2025 (6) TMI 1728 - AT - Service Tax

Levy of service tax - foreclosure charges on account of pre-mature termination of the loan agreement - seizure charges on availing loan towards purchase of the vehicles - the charges are forming part of the taxable services under the category of Banking and Financial Services or not - HELD THAT - The facts that the appellants as registered assessee under the Service Tax statute have discharged the service tax liability in respect of the banking and other financial services provided by them to their customers are not in dispute. Payment of service tax on the provision of taxable service has been mandated under Section 67 of the Finance Act 1994 providing that on the amount charged for provision of such service which is ultimately provided by the assessee to the recipient of service should be considered as the taxable value for payment of service tax thereon. The issue whether any other charges should also form part of the taxable value for the purpose of levy of service tax thereon was the subject matter of the dispute before the Hon ble Supreme Court in the case of M/s Bhayana Builders 2018 (2) TMI 1325 - SUPREME COURT wherein the Hon ble Supreme Court have observed The value of the goods/materials cannot be added for the purpose of aforesaid notification dated September 10 2004 as amended by notification dated March 01 2005. Further the issue with regard to collection of various charges over and above the taxable value received for the provision of service was also considered by the Larger Bench of this Tribunal in the case of Repco Home Finance 2020 (7) TMI 472 - CESTAT CHENNAI . The issue involved in such case was whether the foreclosure charges levied by Banks and Non-Banking Financial company on premature termination of the loan could be subjected to levy of service tax under the Banking and other Financial Services? Such question was answered by the Larger Bench holding that the foreclosure charges collected by the Banks and Non-Banking Financial company on premature termination of loan cannot form part of gross taxable value and not leviable to service tax under Section 65(105) of the Finance Act 1994. Furthermore with regard to the charges collected for bouncing of cheque and penal interest this Bench of the Tribunal in the case of the appellants themselves 2023 (8) TMI 473 - CESTAT MUMBAI has held that such charges are not in context with provision of such services for which the appellants are registered with the Service Tax Department. Though this Bench of the Tribunal in the case of the appellants has dealt with the issue of cheque bounce charges collected on bouncing of cheque but the ratio is squarely applicable to the facts of the present case inasmuch as the seizure charges has also been collected as a penalty from the customers for non-performance of the clause(s) provided under the agreement entered between both sides. The learned adjudicating authority view that the appellants should be liable for payment of service tax on the foreclosure charges and seizure charges collected by them from the customers not agreed upon. Conclusion - i) Foreclosure charges collected on premature loan repayment do not form part of the taxable value for service tax. ii) Seizure charges collected for release of vehicles seized due to loan default are not taxable under the category of Banking and Financial Services. The impugned order is set aside and the appeal is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal were:

• Whether foreclosure charges collected by the appellants on premature termination of loan agreements constitute part of the taxable value under the category of "Banking and Financial Services" for the purpose of service tax levy.
• Whether seizure charges collected by the appellants from customers for release of vehicles seized due to non-payment of loan EMIs form part of the taxable value liable to service tax.
• Whether such charges, being penalties or incidental amounts collected for non-fulfillment of contractual obligations, qualify as "consideration" for a taxable service under Section 67 of the Finance Act, 1994.
• The applicability and interpretation of precedents, including the Supreme Court's ruling on the nexus between amount charged and taxable service, and the Larger Bench's decision on similar financial charges.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Taxability of Foreclosure Charges and Seizure Charges

Relevant Legal Framework and Precedents: The service tax liability is governed by Section 67 of the Finance Act, 1994, which mandates that the taxable value is the amount charged for the provision of a taxable service. The Supreme Court in Commissioner of Service Tax vs. M/s Bhayana Builders clarified that the gross amount charged must have a direct nexus with the taxable service provided. Amounts charged without such nexus do not form part of the taxable value. The Larger Bench of the Tribunal in Repco Home Finance Ltd. also held that foreclosure charges levied on premature loan termination do not constitute taxable value under Banking and Financial Services. Additionally, the Tribunal's prior rulings on cheque bounce charges, which are similar penalty charges, were considered relevant.

Court's Interpretation and Reasoning: The Tribunal observed that the appellants had duly paid service tax on the core Non-banking and other Financial Services provided. The foreclosure and seizure charges were levied only upon breach or premature termination of the loan contract, effectively as penalties or incidental charges rather than payments for additional services. The Tribunal emphasized the Supreme Court's explanation that taxable value must be "amount charged for such service provided," establishing a necessary nexus between the charge and the service rendered. Since foreclosure and seizure charges arise only on non-fulfillment of contract terms and are not connected to any additional taxable service, they cannot be considered part of the gross value for service tax.

Key Evidence and Findings: The appellants' records showed that they collected foreclosure charges when borrowers repaid loans early and seizure charges when vehicles were seized due to default. The Department's contention that these charges fall under taxable Banking and Financial Services was countered by the appellants' argument, supported by judicial precedents, that these charges are penalties or incidental and do not relate to any additional service provided.

Application of Law to Facts: Applying the principle from the Bhayana Builders case, the Tribunal found no nexus between the foreclosure and seizure charges and the taxable service. These charges were not consideration for any service but were penalties or recovery charges for breach of contract. Therefore, they did not fall within the scope of Section 67's taxable value definition.

Treatment of Competing Arguments: The Department argued that these charges should be included in taxable value as they relate to financial services. However, the Tribunal rejected this, relying on authoritative judicial pronouncements that only amounts charged as consideration for taxable services are includible. The appellants' reliance on multiple precedents, including the Larger Bench ruling in Repco Home Finance and the Supreme Court's interpretation, was found persuasive.

Conclusions: The Tribunal concluded that foreclosure and seizure charges do not form part of the gross taxable value under the Finance Act, 1994, and are not liable to service tax. The impugned order demanding service tax on these charges was set aside.

3. SIGNIFICANT HOLDINGS

The Tribunal's crucial legal reasoning includes the verbatim observation from the Supreme Court in Bhayana Builders:

"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 service tax becomes payable but the amount charged has to be necessarily a consideration for the service provided which is taxable under the Act. By using the words 'for such service provided' the Act has provided for a nexus between the amount charged and the service provided. Therefore, 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."

Core principles established by the Tribunal are:

• Only amounts charged as consideration for taxable services constitute the taxable value for service tax.
• Charges collected as penalties or incidental to breach of contract, such as foreclosure and seizure charges, lack nexus with the taxable service and are excluded from taxable value.
• The principle applies uniformly to similar charges, including cheque bounce charges and other penalty fees.

Final determinations on each issue are:

• Foreclosure charges collected on premature loan repayment do not form part of the taxable value for service tax.
• Seizure charges collected for release of vehicles seized due to loan default are not taxable under the category of Banking and Financial Services.
• The impugned order demanding service tax on these charges is set aside, and the appeal is allowed in favor of the appellants.