2025 (5) TMI 1830 - AT - Service Tax

Service tax is leviable on Cheque bouncing Foreclosure charges and Operating lease rentals are leviable to service tax under category of BOFS - incurred various expenditure in foreign currency for the purpose of import of services under reverse charge mechanism - service of lending - financial lease - Legal Advisory Services - wrongful utilisation of CENVAT Credit - Demand along with interest and penalties - HELD THAT - We find that as regard to the issue of demand of service tax on cheque bouncing and foreclosure charges involved in both the appeals are concerned the demand of service tax has been confirmed on both the issues as shown in the table. Both these two issues have been decided by the Tribunal in favour of the appellant in their own case vide Final Order No. 60102-60103/2023 dated 20.04.2023 and the Tribunal held that the demand of service tax with respect to the amount collected as cheque bouncing and foreclosure charges from the customer is not taxable under the Head BOFS and is not liable to service tax. It is pertinent to note that the demand with respect to cheque bouncing charges the demand has been set aside on the ground that the said charges are penal in nature and are not for the purpose of consideration of any service. As regards the demand with respect to foreclosure charges the Tribunal set aside the same by relying upon the decision of the Larger Bench in the case of Repco Home Finance Ltd. 2020 (7) TMI 472 - CESTAT CHENNAI which has categorically held that foreclosure charges cannot be viewed as alternative mode of performance of the contract because they arise upon repudiation of specified terms of contract and are intended to compensate the injured party i.e. banks and non-banking companies. It is pertinent to mention that the Department filed appeal against the decision of the Tribunal and the Hon ble Supreme Court vide its Order dated 29th July 2024 dismissed the appeal of the Department and upheld the order of the Tribunal. In view of the fact that the matter stands settled by the Hon ble Apex Court the demand on these two issues are set aside. Further we find that in the present case over the complete period of lease agreement the entire cost of the asset is not being recovered along with interest charges as detailed in Annexure B to the agreement. Hence sub-clause (3) of the Explanation is not satisfied and therefore the transaction will not amount to financial leasing and cannot be taxed under BOFS. Hence we drop the demand under this category also. As regards the demand of service tax on import of services under reverse charge basis confirmed in the Appeal No. ST/54344/2015 we find that the impugned order has confirmed the demand under four categories viz. the demand of service tax on Equity Shares purchased by the employees under Global Share Participation (GSPP) Legal Advisory Services Medical treatment of employees and amount with respect to services received prior to October 2007. As far as the equity shares are concerned we find that these shares are in fact purchased by the employees and contribution is made by the Appellant as per HR Policy and therefore they are not taxable because they form part of the remuneration of the employees and this activity is not a service and is not classifiable under any of the clause of Section 65(105). As regards the Legal Advisory Services we find that the said services were taxable w.e.f. 01.09.2009 under Section 65(105)(zzzzm) but the services in the present case were received during financial years 2007-08 as per the sample invoices on record therefore they are not liable to service tax. Further as regards the medical treatment of employees are concerned they are in the nature of reimbursement and not towards any service hence not taxable under any clause of the Section 65(105). As regards the amount received in respect of the services received prior to October 2007 we find that the said amount pertains to the services received by the appellant prior to 2007 and the SCN was issued on 22.04.2012 therefore the demand cannot sustain as the same is beyond the extended period of limitation. Further we also find that in the SCN demand has been raised on import of services without specifying the specific category under which the service tax has been demanded. Further the impugned order has also not specified the category under which the demand has been confirmed. Therefore in view of the decisions cited supra the demand is liable to be set aside on this ground also. Therefore we hold that the amount remitted in foreign currency outside India was not subject to service tax during the relevant period. As regards the demand of interest on wrongful availment of CENVAT credit in Appeal No. ST/55729/2013 is concerned we find that the demand of interest in the present case is not sustainable for the reason that the appellant had sufficient balance in its CENVAT credit register during the period from 2007-08 and it cannot be said that the CENVAT credit has been utilized and hence demand of interest is not sustainable therefore we set aside the demand of interest. We also find that the entire demand has been confirmed by invoking extended period of limitation but the Department has failed to prove that there was suppression on the part of the appellant. Further we find that some of the issues involved in the present case were referred to Larger Bench of the Tribunal in the case of Repco Home Finance Ltd (supra) which clearly shows that the issue involves interpretation of law and it is a settled position of law that extended period cannot be invoked in interpretational cases. Further we also find that the entire demand has been raised on the basis of audit which cannot be done in view of the decisions cited supra. Therefore we hold that in the present case the entire demand is barred by limitation. As regards the question of interest and penalty is concerned we find that when the demand itself is not sustainable the question of interest and penalty does not arise. Thus we set aside the demand on merit as well as on limitation and allow both the appeals of the appellant with consequential relief if any as per law.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in these appeals are:

