TaxTMI 
TaxTMI 
2025 (2) TMI 740
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....goods falling under Chapter heading No. 5603 1100, 5603 1400 of the Central Excise Tariff, 1985, and for payment of Central Excise duty and for compliance with the law, they are registered with the jurisdictional Commissionerate vide Central Excise registration No. AAECG7615AEM001 and Service Tax Registration No. AAECG7615ASD001. The appellants also avail CENVAT credit of duty paid on inputs and service tax paid on input services. 2.3 During the course of audit of records of the assessee, it was noticed by the audit officers of the department that the appellants have taken loans from different Banks agreeing to different terms and conditions of the contract/agreement entered with them for sanction of loans. The appellants had taken credit of service tax paid by the banks on the service charges involved in obtaining such loan from them, under the taxable category of Banking and Financial services; further, the appellants have also taken credit of service tax paid on penalty/penal charges for pre-payment or foreclosure of loan. However, the department had objected to such availment of service tax on the ground that payment of penalty on pre- payment of loan does not qualify as inp....
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....k of Commerce, State Bank of Bikaner & Jaipur (SBI, OBC and SBBJ), the rate of interest was 13.30%; the said rate was sum total of Base rate of 9.80% fixed by RBI plus 3.50% rate charged by the banks, which was later on reduced to 12.80% due to reduction in base rate of RBI to 9.30%. Further, the appellants were able to get further lesser rate of interest at 10% per annum on subsequent loan arrangement dated 25.10.2016 with consortium of ICICI Bank and Axis Bank. In order to save the cost of financing loan for running their business, the appellants have refinanced the previous loan with new loan arrangement, by pre-closure of the loan held with SBI, OBC and SBBJ banks as per loan agreement dated 21.09.2013 on payment of pre-payment charges. As the banks have paid service tax on such pre-payment charges treating the same as leviable to service tax, in respect of the input service of financing of loan they had taken CENVAT credit. Therefore, they claim that there is no basis for demand of CENVAT credit which they claimed that it has been rightly taken by the appellants. 3.3 In support of their stand the learned Advocate had relied upon the following judgements: (i) Doypac....
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....f India, Oriental Bank of Commerce, State Bank of Bikaner & Jaipur (SBI, OBC and SBBJ) considering the said pre-closure of loan as an input service, for taking CENVAT credit. The department had interpreted that the input service of foreclosure of loan is not covered under the definition of 'input service' and therefore, service tax paid on such input service is not eligible for taking CENVAT credit. The learned Commissioner (Appeals) had in the impugned order had treated the foreclosure of loan as a service since the same amounted to tolerance of an act, by the consortium banks, who are the service providers. However, he had held that such service is not covered by the definition of 'input service' under Section 2(l) of the CENVAT Credit Rules, 2004. 8.1 In order to appreciate the issue under dispute, the specific legal provisions of the Finance Act, 1994 and CENVAT Credit Rules, 2004 dealt with in the impugned order are extracted and herein given below for ease of reference: Chapter V of the Finance Act, 1994 "Declared services. Section 66E. The following shall constitute declared services, namely:- (a) renting of immovable property; ....
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.... (b) laying of foundation or making of structures for support of capital goods, except for the provision of one or more of the specified services; or.... (B) .... (BA)... (C) ...." CENVAT credit. Rule3(1) A manufacturer or producer of final products or a provider of output service shall be allowed to take credit (hereinafter referred to as the CENVAT credit) of- (i) the duty of excise specified in the First Schedule to the Excise Tariff Act, leviable under the Excise Act: ... (ix)the service tax leviable under section 66 of the Finance Act; (ixa)the service tax leviable under section 66A of the Finance Act; (ixb)the service tax leviable under section 66B of the Finance Act; paid on- (i) any input or capital goods received in the factory of manufacture of final product or by the provider of output service on or after the 10th day of September, 2004; and (ii) any input service received by the manufacturer of final product or by the provider of output services on or after the 10th day of September, 2004,...." 8.2 The learned Commissioner (Appeals) in the impugned order had examined the issue under di....
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.... is needed to be followed. However, the activity of lending banks like Oriental Bank of Commerce & State Bank of Bikaner & Jaipur, as in the case of the appellant, so far as pre-closure is concerned is a service, per-se, in terms of Section 66(E) of Finance Act, 1994 as the act of pre-closure of loan can be considered as an act of tolerance. However even though such activity of pre-closure is a service and the appellant is a receiver of the said service cannot be considered as input service for the appellant in terms of Section 2(l) of CCR,2004..... 7. Moreover, the foreclosure or pre-closure is an activity which can be considered a declared service under Section 66(E) (v) of the Finance Act, 1994 inasmuch as it is a case of any kind of tolerance by the lending banks to compensate the loss of interest that would have accrued to them had the appellant continued with the lending given by those banks. Thereby the foreclosure is activities where the lending banks do tolerate anything but compensate themselves for loss of interest they otherwise would have received from the client in way of such charging of foreclosure amount. Harmonious reading of Rule 2(1), Section 65(12), Se....
