TaxTMI 
TaxTMI 
2019 (8) TMI 1031
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....t S No 1, adjudicating authority has confirmed the entire demand made by the Show Cause Notice dated 07.10.2008 along with Interest and imposed penalties under Section 76, 77 and 78 of Finance Act, 1994. By order at S. No 2, adjudicating authority has confirmed the demand made by Show Cause Notice dated 16.10.2009, to extent of Rs. 48.71 lakhs made by Show Cause Notice dated 26.09.2010. While dropping the demand of Rs. 2.9 Crores made by the Show Cause Notice dated 26.09.2010 and Rs. 3.91 Crores made under Show Cause Notice dated 09.08.2011, Commissioner has taken note of the amounts paid by the appellant against the demand made. He has dropped the penalties under all the three Show Cause Notices. Revenue has filed the appeal at S No 3 against the order of Commissioner dropping the penalties proposed. By order at S No 4, adjudicating authority has confirmed the entire demand made by the Show Cause Notice dated 26.11.2012 along with Interest. No penalties proposed in the demand notice. 2.1 Appellants (M/s LIC Housing Finance Limited) are providing housing finance to individuals. After following the due procedure Housing Loan is sanctioned to the individual and agreement ent....
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....3/2000-CX dated 12th December 2000 • Taxability under Service Tax will depend on the purpose of recovering the charges. As prepayment charges are not collected for the purpose of lending services the same are not taxable. Inclusion of prepayment clause in the loan agreement does not imply that such charges have to treated as a value of taxable service. No relationship between the prepayment charges and rendering of lending services has been established in the impugned orders therefore the same needs to be set aside. • Recovery of prepayment charges cannot be equated with recovery of processing charges. Demand confirmed on such basis cannot survive. • Prepayment charges are not recovered for performing any specific activities relating to closure of the loan, but are recovered for breach of the terms of the agreement and in order to compensate the future loss of interest and therefore cannot be treated as value of taxable service. • Issue has been decided by the tribunal in case of Small Industries Development Bank of India [2011 (23) STR 392 (T-Del)] and the ratio laid down by the decision of HUDCO is distinguishable. â€....
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....unts paid by the appellants under protest, were legally recoverable from them as service tax dues under "Banking and Other Financial Services", instead of dropping the demand as not maintainable on the grounds that the provisions of Section 73(1) covered only service tax not levied or paid or short levied or short paid and that the said provisions did not cover situations where the service tax was paid by assessee. • Adjudicating authority erred in not imposing penalty under Section 76 of Finance Act, 1994, on the ground that the service tax liability in respect of the said prepayment charges had arisen entirely on the account of Circular Dated 11.06.2008. Thus adjudicating authority concluded that the actions of the appellant were bonafide and honest is not correct as the liability to service tax has not arisen in view of the clarification issued but in terms of express provisions of law. 4.1 We have heard Shri S S Gupta, Chartered Accountant for the Appellants and Shri M K Sarangi, Additional Commissioner, Authorized Representative for the revenue. 4.2 Arguing for the appellants, learned Chartered Accountant submitted- • Permitting foreclosure of l....
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....e in nature of penalty, hence not part of value of taxable service. However has gone ahead to confirm the demand relying on CBEC circular of 11.06.2008. • In complaint filed by Neeraj Malhotra against levy of prepayment charges, Competition Commission of India has held as follows: "20.7 It is, therefore, clear that in regard to this issue the provisions of the Contract Act are attracted which clearly provide that in case of breach of a contract, the party which wants to exit has to pay for consequential loss/damage to the other party. Indeed, if this were not the case, wherever in any competitive market the price of a product comes down all the long-term contract buyers would like to break the contract, and if the product prices went up all the suppliers/sellers would like to exit. This kind of situation could create huge uncertainties in any product market, with inevitable negative macro-economic impact." • The prepayment charges, charged by them from borrower are in nature of liquidated damages to recover the loss suffered by them, for the reason that this amount could not have been lended against the interest to other borrowers. [M/s Cheshire a....
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.... (38) STR 666 (T)] hence the demand upto 31.03.2007 is time barred as the Show Cause Notice demanding Service Tax was issued on 16.10.2008. [Continental Foundation Jt Venture [2017 (216) ELT 177 (SC)] • Since tax with was paid as detailed in table below and should have been appropriated towards the demand of service tax. Appeal No Period Amount Paid Intimation Details ST/347/2012 10.09.04 to 31.03.08 5,75,19,824 Letter dated 11.05.12 ST/87781/2013 01.04.08 to 04.06.09 3,24,29,768 Letter dated 21.11.12 05.06.09 to 31.03.11 2,90,29,012 Paid on Monthly basis under protest ST/87431/2012 2011-12 88,59,196 Paid and Appropriated in impugned order Total 12,78,37,800 • The penalty levied under Section 76, 77 & 78 should have not been levied in view of the provisions contained in Section 80 of the Finance Act, 1994 4.3 Arguing for the revenue learned Authorized Representative submitted that- • issue in respect of levy of Service Tax, on the prepayment charges has been considered and de4cided by the tribunal in case of HUDCO [2012 (26) STR 531 (T-Ahd)]. In the loan agre....
