TaxTMI 
TaxTMI 
TaxTMI 
2026 (1) TMI 1163
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....ade available to the Department during the course of such audits. 2. The period involved in the appeal filed by City Union Bank Limited is 01.04.2014 to 30.06.2017. 2.1 During verification of the financial records of the Bank, the Department noticed the following: - i. the Bank had collected penal interest from borrowers on account of delay or default in payment of EMIs in respect of term loans; and ii. the Bank had incurred expenditure under Corporate Social Responsibility (CSR) and allied activities, which according to the Department involved sponsorship services, attracting service tax under Reverse Charge Mechanism (RCM). 2.2 The Department took the view that penal interest collected by the Bank constituted consideration for "tolerating an act", taxable as a declared service under Section 66E(e) of the Finance Act, 1994. 2.3 In respect of CSR expenditure, it was alleged that wherever such expenditure involved display of the Bank's logo, name or brand visibility, or where documentation evidencing pure donation was allegedly insufficient, the activity amounted to "sponsorship service" as defined under Section 65(99a) of the Act. 2.4 Accordingly, a....
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.... i. dropped demand to a limited extent; ii. appropriated certain amounts already paid by the Bank; and iii. confirmed the following demands of Rs.16,11,07,260/towards penal interest; Rs.27,68,700/- towards liquidated damages; Rs.55,59,981/- towards sponsorship services under RCM; along with Interest under Section 75; and imposed penalties under Section 78. 3.6. Aggrieved by the confirmation of the above demands, Karur Vysya Bank Limited has filed the present appeal. 4. Since both appeals ST/40247/2020 and ST/40038/2020 raise identical questions of law on: i) taxability of penal interest; ii) taxability of liquidated damages / notice pay; iii) taxability of CSR expenditure under sponsorship service; iv) invocation of extended period; and v) sustainability of penalties, the appeals are taken up for disposal by this common order. 4.1 The Ld. Chartered Accountant Mr. S. Ananthan, appeared on behalf of the Appellants and advanced detailed submissions in support of the Appeals and the Ld. Authorized Representative Ms. Anandalakshmi Ganeshram, appeared for the Revenue and defended the Impugned Orders. 5. ....
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....donations towards social welfare activities such as construction of schools, hospitals, toilets, medical aid, etc., without any quid pro quo. 5.11 Section 65(99a) of the Finance Act, 1994 expressly excludes donations or gifts, provided the Recipient is under no obligation to provide anything in return. Sponsorship pre-supposes the existence of an event and a reciprocal commercial benefit such as branding, logo display linked to an event, or exclusive rights. 5.12 In several instances, the impugned Orders proceeded merely on assumptions of visibility or goodwill, without establishing the existence of an identifiable event or reciprocity, and in some cases travelled beyond the scope of the Show Cause Notices by invoking an "advertisement" theory. 5.13 The Banks have already discharged service tax under RCM on admitted sponsorship activities, and the same is not in dispute. The remaining demands on CSR expenditure are unsustainable. 5.14 The Banks are regulated entities, regularly filing returns and subjected to departmental audits. The issues involved are purely interpretational and were subject to divergent judicial views. 5.15 In the absence of suppression or intent ....
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....nd visibility. The definition does not mandate that naming of an event is a sine qua non; display of logo or branding by itself is sufficient to attract tax. 6.8 The statutory framework governing sponsorship services and reverse charge liability was consistently in force during the relevant periods imposing 100% reverse charge on the service recipient. 6.9 The fundamental principle applicable is "reciprocity" or "quid pro quo". Wherever CSR expenditure results in branding, visibility, or promotional advantage to the Bank, the activity squarely falls within the ambit of taxable sponsorship service, and service tax is rightly payable under RCM. 6.10 Internal correspondences and records relied upon in the Orders-in-Original demonstrate that both Banks consciously ensured display of their name and logo at places where CSR expenditure was incurred, thereby establishing a clear quid pro quo. 6.11 Donations or contributions for which no documentary proof is furnished, or where branding obligations are evident, have therefore been correctly classified as sponsorship services taxable under Section 65(99a) read with Section 65B(44) of the Finance Act, 1994. 6.12 Since the dema....
