TaxTMI 
TaxTMI 
2020 (7) TMI 472
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.... the Tribunal at Ahmedabad held that service tax would be leviable on such charges but in M/s Magma Fincorp Limited. vs. Commissioner of Service Tax, Kolkata, 2016 (4) TMI 21-CESTAT KOLKATA a Division Bench of the Tribunal at Kolkata held that service tax would not be leviable. 3. It needs to be noted that while dealing with an application filed for waiver of pre-deposit, a Division Bench of the Tribunal at Ahmedabad in Small Industries Dev. Bank of India vs. Commissioner of Service Tax, Ahmedabad, 2015 (38) STR 666 (Tri.-Ahmd.) (II), when confronted with an earlier decision of the Tribunal at Delhi in Small Industries Dev. Bank of India vs. Commissioner, 2011 (23) STR 392 (Tri.-Delhi) (I) and the decision of the Tribunal in Hudco, directed that the matter may be referred to a Larger Bench. 4. When this Appeal came up for hearing before a Division Bench of the Tribunal at Ahmedabad, the Division Bench, after noticing the conflicting decisions of the Tribunal in Hudco and Magma Fincorp, considered it appropriate to refer the issue to a Larger Bench of the Tribunal. This Larger Bench of the Tribunal has, accordingly, been constituted. 5. The Respondent-M/s Repco Home Finance....
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....ed interest loss and with a view to prevent the customers to indiscriminately seek foreclosure of the loan causing uncertainty to the bank. In fact I find the loan sanction order issued by the banks to the respective clients clearly declares under clause 5 (iii) as follows:- "In case of pre-closure, interest rate will stand revised and charged separately by way of pre-closure penalty" 8.4 Thus, the loan sanctioned order clearly indicates that the pre-closure charges are nothing but interest and hence I hold that no service tax is payable on the same under the category "banking and financial services". In this connection, I find that in an identical issue, the Hon'ble CESTAT, New Delhi, in the case of M/s Small Industries & Development Bank of India vs. CCE, Chandigarh (2011-TIOL-581-CESTAT-DEL) had held that the demand of service tax is not sustainable on the amount received towards fore closure of loans. ............................. 9. In view of the above discussion and also drawing strength from the decision of the Hon'ble CESTAT, New Delhi, I hold that the activity of fore-closure of loan cannot be treated as "banking and financial services"....
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.... is for a consideration which is not ascertainable, then such value shall be as may be determined in the prescribed manner. Explanation to section 67, of the Finance Act, as it existed prior to 14 May, 2015, defined "consideration" to include any amount that is payable for the taxable services provided or to be provided but after 14 May, 2015, the definition also seeks to include any reimbursable expenditure or the amount retained by a lottery distributor within its ambit. 13. The contention of the banks and non banking financial companies is that the foreclosure charges are not towards any "consideration" for a service provided by them but are collected to compensate the banks for the breach of the contract as the borrower seeks to make the payment before the agreed period of time. According to the banks, it is not the desire of the banks that a borrower should cut short the period of loan and make the entire payment, for the business of a bank is to earn income out of the interest that it gets on the amount that is given as loan to a borrower. The banks contend that it is the borrower who unilaterally decides to cut short the period of loan by making the payment before the sti....
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....ntire loan amount prior to the agreed term or fixing prepayment charges or closure charges. This service would, therefore, be in relation to "banking and other financial services", which definition includes "lending" after 10 September, 2004. The decision of the Division Bench of the Tribunal at Delhi in Small Industries (I) was distinguished for the reason that the period involved therein was prior to 10 September, 2004, when lending was not included in the definition of "banking and other financial services". 18. This issue was again examined by a Division Bench of the Tribunal at Kolkata in Magma Fincorp Ltd. Apart from observing that the Commissioner had for an earlier dropped the demand in regard to the same issue and the Department had not filed any appeal against the said order, the Tribunal in its decision rendered on 3 February, 2016, held that service tax would not be leviable on prepayment charges when the period of loan is cut short. The Division Bench also relied upon the decision of the Tribunal in Small Industries (I). 19. As noticed above, the issue that has arisen for consideration before this Larger Bench of the Tribunal is whether the foreclosure charges le....