• Whether service tax is leviable on cheque bouncing charges collected by the appellant from its customers under the category of Banking and Other Financial Services (BOFS).
• Whether foreclosure charges collected by the appellant from customers are liable to service tax under BOFS.
• Whether operating lease rentals received by the appellant for leasing equipment such as laptops and desktops constitute taxable financial leasing services under Section 65(12) of the Finance Act, 1944.
• Whether service tax is payable on import of services under the reverse charge mechanism, specifically regarding equity shares purchased under Global Share Participation Plan (GSPP), legal advisory services, medical treatment of employees, and services received prior to October 2007.
• Whether interest is payable on alleged wrongful availment of CENVAT credit in respect of exempt output services, particularly lending and securitisation services.
• Whether the demands raised by the Department are barred by limitation and whether extended period of limitation can be invoked in this case.
• Whether penalties and interest imposed along with the demands are sustainable when the demands themselves are not sustainable.

2. ISSUE-WISE DETAILED ANALYSIS

Cheque Bouncing Charges and Foreclosure Charges

Legal Framework and Precedents: The issue relates to whether cheque bouncing and foreclosure charges are taxable under BOFS. The Tribunal relied on its own earlier decisions in the appellant's case (Appeal Nos. ST/881/2008 and ST/1915/2010) and the Larger Bench decision in Repco Home Finance Ltd. which held foreclosure charges are compensatory in nature and not consideration for any service. The Supreme Court dismissed the Department's appeal against these decisions.

Court's Interpretation and Reasoning: The Tribunal held that cheque bouncing charges are penal in nature and do not constitute consideration for any service, hence not taxable. Foreclosure charges arise upon repudiation of contract terms and are intended to compensate the injured party, thus not an alternative mode of contract performance and not taxable under BOFS.

Key Evidence and Findings: The Tribunal noted the appellant's prior successful litigations on the same issue and the Supreme Court's dismissal of the Department's appeal, establishing binding precedent.

Application of Law to Facts: Since the charges are penal or compensatory and not consideration for service, service tax demand on these charges cannot be sustained.

Treatment of Competing Arguments: The Department's contention that these charges are taxable was rejected based on binding judicial precedents.

Conclusion: Demand of service tax on cheque bouncing and foreclosure charges is set aside.

Operating Lease Rentals

Legal Framework and Precedents: Financial leasing is defined under Explanation to Section 65(12) of the Finance Act, requiring satisfaction of four cumulative conditions, including recovery of full asset cost plus interest and transfer or option to own the asset at lease end. Operating leases do not meet these conditions and are not taxable under BOFS. The Tribunal also relied on the constitutional provision Article 366(29A)(d) treating transfer of right to use goods as deemed sale, taxable under State VAT and not service tax.

Court's Interpretation and Reasoning: The Tribunal found that the appellant's lease agreements were operating leases, not financial leases, as the lease payments did not cover full asset cost plus interest. Possession and control of leased equipment rested with customers. Hence, these transactions amounted to deemed sales and were not liable to service tax.

Key Evidence and Findings: Lease agreements, payment structure, and prior orders setting aside service tax demands on similar transactions were examined.

Application of Law to Facts: Since the transactions did not fulfill the definition of financial leasing, and were deemed sales under the Constitution, service tax demand on operating lease rentals was unsustainable.

Treatment of Competing Arguments: The Department's demand was rejected in light of legal definitions, prior Tribunal orders, and constitutional provisions.

Conclusion: Demand of service tax on operating lease rentals is dropped.

Import of Services under Reverse Charge

Legal Framework and Precedents: Service tax on import of services is leviable under reverse charge mechanism as per Section 68 of the Finance Act. However, the taxable nature depends on the service category and period. Services received before their taxable period or not classifiable as services under Section 65(105) are not taxable. Also, demands must specify the category of service for validity.

