TaxTMI 
TaxTMI 
2019 (8) TMI 1029
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.... reduced to the extent of total service tax payable of Rs. 3,28,602/- and accordingly reject the appeal filed by the Appellant." 2.1 Appellant is a public sector bank and is providing Banking and Financial Services as defined by Section 65(12) of the Finance Act, 1994. 2.2 As per the intelligence gathered the Appellant had entered into a credit facility agreement with M/s Clearing Corporation of India Ltd (CCIL) under which M/s CCIL were required to pay a commitment fee to the Appellant, as fixed percentage, per annum, of fund based limit. The said commitment fee was directly being debited to the account, by the Appellant, without raising any invoice. The said service of lending was a taxable service, w.e.f 11.09.2004 under the category of "Banking and Other Financial Services". However appellants had not taken any registration or paid service tax in respect of the services so rendered. 2.2 After completion of investigations a Show Cause Notice dated 26.12.2006, was issued to them asking them to show cause as to why "i. the service tax including education cess amounting to Rs. 3,30,031/- (Rupees Three Lakhs thirty thousand and thirty one only), as detailed in Anne....
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.... had not utilized the facility, in the hands of appellant these so named commitment fees charges are in fact, in terms of banking practices, minimum interest and not bank charges. • The facility so extended by the appellant is disaster management facility only and cannot be termed as lending. This is further strengthened by the fact that CCIL had never utilized this facility by drawing any amount out of Rs. 100 Crore extended by them during the entire period. • They are one of the six promoters of CCIL and hence CCIL cannot be considered as one of the Banking Customer for them. Thus relevant provisions of Section 65 (105)(zm) do not apply in their case. • Cum Tax Benefit as per Section 67(2) should have been allowed to them. • Penalties under Section 76, 77 & 78 should not have been imposed, also benefit of Section 80 should have been extended to them. • Simultaneous penalties under Section 76 and 78 should not have been imposed [The Financers [2007 (80 STR 7 (T-Del)], Kamal Photo Studio and Color Lab [2007 (7) STR 307 (T-Mum)] • They being public sector bank, o malafide intentions can be attributed to th....
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.... Fifoot, 7th Edition, The Law of Contract page 561 to 565, Ansons Law of Contract 28th Edition J Beatson page 624 & 625, McGregor on Damages, 20th edition by James Edelman para 16.033 & 16.034 page 517 & 518] • Issue on the payment of damages has been considered and decided by the Australian GST {Shaw V Director of Housing & Anor (No 2) [2001 ATC 4054]. Further in case of Ram Decorative & Industries Limited [2000 (124) ELT 659 (T)] it has been held that commitment charges collected from the buyers of excisable goods who failed to lift the entire quantity are in nature of liquidated damages and not includible in assessable value. • Commitment charges for un-availed portion of facilities fall within broad meaning of interest and same is excluded from the purview of the service tax. Board has vide letter F No B2/8/2004-TRU dated 10.09.2004 sated "The interest on loans has been specifically excluded by way of amendment to the provisions relating to the valuation. All such interests that are in nature of interest on loan would thus remain excluded from taxable value." • Commitment charges are inclusive of service tax and hence the benefit of Sectio....
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.... Undisputedly Appellants had extended the Line of Credit facility under a written agreement to Clearing Corporation of India Ltd (CCIL). (CCIL) was set up in April, 2001 to provide guaranteed clearing and settlement functions for transactions in Money, G-Secs, Foreign Exchange and Derivative markets. The Core Committee, appointed at the behest of Reserve Bank of India for setting up CCIL, identified six 'core promoters' for CCIL - State Bank of India, IDBI Bank Ltd.(formerly Industrial Development Bank of India), ICICI Bank Ltd, Life Insurance Corporation of India (LIC), Bank of Baroda and HDFC Bank Ltd. 5.3 CCIL had vide its letter No CCIL/L7S/o6/265 dated 17.11.2006 in response to summons dated 09.11.2006 issued to them submitted the details sating that- • Appellants recovered interest on the line of credit (LOC) amount utilized by it in form of LOC utilization charges; • The LOC utilization charges were recovered by CCIL from its defaulting members; • No bills were raised by the appellants for the commitment charges which were paid based on the terms of agreements either at the commencement or at the end of a calendar quarter; â....
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.... is a credit source that has committed to providing a loan to a company. In committed facilities, the borrowing company must meet specific requirements set forth by the lending institution in order to receive the stated funds. Once the terms and conditions of the loan contract have been agreed upon, the lender must advance money to the borrower when requested. In return, the borrower pays the lender a commitment fee - a fee payable to a lender on available but undrawn amounts and calculated as a percentage of those undrawn funds from time to time. With a committed facility, the bank agrees to provide funds up to a maximum limit for a specified period of time and at an agreed interest rate. Although the terms and conditions are stringent and specific on how the funds are to be used, borrowing firms receive a guaranteed source of funding for the duration of the agreement. A commitment fee generally is specified as either a flat fee or a fixed percentage of the undisbursed loan amount. The lender charges a commitment fee as compensation for keeping a line of credit open or to guarantee a loan at a specific date in the future. The borrower pays the fee in return for the assura....