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.... may be prescribed; (iii) any amount retained by the lottery distributor or selling agent from gross sale amount of lottery ticket in addition to the fee or commission, if any, or, as the case may be, the discount received, that is to say, the difference in the face value of lottery ticket and the price at which the distributor or selling agent gets such ticket. (b) xxxxxxxxxxx (c) xxxxxxxxxxx" (emphasis supplied) 21. It is, thus, clear that where service tax is chargeable on any taxable service with reference to its value, then such value shall be determined in the manner provided for in (i), (ii) or (iii) of sub-section (1) of section 67. What needs to be noted is that each of these refer to "where the provision of service is for a consideration", whether it be in the form of money, or not wholly or partly consisting of money, or where it is not ascertainable. In either of the cases, there has to be a "consideration" for the provision of such service. Explanation to sub-section (1) of section 67 defines "consideration" to include any amount that is payable for the taxable services provided or to be provided, or any reimbursable expenditure, or any....
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.... The cost of free supply goods provided by the service recipient to the service provider is neither an amount "charged" by the service provider nor can it be regarded as a consideration for the service provided by the service provider. In fact, it has no nexus whatsoever with the taxable services for which value is sought to be determined." (emphasis supplied) 24. The aforesaid view was reiterated by the Supreme Court in Union of India vs. Intercontinental Consultants and Technocrafts 2018 (10) GSTL 401 (SC) and it was observed: "23. Obviously, this Section refers to service tax, i.e., in respect of those services which are taxable and specifically referred to in various sub-clauses of Section 65. Further, it also specifically mentions that the service tax will be @ 12% of the "value of taxable services‟. Thus, service tax is reference to the value of service. As a necessary corollary, it is the value of the services which are actually rendered, the value whereof is to be ascertained for the purpose of calculating the service tax payable thereupon. 24. In this hue, the expression "such‟ occurring in Section 67 of the Act assumes importance. In ot....
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.... supplies of services is to be 'everything which constituted the consideration which has been or is to be obtained by the supplier from the customer or a third party for such supplies...' 26. The question referred for preliminary hearing, in essence, was whether a sum paid as a deposit by a client to a hotelier, where the client exercises the cancellation option available to him and that sum is retained by the hotelier, can be regarded as consideration for the supply of a reservation service, which is subject to VAT, or as a fixed compensation for cancellation, which is not subject to VAT. The Court found that there has to be a direct link between the service rendered and the consideration received. The same paid must constitute a genuine consideration for an identifiable service supplied in the context of a legal relationship for which performance is reciprocal. It is in this context that Court observed : "26. Since the obligation to make a reservation arises from the contract for accommodation itself and not from the payment of a deposit, there is no direct connection between the service rendered and the consideration received (Apple and Pear Development Council, para....
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.... consideration for the taxable service provided under the Act. It should also be remembered that there is marked distinction between "conditions to a contract" and "considerations for the contract". A service recipient may be required to fulfil certain conditions contained in the contract but that would not necessarily mean that this value would form part of the value of taxable services that are provided. 28. It is also necessary to remind ourselves that the word "include" is generally used in interpretation clauses to enlarge the meaning of the words or phrases occurring in the body of the statue and when it is so used, such words or phrases must be construed to comprehend, not only such things as they signify according to their natural import, but also those things which the interpretation clause declares that they shall include. This is what was stated in Dilworth vs. Commissioner of Stamps 1899 AC 99. 29. Justice G P Singh in "Principles of Statutory Interpretation" (Thirteenth Edition) has also remarked that where a word is defined to "include" such and such, the definition is prima facie not exhaustive and so the natural meaning of the word cannot be narrowed down by t....
