TaxTMI 
TaxTMI 
2023 (8) TMI 473
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....t, 1994. 2.2. The appellants herein are a Non-Banking Financial Company(NBFC) engaged in the business of providing various types of finance such as auto loans, personal loans, consumer durable loans, loan against property etc. to various customers/borrowers. The appellants have entered into agreements with their customers/borrowers for providing loans to them and collect various charges from customers/borrowers such as processing fees, documentation fees, logging fees, loans statement issuance charges etc. as per terms and conditions of the loan agreement. The appellants are duly paying service tax on such charges collected from the customers/borrowers. The loan agreements, inter-alia, provide for repayment of the outstanding dues/Equated Monthly Instalments (EMI) through Cheques/Electronic Clearing System (ECS) or any other electronic or clearing mandate on the due dates stipulated in the agreement. In case of delay in payment of dues by the customers/borrowers, the appellants collect 'penal interest' as an additional interest for the number of days of delay in terms of the agreement executed by the customers/ borrowers. This penal interest is calculated....
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....t the penal interest collected by them was in the nature of additional interest on the loans/advances provided by them and the same was exempt from payment of service tax. Further, the appellants were also under bonafide belief that bounce charges collected from their customers/borrowers was merely in the nature of penalty or liquidated damages or compensation for the breach of the terms and conditions of the loan agreement, and accordingly, the same was not leviable to service tax. 3.2 Learned Counsel appearing for the appellants also submitted that the appellants and borrowers enter into a contract wherein the appellants agree to grant loan in consideration for payment of interest and return of the principal amount on the due date. Thus, he claimed that the borrower is under an obligation to pay back the loan amount on the due date. In case, the borrower fails to pay the said amount at the time specified, it amounts to breach of the contract. This compensation/damages for breach of contract are not a consideration for any service. 3.3 He further stated that in the present case, there is only one contract between the Appellant and the borrower, which is the agree....
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....ecourse to the remedial provisions in the agreement itself is tolerating the act or the situation of delay in payment of EMI by customers, by imposing/recovering penalty as envisaged under the terms of the agreement. Hence, such an activity of tolerance of situation of delay in payment of EMI is adequately covered in the second expression 'to tolerate an act' provided in clause 5(e) of Schedule II to the CGST Act, 2017 enumerating activities or transactions to be treated as supply of goods/ services. Such a tolerance of an activity of delay in payment is against the agreed consideration and it is in the form of penal charges/penalty. It is agreed between appellant and borrower/customer that in case any delay has occurred, the appellants are entitled to recover the penal charges/penalty from such defaulting borrowers. 4.2. In view of the above submissions made by him, the Learned AR by reiterating the findings made in the impugned order, had stated that the appellants are liable to pay service tax on the penal interest, bounce charges received by the appellants from their customers/borrowers during the relevant period as part of taxable services. 5. The submissions advan....
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....propriately treated as consideration for a declared service of 'tolerating an act' of non-payment/delay in payment of EMI by the customers/borrowers, as per clauses made in the loan agreement entered into by the appellants in providing loans and advances, show cause proceedings were initiated vide SCN dated 15.12.2018. The learned Commissioner had examined certain clauses providing for 'Remedies in case of default', 'terms of loan' and 'definitions/abbreviations' in the various agreements such general Loan agreement, Auto-Loan agreement and personal loan & cross sell agreement and had given a finding that the agreements do not support the contention that these charges are interest on delayed payments; and that the intention of both the parties is to avoid litigation by paying a pre-determined sum to the lender on breach of contract by the borrower. Thus, he concluded that these penal charges and bounce charges paid by the borrower for default in payment of EMI/dishonour of payment instrument is a consideration and such a default/delay/non-payment/dishonour of payment instrument is tolerated by the appellants on payment of an amount as agreed upon in the agreement and it is a declar....
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....nce Limited, under clause (ii) of first proviso and also second proviso to Section 78(1) of the Finance Act, 1994, as amended, to pay 25% of the service tax determined and confirmed at Sr. No. (b) above as penalty, provided M/s Bajaj Finance Limited pays the entire amount of Service Tax, as determined /confirmed in Sr. No.(b) above, along with interest payable thereon as ordered in Sr. No. (c) above as well as the reduced 25% penalty, within 30 days of the date of communication of this order. f) I impose penalty of Rs.10,000/- (Rupees Ten Thousand only) on M/s Bajaj Finance Limited, Pune, under the provisions of Section77(1)(e) of the Finance Act, 1994 for their failure to issue and account for invoices, in respect of Penal and Bounce charges recovered in their books of account in the manner prescribed as per Rule 4A of the Service Tax Rules, 1994 as discussed in Para 19.3 supra. g) I refrain from imposing Penalty under the provisions of Section 77(1)(a) of the Finance Act, 1994 for the reasons discussed in Para 19.2 supra." 8. In order to examine the issues before us, we would like refer to certain words, phrases that have been explained under section 65Bibid,....
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....egative list of services. -The negative list shall comprise of the following services, namely: - (a) services by Government or a local authority excluding the following services to the extent they are not covered elsewhere- (i) services by the Department of Posts by way of speed post, express parcel post, life insurance and agency services provided to a person other than Government; (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) transport of goods or passengers; or (iv) support services, other than services covered under clauses (i) to (iii) above, provided to business entities; (b) services by the Reserve Bank of India; (c) services by a foreign diplomatic mission located in India; (d) services relating to agriculture or agricultural produce by way of- (i) agricultural operations directly related to production of any agricultural produce including cultivation, harvesting, threshing, plant protection or seed testing; (ii) supply of farm labour; (iii) processes carried out at an agricultural farm including tending, pruning, c....