Court's Interpretation and Reasoning: The Tribunal held that equity shares purchased under GSPP are part of employee remuneration and not taxable services. Legal advisory services received before 01.09.2009 were not taxable. Medical treatment reimbursements are not services. Services received prior to October 2007 were beyond limitation period. The SCN and impugned order failed to specify the service categories for the demand, rendering the demand invalid.

Key Evidence and Findings: Invoices and HR policy documents were considered. The limitation period and relevant service tax notifications were examined.

Application of Law to Facts: Since the services were either non-taxable or outside the limitation period and the demand lacked specificity, the service tax demand on import of services was unsustainable.

Treatment of Competing Arguments: The Department's reliance on non-submission of documents and unspecified service categories was rejected due to evidence on record and legal requirements.

Conclusion: Demand of service tax on import of services is set aside.

Interest on Wrongful Availment of CENVAT Credit

Legal Framework and Precedents: Rule 6(2)(iv) of the Service Tax (Determination of Value) Rules, 2006 excludes interest on loans from taxable value. Lending services are taxable, but interest component is exempt. The appellant's CENVAT credit utilization was challenged on the ground of exempt output services.

Court's Interpretation and Reasoning: The Tribunal found that the appellant had sufficient CENVAT credit balance during the relevant period and did not utilize credit wrongfully. Interest on loans was excluded from taxable value, hence no wrongful availment. The demand for interest was therefore not sustainable.

Key Evidence and Findings: CENVAT credit registers and valuation rules were examined.

Application of Law to Facts: Since the appellant complied with valuation and credit rules, the interest demand was set aside.

Treatment of Competing Arguments: The Department's contention of wrongful credit utilization was not supported by evidence.

Conclusion: Demand of interest on wrongful availment of CENVAT credit is set aside.

Extended Period of Limitation

Legal Framework and Precedents: Section 73 of the Finance Act permits extended period of limitation only in cases of willful suppression or fraud. Interpretation issues do not attract extended limitation. Prior decisions including Repco Home Finance Ltd. Larger Bench and other Tribunal rulings establish that extended period cannot be invoked for interpretational disputes.

Court's Interpretation and Reasoning: The Tribunal held that the Department failed to prove any suppression or fraud by the appellant. The demands arose from audit findings and involved interpretation of law. Hence, invocation of extended limitation was not justified.

Key Evidence and Findings: Audit reports, SCNs, and absence of evidence of suppression were noted.

Application of Law to Facts: The demands are barred by limitation and cannot be sustained.

Treatment of Competing Arguments: The Department's reliance on extended limitation was rejected due to lack of evidence.

Conclusion: Demands are barred by limitation and set aside.

Penalties and Interest

Legal Framework and Precedents: Penalties and interest are contingent upon the validity of the underlying demand.

Court's Interpretation and Reasoning: Since the demands themselves were not sustainable, the Tribunal held that interest and penalties cannot be imposed.

Conclusion: Interest and penalties imposed are set aside.

3. SIGNIFICANT HOLDINGS

"The demand of service tax with respect to the amount collected as cheque bouncing and foreclosure charges from the customers is not taxable under the Head 'BOFS' and is not liable to service tax."

"Cheque bouncing charges are penal in nature and do not constitute consideration for any service."

"Foreclosure charges cannot be viewed as alternative mode of performance of the contract because they arise upon repudiation of specified terms of contract and are intended to compensate the injured party i.e. banks and non-banking companies."

"The transaction in the present case does not satisfy the definition of financial leasing under Explanation to Section 65(12) of the Finance Act as the lease payments do not cover the full cost of the asset together with interest charges."

"Transfer of right to use any goods is deemed sale under Article 366(29A)(d) of the Constitution of India and liable to State VAT and not service tax."

"Services such as equity shares purchased by employees as part of remuneration, medical treatment reimbursements, and legal advisory services received prior to their taxable period are not liable to service tax."

"Extended period of limitation cannot be invoked in cases involving interpretation of law and where there is no evidence of willful suppression."

"When the demand itself is not sustainable, the question of interest and penalty does not arise."

Final determinations:

• Service tax demands on cheque bouncing charges and foreclosure charges are set aside.
• Service tax demand on operating lease rentals is dropped as transactions are operating leases and deemed sales.
• Service tax demand on import of services under reverse charge is set aside due to non-taxability or limitation bar.
• Demand of interest on wrongful availment of CENVAT credit is set aside.
• Demands are barred by limitation and extended period cannot be invoked.
• Penalties and interest imposed along with demands are set aside.