TMI Blog2019 (8) TMI 1031X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant, nor can it be the damages as claimed by them. We are not in position to agree with submissions of the appellant that these charges are in nature damages recovered from the customers. Since it was an option extended at the time of entering into the contract/ loan agreement, the same cannot also be termed as liquidated damages for non performance of the conditions specified in the contract. The contract specifies a charge levied for exercising the option the said charge cannot be penalty or liquidated damage to compensate the loss. Time limitation - HELD THAT:- Appellants have not shown any bonafide reason to show that they entertained such a belief. Further if they claim the issue was clarified by CBEC only in 2011, then what made them pay the service tax in the year 2006. The arguments advanced by the appellants do not establish the existence of such a bonafide belief - the demand of Service Tax made by invoking the extended period of limitation is upheld. Demand of interest - HELD THAT:- Also the demand made in respect of the interest at appropriate rate under Section 75 is upheld. Penalty - HELD THAT:- When the invocation of extended period of limitation in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 76, 77 and 78 of Finance Act, 1994. By order at S. No 2, adjudicating authority has confirmed the demand made by Show Cause Notice dated 16.10.2009, to extent of ₹ 48.71 lakhs made by Show Cause Notice dated 26.09.2010. While dropping the demand of ₹ 2.9 Crores made by the Show Cause Notice dated 26.09.2010 and ₹ 3.91 Crores made under Show Cause Notice dated 09.08.2011, Commissioner has taken note of the amounts paid by the appellant against the demand made. He has dropped the penalties under all the three Show Cause Notices. Revenue has filed the appeal at S No 3 against the order of Commissioner dropping the penalties proposed. By order at S No 4, adjudicating authority has confirmed the entire demand made by the Show Cause Notice dated 26.11.2012 along with Interest. No penalties proposed in the demand notice. 2.1 Appellants (M/s LIC Housing Finance Limited) are providing housing finance to individuals. After following the due procedure Housing Loan is sanctioned to the individual and agreement entered into with the borrower laying down the terms and conditions for grant of loan. The loan advanced is to be servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2000 Taxability under Service Tax will depend on the purpose of recovering the charges. As prepayment charges are not collected for the purpose of lending services the same are not taxable. Inclusion of prepayment clause in the loan agreement does not imply that such charges have to treated as a value of taxable service. No relationship between the prepayment charges and rendering of lending services has been established in the impugned orders therefore the same needs to be set aside. Recovery of prepayment charges cannot be equated with recovery of processing charges. Demand confirmed on such basis cannot survive. Prepayment charges are not recovered for performing any specific activities relating to closure of the loan, but are recovered for breach of the terms of the agreement and in order to compensate the future loss of interest and therefore cannot be treated as value of taxable service. Issue has been decided by the tribunal in case of Small Industries Development Bank of India [2011 (23) STR 392 (T-Del)] and the ratio laid down by the decision of HUDCO is distinguishable. Commissioner Service T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amounts paid by the appellants under protest, were legally recoverable from them as service tax dues under Banking and Other Financial Services , instead of dropping the demand as not maintainable on the grounds that the provisions of Section 73(1) covered only service tax not levied or paid or short levied or short paid and that the said provisions did not cover situations where the service tax was paid by assessee. Adjudicating authority erred in not imposing penalty under Section 76 of Finance Act, 1994, on the ground that the service tax liability in respect of the said prepayment charges had arisen entirely on the account of Circular Dated 11.06.2008. Thus adjudicating authority concluded that the actions of the appellant were bonafide and honest is not correct as the liability to service tax has not arisen in view of the clarification issued but in terms of express provisions of law. 4.1 We have heard Shri S S Gupta, Chartered Accountant for the Appellants and Shri M K Sarangi, Additional Commissioner, Authorized Representative for the revenue. 4.2 Arguing for the appellants, learned Chartered Accountant submitted- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ges are not for performance of service but are in nature of penalty, hence not part of value of taxable service. However has gone ahead to confirm the demand relying on CBEC circular of 11.06.2008. In complaint filed by Neeraj Malhotra against levy of prepayment charges, Competition Commission of India has held as follows: 20.7 It is, therefore, clear that in regard to this issue the provisions of the Contract Act are attracted which clearly provide that in case of breach of a contract, the party which wants to exit has to pay for consequential loss/damage to the other party. Indeed, if this were not the case, wherever in any competitive market the price of a product comes down all the long-term contract buyers would like to break the contract, and if the product prices went up all the suppliers/sellers would like to exit. This kind of situation could create huge uncertainties in any product market, with inevitable negative macro-economic impact. The prepayment charges, charged