TaxTMI 
TaxTMI 
2026 (9) TMI 738
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....)-based loans extended through credit card accounts, as well as on additional interest collected for delayed payment of EMIs. 2. The appellant is a banking company engaged in providing banking and financial services, including credit card services. It is not in dispute that the appellant extends loan facilities such as "Loan on Phone", "Balance Conversion", "Dial-an-EMI" and merchant EMI schemes to its existing credit card holders, wherein loan amounts are disbursed and recovered through equated monthly instalments reflected in the monthly credit card statements. The case of the Department is that such transactions are not independent loan transactions but are integrally connected with credit card services and are, therefore, taxable. It is alleged that the interest component embedded in the EMIs constitutes consideration for provision of service and is liable to service tax under both the pre-negative-list and post-negative-list regimes. It is further alleged that the additional interest charged for delayed payment of EMIs is liable to tax as consideration for tolerating an act under Section 66E(e) of the Finance Act, 1994. 3. Aggrieved by the impugned order, the appellant h....
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....hat the same cannot be artificially re-characterised as consideration for tolerating an act. The additional interest is merely compensatory in nature and remains intrinsically connected with the underlying loan transaction. It was, therefore, argued that such additional interest cannot be brought within the ambit of consideration for tolerating an act. vi. On limitation, it was submitted that the dispute is essentially interpretational in nature, that the transactions were duly disclosed in the statutory records and returns and were subjected to audit, and that, consequently, the extended period of limitation as well as penalty are not invocable. 5. Per contra, the Ld. Authorized Representative Shri Anoop Singh firstly has reiterated the findings recorded in the impugned order. Further, it was strenuously contended that the loans are intrinsically linked with credit card services and cannot be regarded as independent lending transactions. According to the Revenue, the entire mechanism operates through credit card accounts and billing statements and, therefore, the service is more appropriately classifiable as "credit card services". It was also elaborately submitted tha....
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....o service tax under the provisions of the Finance Act, 1994, and whether the additional interest charged on delayed payment of such EMIs is independently exigible to service tax? The determination of this issue necessarily turns upon the true and substantive nature of the transactions and upon whether the amounts received by the appellant represent consideration for any taxable service or merely interest arising from loans and advances, which stands excluded from the levy. 10. At the outset, it would be apposite to examine the statutory framework governing the levy of service tax on financial transactions. Prior to 01.07.2012, service tax was leviable on specified taxable services defined under Section 65(105) of the Finance Act, 1994, including banking and other financial services. The valuation of such taxable services was governed by Section 67 read with the Service Tax (Determination of Value) Rules, 2006, and Rule 6(2)(iv) of the said Rules expressly excluded interest on delayed payment of any consideration for provision of services or sale of property, whether movable or immovable. With effect from 01.07.2012, the negative-list regime was introduced, and Section 66D(n) spe....
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....on the basis of its substance and not merely on the nomenclature or form in which it is presented. Applying the aforesaid principle, a transaction involving disbursement of money coupled with an obligation to repay the same together with compensation for its use bears the essential characteristics of a loan. It is further relevant to examine the scope of "Banking and other financial services" as defined under Section 65(12) of the Finance Act, 1994, prior to 01.07.2012, which included credit card services and other financial services, namely, lending. However, even within this broad taxable category, the legislature consciously excluded interest on loans from the taxable value, thereby recognizing the distinction between the activity of lending and the interest. Thus, while the activity of lending may fall within the broad description of banking services, the interest component stands on a distinct statutory footing and is specifically excluded from taxation. Consequently, merely because a transaction is undertaken by a bank or routed through a credit card mechanism, it does not follow that the interest earned therefrom automatically assumes the character of consideration for a tax....