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....lculated at the rate of 1% (One Percent) ("Prepayment Premium") on the prepaid amount." On initial reading, it may appear that the pre-payment premium or foreclosure charges forms part of the financial arrangements of availing loan by the appellants from the banks. However, since there is no separate or distinct service being offered by such banks for taking the pre-payment premium, it would be correct to state that these are not related to the service of financing the loans, which the appellants have taken from these consortiums of banks. Rather, it is clear that those banks are compensating themselves for the loss of interest, which otherwise would have been paid by the appellants in the normal course of financing arrangement as per agreed contract, if the prepayment was not effected by the appellants. Hence, the factual matrix of the case clearly reflects that the prepayment premium paid by the appellants do not have any relation to the financing services availed from the banks. 8.4 I find that the SCN dated 19.06.2019 had rightly invoked Rule 14(1)(ii) of CCR, 2004 for recovery of CENVAT credit which was taken and utilised by the appellants, since the department had found....
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....pudiating it, or by interfering with another party's performance. "A breach may be one by non-performance, or by repudiation, or by both. Every breach gives rise to a claim for damages, and may give rise to other remedies. Even if the injured party sustains no pecuniary loss or is unable to show such loss with sufficient certainty, he has at least a claim for nominal damages. If a court chooses to ignore a trifling departure, there is no breach and no claim arises." Restatement (Second) of Contracts § 236 cmt. a (1979)." 34. Sir Guenter Treitel has, in his book "The Law of Contract", described the manner in which a breach of contract can be remedied. The injured party can be placed in the same position in which he would have been if the contract was not made or the injured party can be placed in a position in which he would have been if the contract had been performed. The former protects "restitution" or "reliance interest", while the latter protects "expectation interest". The paragraphs dealing with the aspect are reproduced : "Remedies for breach of contract are discussed in Chapter 21; but one fundamental point relating to them must be made at t....
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....al purposes of the law of contract in providing the legal framework required for commercial relations." (emphasis supplied) 35. The "expectation interest" is a popular measure for damages arising out of breach of contract. The foreclosure charges, therefore, are not a consideration for performance of lending services but are imposed as a condition of the contract to compensate for the loss of "expectations interest" when the loan agreement is terminated prematurely. In fact, foreclosure charges seek to deter the borrowers from switching over to cheaper available sources of loan, as has been so clearly stated in the Circular dated 26 June, 2012 issued by the Reserve Bank of India. 36. The basis for charging foreclosure amount has also been explained by the Karnataka High Court in M/s. Hotel Vrinda Prakash and Another v. KSFC and Another [ILR 2008 KAR 1311]. The writ petitioner had borrowed a loan from the Karnataka State Financial Corporation but before the period of loan could expire made an application for foreclosure of the loan. The Corporation, however, demanded premium on the advance payment/foreclosure amount which demand was challenged in the writ ....
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.... not and cannot give rise to any "consideration". These clauses also come into effect only after the contract comes to end. 40. Section 74 of the Contract Act which deals with compensation for breach of contract where penalty is stipulated also needs to be referred to. It is reproduced below; "Section 74. Compensation for breach of contract where penalty stipulated for. - When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for. Explanation. - A stipulation for increased interest from the date of default may be a stipulation by way of penalty. Explanation. - xxxxx Explanation. - xxxxx" 41. Compensation for damages in the eventuality of breach of contract clearly contemplates that the sum of damage is named in the agreemen....
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....ompensate the injured party banks and non-banking financial companies. This is because 'alternative mode of performance' still contemplates performance, whereas foreclosure is an express repudiation of the contractual terms giving rise to the levy of foreclosure charges. 46. Thus, merely because the clause relating to damage is featuring in a contract, it would be incorrect to conclude that the party has been given an option to violate the contract. Hence, to treat eventuality of foreclosure as an optional performance is incorrect. The contract cannot be understood to be providing an option to the parties to either perform or not perform/violate. xxx xxx xxx 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. In fact, as noticed above, the contract has been broken by the borrowers for which the banks are entitled to claim damages. The foreclosure charges are nothing but damages which the banks are entitled to receive when the contract is broken. The a....