2025 (6) TMI 1732 - AT - Service Tax

Levy of service tax - Stock Broker Services - Delayed Payment Charges - HELD THAT - The consistent view taken by the Tribunal is that the appellant had made payments to Stock Exchanges on behalf of their clients who delayed the payments against their transactions of securities and the appellant charged the DPC from the said clients by making debit entries in their ledger which cannot be termed as consideration for the service rendered. On the same analogy it was held that it cannot be considered as service of tolerating or refraining from an act or to tolerate an act or situation or to do an act and accordingly and the demand of service tax was therefore set aside. Conclusion - The service tax demand on delayed payment charges collected by the stock broker company from its clients set aside. The impugned order is unsustainable - The demand of service tax on DPC is accordingly set aside - Appeal allowed.

Summary

The core legal question considered in this appeal is whether service tax is applicable on 'Delayed Payment Charges' (DPC) collected by a stock broker company from its clients, specifically whether such charges constitute consideration for a declared service under Section 66E(e) of the Finance Act, 1994, which pertains to agreeing to tolerate an act or situation.

Issue-wise detailed analysis:

Applicability of Service Tax on Delayed Payment Charges (DPC) under 'Stock Broker Services'

Relevant Legal Framework and Precedents: The issue revolves around the interpretation of Section 66E(e) of the Finance Act, 1994, which defines certain declared services including "agreeing to tolerate an act or a situation or to do an act." The question is whether charging interest or penalty for delayed payments falls within this category. The Tribunal relied on a series of precedents including decisions of this Tribunal and the Apex Court, notably:

• M/s. Globe Capital Market Limited Vs. ADGGGI
• M/s. Almondz Global Securities Ltd. Vs. Commissioner of Central Excise
• Religare Securities Ltd. Vs. Commissioner of Service Tax
• M/s India Infoline Limited Vs. Additional Director General
• Commissioner of Central Excise and Service Tax Vs. M/s Power Limited
• South Eastern Coalfields Ltd. (affirmed by Apex Court)

Court's Interpretation and Reasoning: The Tribunal observed that the appellant, acting as an intermediary, advances payments to the Stock Exchange on behalf of clients who default in making timely payments. The appellant then charges DPC from these clients, which amounts to interest on delayed payments. The Tribunal held that these DPCs are not consideration for any service rendered by the appellant under the category of tolerating an act or refraining from an act under Section 66E(e).

The Tribunal emphasized that the agreement between the parties is primarily for brokerage services related to securities transactions. The delayed payment charges are penal in nature, designed to safeguard the commercial interests of the appellant and to discourage defaults by clients. These charges do not constitute a separate service of "tolerating" the delay but are merely a financial consequence of breach of payment terms.

The Tribunal referred extensively to the Apex Court's ruling in South Eastern Coalfields Ltd., which clarified that penal clauses or charges for breach of contract do not amount to a declared service under Section 66E(e). The Court stated:

"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. ... 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."

Key Evidence and Findings: The appellant's ledger entries showing debit of DPC from clients were examined. It was found that these charges are interest on delayed payments, not fees for tolerating delay. The appellant already pays service tax on brokerage commissions, which was undisputed.

Application of Law to Facts: Applying the legal principles, the Tribunal concluded that DPC is not consideration for a declared service under Section 66E(e). The charges are compensatory and penal, not a service of toleration or refraining from an act. Therefore, service tax cannot be levied on such delayed payment interest.

Treatment of Competing Arguments: The Revenue argued that DPC falls within Section 66E(e) as consideration for tolerating delayed payments. The appellant and its counsel countered by relying on binding precedents and the nature of the charges as penal interest. The Tribunal accepted the appellant's submissions, consistent with the settled jurisprudence.

Conclusions: The Tribunal held the demand of service tax on DPC to be unsustainable and set aside the impugned order confirming the demand.

Significant holdings:

"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. ... 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 core principle established is that penal or compensatory charges for breach of contract, such as interest on delayed payments, do not constitute service tax-liable "declared services" under Section 66E(e) of the Finance Act, 1994.

Final determination: The Tribunal allowed the appeal and set aside the service tax demand on delayed payment charges collected by the stock broker company from its clients.