TMI Blog2023 (5) TMI 302X X X X Extracts X X X X X X X X Extracts X X X X ..... e customer - HELD THAT:- The collection of penal charges arises on account of a separate cause of action which is independent of lending services rendered by the appellant. Here, decision in the case of M/S. ROHAN MOTORS LIMITED VERSUS COMMISSIONER OF CENTRAL EXCISE, DEHRADUN [ 2020 (12) TMI 1014 - CESTAT NEW DELHI] referred, wherein it has been held by the Tribunal that the demand of service tax on the amount collected on account of bouncing of cheques is not sustainable as such amount is penal in nature and is not towards consideration for any service. In the following cases, the Tribunal has held that the amounts collected as penalty/penal charges penal charges are not chargeable to service tax as the same are not consideration under the finance Act, NORTHERN COALFIELDS LTD. VERSUS COMMISSIONER CGST, CE CUSTOMS - JABALPUR [ 2023 (1) TMI 934 - CESTAT NEW DELHI] and M/S MAGMA FINCORP LTD VERSUS COMMISSIONER OF SERVICE TAX, KOLKATA, COMMISSIONER OF SERVICE TAX VERSUS M/S. MAGMA SHARCHI FINANCE LTD [ 2015 (6) TMI 442 - CESTAT KOLKATA] - thus the demand of service tax on penal charges is not sustainable in law and is set aside. Demand of service tax on insurance admini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e identical, hence, both the appeals are taken together for the purpose of discussion and disposal. The details of show cause notices, period involved and the amount in each of the appeals is given herein below:- Appeal no. ST/881/2008 ST/1915/2010 Period of dispute 01.07.2003 to 31.03.2007 01.04.2007 to 30.09.2008 OIO 38/2008 dt. 22.05.2008 07/2010 dt. 12.04.2010 SCN 17/2008 dt. 06.02.2008 (i) 272/2008 Dated 10.10.2008 (ii) 525/2009 Dated 19.10.2009 Tax involved Rs. 12,90,10,10,648/- Rs. 6,50,63,533/- Penalty Rs. 20,00,00,000/- under section 78 of the Finance Act, 1994 Rs. 200/- per day during which the failure to pay tax continues or 2% of tax, whoever is higher under Section 76 of the Finance Act, 1994. 2. Briefly the facts of the present case are that the appellant is a non-banking financial services company and is e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firmed the demand of service tax on foreclosure charges under banking and financial services by misinterpreting or by wrongly interpreting the taxable services of banking and other financial services (BOFS) as provided under Section 65(12). He further submitted that the adjudicating authority has wrongly held that foreclosure of loan is the last leg of the lending activity. Ld. Counsel further submits that foreclosure charges are collected by the appellant from their customers who desire to terminate a loan agreement prior to pre-agreed period of loan and these charges are independent of lending services and are not collected for providing the service of lending but in fact for premature termination of the same. He also submitted that these charges are collected by virtue of the separate clause in the contract which is triggered only in specified circumstances, i.e. repayment of loan amount before the maturity of the loan in order to compensate for the loss of interest to the appellant. Therefore, foreclosure charges are recovered as compensation for disruption of service and not towards lending services . He further submitted that foreclosure charges cannot be said to be part o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lending service. In support of his submissions he placed reliance on the decision in the case of Karur Vysya Bank Limited Vs. Commissioner of Central Excise -2018 (8) TMI 702 (Tri.-472) wherein it has been held that the charges collected towards dormant account are in the nature of penalty and are not towards any services being provided to the customer. He also relied upon the following cases :- (i) Rohan Motors Limited Vs. Commissioner of Central Excise 2020 (12) TMI 1014 (Tri.-Del.) (ii) Northern Coalfields Ltd. Vs. Commissioner CGST, CE, 2023 (1) TMI 934 (Tri.-Del.) (iii) Commissioner of Service Tax Vs. Magma Sharchi Finance Ltd. 2015 (6) TMI 442 (Tri.- Cal.). With regard to third issue of service tax charge on insurance administration fees under the category of business auxiliary service. Ld. Counsel submitted that for a transaction to be covered under the taxable category BAS, the service rendered must be auxiliary to some business activity of the client. He cited the decision of the Tribunal in the case of Sukhmani Society for Citizen Services Vs. CCE ST, Chandigarh 2017 (47) STR 172 (Tri.- Chan.) wherein it has been held that business auxiliary service w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to set aside. 