TMI Blog2011 (11) TMI 95X X X X Extracts X X X X X X X X Extracts X X X X ..... lending and is covered by Service Tax definition. - Levy of service tax upheld - Decided against the assessee. Extended period of limitation - held that:- plea of bonafide has to be considered in the light of decision of the Tribunal in the case of SPIE CAPAG S.A. Vs CCE Mumbai (2009 -TMI - 75146 - CESTAT, MUMBAI), is appropriate. In that case, while dealing with the plea of bonafide belief, the Tribunal observed that "the least that was expected of the appellant to discharge the plea of bonafide belief was to make enquiries from Central Excise authorities or some reputed legal firm regarding dutiability of items manufactured by it." - demand for extended period for Service Tax and interest thereon has to be upheld. - However penalty set aside. - ST/303/2009 - A/2057/WZB/AHD/2011 - Dated:- 25-11-2011 - Shri M.V. Ravindran, Shri B.S.V. Murthy, JJ Represented by: Shri Jigar Shah, Advocate For Appellant Shri S K Mall, AR For Respondent Per: B S V Murthy: The appellant is registered with the Department under the category of 'Banking and other financial services' and paying Service Tax on the services provided. The assessee is involved in the business of providin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the decision of European Court of Justice in the case of Societe thermale d'Eugenie-les-Bains Vs Ministere de I'Economie, des Finances et de I'Industrie. In that case, it was held that when the client exercises cancellation option available to him in respect of hotel services and cancellation charges are retained by hotelier, it cannot be considered as having any direct connection with the supply of any service for consideration and therefore not liable to value added tax. In the case of B.A.Z. Bausystem AG Vs. Finanzamt Munchen Fur Korperschaften [1982] 3 C.M.L.R. 688, it was revealed that where interest/damages plus interest are awarded for breach of contract, interest cannot be included in the taxable amount. In the Master Circular No.96/7/2007-ST, dt.23.8.07, it was clarified that the Service Tax is not liable on account of collection of surcharge for delayed payment of telephone bill. This was submitted to support the view that only those charges which have direct nexus/connection with the provisions of services are to be charged Service Tax. The appellant also relied upon the Circular of the Board No.121/3/2010-ST, dt.26.4.10, to submit that the clarification given that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the definition of 'Banking and other financial services' as it existed prior to 10.09.04 and after 10.09.04. The definition as it existed prior to 10.09.04 was reproduced in the order of the Tribunal in the case of SIDBI and the same is reproduced as under: "banking and other financial services" means - (a) the following services provided by a banking company or a financial institution including a non-banking financial company, namely :- (i) financial leasing services including equipment leasing and hire purchase by a body corporate; (ii) credit card services; (iii) merchant banking services; (iv) securities and foreign exchange (forex) broking; (v) asset management including portfolio management, all forms of fund management, pension fund management, custodial depository and trust services, but does not include cash management; (vi) advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisition and advice on corporate restructuring and strategy; and (vii) provision and transfer of information and data processing: 8. This definition of 'Banking and other financial services' was amended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as interest. The question to our mind is not whether how the appellants are treating it or income tax department is treating it, but the question is whether the activity of collecting prepayment charges and reset charges in respect of a borrower can be called as service in relation to lending. When a borrower opts for prepayment of loan, as submitted by the appellants themselves, the tenure of the loan, reason for the prepayment, track record of the borrower in servicing loan, the interest rate existing at the time of lending and at the time of closure, and the loss to the lender because of prepayment are taken into account. Admittedly, the prepayment charges vary from borrower to borrower, according to the appellant themselves. Further, it is collected for premature closure of the loan and it is not the interest factor that is taken into account. It has to be noted that when a borrower makes a prepayment and therefore pays interest separately upto the date of payment, that amount is shown separately as interest and prepayment charges are not collected as interest, but collected as prepayment charges. Further, even though the borrower has already borrowed the money and the proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... possible loss of expected revenue, on the loan amount returned by the customer. The most important aspect to be taken note of is the fact that during the relevant time, the services provided in relation to lending were not taxable. Therefore, the Tribunal had no occasion to consider whether the service was in relation to lending. The appellants contended that the Tribunal had considered the issue and come to the conclusion that the activity of foreclosure is amounting to withdrawal of the service and not providing any service at all and therefore, the decision of the Tribunal in the case of SIDBI would be still applicable even though the definition was different. At this stage, we have to take note of the fact that in the case of SIDBI, the Department had not even indicated as to which part of the definition, the activity of foreclosure falls under. The observations of the Tribunal in the order start with this sentence. There was no discussion as to the nature of payment, method adopted, how it is covered under the definition and why it is taxable. When the definition itself did not cover the lending activity itself, the question as to whether the prepayment of loan is a part of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o not necessary that when a loan is prepaid or reset, the lender suffers. In fact, foreclosure by prepayment and reset are relatable to lending and if an application for processing a loan application is chargeable to Service Tax and processing fee charged for foreclosure/prepayment of loan or reset of interest would also be chargeable. In fact, we are unable to see what is the difference between the liability of Service Tax in respect of application of a loan where the processing fee is charged which is independent of loan and over and above the interest, when we see here also it is over and above the interest. The processing fee is charged for considering the various aspects such as credit worthiness of the borrower repaying capacity of the borrower, period of loan vis-a-vis repaying capacity of the borrower, quality of assets of the borrower etc. When the proposal is made for prepayment of loan or resetting, processing the application is involved. Therefore, there is definitely an element of service in prepayment of loan or resetting of interest. As already discussed earlier, the definition covers any activity in relation to lending. 15. Even though, we have not discussed the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s provided by charging reset charges/prepayment charges, Service Tax is not payable. 17.2 Charges collected for restructuring of loans and prepayment of loans is a way of value addition. The very fact that the cost that the customer has to pay for the facilities of prepayment/reset, is named as prepayment "charge" and reset "charge", immediately conveys that the same is in the nature of fee in lieu of some service/facility. The cost of the service for the customers increases or decreases with the increase or decrease of these charges. Thus, the reset charges and prepayment charges can be considered as the cost incurred by the borrower towards value added services like restructuring of the loan and prepayment of loan. Hence, the same charges are liable for Service Tax. 18.1 Reset charges/prepayment charges charged to the customers by the appellant is in the nature of additional interest only and therefore not liable to Service Tax. 18.2 The appellant has contended that the said charges are calculated taking into consideration the rate of interest and loan amount. Thus, they are in the nature of additional interest and not liable to service tax. 18.3 It has already been discu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... restructure his loan. The service comes into being only when the borrower opts for either of them. Thus, the clarification issued by the Board in the case of lease or hire purchase agreements cannot be applied to the issue at hand. 20. It was submitted on behalf of the appellant that the appellant is wholly owned Government Company and therefore there cannot be malafide intention on their part to evade payment of Service Tax. Revenue relied upon the decision of the Tribunal in the case of Bharat Petro Corporation Ltd Vs CCE Nasik 2009 (242) ELT 358 (Tri-Mum), wherein the Tribunal upheld the submission that BPCL is a Government owned company had suppressed the fact and therefore, just because it is wholly owned Govt. company, it cannot be said that bonafide can be presumed. He also submitted that blind belief cannot be a ground for non-payment of taxes. In this case, we find that the appellants have treated the amount of prepayment charges as additional interest and reset charges as additional interest from 2005-2006. It was also submitted that Income Tax Department has accepted such treatment given by them. The fact remains that after definition of lending was amended, and the se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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