TMI Blog2020 (7) TMI 472X X X X Extracts X X X X X X X X Extracts X X X X ..... s clear from the definition of consideration that only an amount that is payable for the taxable service will be considered as consideration . This apart, what is important to note is that the term consideration is couched in an inclusive definition. A Larger Bench of the Tribunal in M/S BHAYANA BUILDERS (P) LTD. OTHERS VERSUS CST, DELHI OTHERS. [ 2013 (9) TMI 294 - CESTAT NEW DELHI (LB)] observed that implicit in the legal architecture is the concept that any consideration whether monetary or otherwise, should have flown or should flow from the service recipient to the service provider and should accrue to the benefit of the latter. In the said decision, the Larger Bench made reference to the concept of consideration‟, as was expounded in the decision pertaining to Australian GST Rules, wherein a categorical distinction was made between conditions‟ to a contract and consideration‟. The foreclosure of loan is, therefore, a material breach of contract as it curtails the loan service period unilaterally, which can prompt the promisor to claim damages. Damages can be determined by Courts or they can also be incorporated in the loan agreements a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Hence, to treat eventuality of foreclosure as an optional performance is incorrect. The contract cannot be understood to be providing an option to the parties to either perform or not perform/violate. Foreclosure charges collected by the banks and non banking financial companies on premature termination of loans are not leviable to service tax under banking and other financial services as defined under section 65 (12) of the Finance Act. The appeal may now be listed before the regular Bench for hearing. - Service Tax Appeal No. 511 of 2011-LB With Service Tax Cross Application No. 40320 of 2018 - MISCELLANOUS ORDER NO. 40053/2020 - Dated:- 8-6-2020 - HON BLE MR. JUSTICE DILIP GUPTA, PRESIDENT, HON BLE MS. SULEKHA BEEVI, C.S MEMBER (JUDICIAL) AND HON BLE MR. P. V. SUBBA RAO, MEMBER (TECHNICAL) Sridevi T., Joint Commissioner Present for the Respondent: Shri P Ravindran, Advocate For the Intervener: Shri Raghavan Ramabhadran, Advocate ORDER JUSTICE DILIP GUPTA: 1. Divergent views have been expressed by Division Benches of the Tribunal on the issue as to whether foreclosure charges levied by the banks and non banking financial companies on p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 78 of the Finance Act was issued to Repco Finance. A reply was filed by Repco Finance to the show cause notice. The Joint Commissioner, however, confirmed the demand by Order dated 31 March 2009 but refrained from imposing penalty under section 76 of the Finance Act. 7. Feeling aggrieved by the order passed by the Joint Commissioner, Repco Finance filed an appeal before the Commissioner (Appeals). The Commissioner (Appeals), by order dated 27 May, 2011, allowed the appeal and set aside the order passed by the Joint Commissioner for the reason that the activity of foreclosure of loan cannot be treated as banking and other financial services and the amount collected towards the foreclosure of loan is not for rendering any service . The Commissioner (Appeals) relied upon the decision of the Tribunal in Small Industries (I). The relevant portion of the order passed by the Commissioner (Appeals) is reproduced below: 8.0 ................. The issue to be decided in the instant case is whether service tax is payable on the fore closure charges collected by the appellant from their customers under the category banking and other financial services . 8.1 xxxxxxx 8.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the loan and the period of loan that is cut short by the borrower. 11. In order to determine whether the foreclosure charges on termination of the loan prior to the agreed period can be subjected to service tax under banking and other financial services , it is necessary to refer to the relevant statutory provisions. 12. Section 66 of the Finance Act 1994, the Finance Act seeks to levy service tax at the rate of 12% of the value of taxable services referred to in various sub-clauses of section 65 (105). Taxable service has been defined under section 65 (105) of the Finance Act to mean any service provided or to be provided under the various sub-clauses of section 65 (105). Section 67 of the Finance Act deals with valuation of taxable services for charging service tax. Sub-section (1) of section 67 of the Finance Act provides that where service tax is chargeable on any taxable service with reference to its value, then such value shall, in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him. However, in a case where the provision of service is for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service falling within the ambit of banking and other financial services and would be leviable to service tax. The Revenue contends that the foreclosure charges are levied over and above the interest that is charged from the borrower and do not have the character of interest income and cannot also be termed as penal interest since penal interest is chargeable only in case of default in making the regular payments and not for making payments before the stipulated period. 15. At this stage, it would be appropriate to examine the conflicting decisions rendered by the Division Benches of the Tribunal. 