2025 (5) TMI 1453 - AT - Service Tax

Service tax liability on their income of brokerage - Payment of service tax payable on certain payments/charges received from their clients - cum tax benefit - demand along with interest and the penalties - HELD THAT - Once the amount is held to be in the nature of penal charges we observe that the decision of this Tribunal in South Eastern Coalfields Limited 2020 (12) TMI 912 - CESTAT NEW DELHI which has been affirmed by Hon ble Apex Court in the case of Commissioner of Central Excise and Service Tax Vs. South Eastern Coalfields Ltd.- 2023 (8) TMI 606 - SC ORDER squarely covers the present dispute. The DPC are not taxable as these charges are not an amount towards rendering service. Since the issue arising out of the impugned order stands already settled and decided in favour of the assessee the issue is no more res integra. Also we do not find any reason to differ from those findings. Hence the order under challenge is set aside. Consequent thereto the appeal is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

• Whether Delayed Payment Charges (DPC) collected by a stock broker from clients for delayed payment constitute taxable service consideration under the Finance Act, 1994.
• Whether DPC amounts are penal in nature and hence not includible in the taxable value for service tax purposes.
• Whether the activity of extending credit facilities or recovering DPC from clients constitutes a separate taxable service distinct from stock broker services.
• The applicability and interpretation of the provisions of Section 65B(44), Section 66E(e), Section 66D, and Section 67 of the Finance Act, 1994, relating to the definition of service, declared services, negative list, and valuation of taxable services.
• The relevance and binding nature of precedents including Tribunal decisions and Circulars issued by the Central Board of Excise and Customs (CBEC) on the issue of taxation of DPC.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Taxability of Delayed Payment Charges (DPC) as part of stock broker service consideration

Relevant legal framework and precedents: The Finance Act, 1994 defines "service" under Section 65B(44) and specifies declared services under Section 66E(e). Section 67 governs valuation of taxable services. The negative list regime under Section 66D excludes certain services from taxation. Tribunal precedents such as M/s India Infoline Limited and South Eastern Coalfields Ltd. provide authoritative guidance on the taxability of DPC.

Court's interpretation and reasoning: The Tribunal observed that the facts in the present case are identical to those in the India Infoline Limited case, where it was held that DPC collected for delayed payments represent penal charges and are not consideration for taxable services. The Tribunal emphasized that the stock broker service is completed upon settlement of the contract terms with the client, including payment of brokerage and settlement of transactions with the stock exchange. DPC are charged only from clients who fail to pay within stipulated time, and thus are not part of the core brokerage service consideration.

Key evidence and findings: The appellant's contracts with clients stipulated DPC for delayed payments, which the Tribunal characterized as penal charges. The CBEC Circular No. 137/25/2011 dated 03.08.2011 was considered, which explicitly clarifies that DPC received by stock brokers are not includible in taxable value as they are penal in nature and not consideration for taxable services. The Tribunal also noted the consistent view in Religare Securities Limited case that DPC are not liable to service tax.

Application of law to facts: Applying the statutory definitions and precedents, the Tribunal concluded that DPC do not constitute taxable service consideration. The penal nature of DPC excludes them from valuation under Section 67 for service tax purposes.

Treatment of competing arguments: The Revenue argued that DPC arise from contractual obligations and constitute a separate service distinct from stock broker services, relying on the definition of "activity" under Section 65B(44) and the negative list regime. The Tribunal rejected this, holding that the activity of settling accounts and charging DPC is integral to the stock broker service and not a separate taxable service. The Tribunal also rejected the Revenue's contention that the DPC are consideration for extending credit facilities, emphasizing the penal character of these charges.

Conclusions: DPC collected by the stock broker are penal charges and not consideration for taxable services. Hence, they are not liable to service tax.

Issue 2: Whether the activity of extending credit facilities and recovery of DPC is a separate taxable service

Relevant legal framework and precedents: Section 65B(44) defines "service" as any activity carried out for consideration, excluding goods. Section 66E(e) declares certain services taxable. The negative list under Section 66D excludes specified services from taxation. The Tribunal's earlier decisions and the Apex Court's ruling in South Eastern Coalfields Ltd. were considered.

