TMI Blog2023 (8) TMI 473X X X X Extracts X X X X X X X X Extracts X X X X ..... he period for which such loan is taken. The principal and interest amount on such loan is repaid by customers/borrowers by way of EMI over a period of loan tenure. Accordingly, while computing the EMI, the appellants charges pro-rata interest payable on each due date, on the underlying assumption that the customers/borrowers would not default in payment of the EMI on the due dates. However, in case of any default, the appellants charge them an additional interest in the form of penal interest for the number of days of default - Considering the nature of the principal interest on the loan due over the entire loan tenure, collected in the form of EMI comprising of principal amount plus interest, in our considered opinion this principal interest could be treated as consideration for the usage or retention of money lent by the appellants to their customers/borrowers as per the agreement and EMIs in force. In a case where the borrower is unable to repay a particular EMI on the due date, penal interest is charged on the period of delay or additional time taken for repayment of EMI, beyond the due date. Such penal interest also represents the consideration for usage or retention of mon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Principal Bench of this Tribunal in the case of M/S SOUTH EASTERN COALFIELDS LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX, RAIPUR [ 2020 (12) TMI 912 - CESTAT NEW DELHI] . In this case, the Tribunal had held that the penal clauses are in the nature of providing a safeguard to the commercial interest of the appellant and it cannot, by any stretch of imagination, be said that recovering any sum by invoking the penalty clauses is the reason behind the execution of the contract for an agreed consideration. It is not the intention of the appellant to impose any penalty upon the other party nor is it the intention of the other party to get penalized. Hence, it was held by the Tribunal that it is not possible to sustain the view that penalty amount, forfeiture of earnest money deposit and liquidated damages have been received by the appellant towards consideration for tolerating an act leviable to service tax under section 66E(e) of the Finance Act. The issue of liability of service tax on the declared service of Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act under clause (e) of Section 66E of the Finance Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The loan agreements, inter-alia, provide for repayment of the outstanding dues/Equated Monthly Instalments (EMI) through Cheques/Electronic Clearing System (ECS) or any other electronic or clearing mandate on the due dates stipulated in the agreement. In case of delay in payment of dues by the customers/borrowers, the appellants collect penal interest as an additional interest for the number of days of delay in terms of the agreement executed by the customers/ borrowers. This penal interest is calculated at a fixed percentage on the overdue loan amounts, and it normally varies from customer to customer, and generally ranges between 2% to 4% per month. In addition to the above, the appellants also collect bounce charges on account of dishonour of cheque/ ECS or any other electronic or clearing mandate given by the customers/ borrowers, which is in line with agreed terms and conditions. This bounce charges are generally a fixed amount per default committed by the customer, for e.g., Rs.350/- for each dishonour of Cheque/ECS. The Department had interpreted that the penal interest/bounce charges are not part of EMI of the loan amount or principal loan amount, and these are extra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f interest and return of the principal amount on the due date. Thus, he claimed that the borrower is under an obligation to pay back the loan amount on the due date. In case, the borrower fails to pay the said amount at the time specified, it amounts to breach of the contract. This compensation/damages for breach of contract are not a consideration for any service. 3.3 He further stated that in the present case, there is only one contract between the Appellant and the borrower, which is the agreement for loan, for which consideration is payable by the borrower in the form of interest. Upon breach of contract, the liquidated damages become payable not as a consideration for the contract but as a compensation for damage suffered due to breach of the contract. Their agreement is for performance of the contract and not for its breach. Thus, he claimed that the provisions of Section 66E(e) is not applicable in the present case. 3.4. Learned Advocate also stated it is a settled position of law that damages/penalty/compensation for breach of contract is not consideration for any service and thus not leviable to service tax. In this regard, he placed reliance on the following judicia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... occurred, the appellants are entitled to recover the penal charges/penalty from such defaulting borrowers. 4.2. In view of the above submissions made by him, the Learned AR by reiterating the findings made in the impugned order, had stated that the appellants are liable to pay service tax on the penal interest, bounce charges received by the appellants from their customers/borrowers during the relevant period as part of taxable services. 