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TMI Blog2020 (7) TMI 472X X X X Extracts X X X X X X X X Extracts X X X X ..... e tax would be leviable on such charges but in M/s Magma Fincorp Limited. vs. Commissioner of Service Tax, Kolkata, 2016 (4) TMI 21-CESTAT KOLKATA a Division Bench of the Tribunal at Kolkata held that service tax would not be leviable. 3. It needs to be noted that while dealing with an application filed for waiver of pre-deposit, a Division Bench of the Tribunal at Ahmedabad in Small Industries Dev. Bank of India vs. Commissioner of Service Tax, Ahmedabad, 2015 (38) STR 666 (Tri.-Ahmd.) (II), when confronted with an earlier decision of the Tribunal at Delhi in Small Industries Dev. Bank of India vs. Commissioner, 2011 (23) STR 392 (Tri.-Delhi) (I) and the decision of the Tribunal in Hudco, directed that the matter may be referred to a Larger Bench. 4. When this Appeal came up for hearing before a Division Bench of the Tribunal at Ahmedabad, the Division Bench, after noticing the conflicting decisions of the Tribunal in Hudco and Magma Fincorp, considered it appropriate to refer the issue to a Larger Bench of the Tribunal. This Larger Bench of the Tribunal has, accordingly, been constituted. 5. The Respondent-M/s Repco Home Finance Ltd., the Repco Finance is registered with the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k foreclosure of the loan causing uncertainty to the bank. In fact I find the loan sanction order issued by the banks to the respective clients clearly declares under clause 5 (iii) as follows:- "In case of pre-closure, interest rate will stand revised and charged separately by way of pre-closure penalty" 8.4 Thus, the loan sanctioned order clearly indicates that the pre-closure charges are nothing but interest and hence I hold that no service tax is payable on the same under the category "banking and financial services". In this connection, I find that in an identical issue, the Hon'ble CESTAT, New Delhi, in the case of M/s Small Industries & Development Bank of India vs. CCE, Chandigarh (2011-TIOL-581-CESTAT-DEL) had held that the demand of service tax is not sustainable on the amount received towards fore closure of loans. ............................. 9. In view of the above discussion and also drawing strength from the decision of the Hon'ble CESTAT, New Delhi, I hold that the activity of fore-closure of loan cannot be treated as "banking and financial services" and the amount collected towards fore-closure of loan is not towards rendering of any service. Hence, I set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Explanation to section 67, of the Finance Act, as it existed prior to 14 May, 2015, defined "consideration" to include any amount that is payable for the taxable services provided or to be provided but after 14 May, 2015, the definition also seeks to include any reimbursable expenditure or the amount retained by a lottery distributor within its ambit. 13. The contention of the banks and non banking financial companies is that the foreclosure charges are not towards any "consideration" for a service provided by them but are collected to compensate the banks for the breach of the contract as the borrower seeks to make the payment before the agreed period of time. According to the banks, it is not the desire of the banks that a borrower should cut short the period of loan and make the entire payment, for the business of a bank is to earn income out of the interest that it gets on the amount that is given as loan to a borrower. The banks contend that it is the borrower who unilaterally decides to cut short the period of loan by making the payment before the stipulated time. Thus, the promise to service the loan for an agreed period of time gets repudiated resulting in a breach of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation to "banking and other financial services", which definition includes "lending" after 10 September, 2004. The decision of the Division Bench of the Tribunal at Delhi in Small Industries (I) was distinguished for the reason that the period involved therein was prior to 10 September, 2004, when lending was not included in the definition of "banking and other financial services". 18. This issue was again examined by a Division Bench of the Tribunal at Kolkata in Magma Fincorp Ltd. Apart from observing that the Commissioner had for an earlier dropped the demand in regard to the same issue and the Department had not filed any appeal against the said order, the Tribunal in its decision rendered on 3 February, 2016, held that service tax would not be leviable on prepayment charges when the period of loan is cut short. The Division Bench also relied upon the decision of the Tribunal in Small Industries (I). 