2025 (6) TMI 359 - AT - Service Tax

Levy of service tax - banking and financial services - appellant is collecting various fee in the form of processing fee sale of passbook consultancy fee admission fee documentation fee risk fund fee etc. from the borrowers - HELD THAT - It is seen that in order to qualify as a banking company or financial services company the entity has to be recognized by Reserve Bank of India and proper license has to be obtained from RBI. In the present case the Department has not brought in any evidence to the effect that the appellant was issued such license by Reserve Bank of India. Prior to 30.06.2012 the Service Tax demand has to be quantified on a particular specific head. In the present case the demand has been made under the specific heading of Service Tax payable under Banking and Financial services . The appellant does not fall under the category of banking or financial institution at all during the period 2008 to 30.06.2012. Therefore on this ground itself the demand for the period 2008-09 to 30.06.2012 does not survive. Accordingly we set aside the demand for this period on merits. From the definition of Interest it can be seen that the Service Tax exemption is granted only for interest as specified above. Other service fee and other charges in respect of monies borrowed or debt incurred are not termed as interest . Therefore we do not subscribe to the view of the appellant that admission fee and other charges which are being levied on the borrower will fall under the category of interest after 1.7.2012. Accordingly we hold that the demand for the period 1.7.2012 to 31.3.2013 is required to be affirmed. It is found that the entire demand for 2012-13 is within the normal period. Therefore it cannot be considered that the appellant s submissions on account of time bar. Conclusion - The appellant is required to pay the service tax for the period 1.7.2012 to 31.3.2013. Interest is also required to be paid by the appellant in terms of Section 75 of the Finance Act 1994. Considering the fact that the entire issue is that of interpretation and the bulk of demand has been set aside on merits for the period 2008-09 to 2012 we hold that no case of suppression has been made out against the appellant. Accordingly the entire penalties imposed on the appellant set aside. Appeal allowed in part.

Summary

The core legal questions considered by the Tribunal include: (1) Whether the appellant qualifies as a "banking company" or "financial institution" under the relevant definitions in the Reserve Bank of India Act, 1934, thereby attracting Service Tax under the category of banking and financial services for the period 2008-09 to 2012-13; (2) Whether the fees charged by the appellant, such as processing fee, consultancy fee, admission fee, documentation fee, and risk fund fee, constitute taxable services under the Service Tax regime; (3) Whether the appellant's non-profit status exempts it from Service Tax liability; (4) The applicability of Service Tax on interest and other charges post 1.7.2012 under the amended Service Tax provisions; and (5) The question of limitation and penalty imposed on the appellant for non-payment of Service Tax.

Regarding the first issue, the Tribunal examined the statutory definitions under Section 65(11) and Section 65(45) of the Finance Act, which incorporate meanings assigned in Sections 45A and 45-I of the Reserve Bank of India Act, 1934. The Court noted that to qualify as a banking company or financial institution, an entity must be recognized and licensed by the Reserve Bank of India (RBI). The Department failed to produce evidence that the appellant held any such license or recognition. Consequently, for the period prior to 30.06.2012, when Service Tax demands had to be linked to specific service categories, the appellant did not fall within the ambit of banking or financial services. The Tribunal thus set aside the demand for this period on merits, emphasizing the necessity of RBI recognition to attract such Service Tax liability.

On the second and third issues, the appellant contended that as a non-profit women's welfare society, the fees collected were used solely for running the society and any surplus was reinvested, negating a commercial or profit-making character. However, the Tribunal focused on the nature of the services rendered rather than the profit motive. The Department's verification of records established that the appellant charged various fees related to loan facilitation. Post 1.7.2012, the Service Tax regime shifted to a broader levy under Section 66B, where any consideration received for the provision of any service is taxable unless specifically exempted under the Negative List or notifications. The non-profit status did not exempt the appellant from tax liability on these fees, as the fees constituted consideration for service.

The fourth issue involved the interpretation of the definition of "interest" under Section 66B(30) of the Finance Act. The appellant argued that all charges, including admission and other fees, should be exempt as "interest." The Tribunal clarified that the exemption applies strictly to "interest payable in respect of moneys borrowed or debt incurred," excluding any service fee or other charges associated with the loan or credit facility. Therefore, fees like admission fee and consultancy fee do not qualify as interest and remain taxable. The Tribunal affirmed the Service Tax demand for the period 1.7.2012 to 31.3.2013 accordingly.

Regarding limitation and penalty, the Tribunal observed that the demand for the later period was within the normal limitation period, thus rejecting the appellant's plea for setting aside the demand on time-bar grounds. However, considering the substantial portion of the demand (2008-09 to 30.06.2012) was set aside on merits, and the issue primarily involved interpretation rather than deliberate evasion, the Tribunal found no case of suppression or fraud. Consequently, it set aside the penalties imposed on the appellant while confirming the interest liability under Section 75 of the Finance Act, 1994.

In conclusion, the Tribunal held that the appellant was not liable to pay Service Tax on the fees collected for the period 2008-09 to 30.06.2012 due to the absence of RBI recognition as a banking or financial institution. For the period post 1.7.2012, the appellant was liable to pay Service Tax on all fees charged except interest, which is exempt. The penalties were quashed due to lack of suppression, though interest was upheld. The appeal was allowed partly on these terms.

Significant holdings include the Tribunal's interpretation that "banking company" and "financial institution" status under Service Tax law is strictly tied to RBI recognition and licensing, and absent such recognition, Service Tax demands under banking and financial services cannot be sustained. The Tribunal emphasized the distinction between "interest" and other service charges, clarifying that only the former is exempt post 1.7.2012. The ruling also established that non-profit status does not per se exempt an entity from Service Tax liability if it provides taxable services for consideration. Finally, the Tribunal underscored the necessity of evidence for suppression before imposing penalties, setting aside penalties where the issue was one of interpretation rather than concealment.