5. The submissions advanced by the learned Advocate appearing for the appellants and the learned Authorized Representative of the Department have been considered. We have also perused the records of the case. 6. We find that the issue for consideration before us is to determine whether service tax is liable to be paid in respect of penal interest and bouncing charges, more fully described below, (i) penal interest or delayed payment charges in case of late payment of EMI or delay in payment of periodical installments of loan/advance repayments, and (ii) bouncing charges i.e., charges recovered for bouncing of repayment instruments such as dishonour of cheque/ECS or any other electronic or clearing mandate given by the customers/bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rties is to avoid litigation by paying a pre-determined sum to the lender on breach of contract by the borrower. Thus, he concluded that these penal charges and bounce charges paid by the borrower for default in payment of EMI/dishonour of payment instrument is a consideration and such a default/delay/non-payment/dishonour of payment instrument is tolerated by the appellants on payment of an amount as agreed upon in the agreement and it is a declared service of agreeing to tolerate an act or a situation under section 66 E(e) of the Finance Act, 1994. Accordingly, he ordered that penal Charges and bounce charges paid by borrowers is a consideration for service rendered by the appellants and service tax is thus payable on such consideration by confirming the adjudged demands. The decision taken by the learned Commissioner in the impugned order dated 07.09.2018 is as follows: Para 21. In view of the above discussions and findings, I pass the following order ORDER a) I hold that activity of M/s Bajaj Finance Limited of tolerating the act of default and non-payment and late payment in payment of EMI by the Borrowers Customers and dishonor of payment instrument ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in their books of account in the manner prescribed as per Rule 4A of the Service Tax Rules, 1994 as discussed in Para 19.3 supra. g) I refrain from imposing Penalty under the provisions of Section 77(1)(a) of the Finance Act, 1994 for the reasons discussed in Para 19.2 supra. 8. In order to examine the issues before us, we would like refer to certain words, phrases that have been explained under section 65Bibid,for the purpose of interpretation under the service tax statue i.e., Finance Act, 1994. The relevant words and legal provisions referred in the case before us are extracted below: 65B. Interpretations. In this Chapter, unless the context otherwise requires, (22) declared service means any activity carried out by a person for another person for consideration and declared as such under section 66E; xx xx xx xx xx (30) interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) but does not include any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; (ii) supply of farm labour; (iii) processes carried out at an agricultural farm including tending, pruning, cutting, harvesting, drying, cleaning, trimming, sun drying, fumigating, curing, sorting, grading, cooling or bulk packaging and such like operations which do not alter the essential characteristics of agricultural produce but make it only marketable for the primary market; (iv) renting or leasing of agro machinery or vacant land with or without a structure incidental to its use; (v) loading, unloading, packing, storage or warehousing of agricultural produce; (vi) agricultural extension services; (vii) services by any Agricultural Produce Marketing Committee or Board or services provided by a commission agent for sale or purchase of agricultural produce; (e) trading of goods; (f) any process amounting to manufacture or production of goods; (g) selling of space or time slots for advertisements other than advertisements broadcast by radio or television; (h) service by way of access to a road or a bridge on payment of toll charges; (i) betting, gambling or lottery; (j) admission to entertainment events or acces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such loan is repaid by customers/borrowers by way of EMI over a period of loan tenure. Accordingly, while computing the EMI, the appellants charges pro-rata interest payable on each due date, on the underlying assumption that the customers/borrowers would not default in payment of the EMI on the due dates. However, in case of any default, the appellants charge them an additional interest in the form of penal interest for the number of days of default. In any case of loan arrangement for lending money, the agreement between the parties i.e., lender and borrower provide for repayment of outstanding loan amount and the interest thereon in the form of Equated Monthly Installments, payable on a pre-determined date, over the entire loan tenure/repayment period. Considering the nature of the principal interest on the loan due over the entire loan tenure, collected in the form of EMI comprising of principal amount plus interest, in our considered opinion this principal interest could be treated as consideration for the usage or retention of money lent by the appellants to their customers/borrowers as per the agreement and EMIs in force. In a case where the borrower is unable to repay a pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.25,000. Penal interest can be levied for reasons such as default in repayment, non submission of financial statements, etc. However, the policy on penal interest should be governed by well-accepted principles of transparency, fairness, incentive to service the debt and due regard to genuine difficulties of customers. Thus, we find that the guidelines of RBI which provide for charging interest on loans and advances also provide for levy of penal interest for default in repayment or non-submission of instruments of repayment of loan in time. The appellants being a Non-Banking Financial Institution governed by the regulatory frame work of RBI had followed the guidelines and hence there is no extra consideration that flows in such payments made on account of penal interest/delayed payment charges. 10.2. We further find that clause (iv) to sub-rule 2 to Rule 6 of the Service Tax (Determination of Value) Rules, 2006, notified vide Notification No.24/ 2012 - S.T. dated 06.06.2012, inter alia, provide that the value of any taxable service does not include, (iv) interest on delayed payment of any consideration for the provision of services or sale of property, whether movable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led time, there is a levy of additional / penal interest on account of delay in payment of EMI. 2. Doubts have been raised regarding the applicability of GST on additional / penal interest on the overdue loan i.e. whether it would be exempt from GST in terms of Sl. No. 27 of notification No. 12/2017-Central Tax (Rate) dated 28th June 2017 or such penal interest would be treated as consideration for liquidated damages [amounting to a separate taxable supply of services under GST covered under entry 5(e) of Schedule II of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the CGST Act) i.e. agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act ]. In order to ensure uniformity in the implementation of the provisions of the law, the Board, in exercise of its powers conferred by section 168 (1) of the CGST Act, hereby issues the following clarification. 