19. As noticed above, the issue that has arisen for consideration before this Larger Bench of the Tribunal is whether the foreclosure charges levied by banks and non banking financial companies on premature termination of a loan can be subjected to levy of service tax under "ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t received, that is to say, the difference in the face value of lottery ticket and the price at which the distributor or selling agent gets such ticket. (b) xxxxxxxxxxx (c) xxxxxxxxxxx" (emphasis supplied) 21. It is, thus, clear that where service tax is chargeable on any taxable service with reference to its value, then such value shall be determined in the manner provided for in (i), (ii) or (iii) of sub-section (1) of section 67. What needs to be noted is that each of these refer to "where the provision of service is for a consideration", whether it be in the form of money, or not wholly or partly consisting of money, or where it is not ascertainable. In either of the cases, there has to be a "consideration" for the provision of such service. Explanation to sub-section (1) of section 67 defines "consideration" to include any amount that is payable for the taxable services provided or to be provided, or any reimbursable expenditure, or any amount retained by the lottery distributor or selling agent. It is clear from the aforesaid definition of "consideration" that only an amount that is payable for the taxable service will be considered as "consideration". This apart, what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no nexus whatsoever with the taxable services for which value is sought to be determined." (emphasis supplied) 24. The aforesaid view was reiterated by the Supreme Court in Union of India vs. Intercontinental Consultants and Technocrafts 2018 (10) GSTL 401 (SC) and it was observed: "23. Obviously, this Section refers to service tax, i.e., in respect of those services which are taxable and specifically referred to in various sub-clauses of Section 65. Further, it also specifically mentions that the service tax will be @ 12% of the "value of taxable services‟. Thus, service tax is reference to the value of service. As a necessary corollary, it is the value of the services which are actually rendered, the value whereof is to be ascertained for the purpose of calculating the service tax payable thereupon. 24. In this hue, the expression "such‟ occurring in Section 67 of the Act assumes importance. In other words, valuation of taxable services for charging service tax, the authorities are to find what is the gross amount charged for providing "such‟ taxable services. As a fortiori, any other amount which is calculated not for providing such taxable service cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a deposit by a client to a hotelier, where the client exercises the cancellation option available to him and that sum is retained by the hotelier, can be regarded as consideration for the supply of a reservation service, which is subject to VAT, or as a fixed compensation for cancellation, which is not subject to VAT. The Court found that there has to be a direct link between the service rendered and the consideration received. The same paid must constitute a genuine consideration for an identifiable service supplied in the context of a legal relationship for which performance is reciprocal. It is in this context that Court observed : "26. Since the obligation to make a reservation arises from the contract for accommodation itself and not from the payment of a deposit, there is no direct connection between the service rendered and the consideration received (Apple and Pear Development Council, paragraphs 11 and 12; Tolsma, paragraph 13; and Kennemer Golf, paragraph 39). The fact that the amount of the deposit is applied towards the price of the reserved room, if the client takes up occupancy, confirms that the deposit cannot constitute the consideration for the supply of an inde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly mean that this value would form part of the value of taxable services that are provided. 28. It is also necessary to remind ourselves that the word "include" is generally used in interpretation clauses to enlarge the meaning of the words or phrases occurring in the body of the statue and when it is so used, such words or phrases must be construed to comprehend, not only such things as they signify according to their natural import, but also those things which the interpretation clause declares that they shall include. This is what was stated in Dilworth vs. Commissioner of Stamps 1899 AC 99. 29. Justice G P Singh in "Principles of Statutory Interpretation" (Thirteenth Edition) has also remarked that where a word is defined to "include" such and such, the definition is prima facie not exhaustive and so the natural meaning of the word cannot be narrowed down by the "includes" part. 30. In this connection it would also be pertinent to refer to TRU Circular dated 20 June, 2012 issued by the Central Board of Excise and Customs as an Education Guide when the Negative List based taxation regime was introduced to clarify various aspects of the levy of service tax. The Board dealt wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est that the loan runs the entire agreed tenure for the banks thrive on interest earned from lending activities. As premature termination of a loan results in loss of future interest income, the banks charge an amount for foreclosure of loan to compensate for the loss in interest income. It is the customer who has taken the loan, who moves for foreclosure of the loan by making the payment of the loan amount before the stipulated period and thereby breaching the promise to service the loan for the agreed period of time. This results in a unilateral act of the borrower in repudiating the contract and consequently breach of one of the essential terms of the loan agreement. A breach of contract may give rise to a claim for damages. 