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....e levy of service tax on the impugned activities and the clarifications issued by the Board. The scope of service tax during the relevant period is governed by the definitions of "service", "declared service" and "sponsorship service" as contained in the Finance Act, 1994, particularly under Sections 65B (44), 66E(e) and 65(99a). These provisions delineate the essential ingredients required to fasten tax liability, namely, the existence of an activity carried out for consideration, the presence of an enforceable obligation in cases of declared services, and the element of reciprocity or quid pro quo in the case of sponsorship. Section 65(99a) - "Sponsorship" (As applicable during the relevant period) "(99a) 'sponsorship' includes naming an event after the sponsor, displaying the sponsor's company logo or trading name, giving the sponsor exclusive or priority booking rights, sponsoring prizes or trophies for competition; but does not include any financial or other support in the form of donations or gifts, given by the donors subject to the condition that the service provider is under no obligation to provide anything in return to such donors." Se....
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....sing out of breach of contract are compensatory in nature and do not, by themselves, constitute as a consideration for a taxable service. CBEC Circular No. 178/10/2022-ST dated 03.08.2022 Clarifies that: "Tolerating an act" requires independent, conscious agreement, Damages for breach, notice pay, penal interest are not taxable and Employment-related recoveries are outside service tax 9.3 The Board has further clarified that for an activity to be taxable under the category of "tolerating an act", there must exist a separate, conscious and independent agreement to tolerate such act for consideration, and that mere occurrence of breach and consequential recovery cannot be elevated to the status of a taxable service. Likewise, in the context of sponsorship, the statutory exclusion in respect of donations or gifts, where the recipient is under no obligation to provide anything in return, has been reiterated. 9.4 It is in the above statutory and administrative clarifications that the issues arising in the present appeals are required to be examined and answered. ISSUE NO. (i) Whether penal interest collected by the Appellant Banks for delayed/defaulted EMIs is taxable as a d....
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....tract. 10.3.5 In loan transactions, the Banks do not agree to tolerate default. On the contrary, default is expressly discouraged, and penal interest is imposed only as a consequence of breach, not as a service willingly rendered. 10.3.6 We find that the issue is no longer res integra in view of the judgment of the Hon'ble Supreme Court in Clix Capital Services Pvt. Ltd. v. CST [2024 (8) TMI 98 (SC)]. The Hon'ble Supreme Court has unequivocally held that: - penal charges or liquidated damages arising out of breach of contract do not constitute consideration for tolerating an act; and mere occurrence of breach and consequent recovery does not amount to provision of a service under Section 66E(e). The ratio laid down by the Hon'ble Supreme Court is binding under Article 141 of the Constitution, and all contrary views stand eclipsed. 10.3.7 We also note that the Principal Bench of this Tribunal in South Eastern Coal Fields Ltd. 2023 (12) TMI 1241 - AT - Service Tax has taken the same view, which has attained finality upon dismissal of departmental appeals by the Hon'ble Supreme Court. 10.3.8 We find that In the case of Karur Vysya Bank Ltd. v. CCE, 201....
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....sides and find that the recovery of notice period pay arises exclusively out of the employer-employee relationship, when an employee resigns without serving the stipulated notice period. Such recovery is compensatory in nature and does not involve any activity carried out by the employer for the employee for consideration. 11.4 Section 65B (44) expressly excludes services provided by an employee to employer in the course of employment. 11.5 We also find that the Madras High Court, in the case of GE T&D India Ltd. v. Deputy Commissioner of Central Excise, 2020(1) TMI 1096-Madras HC has ruled that notice period pay recovered from an employee is not exigible to service tax. This principle aligns with the rationale established in cases like South Eastern Coalfields Ltd. v. Commissioner of Central Excise and Service Tax, Raipur., which determined that damages for breach of contract are not "consideration" for a service. 11.6 The Madras High Court held that notice pay is compensation for the sudden exit of an employee, a contractual mechanism, and not a "consideration" for any service rendered by the employer (such as "tolerating" the early exit). 11.7 The court determined th....