by them from borrower are in nature of liquidated damages to recover the loss suffered by them, for the reason that this amount could not have been le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utes was referred to larger bench in case of Small Industrial Development Bank of India [2015 (38) STR 666 (T)] hence the demand upto 31.03.2007 is time barred as the Show Cause Notice demanding Service Tax was issued on 16.10.2008. [Continental Foundation Jt Venture [2017 (216) ELT 177 (SC)] Since tax with was paid as detailed in table below and should have been appropriated towards the demand of service tax. Appeal No Period Amount Paid Intimation Details ST/347/2012 10.09.04 to 31.03.08 5,75,19,824 Letter dated 11.05.12 ST/87781/2013 01.04.08 to 04.06.09 3,24,29,768 Letter dated 21.11.12 05.06.09 to 31.03.11 2,90,29,012 Paid on Monthly basis under protest ST/87431/2012 2011-12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd further it is not in nature of penalty. As per finding of Commission prepayment can be both in case falling interest rate and rising interest rate, hence pre paid amount can be deployed by banks at higher yield to new investors. Circular relied by appellant w r t payments, if applied to present situation, there should be refund on interest by Banks to customers, and similar view has been taken by tribunal in HUDCO case, as there has been pre payment. In facts as per business practice followed normally, if any utility bill is settled before the due date, the consumer is offered discount on total amount. Appellants have failed to intimate Deptt, and file ST- 3 return disclosing the said transaction and did not pay S Tax, extended period has been invoked and penalty has been imposed. On limitation non-payment of Service Tax was found during audit. The relevant question is whether the appellant have truly disclosed the taxable activity and revenue had knowledge of the affairs of the company before the audit. {Reliant advertising [2013 (31) STR 166 (T-Del)], Vodafone Digilink [2011 (24) STR 562 (TDel)], BSNL [2011-TIOL-552-CESTAT-MUM], Rennaissance L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded is optional, and the customer has option to exercise the same subject to terms and conditions. It is thus quite evident the facility of prepayment, has been extended at the time of entering into the loan agreement and agreement itself allows against payment of certain levy charges . The levy charges are for exercising the option which has been extended by the appellant. These charges are not towards any default on the behalf of customer. 5.4 Such options are not something new. Financial Instruments such as the loan agreement often extend such options against a price. As per http://www.economywatch.com/options-andfutures/ financial-options. html, Financial options are those derivatives contracts in which the underlying assets are financial instruments such as stocks, bonds or an interest rate. The options on financial instruments provide a buyer with the right to either buy or sell the underlying financial instruments at a specified price on a specified future date. Although the buyer gets the rights to buy or sell the underlying options, there is no obligation to exercise this option. However, the seller of the contract is under an obligatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not in the least degree invalidate the stipulation. The question remains, had the respondents no interest to protect by that clause, or was that interest palpably incommensurate with the sums agreed on? It seems to me that to put this question, in the present instance, is to answer it. 21. Dunlop arose out of a contract for the supply of tyres, covers and tubes by a manufacturer to a garage. The contract contained a number of terms designed to protect the manufacturer s brand, including prohibitions on tampering with the marks, restrictions on the unauthorised export or exhibition of the goods, and on resales to unapproved persons. There was also a resale price maintenance clause, which would now be unlawful but was a legitimate restriction of competition according to the notions prevailing in 1914. It was this clause which the purchaser had broken. The contract provided for the payment of 5 for every tyre, cover or tube sold in breach of any provision of the agreement. Once again, the provision was held to be a valid liquidated damages clause. In his speech, Lord Dunedin formulated four tests which, if applicable to the case under consideration, may prove help ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y consideration. For present purposes, the most instructive is that of Lord Atkinson, who approached the matter on an altogether broader basis. 23. Lord Atkinson pointed (pp 90-91) to the critical importance to Dunlop of the protection of their brand, reputation and goodwill, and their authorised distribution network. Against this background, he observed (pp 91- 92): It has been urged that as the sum of 5 becomes payable on the sale of even one tube at a shilling less than the listed price, and as it was impossible that the appellant company should lose that sum on such a transaction, the sum fixed must be a penalty. In the sense of direct and immediate loss the appellants lose nothing by such a sale. It is the agent or dealer who loses by selling at a price less than that at which he buys, but the appellants have to look at their trade in globo, and to prevent the setting up, in reference to all their goods anywhere and everywhere, a system of injurious undercutting. The object of the appellants in making this agreement, if the substance and reality of the thing and the real nature of the transaction be looked at, would appear to be a single o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e with that interest even if it