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....d non banking financial companies are promisors and the promisees are the borrowers. The contractual relationship between the banks and non banking financial companies and the customers is repayment of the loan amount over an agreed period. The banks and non banking financial companies would not desire pre-mature termination of the loan advanced by them as it is in their interest that the loan runs the entire agreed tenure for the banks thrive on interest earned from lending activities. As premature termination of a loan results in loss of future interest income, the banks charge an amount for foreclosure of loan to compensate for the loss in interest income. It is the customer who has taken the loan, who moves for foreclosure of the loan by making the payment of the loan amount before the stipulated period and thereby breaching the promise to service the loan for the agreed period of time. This results in a unilateral act of the borrower in repudiating the contract and consequently breach of one of the essential terms of the loan agreement. A breach of contract may give rise to a claim for damages. 33. Breach of contract has been defined in Black's Law Dictionary (Eighth Editio....
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....e for the agreed price. It is quite immaterial that the value of the goods with which the seller has parted was lower than that price. What the law does in these cases is to protect the injured party's expectation interest. Sometimes it does so directly, by actually ordering the party in breach to perform his part of the contract. Sometimes it does so indirectly by ordering him to pay the injured party damages for loss of his bargain. The result of awarding damages on this basis is to compensate the injured party, not because he is worse off than he was before the contract was made, but because the other party has failed to make him better off. The law of contract takes this position in response to the needs of commercial certainty. It is probably going too far to say that business could not be carried on at all if the law did not protect the injured party's expectation interest. Some industries (such as the credit betting industry) are carried on without this, or indeed any other legally recognised, sanction. But in relation to other sphere of commercial activity, such as share and commodity markets and the insurance industry (to take a few random examples) the protection....
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....an service period unilaterally, which can prompt the promisor to claim damages. Damages can be determined by Courts or they can also be incorporated in the loan agreements and other commercial contracts so as to ensure certainty in dealings and also serve as a deterrent measure. This aspect of damage is known as liquidated damages. 38. Liquidated damages have been dealt with by Pollock & Mulla in the book titled "The Indian Contract and Specific Relief Acts" (Fourteenth Edition) and the relevant portion is reproduced below : "Liquidated Damages 'Liquidated damages' means that is shall be taken as the sum which the parties have by the contract assessed as damages to be paid whatever may be the actual damage. A fixed figure of damages, which is not assessed for all circumstances, but is graduated to correspond with passage of time between the making of contract and of its breach, is a proper estimate of the damages to be anticipated from the breach, and is liquidated damages." 39. It would thus be seen that clauses relating to damages for foreclosure of loan are usually incorporated in contracts as an agreed measure of damages which can be enforced in the even....
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....n Law between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty, which under the Common Law is stipulation in terrorem; a genuine pre-estimate of damages is regarded as liquidated damages, and is binding. 44. It, therefore, clearly follows that foreclosure charges are recovered as compensation for disruption of a service and not towards "lending" services. In fact, the amount for processing charges and documentation charges or like charges are subjected to service tax because they are essential for the activity of lending and are treated as activities "in relation to lending". Foreclosure is anti thesis to lending and, therefore, cannot be construed to be "in relation to lending". The phrase "in relation to lending" cannot be so stretched so as to bring within its ambit even activities which terminate the activity. In Standard Chartered Bank vs. Commissioner of Service Tax, Mumbai-I 2015 (40) S.T.R. 104 (Tri.-LB), it was emphasised that this phrase should not be given a very wide meaning. 45. These foreclosure charges should not be viewed as 'alternative mode of performance' of the contract because they arise upon repudiation o....
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....er of information and data processing; (b) foreign exchange broking provided by a foreign exchange broker other than those covered under sub-clause (a); 48. Section 65 (12) was substituted with effect from 10 September, 2004 by adding two clauses which are as follows: (viii) banker to an issue services; and (ix) other financial services, namely, lending; issue of pay order, demand draft, cheque, letter of credit and bill of exchange; transfer of money including telegraphic transfer, mail transfer and electronic transfer; providing bank guarantee, overdraft facility, bill discounting facility, safe deposit locker, safe vaults; operation of bank accounts; 49. The Bench observed that when pre payment is proposed, the borrower is expected to make a request which has to be considered by the banks, charges have to be worked out and informed. Thus there is an element of service involved in considering the request of the borrower for pre payment of loan, fixing of pre payment charges collection of the same and closure of their loan. The relevant portion of the order is reproduced below: "10. Admittedly, the prepayment charges vary from borrower, ac....