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....gal consequence flowing from such transactions, namely, whether the interest so earned can nevertheless be brought within the taxable category of credit-card services merely because the loans are offered to existing credit-card holders and the transactions are reflected through their credit-card accounts. 13. The aforesaid issue also finds support from the judgment of the Hon'ble Calcutta High Court in Ramesh Kumar Patodia v. Citi Bank N.A., [2023 (7) TMI 1102], wherein, while examining a similar transaction in the context of GST, the Hon'ble High Court examined the substance of a loan facility extended to a credit-card holder and held that the mere fact that the loan transaction was reflected in the monthly statement of the credit card did not alter its essential character as a separate loan transaction. The Hon'ble High Court, in substance, held that where the loan was independently sanctioned and advanced by the bank, the transaction could not, merely by reason of its reflection in the credit-card statement, be treated as a credit-card service. The said decision lends considerable support to the appellant's contention that the legal character of the underlying....
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....ner in respect of money borrowed or debt incurred, while excluding service fees or other charges relating thereto. Section 65B(33), in turn, defines "money" broadly to include legal tender and various monetary instruments. The statutory scheme thus draws a clear distinction between consideration for a service and amounts arising from a transaction in money. In the present case, under the various EMI-based schemes, the appellant advances a quantified sum to the customer, which is repayable over a stipulated period together with interest. The transaction is, in substance, one of lending and repayment of money, and the interest represents the return for the time value of the money lent, rather than consideration for any independent service. The mere fact that the loan facility is administered through, or reflected in, the customer's credit-card account cannot alter the essential character of the transaction. Accordingly, the impugned receipts, being interest arising from transactions in money, cannot be brought within the ambit of "service" merely by treating the lending facility as a credit-card service. 14.2 We find merit in the appellant's contention that interest on loans i....
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.... The same principle finds support in the judgment of the Hon'ble Bombay High Court in Shriram Transport Finance [2021 (46) G.S.T.L. 385 (Bom.)] and the decision of this Tribunal in Thermax Ltd. [2007-TIOL-1466-CESTAT-MUM], wherein it was recognised that interest charged on loans, including where recovered through EMIs, cannot be regarded as consideration for the provision of any service. We, therefore, find that the reliance placed in the impugned order on the earlier stay order in Mahindra Holidays is misplaced and cannot sustain the demand of Service Tax on the interest component. 15.1 We find merit in the submission of the appellant that interest charged on loans and advances cannot be regarded as consideration for any taxable service. Under the Finance Act, 1994, Service Tax is leviable only on consideration attributable to the provision of a taxable service. Thus, an amount can constitute consideration only where there exists a direct and proximate nexus between such amount and the taxable activity. The mere receipt of an amount by a service provider cannot, by itself, render the same exigible to Service Tax. This principle finds support in Karur Vysya Bank Ltd. v. Commissi....
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.... advances offered through credit cards and requires such facilities to comply with the instructions applicable to loans and advances. The directions also mandate disclosure of the principal, interest and other components when credit-card transactions are converted into EMIs. Thus, the regulatory framework itself draws a distinction between the core credit-card facility and loan products offered through the card. The RBI's accounting and reporting framework also maintains a clear distinction between interest income on loans and advances and fee or commission income arising from credit-card services. Interest earned on loans and advances is separately recognised as interest income, whereas credit-card fees and charges form part of other operating income. This distinction is significant, as it reflects the substantive character of the income rather than merely the mode through which the facility is offered. 17. We also find merit in the reliance placed by the appellant upon the CBEC Education Guide, 2012 and Circulars dated 17.09.2004 and 28.02.2006, which clarify that interest on loans, advances and deposits, including additional or penal interest, is not chargeable to Service Tax....