3. Generally, following two transaction options involving EMI are prevalent in the trade:- Case 1: X sells a mobile phone to Y. The cost of mobile phone is Rs 40,000/-. However, X gives Y an option to pay in installments, Rs 11,000/- every mont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be included in the value of the mobile, irrespective of the manner of invoicing. Case 2: The additional / penal interest is charged for a transaction between Y and M/s ABC Ltd., and the same is getting covered under Sl. No. 27 of notification No. 12/2017-Central Tax (Rate) dated 28.06.2017. Accordingly, in this case the 'penal interest' charged thereon on a transaction between Y and M/s ABC Ltd. would not be subject to GST, as the same would not be covered under notification No. 12/2017-Central Tax (Rate) dated 28.06.2017. The value of supply of mobile by X to Y would be Rs. 40,000/- for the purpose of levy of GST. 6. It is further clarified that the transaction of levy of additional / penal interest does not fall within the ambit of entry 5(e) of Schedule II of the CGST Act i.e. agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act , as this levy of additional / penal interest satisfies the definition of interest as contained in notification No. 12/2017- Central Tax (Rate) dated 28.06.2017. It is further clarified that any service fee/charge or any other charges that are levied by M/s ABC Ltd. in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich is taxable. It should also be remembered that there is marked distinction between conditions to a contract and considerations for the contract . A service recipient may be required to fulfil certain conditions contained in the contract but that would not necessarily mean that this value would form part of the value of taxable services that are provided. 25. It is in the light of what has been stated above that the provisions of section 66E(e) have to be analyzed. Section 65B(44) defines service to mean any activity carried out by a person for another for consideration and includes a declared service. One of the declared services contemplated under section 66E is a service contemplated under clause (e) which service is agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. There has, therefore, to be a flow of consideration from one person to another when one person agrees to the obligation to refrain from an act, or to tolerate an act, or a situation, or to do an act. In other words, the agreement should not only specify the activity to be carried out by a person for another person but should specify the: (i) cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lies with the terms of the contract and a penalty is imposed only if there is non-compliance. xx xx xx xx xx 42. The conclusion drawn by the learned authorized representatives of the Department from the aforesaid decision of the Supreme Court that compensation received is synonymous with tolerating or that the Supreme Court acknowledged that in a breach of contract, one party tolerates an act or situation is not correct. 43. It is, therefore, not possible to sustain the view taken by the Principal Commissioner that penalty amount, forfeiture of earnest money deposit and liquidated damages have been received by the appellant towards consideration for tolerating an act leviable to service tax under section 66E(e) of the Finance Act. 44. The impugned order dated December 18, 2018 passed by the Commissioner, therefore, cannot be sustained and is set aside. The appeal is, accordingly, allowed. The aforesaid order of the Principal Bench of the Tribunal was appealed by the department before the Hon ble Supreme Court in Civil Appeal No.2372/2021 and the Hon ble Apex Court dismissed the same as withdrawn. The said Order dated 11.9.2023 is extra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant paragraph of the said circular is extracted below: 3. The description of the declared service in question, namely, agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act is similar in GST. Agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act has been specifically declared to be a supply of service in para 5 (e) of Schedule II of the CGST Act, 2017. 4. As can be seen, the said expression has three limbs: - i) Agreeing to the obligation to refrain from an act, ii) Agreeing to the obligation to tolerate an act or a situation, iii) Agreeing to the obligation to do an act. Service of agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act is nothing but a contractual agreement. A contract to do something or to abstain from doing something cannot be said to have taken place unless there are two parties, one of which expressly or impliedly agrees to do or abstain from doing something and the other agrees to pay consideration to the first party for doing or abstaining from such an act. Such contractual arrangement must be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are penal in nature and thus are not towards consideration for any service. 19 . The demand of service tax in respect of the amount collected on account of bouncing of cheques and cancellation of orders is also not sustainable. These amount are penal in nature and not towards consideration for any service. In this connection reliance can be placed on the decisions of the Tribunal in Jaipur Jewellery Show v. C.C.E S.T., Jaipur - 2016 (12) TMI 344 - CESTAT New Delhi = 2017 (49) S.T.R. 313 (Tribunal) and K.N. Food Industries (P.) Ltd. v. Commissioner of CGST Central Excise, Kanpur - 2019-TIOL-3651-CESTAT-ALL = 2020 (38) G.S.T.L. 60 (Tri. - All.). xx xx xx xx xx 21 . The Learned Authorized Representative of the Department has, however, placed reliance upon a ruling dated March, 2019 of the Appellate Authority for Advance Ruling Maharashtra to contend that the amount collected towards bouncing of cheque charges amounts to supply of service, but Learned Counsel for the appellant has pointed out that the said order was rectified subsequently by the Appellate Authority for Advance Ruling Maharashtra in its order dated December 12, 2019 [2020 (41) G.S.T.L. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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