was incommensurate with the loss occasioned by the wrongful sale of a single item. 24. Although the other members of the Appellate Committee did not express themselves in the same terms as Lord Atkinson, their approach was entirely consistent with his. Lord Parker at p 97 said that whether the sum agreed to be paid on the breach is really a penalty must depend on the circumstances of each particular case , and at p 99, echoing Lord Atkinson s fuller treatment of the point, as just set out, he described the damage which would result from any breach as consist[ing] in the disturbance or derangement of the system of distribution by means of which [Dunlop s] goods reach the ultimate consumer . In their speeches, Lord Dunedin (p 87), Lord Parker (p 98) and Lord Parmoor (p 103) ultimately were content to rest their decision that the 5 was not a penalty on the ground that an exact pre-estimate of loss was impossible, whereas, in the passages quoted above, Lord Atkinson analysed why that was so. It seems clear that the actual result of the case was strongly influenced by Lord Atkinson s reasoning. The clause was upheld although, on the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y from breach. 27. Colman J s approach was approved by Mance LJ, delivering the leading judgment in the Court of Appeal in Cine Bes Filmcilik ve Yapimcilik v United International Pictures [2004] 1 CLC 401, para 13. A similar view was taken by Arden LJ in Murray v Leisureplay plc [2005] IRLR 946, para 54, where she posed the question Has the party who seeks to establish that the clause is a penalty shown that the amount payable under the clause was imposed in terrorem, or that it does not constitute a genuine pre-estimate of loss for the purposes of the Dunlop case, and, if he has shown the latter, is there some other reason which justifies the Page 14 discrepancy between [the amount payable under the clause and the amount payable by way of damages in common law]? (emphasis added). She considered that the clause in question had advantages for both sides, and pointed out that no evidence had been adduced to show that the clause lacked commercial justification: see paras 70-76. But Buxton LJ put the matter on a wider basis for which Clarke LJ (para 105) expressed a preference. He referred to the speech of Lord Atkinson in Dunlop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we have misgivings about some aspects of their reasoning, these aspects are peripheral to the essential point which Colman J and Buxton LJ were making, and we consider that their emphasis on justification provides a valuable insight into the real basis of the penalty rule. It is the same insight as that of Lord Robertson in Clydebank and Lord Atkinson in Dunlop. A damages clause may properly be justified by some other consideration than the desire to recover compensation for a breach. This must depend on whether the innocent party has a legitimate interest in performance extending beyond the prospect of pecuniary compensation flowing directly from the breach in question. 30. More generally, the attitude of the courts, reflecting that of the Court of Chancery, is that specific performance of contractual obligations should ordinarily be refused where damages would be an adequate remedy. This is because the minimum condition for an order of specific performance is that the innocent party should have a legitimate interest extending beyond pecuniary compensation for the breach. The paradigm case is the purchase of land or certain chattels such as ships, which the law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o different in this respect from a contractual inducement. Neither is it inherently penal or contrary to the policy of the law. The question whether it is enforceable should depend on whether the means by which the contracting party s conduct is to be influenced are unconscionable or (which will usually amount to the same thing) extravagant by reference to some norm. 32. The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation. The innocent party can have no proper interest in simply punishing the defaulter. His interest is in performance or in some appropriate alternative to performance. In the case of a straightforward damages clause, that interest will rarely extend beyond compensation for the breach, and we therefore expect that Lord Dunedin s four tests would usually be perfectly adequate to determine its validity. But compensation is not necessarily the only legitimate interest that the innocent party may have in the performance of the defaulter s primary obligations. This w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date. Hence the return of money cannot be subject to interest charge as claimed by the appellant, nor can it be the damages as claimed by them. 5.8 Appellants have relied on the decision of the Competition Commission of India in case of Neeraj Malhotra. The Competition Commission has itself in para 20.3 and 20.4 observed as follows: 20.3 Once the borrower has made the choice fully, he/she enters into a contractual agreement with the selected bank/HFC. Provisions in regard to PPC, if any, are part of this agreement. This agreement so entered into is entirely voluntary, with full knowledge of all the provisions, and cannot be in any way confused with an agreement entered into without choice due to abuse of dominance by a provider of goods/services attracting the provisions of Section 4 of the Act. 20.4 Coming to the decision to exit mentioned in para (b) above, the borrower is free to exit subject to paying the PPC. Thus the exit is not prohibited, and only has a cost attached to it. The reasons and justification given for this cost have been covered earlier, including being on account of cost incurred due to loss of interest, hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of