TaxTMI 
TaxTMI 
2023 (8) TMI 473
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....erein 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 at a fixed percentage on the overdue loan am....
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....he 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 agreement for loan, for which consideration is payable b....
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.... 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 advanced by the learned Advocate appearing for the appellants and the learned Authorized Represe....
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....ent 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 declared service of 'agreeing to tolerate an act or a situation' under section 66 E(e) of the Finance Act, 1994. Acco....
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....e 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,for the purpose of interpretation under the service tax statue i.e., Finance Act, 1994. The relevant words and legal provisions referred in the case before us are e....
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....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, cutting, harvesting, drying, cleaning, trimming, sun drying, fumigating, curing, sorting, grading, cooling or bulk packaging and such like operations which do not alter the essential characteristics of agricultural produce but make it only marketable for the primary market; (iv) renting or leasing of agro machinery or....
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....eceased. 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 which such loan is taken. The principal and interest amount on such loan is repaid by customers/borrowers by way of EMI over a period of loan tenure. Accordingly, while computing the EMI, the appellants charges pro-rata interest payable on each due date, on the underlying assumption that the customers/borrowers would not default in payment of the EMI on the due dates. However, in case of any default, the appellants charge them an additional interest in the form of penal interest for the number of days of default. In any case of loan arrang....
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.... 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. However, in the case of loans to borrowers under priority sector, no penal interest should be charged for loans up to Rs.25,000. Penal interest can be levied for reasons such as default in repayment, non submission of financial statements, etc. However, the policy on penal interest should be governed by well-accepted principles of transparency, fairness, incentive to service the debt and due regard to genuine difficulties of customers." Thus, we find that the guidelines of RBI which provide for charging interest on loans and advances also provide for levy of penal interest for d....
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....s / 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 specified date every calendar month. EMIs are used to pay off both interest and principal every month, so that over a specified period, the loan is fully paid off along with interest. In cases where the EMI is not paid at the scheduled time, there is a levy of additional / penal interest on account of delay in payment of EMI. 2. Doubts have been raised regarding the applicability of GST on additional / penal interest on the overdue loan i.e. whether it would be exempt from GST in terms of Sl. No. 27 of notification No. 12/2017-Central Tax (Rate) dated 28th June 2017 or such penal interest would be treated as consideration for liquidated damages [amounting to a separate taxable supply of services und....
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.... 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 provisions of sub-clause (d) of sub-section (2) of section 15 of the CGST Act, the amount of penal interest is to be included in the value of supply. The transaction between X and Y is for supply of taxable goods i.e. mobile phone. Accordingly, the penal interest would be taxable as it would be included in the value of the mobile, irrespective of the manner of invoicing. Case 2: The additional / penal interest is charged for a transaction between Y and M/s ABC Ltd., and the same is getting covered under Sl. No. 27 of notification No. 12/2017-Central Tax (Rate) dated 28.06.2017. Accordingly, in this case the 'penal interest' charged thereon on a transaction between Y and M/s ABC Ltd. would not be subject to GST, as the same would not be ....
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....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 should accrue to the benefit of the service provider and that the amount charged has necessarily to be a consideration for the taxable service provided under the Finance Act. Any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which is taxable. 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. 25. It is in the light of what has been stated above that the provisions of section 66E(e) have to be ....
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....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 activity to receive compensation nor can there be any intention of the other party to breach or violate the contract and suffer a loss. The purpose of imposing compensation or penalty is to ensure that the defaulting act is not undertaken or repeated and the same cannot be said to be towards toleration of the defaulting party. The expectation of the appellant is that the other party complies with the terms of the contract and a penalty is imposed only if there is non-compliance. xx xx xx xx xx 42. The conclusion drawn by the learned authorized representatives of the Department from the aforesaid decision of the Supreme Court that compensation received is 'synonymous' with 'tolerating' or that the Supreme Court acknowledged that in a breach of contract, one party....
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.... 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 Tax dated 28.02.2023, in the context of the orders passed by this Tribunal in various cases. Accordingly, it was clarified that there should be a flow of consideration for this activity of tolerating an act or a situation. It was also decided by the Board not to pursue the Civil Appeals filed before the Apex Court in those cases, where the Tribunal had ordered for setting aside the orders of lower authorities for confirming the service tax demands under Section 66E(e). The relevant paragraph of the said circular is extracted below: "3. The description of the declared service in question, namely, agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act is similar in GST. "Agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act" has been specifically declared to be a supply of ....
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....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. Difficulty experienced, if any, in implementing the circular should be brought to the notice of the Board. Hindi version will follow." 15. We also note that demand of service tax in respect of the amount collected on account of bouncing of cheques, the issue has already been decided by the Principal Bench of this Tribunal in the case of M/s. Rohan Motors Ltd. Vs. Commissioner of Central Excise, Dehradun in Final Order No. 51620/2020 dated 05.10.2020 reported in 2021 (45) G.S.T.L. 315 (Tri. - Del.) holding that these charges are penal in nature and thus are not towards consideration for any service. "19. The demand of service tax in respect of the amount collected on account of bouncing of cheques and cancellation of orders is also not sustainable. These amount are penal in nature and not towards consideration for any service. In this connection reliance can be placed on the decisions of the Tribunal in Jaipur Jewell....