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....ile ST- 3 return disclosing the said transaction and did not pay S Tax, extended period has been invoked and penalty has been imposed. On limitation - non-payment of Service Tax was found during audit. The relevant question is whether the appellant have truly disclosed the taxable activity and revenue had knowledge of the affairs of the company before the audit. {Reliant advertising [2013 (31) STR 166 (T-Del)], Vodafone Digilink [2011 (24) STR 562 (TDel)], BSNL [2011-TIOL-552-CESTAT-MUM], Rennaissance Leasing & Finance Pvt Ltd [2017 (52) STR 4 (T-Del)], Lakhan Singh [2016 (46) STR 297 (T-Del)]} 5.1 We have considered the impugned order along with the submissions made in appeal and during the course of argument of appeal. 5.2 Undisputedly Appellants had extended the benefit of pre-payment for the foreclosure of the loan extended by it to the their clients. Para 7(b) and 7(c) of the Loan agreement reads as follows: "7(b). You will be at liberty to make either full payment or part payment towards the Principal in multiples of Rs. 2000/- 9Rupees Two Thousand only) at any time after the expiry of 6 months from the date of disbursement of the loan or the first installment ....
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....s such as stocks, bonds or an interest rate. The options on financial instruments provide a buyer with the right to either buy or sell the underlying financial instruments at a specified price on a specified future date. Although the buyer gets the rights to buy or sell the underlying options, there is no obligation to exercise this option. However, the seller of the contract is under an obligation to buy or sell the underlying instruments if the option is exercised." Since the levy charges are in nature of charge towards the exercise of an option extended by the loan agreement, appellants submission that these charges are penalty cannot be acceded to. There is a interesting distinction laid down by the UK Supreme Court in case of Cavendish Square Holdings BV v. Makdessi and ParkingEye Ltd v. Beavis, reported together at [2015] UKSC 67. "What makes a contractual provision penal? 19. As we have already observed, until relatively recently this question was answered almost entirely by reference to straightforward liquidated damages clauses. It was in that context that the House of Lords sought to restate the law in two seminal decisions at the beginning of the 20th c....
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....haser had broken. The contract provided for the payment of GBP5 for every tyre, cover or tube sold in breach of any provision of the agreement. Once again, the provision was held to be a valid liquidated damages clause. In his speech, Lord Dunedin formulated four tests "which, if applicable to the case under consideration, may prove helpful, or even conclusive" (p 87). They were (a) that the provision would be penal if "the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach"; (b) that the provision would be penal if the breach consisted only in the nonpayment of money and it provided for the payment of a larger sum; (c) that there was "a presumption (but no more)" that it would be penal if it was payable in a number of events of varying gravity; and (d) that it would not be treated as penal by reason only of the impossibility of precisely pre-estimating the true loss. 22. Lord Dunedin's speech in Dunlop achieved the status of a quasi-statutory code in the subsequent case-law. Some of the many decisions on the validity of damages clauses are little more than a ....
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.... in globo, and to prevent the setting up, in reference to all their goods anywhere and everywhere, a system of injurious undercutting. The object of the appellants in making this agreement, if the substance and reality of the thing and the real nature of the transaction be looked at, would appear to be a single one, namely, to prevent the disorganization of their trading system and the consequent injury to their trade in many directions. The means of effecting this is by keeping up their price to the public to the level of their price list, this last being secured by contracting that a sum of GBP5 shall be paid for every one of the three classes of articles named sold or offered for sale at prices below those named on the list. The very fact that this sum is to be paid if a tyre cover or tube be merely offered for sale, though not sold, shows that it was the consequential injury to their trade due to undercutting that they had in view. They had an obvious interest to prevent this undercutting, and on the evidence it would appear to me impossible to say that that interest was incommensurate with the sum agreed to be paid." Lord Atkinson went on to draw an analogy, which has....
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.... that an exact pre-estimate of loss was impossible, whereas, in the passages quoted above, Lord Atkinson analysed why that was so. It seems clear that the actual result of the case was strongly influenced by Lord Atkinson's reasoning. The clause was upheld although, on the face of it, it failed all but the last of Lord Dunedin's tests. The GBP5 per item applied to breaches of very variable significance and it was impossible to relate the loss attributable to the sale of that item. It was justifiable only by reference to the wider interests identified by Lord Atkinson. 25. The great majority of cases decided in England since Dunlop have concerned more or less standard damages clauses in consumer contracts, and Lord Dunedin's four tests have proved perfectly adequate for dealing with those. More recently, however, the courts have returned to the possibility of a broader test in less straightforward cases, in the context of the supposed "commercial justification" for clauses which might otherwise be regarded as penal. An early example is the decision of the House of Lords in The "Scaptrade", where at p 702, Lord Diplock, with whom the rest of the Appellate Committee agreed, o....