33. Breach of contract has been defined in Black's Law Dictionary (Eighth Edition) as follows: "Breach of contract. Violation of a contractual obligation by failing to perform one's own promise, by repudiating it, or by interfering with another party's performance. "A breach may be one by non-performance, or by repudiation, or by both. Every breach gives rise to a claim for damages, and may give rise to other remedies. Even if the injured party sustains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y damages for loss of his bargain. The result of awarding damages on this basis is to compensate the injured party, not because he is worse off than he was before the contract was made, but because the other party has failed to make him better off. The law of contract takes this position in response to the needs of commercial certainty. It is probably going too far to say that business could not be carried on at all if the law did not protect the injured party's expectation interest. Some industries (such as the credit betting industry) are carried on without this, or indeed any other legally recognised, sanction. But in relation to other sphere of commercial activity, such as share and commodity markets and the insurance industry (to take a few random examples) the protection of expectations is of crucial importance. In these cases, that protection promotes stability and furthers one of the central purposes of the law of contract in providing the legal framework required for commercial relations." (emphasis supplied) 35. The "expectation interest" is a popular measure for damages arising out of breach of contract. The foreclosure charges, therefore, are not a consideration fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ian Contract and Specific Relief Acts" (Fourteenth Edition) and the relevant portion is reproduced below : "Liquidated Damages 'Liquidated damages' means that is shall be taken as the sum which the parties have by the contract assessed as damages to be paid whatever may be the actual damage. A fixed figure of damages, which is not assessed for all circumstances, but is graduated to correspond with passage of time between the making of contract and of its breach, is a proper estimate of the damages to be anticipated from the breach, and is liquidated damages." 39. It would thus be seen that clauses relating to damages for foreclosure of loan are usually incorporated in contracts as an agreed measure of damages which can be enforced in the event there is a breach of contract with a view to bring about certainty in contracts. These clauses do not and cannot give rise to any "consideration". These clauses also come into effect only after the contract comes to end. 40. Section 74 of the Contract Act which deals with compensation for breach of contract where penalty is stipulated also needs to be referred to. It is reproduced below; "Section 74. Compensation for breach of contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r like charges are subjected to service tax because they are essential for the activity of lending and are treated as activities "in relation to lending". Foreclosure is anti thesis to lending and, therefore, cannot be construed to be "in relation to lending". The phrase "in relation to lending" cannot be so stretched so as to bring within its ambit even activities which terminate the activity. In Standard Chartered Bank vs. Commissioner of Service Tax, Mumbai-I 2015 (40) S.T.R. 104 (Tri.-LB), it was emphasised that this phrase should not be given a very wide meaning. 45. These foreclosure charges should not 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 banks and non banking financial companies. This is because 'alternative mode of performance' still contemplates performance, whereas foreclosure is an express repudiation of the contractual terms giving rise to the levy of foreclosure charges. 46. Thus, merely because the clause relating to damage is featuring in a contract, it would be incorrect to conclude that the party has been given an option to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uarantee, overdraft facility, bill discounting facility, safe deposit locker, safe vaults; operation of bank accounts; 49. The Bench observed that when pre payment is proposed, the borrower is expected to make a request which has to be considered by the banks, charges have to be worked out and informed. Thus there is an element of service involved in considering the request of the borrower for pre payment of loan, fixing of pre payment charges collection of the same and closure of their loan. The relevant portion of the order is reproduced below: "10. Admittedly, the prepayment charges vary from 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 up to the date of payment, that amount is shown separately as interst 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 process is over, when prepayment is proposed, borrower is expected to make a request which ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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