is repaid by customers/borrowers by way of EMI over a period of loan tenure. Accordingly, while computing the EMI, the appellants charges pro-rata interest payable on each due date, on the underlying assumption that the customers/borrowers would not default in payment of the EMI on the due dates. However, in case of any default, the appellants charge them an additional interest in the form of penal interest for the number of days of default - Considering the nature of the principal interest on the loan due over the entire loan tenure, collected in the form of EMI comprising of principal amount plus interest, in our considered opinion this principal interest could be treated as consideration for the usage or retention of money lent by the appellants to their customers/borrowers as per the agreement and EMIs in force. In a case where the borrower is unable to repay a particular EMI on the due date, penal interest is charged on the period of delay or additional time taken for repayment of EMI, beyond the due date. Such penal interest also represents the consideration for usage or retention of money lent beyond the agreed time for payment in the form of due date of EMI. In other words, both the principal interest and the penal interest represent the time value of money. While the former indicates the interest in the form of cost for agreed periodical repayments in the form of EMI period/due dates, the later represent the cost for period of delay or additional time taken for repayment of EMI, beyond the due date. Thus, it is found that both the principal interest and penal interest is covered under the scope of the term “interest” under Section 65B(30) ibid. Clause (iv) to sub-rule 2 to Rule 6 of the Service Tax (Determination of Value) Rules, 2006, notified vide Notification No.24/ 2012 - S.T. dated 06.06.2012, inter alia, provide that the value of any taxable service does not include, ‘(iv) interest on delayed payment of any consideration for the provision of services or sale of property, whether movable or immovable’. Thus, the above entry clearly provide the Government had excluded the interest on delayed payment from the scope of payment of service tax. In the impugned order, the learned Commissioner had held that penal charges and bounce charges are in the nature of consideration for having agreed to tolerate an act or a situation and thus it is a declared service of ‘agreeing to tolerate an act or a situation’ under section 66 E(e) of the Finance Act, 1994. Charging of penal interest in respect of delay in payment of EMI, had been examined by the Ministry of Finance in the context of applicability of GST - HELD THAT:- It was clarified vide CBIC Circular No. 102/21/2019-GST dated 28.06.2019, that the transaction of levy of additional/penal interest does not fall within the ambit of entry 5(e) of Schedule II of the CGST Act i.e. “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”, as this levy of additional/penal interest satisfies the definition of ‘interest’ as contained in Notification No.12/2017-Central Tax (Rate) dated 28.06.2017. Accordingly, it was clarified that ‘penal interest’ charged on a transaction would not be subject to GST. The issue of penal charges in respect of delay in payment amounting to declared service as contemplated by the department under section 66E(e) of the Finance Act, on which service became taxable w.e.f. July 1, 2012, has already been decided by Principal Bench of this Tribunal in the case of M/S SOUTH EASTERN COALFIELDS LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX, RAIPUR [2020 (12) TMI 912 - CESTAT NEW DELHI]. In this case, the Tribunal had held that the penal clauses are in the nature of providing a safeguard to the commercial interest of the appellant and it cannot, by any stretch of imagination, be said that recovering any sum by invoking the penalty clauses is the reason behind the execution of the contract for an agreed consideration. It is not the intention of the appellant to impose any penalty upon the other party nor is it the intention of the other party to get penalized. Hence, it was held by the Tribunal that it is not possible to sustain the view that penalty amount, forfeiture of earnest money deposit and liquidated damages have been received by the appellant towards consideration for tolerating an act leviable to service tax under section 66E(e) of the Finance Act. The issue of liability of service tax on the declared service of “Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” under clause (e) of Section 66E of the Finance Act, 1994 was clarified by the CBEC in its Circular No.214/1/2023Service Tax dated 28.02.2023, in the context of the orders passed by this Tribunal in various cases. Accordingly, it was clarified that there should be a flow of consideration for this activity of tolerating an act or a situation. It was also decided by the Board not to pursue the Civil Appeals filed before the Apex Court in those cases, where the Tribunal had ordered for setting aside the orders of lower authorities for confirming the service tax demands under Section 66E(e). The impugned order holding that penal interest and bouncing charges received by the appellants as “consideration” for “tolerating an act”, and are leviable to service tax under section 66E(e) of the Finance Act, 1994, cannot be sustained. Appeal allowed. Issues Involved:1. Liability of service tax on penal interest for delayed payment of EMI.2. Liability of service tax on bounce charges for dishonoured repayment instruments.Summary:Issue 1: Liability of Service Tax on Penal Interest for Delayed Payment of EMIThe appellants, M/s Bajaj Finance Limited, argued that penal interest collected for delayed EMI payments was additional interest exempt from service tax. They contended that such charges were compensation for breach of contract, not consideration for any service. The Department, however, treated penal interest as consideration for the declared service of 'agreeing to tolerate an act or situation' under Section 66E(e) of the Finance Act, 1994, and initiated recovery proceedings for service tax.The Tribunal found that both principal interest and penal interest represent the time value of money and are covered under 'interest' as defined in Section 65B(30) of the Finance Act, 1994. The RBI guidelines and Service Tax (Determination of Value) Rules, 2006, exclude interest on delayed payments from the scope of service tax. The Tribunal referenced CBIC Circular No. 102/21/2019-GST, which clarified that penal interest does not fall within the ambit of entry 5(e) of Schedule II of the CGST Act and is not subject to GST.Issue 2: Liability of Service Tax on Bounce Charges for Dishonoured Repayment InstrumentsThe appellants contended that bounce charges were penalties for dishonoured cheques/ECS mandates, not consideration for any service. The Department argued that these charges were for tolerating the act of dishonour, thus falling under the declared service of 'agreeing to tolerate an act or situation.'The Tribunal referred to CBEC Circular No. 178/10/2022-Service Tax, which clarified that cheque dishonour fines or penalties are not consideration for any service and are not taxable. The Tribunal also cited the case of M/s. Rohan Motors Ltd. vs. Commissioner of Central Excise, Dehradun, where it was held that bounce charges are penal in nature and not towards consideration for any service.Conclusion:The Tribunal concluded that penal interest and bounce charges received by the appellants are not consideration for 'tolerating an act' and are not leviable to service tax under Section 66E(e) of the Finance Act, 1994. The appeals filed by the appellants were allowed, and the impugned order dated 24th August 2018 was set aside.