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....how that the clause lacked commercial justification: see paras 70-76. But Buxton LJ put the matter on a wider basis for which Clarke LJ (para 105) expressed a preference. He referred to the speech of Lord Atkinson in Dunlop and suggested that the ratio of the actual decision in that case had been that "an explanation of the clause in commercial rather than deterrent terms was available". All three members of the court endorsed the approach of Colman J in Lordsvale and Mance LJ in Cine Bes. 28. Colman J in Lordsvale and Arden LJ in Murray were inclined to rationalise the introduction of commercial justification as part of the test, by treating it as evidence that the impugned clause was not intended to deter. Later decisions in which a commercial rationale has been held inconsistent with the application of the penalty rule, have tended to follow that approach: see, for example, Euro London Appointments Ltd v Claessens International Ltd [2006] 2 Lloyd's Rep 436, General Trading Company (Holdings) Ltd v Richmond Corpn Ltd [2008] 2 Lloyd's Rep 475. It had the advantage of enabling them to reconcile the concept of commercial justification with Lord Dunedin's four tests. But we ....
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....t party should have a legitimate interest extending beyond pecuniary compensation for the breach. The paradigm case is the purchase of land or certain chattels such as ships, which the law recognises as unique. Because of their uniqueness the purchaser's interest extends beyond the mere award of damages as a substitute for performance. As Lord Hoffmann put it in addressing a very similar issue "the purpose of the law of contract is not to punish wrongdoing but to satisfy the expectations of the party entitled to performance": Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1, 15. 31. In our opinion, the law relating to penalties has become the prisoner of artificial categorisation, itself the result of unsatisfactory distinctions: between a penalty and genuine pre-estimate of loss, and between a genuine preestimate of loss and a deterrent. These distinctions originate in an over-literal reading of Lord Dunedin's four tests and a tendency to treat them as almost immutable rules of general application which exhaust the field. In Legione v Hateley (1983) 152 CLR 406, 445, Mason and Deane JJ defined a penalty as follows: "A penalty, as its ....
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....sation is not necessarily the only legitimate interest that the innocent party may have in the performance of the defaulter's primary obligations. This was recognised in the early days of the penalty rule, when it was still the creature of equity, and is reflected in Lord Macclesfield's observation in Peachy (quoted in para 5 above) about the application of the penalty rule to provisions which were "never intended by way of compensation", for which equity would not relieve. It was reflected in the result in Dunlop. And it is recognised in the more recent decisions about commercial justification. And, as Lord Hodge shows, it is the principle underlying the Scottish authorities." 5.5 The above quoted English decision clearly lays down what can be called a penalty clause under the contractual obligation and the decision has been rendered after considering the law/ decision as have emerged on the subject across the world. In our view the fees for option to prepay cannot be termed as penalty in terms of penalty rule as has been laid down and discussed extensively in the above quoted decision. We also do not find any merits in the submissions of the appellants relying on the RBI Circu....
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.... earlier, including being on account of cost incurred due to loss of interest, holding cost of money till it is redeployed, possibility of fresh deployment being at a lower interest rate (since switching typically is resorted to by borrowers in a falling interest rate regime) etc. This part of the transaction has, therefore, to be seen in terms of the Indian Contract Act, 1872, since the costs/prices to be charged in a competitive market are determined by the market and is not an issue to be determined by a competition regulator. This would become a competition issue only if this is sought to be manipulated through anti-competitive agreement(s) or abuse of dominance. It is, therefore, necessary to take up a harmonious construction of Competition Act, 2002 and Indian Contract Act, 1872..." In our view Competition Commission itself has held that prepayment charges are in nature of cost imposed for permitting the early exit. 5.9 The reliance placed by the counsel for appellant on the decision of this tribunal in case of Ram Decorative & Industries Limited [2000 (124) ELT 659 (T)] is not of any help. In that decision the tribunal was dealing with goods which are tangible in natur....
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....ng 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 processing; and (viii) other financial services, namely, lending, issue of pay order, demand draft, cheque, letter of credit and....
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....rges 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 difficult for the borrower. This shows that prepayment charges can never be considered to be in the nature of interest. 11. The....
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....inition 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 v. CC, New Delhi - 2006 (202) E.L.T. 7 (S.C.) 13. We find that these decisions support the submissions. We have already ....
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....e, 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 2005-06, 2006-07, 2007-08, the appellant had changed the head of income from resetting charges to additional interest. We find that thi....
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.... 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." 5.11 Following the decision of HUDCO, tribunal has in case of Punjab National Bank, in respect of Commitment Charges held as follows: "5. I have carefully gone through the facts of the case and submissions made by the appellants in the appeal memorandum and during personal ....
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....as 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. The fact remains that the appellant was required to declare the income received once the law was amended and they were required t....
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....he issue of penalty Tribunal has in case of HUDCO held as follows: "22. An alternative submission was made that the provisions of Section 80 are invocable in this case. According to Section 80 of Finance Act, 1994, "provision of Section 76, 77 or 78, no penalty shall be imposable on the assessee for any failure referred to any such provision, if the assessee prove that there was a reasonable cause for the said failure." We consider that the appellant being a wholly owned government company and the fact that they did not pay Service Tax only on prepayment charges and reset charges and also in view of the fact that accounting treatment given to these items as additional interest has been accepted by the Income Tax 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." 5.16 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 ca....