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....on, a quid pro quo is established. Reliance was placed on TRU letters TRU Letter (D.O.F. No. 334/4/2006TRU) dated 28.02.2006 and TRU Letter dated 26.02.2010 (D.O.F. No. 334/1/2010-TRU) 26.02.2010 and Notification No. 30/2012-ST to contend that such expenditure amounts to sponsorship taxable under reverse charge. 12.3 Having heard both the sides, we note that Section 65(99a) includes sponsorship involving naming of events, logo display, exclusive rights, etc., but explicitly excludes donations or gifts where the service provider is under no obligation to provide anything in return. TRU Circular Dated 26.02.2010 relied upon by the Department clarify that sponsorship is an alternate form of advertisement only when associated with an event and reciprocity. 12.4 We find that Sponsorship service under Section 65(99a) is predicated upon the existence of an event and reciprocity, whereby the sponsor derives identifiable commercial or promotional benefit. 12.5 We also note that in paragraphs 15.06 to 15.15 of the Order-in-Original in the case of CUB, and paragraphs 15.06 to 15.11 of the Order-in-Original in the case of KVB, the adjudicating authority has recorded detailed findings ....
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....beyond the SCN. 12.11 We further find that the impugned orders specifically record that the Board Resolutions of the appellant banks mandate that the bank's logo shall be displayed in sponsorship events and on sponsored materials/gifts. Such internal policy documents clearly demonstrate that sponsorship was undertaken with a definite commercial and promotional objective, namely enhancement of brand visibility. 12.12 In several instances, the appellants have merely asserted that the amounts paid were in the nature of donations or CSR contributions, without furnishing any documentary evidence explaining: the nature of the event, the nexus between the event and the appellant bank, the absence of brand visibility or logo display, and why such payments should be treated as donations. In the absence of such evidence, the mere nomenclature of "donation" cannot alter the true character of the transaction. Accordingly, we hold that: the impugned orders do not travel beyond the scope of the SCN, and the findings of the adjudicating authority are not vitiated on this ground. 12.13 In the absence of such documentary substantiation, we find no reason to interfere with the factual fi....
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....fied. 15.2 The Department contends that the appellants failed to disclose the sponsorship receipts and corresponding tax liability in their ST-3 returns. Mere reflection in balance sheets does not amount to disclosure to the Department. The appellants neither sought clarification nor paid tax under protest, justifying invocation of the extended period. 15.3 We find that the appellants did not declare the impugned sponsorship transactions in their ST-3 returns nor did they disclose the nature of such transactions to the Department at any stage prior to Audit/investigation. The service tax liability under reverse charge on sponsorship services was also not discharged. Mere accounting of the amounts in the books of accounts or disclosure in balance sheets cannot be construed as disclosure to the Department for the purposes of limitation. 15.4 Further, in Nizam Sugar Factory v. CCE - 2006 (197) ELT 465 (SC), the Hon'ble Supreme Court clarified that disclosure of information in balance sheets, books of accounts or records maintained by the assessee does not amount to disclosure to the Department unless the same is specifically brought to the notice of the assessing authority. T....
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....ies ought to be set aside. 16.2 The Department submits that once the extended period of limitation is held to be rightly invoked on account of suppression of material facts, penalty under Section 78 necessarily follows. It is contended that the appellants neither disclosed the sponsorship transactions in their statutory returns nor discharged service tax liability under reverse charge. Failure to comply with statutory requirements attracts penalties under Sections 77 and 78 as well. 16.3 We have already held, while examining limitation, supra that the appellants failed to disclose the sponsorship services in their statutory ST-3 returns and did not discharge service tax liability under reverse charge. Such non-disclosure amounts to suppression of material facts with intent to evade payment of service tax. The invocation of the extended period under the proviso to Section 73(1) of the Finance Act, 1994 has therefore been upheld. 16.4 It is a settled position of law that once suppression with intent to evade tax is established and the extended period is rightly invoked, penalty under Section 78 follows as a natural consequence. The penalty under Section 78 is attracted not m....