2024 (11) TMI 404
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....od Industries Pvt. Ltd. 2020 (38) GSTL 60 (Tri.-All.) d) M.P. Poorva Kshetra Vidyut Vitran Co. Ltd. 2021 (46) GSTL 509 (T.Del.) e) Steel Authority of India Ltd. 2021 (55) GSTL 34 (Tri. Chennai) f) Ruchi Soya Industries Ltd. 2022 (56) GSTL 303 (Tri. Del.) g) Lemon Tree Hotel [2020 (34) GSTL 200 (Tri. Del.)] h) Tirupati Balaji Furnaces Pvt Ltd. 2022-TIOL-77-CESTAT-DEL i) MNH Shakti Ltd. 2021-TIOL-732-CESTAT-Kol j) Bajaj Finance Ltd. 2023 (8) TMI 473-CESTAT-Mumbai k) Mangalam Cement Limited 2024 (9) TMI 407-CESTAT Del 3. Shri Himanshu P. Shrimali, Learned Superintendent (Authorised Representative) appearing on behalf of the Revenue reiterates the findings of the impugned order. 4. We have carefully considered the submission made by both the sides and perused the records. We find that from the facts of the present case appellant are a manufacturer of excisable goods and selling the same on principal to principal basis to their customers. As per normal commercial trend in the trading market the supplier of goods provides credit period for making the payment against sale of the goods and after the said credit period if there is a delay, usually there is a condition for ....
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....another for consideration', will be levied to service tax, unless otherwise excluded or covered by the negative list of services. On the basis of various clauses in the agreement entered into by the appellants with their customers/borrowers, the Department alleged that recovery/earning of an extra/surplus (i.e., penal interest/penalty) being other than the loan amount and the principal interest is nothing but a compensation received by the appellants on account of delay in payment of EMI by the customer. As these charges are not in the nature of principal interest and are to be appropriately 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 ....
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.... Finance Act, 1994. c) I confirm the demand of interest on the amount of Service tax confirmed as detailed in Sr. No.(b) above, as the applicable rates, and order recovery of the same from M/s Bajaj Finance Limited, under the provisions of Section 75 of Finance Act, 1994. d) I also impose a penalty of Rs.53,87,14,050/- [Rupees Fifth three crores eighty seven lakhs fourteen thousand and fifty only], on M/s Bajaj Finance Limited, Pune, under the provisions of Section 78(1) of the Finance Act, 1994. e) However, I give an option to M/s Bajaj Finance 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 Sect....
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....on which service tax is leviable under section 66B; 66B. Charge of service tax on and after Finance Act, 2012. - There shall be levied a tax (hereinafter referred to as the service tax) at the rate of fourteen percent. on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed. 66D. Negative 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 dipl....
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.... (A) first class; or (B) an air conditioned coach; (iii) metro, monorail or tramway; (iv) inland waterways; (v) public transport, other than predominantly for tourism purpose, in a vessel between places 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....
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....rcise of the powers vested with it under the Reserve Bank of India Act, 1934 and various policy circulars in this regard are 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 transparen....
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....a situation, or to do an act", as this levy of additional/penal interest satisfies 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 specified date every calendar month. EMIs ....
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....isions 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 provisions of sub-clause (d) of sub-section (2) of section 15 of the CGST Act, the....
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.... 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 should accrue to the benefit of the service provider and that the amount charged has necessarily to be a consideration....
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.... 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 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 ....
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.... tolerate an act or a situation, or to do an act was examined by the CBEC and they had issued certain guidelines to the field formations clarifying the legal position for determining whether tax on an activity can be imposed, in its Circular No.178/10/2022-Service Tax dated 03.08.2022. The relevant portion of the above circular dealing with 'cheque dishonor fine/penalty' is extracted below: "Cheque dishonor fine/ penalty 7.3 No supplier wants a cheque given to him to be dishonoured. It entails extra administrative 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 ....
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....ation. 5. The issue also came up in the CESTAT in Appeal No. ST/ 50080 of 2019 in the case of M/s Dy. GM (Finance) Bharat Heavy Electricals Ltd in which the Hon'ble Tribunal relied on the judgement of divisional bench in case of M/s South Eastern Coal Fields Ltd Vs. CCE Raipur {2021(55) G.S.T.L 549(Tri-Del)}. Board has decided not to file appeal against the CESTAT order ST/A/50879/2022CU[DB] dated 20.09.2022 in this case and also against Order A/85713/2022 dated 12.8.2022 in case of M/s Western Coalfields 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 tax....
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....ustomers against the delayed payment of monthly instalments of the load extended to such customers, would be exempt from GST in terms of Sl. 27 of the Notification No. 12/2017-C.T. (Rate), dated 28-6-2017." 22. Thus, for all the reasons stated above, it is not possible to sustain the impugned order dated June 18, 2015 passed by Commissioner. It is, accordingly, set aside and the appeal is allowed." 16. In view of the above discussions and findings recorded in the preceding paragraphs, as well as on the basis of decisions of the Tribunal and higher judicial forum, we are of the considered view that the impugned order holding that penal interest and bouncing charges received by the appellants as "consideration" for "tolerating an act", and are leviable to service tax under section 66E(e) of the Finance Act, 1994, cannot be sustained. 17. In view of the above, the appeals filed by the appellants are allowed by setting aside the impugned order dated 24th August, 2018." In the case of South Eastern Coalfields Ltd. 2021 (55) GSTL 549 (Tri. Del.) following has been observed: "10. The issue that is involved is whether the appellant is providing a "declared service....