7. On the other hand, before making his submissions on merit the Ld. DR for the Revenue raised a preliminary objection that on the issue of service tax liability on foreclosure charges of loans, the larger bench of Tribunal at Ahmadabad disposed off of the reference vide final order dated 26.04.2018 by observing that the reference could not be decided without the final decision of the jurisdictional High Court and the appellant in that case was given the liberty to approach the Tribunal again after the decision of the High Court. Ld. DR further submitted that Hon ble Madras High Court vide its order dated 28.02.2019 while remanding the matter to the Tribunal directed to await the decision of the High Court at Ahmadabad in the case of Housing and Urban Development Corporation. He further submits that on the issue of service tax liability on foreclosure charges, larger bench in the case of CST, Chennai Vs. Repco Home Finance Ltd. -2020 (42) GSTL 104 vide miscellaneous final order no. 40053/2020 dated 08.06.2020 decided the issue of foreclosure charges in favour of the assessee. He further submits that the decision of the larger bench at Chennai in the case of Rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Ld. DR submits that penal charges are received by the appellants towards the following:- (i) Late payment of EMI for loans taken. (ii) Late payment of minimum due in the case of credit card. (iii) Bounce charges in the case of bounced cheques from the customers. 12. Ld. DR further referred to the various clauses in the loan agreement entered into between the appellant and their borrowers and then submitted that it is evident from the agreement that this activity of delayed payment of EMI, bouncing of cheques etc. is a part of the process of repayment of loans and are clearly relatable to the lending activity and is covered as part of the banking and other financial services as provided in the definition. As per the Ld. DR these charges are chargeable to service tax under the category of BOFS. 13. As regards the issue of insurance administration fees, he submits that service tax has been demanded from the appellant on the insurance administration fee received by them in respect of extending benefit to its customers of insurance policy issued by the insurance company against the risk of repayment of the loan amount and therefore the said income is includable in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncern, namely:- (i) Financial leasing services including equipment leasing and hire purchase; (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 acquisitions and advice on corporate restricting and strategy; and (vii) Provision and transfer of information and date procession; and (viii) Other financial services, namely, lending, issue of pay order, demand draft, cheque, letter of credit and bill of exchange, providing bank guarantee, overdraft facility, bill discounting facility, safe deposit locker, safe vaults, operation of bank accounts; (b) Foreign exchange broking provided by a foreign exchange broker other than those covered under sub-clause (a); From the above, it can be seen that sub-clause(viii) and clause (b) marked bold were added in the 2004 Budg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... including investment and portfolio research and advice, advice on merges and acquisitions and advice on corporate restructuring and strategy; and (vii) provision and transfer of information and data processing; (b) foreign exchange broking provided by a foreign exchange broker other than those covered under sub-clause (a); 48. Section 65(12) was substituted with effect from 10 September, 2004 by adding two clauses which are as follows : (viii) banker to an issue services; and (ix) other financial services, namely, lending; issue of pay order, demand draft, cheque, letter of credit and bill of exchange; transfer of money including telegraphic transfer, mail transfer and electronic transfer; providing bank guarantee, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 levied on foreclosure charges. 52. The submission of the Learned Authorised Representative of the Department that premature closure is a facility available to a borrower at a price in the same manner as a facility for availing a loan for a price and, therefore, the activity would fall within the ambit of banking and other financial services cannot, therefore, be accepted. 53. Thus, for all the reason stated above, it is not possible to subscribe to the view taken by the Bench of the Tribunal in Hudco. Service tax cannot be levied on the foreclosure charges levied by the banks and non-banking financial companies on premature termination of loans under banking and other financial services as defined under Section 65(12) of the Finance Act. 54. The reference is, accordingly, answered in the following terms; 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 defi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted or promoted by the client, in whatever form or by whatever name called, whether or not conducted online, including lottery, lotto bingo;] (iii) Any customer care service provided on behalf of the client; or (iv) Procurement of goods or services, which are inputs for the client; or [explanation- for the removal of doubts, it is hereby declared that for the purposes of this sub-clause, inputs means all goods or services intended for use by the client;] (v) Production or processing of goods for, or on behalf of, the client;] (vi) Provision of service on behalf of the client; or (vii) A service incidental or auxiliary to any activity specified in sub-clause (i) (vi), such as billing, issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customer or vendor, public relation services, management of supervision, And includes services as a commission agent, but does not include any activity that amounts to manufacture within the meaning of clause (f) of section 2 of the central Excise Act, 1944 (1 of 1944). After considering the definition of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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