TaxTMI 
TaxTMI 
2023 (2) TMI 896
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....s of Software Solutions, Business Process Outsourcing, Hire Purchase and Leasing including Equipment Leasing. They have obtained Service Tax registration for various categories of services. The appellant has a system whereby the customer who avails the loan / hire-purchase facility is permitted to pay-up ahead of the scheduled EMI, part of or the entire outstanding principal, which in financial parlance is known as "Preclosure/Foreclosure" of the loan. Appellant at the time of accepting the part payment for preclosure, in addition, also collects penal charges @ 3% on the outstanding amount. The said amount was mentioned as (Finance Charges) FC penalty in the settlement working sheet. The Department was of the view that the appellant is liab....
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....ies on premature termination of loas is subject to levy of service tax under "Banking and Other Financial Services" as defined under Section 65 (12) of the Finance Act, 1994. The Larger Bench in the case of Repco India Ltd. (supra) has considered the issue and held that such charges are not liable to service tax. The relevant paragraphs of the Larger Bench decision reads as under : "47. The decision of the Tribunal in Hudco now needs to be examined. It concludes that the foreclosure charges would be subjected to service tax after 10 September, 2004 as the definition of "banking and other financial services" was amended under Section 65(12) of the Finance Act by including other financial services like lending in the definition. The ....
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.... 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....
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....rce 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 the nature of interest." 50. The decision rendered in Small Industries (I) (supra) was distinguished for the reason that it dealt with a period prior to 10 September, 2004. 51. It is not possible to accept the reasoning given by the Bench in Hudco in view of the discussions made above. The amount of damages is clearly stipulated in the contracts and no element of service is sought to have been rendered by the banks to borrowers....