prepayment levy charges has been provided by the loan agreement/ contract itself. Thus we are not in position to agree with submissions of the appellant that these charges are in nature damages recovered from the customers. Since it was an option extended at the time of entering into the contract/ loan agreement, the same cannot also be termed as liquidated damages for non performance of the conditions specified in the contract. The contract specifies a charge levied for exercising the option the said charge cannot be penalty or liquidated damage to compensate the loss. 5.10 In view of discussions as above we do not find any merits in submissions of the Appellant, relying on the Hon ble Apex Court decision in case of Intercontinental Consultants and Technocrats Pvt Ltd [2018 (10) GSTL 401 (SC)]. In this case there is clear nexus between the service provided and the consideration received. Since the option of early exit is part of the loan agreement it is essentially part and parcel of lending activities undertaken by the appellants. In case of HUDCO, Tribunal has held as follows: 8. This definition of Banking and other financial services was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the amounts collected are in the nature of interest, no Service Tax is leviable since there is no Service Tax on the interest, but only on the activity of lending. The appellants have contended that such charges are nothing but interest and are treated 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 interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the customer of loan and hence the same cannot be treated as rendering any services by the financial institution. We agree with the ld. Advocate that it is a case of withdrawing services rendered at the request of customer and the foreclosure premium is a kind of compensation for 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reset charges are not in the nature of interest at all but is in the nature of charge for early closure of loan/resetting of loan and is relatable to lending since it either closes the loan or charges the terms and hence it cannot be equated with interest at all. It has to be noted that in the case of prepayment, interest is collected separately till the date of prepayment. It is also 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- -vis repaying capacity of the bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es provided by the service provider. Since the customers do not get any value addition in the services 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f levy of Service Tax in respect of the Commitment Charges, which lead to delay in payment of taxes. We do not find any merits in the submissions of the Appellant. Appellants have not shown any bonafide reason to show that they entertained such a belief. Further if they claim the issue was clarified by CBEC only in 2011, then what made them pay the service tax in the year 2006. The arguments advanced by the appellants do not establish the existence of such a bonafide belief. In case of HUDCO, the bench rejected the similar grounds raised by the appellant on limitation stating as follows: 20. It was submitted on behalf of the appellant that the appellant is wholly owned Government Company and therefore there cannot be mala fide 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. v. CCE, Nasik 2009 (242) E.L.T. 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 bona fide can be presumed. He also submitted that bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing sufficient care for their interpretation, is correct. In the absence of any evidence to show that the appellant had intimated the Department or had obtained legal opinion, invocation of extended period on the ground of suppression of facts has to be upheld. 21. Therefore, the demand for extended period for Service Tax and interest thereon has to be upheld. 5.13 Thus following the decision as above we uphold the demand of Service Tax made by invoking the extended period of limitation. Also the demand made in respect of the interest at appropriate rate under Section 75 is upheld. 5.14 We also take note of the fact that appellants have in fact paid the entire amount of service tax (including cesses) and intimated to the department. Major portion of the taxes was paid within the stipulated time. The details of demands and payments made are summarized in the table below: SCN Date Period Service Tax including Cess Rs Remark Demanded Confirmed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he have held the invocation of extended period of limitation in terms of proviso to section 73(1), penalty under Section 78 should follow in view of the decision of Hon ble Apex Court in case of Rajasthan Spinning and Weaving Mills [2009 (238) ELT 3 (SC)]. Also for various contraventions of the provisions of Chapter V of Finance Act, 1994, the penalties imposed under Section 76 and 77 too are justified. We also take note of the Section 80 of The Finance Act, 1994 whereby the following has been provided: 80. Notwithstanding anything contained in the provisions of Section 76, Section 77, Section 78 or Section 79 , no penalty shall be imposable on the assessee for any failure referred to in the said provisions, if the assessee proves that there was reasonable cause for the said failure. Taking note of the fact that Appellants have deposited the entire amount of Service Tax and also the decisions in case Adecco Flexione Workforce {2012 (26) STR 3 (Kar)] wherein Hon ble Karnataka High Court held as follows: 3. Unfortunately the assessing authority as well as the appellate authority seem to think. If an assessee does not pay the tax w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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