Court's interpretation and reasoning: The Tribunal noted that the Revenue's argument that extending credit and recovering DPC is a separate service was not supported by the contract's commercial intent or the statutory framework. The Apex Court in South Eastern Coalfields Ltd. clarified that penal clauses in contracts are safeguards for commercial interests and do not constitute separate taxable services. The Tribunal held that the intention of parties was for supply of goods or services, not for penal charges to constitute a service.

Key evidence and findings: The contract terms and the nature of DPC as penalty for breach of payment terms were examined. The Tribunal found no intention to create a separate service for credit extension or DPC recovery. The penal nature was emphasized, consistent with the Apex Court's ruling.

Application of law to facts: The Tribunal applied the principle that penal charges are not consideration for service and that the entire agreement must be read to discern the parties' intention. The DPC do not amount to a declared service under Section 66E(e) and are not taxable.

Treatment of competing arguments: The Revenue's reliance on the definition of "activity" and the negative list was countered by the Tribunal's interpretation that the DPC activity is ancillary and penal, not a separate service. The Tribunal found no infirmity in the appellant's submissions and precedent decisions.

Conclusions: The activity of extending credit and recovery of DPC does not constitute a separate taxable service.

Issue 3: Applicability of CBEC Circular and precedents on DPC taxability

Relevant legal framework and precedents: CBEC Circular No. 137/25/2011 clarifies tax treatment of DPC. Tribunal decisions in India Infoline Limited and Religare Securities Limited, and the Apex Court ruling in South Eastern Coalfields Ltd. provide binding precedents.

Court's interpretation and reasoning: The Tribunal relied heavily on the CBEC Circular which explicitly excludes DPC from taxable value. The Tribunal also emphasized consistent judicial pronouncements holding DPC as penal charges not liable to service tax.

Key evidence and findings: The Circular's para 2.1 clarifies DPC are not consideration for taxable services. The Tribunal found the Circular and precedents squarely applicable and binding.

Application of law to facts: The Tribunal applied the Circular and precedents to the facts, confirming non-taxability of DPC.

Treatment of competing arguments: The Revenue did not dispute the Circular but argued a different interpretation of contractual obligations. The Tribunal found no merit in this contrary argument.

Conclusions: CBEC Circular and judicial precedents conclusively establish that DPC are not taxable service consideration.

3. SIGNIFICANT HOLDINGS

The Tribunal held:

"Any income which gets generated up to the settlement of the agreement of rendering services which shall form the part of the taxable value of Section 67 of the Finance Act the service of stock broker gets completed when the terms and conditions of the contract entered with the client for sale/purchase of securities are completely accomplished. Thus the payment of outstanding amount to the stock exchange on behalf of the clients is the part of service relating to stock broker service which gets completed when the transaction for the same are finally settled. The amount of DPC are not collected from all the clients to whom the stock broker service are rendered by the appellant. These amounts are being collected only from those clients who have not paid the appellant within the time limit and the appellant being under a legal contract with the exchange, had to deposit the value of securities sold/purchased by their clients as such. To our opinion, the nature of amount of such DPCs is nothing beyond a penal charge."

"A service conceived in an agreement where one person, for a consideration, agrees to an obligation to refrain from an act, would be a 'declared service' under section 66E(e) read with section 65B (44) and would be taxable under section 68 at the rate specified in section 66B. Likewise, there can be services conceived in agreements in relation to the other two activities referred to in section 66E(e)- It is trite that an agreement has to be read as a whole so as to gather the intention of the parties. The intention of the appellant and the parties was for supply of coal; for supply of goods, and for availing various types of services, The consideration contemplated under the agreements was for such supply of coal, materials or for availing various types of services. 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."

The Tribunal concluded that the issue regarding taxability of DPC is no longer res integra and is settled in favour of the appellant. The impugned order confirming demand of service tax on DPC was set aside, and the appeal was allowed.