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....ll March 2016 for the reason that by collecting the said amount the appellant had agreed to the obligation to refrain from an act or to tolerate the non-performance of the terms of the contract by the other party. 15. Section 65B (44) defines 'service' to mean any activity carried out by a person for another person for consideration, and includes a declared service. Under section 66E (e), a declared service shall constitute agreeing to the obligation to refrain from an act, or to tolerate an act or situation, or to do an act. Section 66 B provides that service tax shall be levied at the rate of 12 per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed. Section 66D contains a negative list of services, while section 66E contains a list of declared services. 16. Section 67 of the Finance Act deals with valuation of taxable service for charging service tax. It is reproduced below:- 67. (1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference ....
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....as made between "conditions' to a contract and "consideration for the contract". It has been prescribed under the said GST Rules that certain "conditions' contained in the contract cannot be seen in the light of "consideration' for the contract and merely because the service recipient has to fulfil such conditions would not mean that this value would form part of the value of the taxable services that are provided. 20. The Supreme Court in Commissioner of Service Tax vs. M/s Bhayana Builders [2018 (2) TMI 1325] , while deciding the appeal filed by the Department against the aforesaid decision of the Tribunal, also explained the scope of Section 67 of the Act. The Supreme Court observed that 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 under Section 67. The observations are: "The amount charged should be for "for such service provided": Section 67 clearly indicates that the gross amount charged by the service provider has to be for the service provided. Therefore, it is not any amount charged which can become the basis of value on which ser....
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....72 as follows- xxxxx xxxxx xxxxx (emphasis supplied) 23. It would, therefore, be appropriate to examine the definition of "consideration" in section 2(d) of the Contract Act, as the Contract Act deals with all kinds of contracts and pre-dates the Finance Act. The definition of "consideration"" is as follows:- "2(d) When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise."" 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 prov....
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....rd 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 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 t....
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....llant to refrain from an act or tolerate an act or a situation. It is no doubt true that the contracts may provide for penal clauses for breach of the terms of the contract but, as noted above, there is a marked distinction between 'conditions to a contract' and 'considerations for a contract'. 33. It would be apt to refer to a judgment of the European Court of Justice (First Chamber) in Case C-277/2005, in Societe Thermale d'Eugenic-les-Bains vs. Ministere de I'Economie, des Finances et de I'Industrie as it deals with the issue whether an obligation to refrain from an act or to tolerate an act or situation would result in supply of services when 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. Under Article 2(1) of the Sixth Directive, 'the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such' is subjected to VAT. Article 6(1) of the Sixth Directive provides that "supply of services" shall ....
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....f a cancellation or breach of their obligations. Instead of defining their obligations in detail, they may nevertheless refer to the various instruments of civil law. 29. Thus the parties may make contractual provision - applicable in the event of non-performance - for compensation or a penalty for delay, for the lodging of security or a deposit. Although such mechanisms are all intended to strengthen the contractual obligations of the parties and although some of their functions are identical, they each have their own particular characteristics. xxxxxx xxxxxxx xxxxxxx 32. Whereas, in situations where performance of the contract follows its normal course, the deposit is applied towards the price of the services supplied by the hotelier and is therefore subject to VAT, the retention of the deposit at issue in the main proceedings is, by contrast, triggered by the client"s exercise of the cancellation option made available to him and serves to compensate the hotelier following the cancellation. Such compensation does not constitute the fee for a service and forms no part of the taxable amount for VAT purposes (see, to that effect, as regards interest applied on account of ....
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....at no service tax is attracted under the provisions of Section 66 E(e) of the Finance Act. Accordingly, this ground is allowed in favour of the appellant." (emphasis supplied) 36. A Division Bench of the Tribunal in K.N. Food Industries examined the provisions of section 66E(e) in the context of an assessee manufacturing for and on behalf of M/s Parley and clearing the same upon payment of central excise duty. In a situation when the capacity of the assessee was not fully utilized by M/s Parley, ex-gratia charges were claimed so as to compensate the assessee from financial damage or injury. The Department invoked the provisions of 66E(e) to levy tax on the amount so received. The Tribunal held that the ex-gratia charges were for making good the damages due to the breach of the terms of the contract and did not emanate from any obligation on the part of any of the parties to tolerate an act or a situation and cannot be considered to be towards payment for any services. The relevant portion of the decision is reproduced below: "4. ******* ******* ******* We find that appellant is admittedly manufacturing confectionaries for and on behalf of the M/s Parle and is clea....
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....ng" and the Supreme Court in Fateh Chand held that a reasonable compensation for breach of contract has to be proportionate to the actual injury suffered. Thus, according to the learned authorized representative of the Department it has been acknowledged by the Supreme Court that in a case of breach of contract, one party tolerates an act or situation. 38. The decision of the Supreme Court in Fateh Chand does not help the Department. The facts indicate that the Delhi Improvement Trust had granted lease hold rights for ninety years to Dr. M.M. Joshi in respect of a property. The relevant clauses of the agreement are:- i) The plaintiff has agreed to sell the building to the defendant for Rs. 1,12,500/-. ii) Rs. 1000, being earnest money deposit, was to be paid to the plaintiff at the time of the execution of the agreement. iii) The plaintiff had to deliver actual possession to the defendant on March 30 1949 and the defendant had to give Rs. 24,000/- out of the sale price. iv) The defendant had to get the sale deed registered by July 1, 1949. If, for any reason, the defendant failed to get the sale deed registered by the stipulated date, then the sum of R....