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....laces located in India; and (vi) metered cabs, radio taxis or auto rickshaws; (p) services by way of transportation of goods- (i) by road except the services of- (A) a goods transportation agency; or (B) a courier agency; (ii) by an aircraft or a vessel from a place outside India up to the customs station of clearance in India; or (iii) by inland waterways; (q) funeral, burial, crematorium or mortuary services including transportation of the deceased. 66E. Declared services. - The following shall constitute declared services, namely: - (a) renting of immovable property xx xx xx xx xx (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;" 9. 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 w....
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.... being issued from time to time by RBI. Accordingly, all banks/ banking company dealing with banking business are required to charge interest on loans / advances / cash credits / overdrafts or any other financial accommodation granted / provided / renewed by them or discount usance bills in accordance with the directives on interest rates on advances issued by Reserve Bank of India from time to time. The Master Circular issued by RBI in this regard vide RBI/2010-11/72 DBOD.No.Dir.BC.9 /13.03.00/2010-11 dated 01.07.2010 deals, inter-alia, with the issue of penal interest, as follows: "2. Guidelines 2.1. General 2.1.1. Banks should charge interest on loans / advances / cash credits / overdrafts or any other financial accommodation granted / provided / renewed by them or discount usance bills in accordance with the directives on interest rates on advances issued by Reserve Bank of India from time to time. xx xx xx xx xx 2.5. Levying of penal rates of interest Banks are permitted to formulate a transparent policy for charging penal interest with the approval of their Board of Directors....
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....fies 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 said circular is extracted below: "Circular No. 102/21/2019-GST F. No. CBEC- 20/16/04/2018 - GST Government of India Ministry of Finance Department of Revenue Central Board of Indirect Taxes and Customs GST Policy Wing **** New Delhi, Dated the 28th June, 2019 To, The Principal Chief Commissioners / Chief Commissioners / Principal Commissioners / Commissioners of Central Tax (All) The Principal Director Generals / Director Generals (All) Madam/Sir, Subject: Clarification regarding applicability of GST on additional / penal interest - reg. Various representations have been received from the trade and industry regarding applicability of GST on delayed payment charges in case of late payment of Equated Monthly Instalments (EMI). An EMI is a fixed amount paid by a borrower to a lender at a specifie....
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....per month for any delay in payment. 4. As per the provisions of sub-clause (d) of sub-section (2) of section 15 of the CGST Act, the value of supply shall include "interest or late fee or penalty for delayed payment of any consideration for any supply". Further in terms of Sl. No. 27 of notification No. 12/2017- Central Tax (Rate) dated the 28.06.2017 "services by way of (a) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services)"is exempted. Further, as per clause 2 (zk) of the notification No. 12/2017-Central Tax (Rate) dated the 28th June, 2017, "'interest' means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) but does not include any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised;". 5. Accordingly, based on the above provisions, the applicability of GST in both cases listed in para 3 above would be as follows: Case 1: As per the....
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....nal Order No. 51651/2020 dated 22.12.2020. 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 relevant paragraphs in the above order of the Tribunal are extracted below: "24. What follows from the aforesaid decisions of the Supreme Court in Bhayana Builders and Intercontinental Consultants, and the decision of the Larger Bench of the Tribunal in Bhayana Builders is that "consideration" must flow from the service recipient to the service provider and....
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.... various types of services. The consideration contemplated under the agreements was for such supply of coal, materials or for availing various types of services. The intention of the parties certainly was not for flouting the terms of the agreement so that the penal clauses get attracted. 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. 28. It also needs to be noted that section 65B(44) defines "service" to mean any activity carried out by a person for another for consideration. Explanation (a) to section 67 provides that "consideration" includes any amount that is payable for the taxable services provided or to be provided. The recovery of liquidated damages/penalty from other party cannot be said to be towards any service per se, since neither the appellant is carrying on any activ....
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....tive cost to him and disruption of his routine activities and cash flow. The promise made by any supplier of goods or services is to make supply against payment within an agreed time (including the agreed permissible time with late payment) through a valid instrument. There is never an implied or express offer or willingness on part of the supplier that he would tolerate deposit of an invalid, fake or unworthy instrument of payment against consideration in the form of cheque dishonour fine or penalty. The fine or penalty that the supplier or a banker imposes, for dishonour of a cheque, is a penalty imposed not for tolerating the act or situation but a fine, or penalty imposed for not tolerating, penalizing and thereby deterring and discouraging such an act or situation. Therefore, cheque dishonor fine or penalty is not a consideration for any service and not taxable." 14. We further find that 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....
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....oalfields Ltd. Further, Board has decided not to pursue the Civil Appeals filed before the Apex Court in M/s South Eastern Coalfields Ltd. supra (CA No. 2372/2021), M/s Paradip Port Trust (Dy. No. 24419/2022 dated 08-08-2022), and M/s Neyveli Lignite Corporation Ltd (CA No. 0051-0053/2022) on this ground. 6. In view of above, it is clarified that the activities contemplated under section 66E(e), i.e. when one party agrees to refrain from an act, or to tolerate an act or a situation, or to do an act, are the activities where the agreement specifically refers to such an activity and there is a flow of consideration for this activity. Field formations are advised that while taxability in each case shall depend on facts of the case, the guidelines discussed above and jurisprudence that has evolved over time, may be followed in determining whether service tax on an activity or transaction needs to be levied treating it as service by way of agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. Contents of Circular No. 178/10/2022-GST dated 3rd August, 2022, may also be referred to in this regard. 7. Difficu....