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....t as a penalty, which applies to the Appellant's case. 11. The opening of a line of credit by the Appellant, for loan to the potential borrower, M/s. CCIL, is in itself part of the taxable service of lending, provided by the Appellant to M/s. CCIL, and as per banking practices they, as lender, have charged the 'commitment fee' either as 'liquidated damages' for breach of contract or as compensation for earmarking the funds for loan to the said borrower. Commitment fees, are therefore distinct and separate from interest and are thus part of the taxable service charges which are liable to service tax. Further, M/s. CCIL is an independent company, and even if they had been promoted by the Appellant, as claimed, it does not mean that M/s. CCIL cannot be a customer of the Appellant, for the purpose of providing taxable services, as argued in their submission. The contention of the Appellant in this regard, vide para 5(ii), (iii) and (iv) above, is therefore not acceptable." 5.7 In view of the discussions as above and established practices in banking and financial industry we do not find any merits in the submissions of the appellant that the commitment fees charged by them f....
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....the service provided and the consideration received. In case of HUDCO, Tribunal has held as follows: "8. This definition of 'Banking and other financial services' was amended by Finance Act, 2004 and the present definition as amended reads as under : "banking and financial services" means - (a) the following services provided by a banking company or a financial institution including a non banking financial company or any other body corporate or commercial concern, namely :- (i) financial leasing services including equipment leasing and hire purchase; (ii) credit card services; (iii) merchant banking services; (iv) securities and foreign exchange (forex) broking; (v) asset management including portfolio management, all forms of fund management, pension fund management, custodial, depository and trust services, but does not include cash management; (vi) advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisitions and advice on corporate restructuring and strategy; and (vii) provision and transfer of information and data process....
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....t and therefore pays interest separately up to 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 up to 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 10-9-04. Further, when loans are foreclosed, 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 diffic....
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....der start with this sentence. There was no discussion as to the nature of payment, method adopted, how it is covered under the definition and why it is taxable. When the definition itself did not cover the lending activity itself, the question as to whether the prepayment of loan is a part of service or not, was not considered and could not have been considered. The observations of the Tribunal have to be considered in the context in which they were made and in line with which provisions they were made and it is also to be taken note that the decision is in the light of the submissions made by both sides. In this connection, we find it appropriate to take note of the decisions cited by the ld. Authorised representative appearing for the Department and listed below, to support his submission that the facts of the decision relied upon have to be shown, and the ratio of the case is what is decided therein in the facts of the case and not what logically can be deducted from the same. (i) Collr. of CCE, Calcutta v. Alnoori Tobacco Products - 2004 (170) E.L.T. 135 (S.C.) (ii) CCE, Bangalore v. Srikumar Agencies - 2009 (13) S.T.R. 3 (S.C.) (iii) Sneh Enterprises....
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.... 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. 15. Even though, we have not discussed the charges levied for resetting the loan in detail, the principle underlining reset of interest and prepayment of loan are same. The Revenue has a better case in respect of reset charges since the issue is not at all covered by the decision of the Tribunal in the case of SIDBI as far as resetting charges are concerned. Further, in the case of resetting, the relationship between the lender and the borrower does not cease to exist and loan also continues. Therefore, 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 ld. A.R. appearing for the Department that in the financial year 2005-....
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....nterest and not liable to Service tax. 18.3 It has already been discussed that the prepayment charges are the charges for allowing the facility of prepayment of loan. Similarly, reset charges are the charges levied by the appellant for restructuring the interest rate. The method of calculating the charges has no bearing on the nature of service provided. Just because the charges have been calculated based on the outstanding loan amount and the interest rate prevalent at that time will not change the head of income from service charges to interest. 18.4 Interest is nothing but the time-compensation for somebody's money being retained by somebody else. The longer the period of retention, the higher will be the interest amount. In this background, the prepayment charges can never be considered to be in the nature of interest as prepayment only means payment before time. This should ideally result in refund of interest and not the demand for more interest because the borrowed money is being paid back before time." 5.9 Following the decision of HUDCO, tribunal has in case of Punjab National Bank, in respect of Commitment Charges held as follows: "5. I have ....
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....s additional interest and reset charges as additional interest from 2005-2006. It was also submitted that Income Tax Department has accepted such treatment given by them. The fact remains that after definition of lending was amended, and the service tax definition included in the activity in relation to lending for liability to Service Tax, appellant should have intimated the fact to the Department and checked up whether such collection of amount in relation to lending would be liable to tax or not. It is settled law that Government company is not Government and it has to be taken note that even Government departments make the payments for the services received from another department. Telecommunication department used to provide telecommunication services to other departments and other departments paid for the telecom services rendered and even for the services rendered by Railways, Postal and other departments, payments are made. Therefore, the fact that the appellant is a wholly owned government company, does not mean that they need not have to follow the law of land or take it lightly and plead ignorance of law or being a wholly government company, seek differential treatment. ....
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....department, in our opinion, would be sufficient for invoking provisions of Section 80 of Finance Act, 1994. Accordingly, while upholding the demand of Service Tax and interest, penalties imposed under various Sections of Finance Act, 1994 are set aside." 5.13 In our view when he have held the invocation of extended period of limitation in terms of proviso to section 73(1), penalty under Section 78 should follow in view of the decision of Hon'ble Apex Court in case of Rajasthan Spinning and Weaving Mills [2009 (238) ELT 3 (SC)]. Also for various contraventions of the provisions of Chapter V of Finance Act, 1994, the penalties imposed under Section 76 and 77 too are justified. We also take note of the Section 80 of The Finance Act, 1994 whereby the following has been provided: "80. Notwithstanding anything contained in the provisions of Section 76, Section 77, Section 78 or Section 79 , no penalty shall be imposable on the assessee for any failure referred to in the said provisions, if the assessee proves that there was reasonable cause for the said failure." Taking note of the fact that Appellants are a Public Sector Bank and had deposited the entire amount of Service....