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....st over a defined tenure. The system records relied upon in the impugned order also disclose the principal amount, interest, tenure and outstanding balance. These features, in our view, are the essential characteristics of a loan transaction. The adjudicating authority, however, has proceeded to treat the transactions as taxable credit-card services merely because they were routed through the credit-card accounts. Such an approach, in our considered view, is unsustainable. The Welcome Letter issued by the appellant further corroborates the nature of the transaction as a credit facility repayable with interest. The reflection of EMI amounts in the credit-card statement is merely a mode of accounting and recovery and cannot determine the substantive character or taxability of the transaction. 20. We find further support for the aforesaid conclusion from the Larger Bench decision of this Tribunal in Standard Chartered Bank v. CST, 2015 (40) S.T.R. 104 (Tri.LB), wherein the scope and essential characteristics of a credit-card service were examined. The Larger Bench noticed that a conventional credit-card transaction involves a multiparty arrangement comprising the cardholder, mercha....
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....Merely because the interest is described as "additional" or "penal" does not alter its essential character as interest arising from the underlying loan transaction. We also find merit in the appellant's reliance upon the decisions of the Tribunal in Bajaj Finance Ltd. v. CCE & GST, Pune-I, 2023 (8) TMI 473, Ashiana Housing Ltd. v. CST, Jaipur, 2024 (5) TMI 795 (Tri.-Del.), and Balajee Loha Pvt. Ltd. v. CCE, Final Order dated 02.06.2025, wherein it has been consistently held that penal or additional interest charged on delayed payments retains the character of interest and cannot be treated as consideration for any taxable service. Such amounts are merely compensatory and arise directly from the principal transaction; they cannot be artificially re-characterised as consideration for "tolerating an act" under Section 66E(e) of the Finance Act, 1994. The aforesaid position also stands clarified in GST Circular No. 102/21/2019-GST dated 28.06.2019, wherein it has been stated that additional or penal interest on delayed payments continues to be in the nature of "interest" and does not fall within the scope of agreeing to tolerate an act. Though issued under the GST regime, the clarifica....
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....heads and Service Tax records. Subsequent audit proceedings were also undertaken in 2015. The appellant's activities and income streams were, therefore, within the knowledge of the Department. In these circumstances, the allegation of suppression or wilful misstatement cannot be sustained. The contemporaneous Chartered Accountant's opinion dated 08.08.2014, treating "Loan on Phone", "Balance Conversion" and EMI facilities as loans and opining that the interest thereon was not liable to Service Tax, is also a relevant circumstance demonstrating the appellant's bona fide understanding of the legal position. 25. The settled legal position is that mere non- payment of duty or tax is insufficient to invoke the extended period. In Uniworth Textiles Ltd. v. CCE, 2013 (288) E.L.T. 161 (S.C.), and Continental Foundation v. CCE, 2007 (216) E.L.T. 177 (S.C.), the Hon'ble Supreme Court held that suppression must be wilful and accompanied by the requisite intent. The same principle has been recognised in Chamundi Die Cast Pvt. Ltd. v. CCE, 2007 (215) E.L.T. 169 (S.C.), Larson & Toubro Ltd. v. CCE, 2007 (211) E.L.T. 513 (S.C.), and CCE & ST v. Krishnaraj Shipping Co. Ltd., 2024 (388) E.L.T. 1....
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....able to the facts before us. 27. Having regard to the cumulative circumstances- namely, the prior Show Cause Notice, departmental audits, disclosure of the relevant transactions in the appellant's records, the contemporaneous professional opinion and the interpretational nature of the dispute-we find no material establishing fraud, suppression, wilful misstatement or intent to evade payment of tax. The extended period under the proviso to Section 73(1) is, therefore, not invocable. For the same reason, the essential ingredients for imposition of penalty under Section 78 are absent. The appellant's conduct cannot be characterised as contumacious or mala fide merely because the Department has taken a different view of the taxability of the receipts. The demand, to the extent covered by the extended period, is accordingly barred by limitation and the penalty imposed under Section 78 is liable to be set aside. 28. In view of the foregoing discussion and findings, we hold that the interest earned by the appellant on EMI-based loan transactions, including additional or penal interest charged for delayed payment, represents consideration for the use of money and not for the provisio....