16. In Small Industries (I), a Division Bench of the Tribunal at Delhi held that foreclosure brings an end to the loan and cannot be treated as lending to the customers. Thus, no service can be said to be rendered by the banks. In fact, it results in withdrawing the services rendered, at the request of the customers, and the foreclosure premium is a kind of compensation for possible loss of interest revenue on the loan amount returned by the customer. The Division Bench, therefore, held that the activity of foreclosure of loan cannot be treated as banking and other financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce provided or to be provided by him; (ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money, with the addition of service tax charged, is equivalent to the consideration; (iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner. (2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged. (3) The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service. (4) Subject to the provisions of sub-sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed. Explanation .-For the purposes of this section,- (a) consideration includes (i) any amount that is payable for the taxable services provided or to be provided; (ii) any reimbursable expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said GST Rules that certain conditions‟ contained in the contract cannot be seen in the light of consideration‟ for the contract and merely because the service recipient has to fulfil such conditions would not mean that this value would form part of the value of the taxable services that are provided. 23. The Supreme Court in Commissioner of Service Tax vs. M/s Bhayana Builders 2018 (2) TMI 1325 , while deciding the appeal filed by the Department against the aforesaid decision of the Tribunal, also explained the scope of Section 67 of the Act, both before and after the amendment, in the following words : The amount charged should be for for such service provided : Section 67 clearly indicates that the gross amount charged by the service provider has to be for the service provided. Therefore, it is not any amount charged which can become the basis of value on which service tax becomes payable but the amount charged has to be necessarily a consideration for the service provided which is taxable under the Act. By using the words for such service provided the Act has provided for a nexus between the amount charged and the service provided. Therefore, any amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on paid as quid pro qua for rendering such a service. 25. This position did not change even in the amended Section 67 which was inserted on May 1, 2006. Sub-section (4) of Section 67 empowers the rule making authority to lay down the manner in which value of taxable service is to be determined. However, Section 67(4) is expressly made subject to the provisions of sub-section (1). Mandate of subsection (1) of Section 67 is manifest, as noted above, viz., the service tax is to be paid only on the services actually provided by the service provider. 25. It would also be pertinent to refer to the judgment of the European Court of Justice (First Chamber) in Case C-277/2005, in Societe Thermale d Eugenic-les-Bains vs. Ministere de I Economie, des Finances et de I Industrie. Under Article 2(1) of the Sixth Directive, the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such is subjected to VAT. Article 6(1) of the Sixth Directive provides that Supply of services shall mean any transaction which does not constitute a supply of goods within the meaning of Article 5 and that such transactions may include inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties may make contractual provision applicable in the event of non-performance for compensation or a penalty for delay, for the lodging of security or a deposit. Although such mechanisms are all intended to strengthen the contractual obligations of the parties and although some of their functions are identical, they each have their own particular characteristics. xxxxxxx xxxxxxx xxxxxxx 32. Whereas, in situations where performance of the contract follows its normal course, the deposit is applied towards the price of the services supplied by the hotelier and is therefore subject to VAT, the retention of the deposit at issue in the main proceedings is, by contrast, triggered by the client s exercise of the cancellation option made available to him and serves to compensate the hotelier following the cancellation. Such compensation does not constitute the fee for a service and forms no part of the taxable amount for VAT purposes (see, to that effect, as regards interest applied on account of late payment, Case 222/81 BAZ Bausystem [1982] ECR 2527, paragraphs 8 to 11). 27. What follows from the aforesaid decisions is that consideration must flow from the service recipien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on as given in section 2(d) of the Indian Contract Act, 1872 as follows- xxxxx xxxxx xxxxx In simple terms, consideration means everything received or recoverable in return for a provision of service which includes monetary payment and any consideration of non-monetary nature or deferred consideration as well as recharges between establishments located in a non-taxable territory on one hand and taxable territory on the other hand. (emphasis supplied) 31. It would, therefore, be appropriate to examine the definition of consideration in section 2 (d) of the Contract Act, as the Contract Act deals with all kinds of contracts and pre-dates the Finance Act. The definition of consideration is as follows:- 2 (d) When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise. 32. What needs to be noted from the aforesaid definition of consideration under section 2(d) of the Contract Act is that consideration should flow at the desire of the promisor. Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otects expectation interest . The paragraphs dealing with the aspect are reproduced : Remedies for breach of contract are discussed in Chapter 21; but one fundamental point relating to them must be made at this stage. Such remedies might attempt to do one of two things. First, they might attempt to put the injured party into the position in which he would have been if the contract had never been made. This would require the party in breach to restore anything that he had received under the contract, and also to compensate the injured party for any loss that he had suffered by acting in reliance on the contract. Such remedies are said to protect the injured party s restitution and reliance interest. But remedies for breach of contract go beyond the pursuit of these objectives. Their distinguishing feature is that they seek to put the injured party into the position in which he would have been if the contract had been performed . If, for example a seller agrees to sell goods for less than they are worth, and then fails to deliver them, he must compensate the buyer for not having received goods which are worth more than he had agreed to pay for them. Conversely, if a buyer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he period of loan could expire made an application for foreclosure of the loan. The Corporation, however, demanded premium on the advance payment/ foreclosure amount which demand was challenged in the writ petition. The High Court, after noticing that the contract contained a clause giving discretion to the Corporation to impose premium on the balance amount of loan, observed that granting of loans is a business of the Corporation and if the loan is prepaid, the Corporation may have to suffer loss. It is to overcome this situation that premium is charged. The observations are as follows; 13...............................Therefore, the granting of loans or advances is one of the business of the Corporation. As stated above, the Corporation borrows funds from the financial institution at the prevailing rate of interest. If an account is prepaid/ foreclosure when the interest rates are falling, the Corporation may have to suffer loss. To overcome this situation, if a premium is charged on the outstanding loan being prepaid, the same cannot be found fault with. I am of the considered view that the Corporation has the power and authority to levy prepayment/ foreclosure premium. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - xxxxx 41. Compensation for damages in the eventuality of breach of contract clearly contemplates that the sum of damage is named in the agreement. The section itself would be applicable only in cases where the eventuality of damage and the quantification for damages is specified in the agreement 42. To attract the provisions of section 74 of the Contract Act it is not necessary that the entire contract should come to an end; the breach of each term thereof can be visualised in advance and taken care of by providing an adequate clause for liquidated damages so that the parties to the contract can proceed to work out the contract in future and settle the question of damages that have accrued on the basis of the rate that has been put as a pre-estimate at the commencement of the contract. This was so held by the Bombay High Court in Indian Drugs and Pharmaceuticals Ltd. vs. Industrial Oxygen Co. Ltd. AIR 1985 Bom 186 43. A penalty is a sum of money so stipulated in terrorem, and liquidated damages are a genuine pre-estimate of damages. So far as the law in India is concerned there is no qualitative difference in the nature of liquidated and unliquidated damages, as sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce Act means any service provided or to be provided to any person, by a banking company or the financial institution including non banking financial companies, or any other body corporate, in relation to banking and other financial companies . The definition of banking and other financial services , as it existed prior to 10 September, 2004, is as follows: banking and other financial service means- (a) The following services provided by a banking company or a financial institution including a non banking financial company or any other body corporate, 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 merges and acquisitions and advice on corporate restructuring and strategy; and (vii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ource for deployment of such funds. Prepayment charges are the charges leviable by a bank/lender to offset the cost of such finding such alternative source for deployment of fund and also intended to make exit difficult for the borrower. This shows that prepayment charges can never be considered to be the nature of interest. 50. The decision rendered in Small Industries (I) was distinguished for the reason that it dealt with a period prior to 10 September, 2004. 51. It is not possible to accept the reasoning given by the Bench in Hudco in view of the discussions made above. The amount of damages is clearly stipulated in the contracts and no element of service is sought to have been rendered by the banks to borrowers. In fact, as noticed above, the contract has been broken by the borrowers for which the banks are entitled to claim damages. The foreclosure charges are nothing but damages which the banks are entitled to receive when the contract is broken. The amendment made in section 65 (12) of the Finance Act in the definition of banking and other financial services by addition of lending is not relevant at all for the purpose of determining whether service tax can be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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