2011 (1) TMI 495 - AT - Service Tax

Demand - banking and financial services - Foreclosure is ending the loan already given and cannot be treated as lending to the customers of loan, and in our considered opinion the same cannot be treated as rendering any services by the financial institution - it is a case of 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 customers. Therefore, the activity of foreclosure of loan can not be treated as banking and financial services - Appeal is allowed

Summary

Issues:
Appeal against order upholding service tax demand on premium for pre-payment of direct loans; Interpretation of whether foreclosure charges constitute banking and financial services.

Analysis:
The appeal challenged the order of the Commissioner of Central Excise (Appeals) upholding the demand for service tax on the premium collected for pre-payment of direct loans. The appellant, engaged in banking and financial services, disputed the characterization of the amount collected as service charges under the category of "banking and other financial services." The original authority confirmed the service tax demand without imposing a penalty, which the appellant contested, arguing that charges for loan rescheduling and foreclosure do not constitute services. The appellant also contended that the demand raised through the show cause notice invoking an extended period was not sustainable due to the absence of penalty imposition.

In analyzing the case, the Tribunal referred to the relevant provisions of the Finance Act, 1994, defining "banking and financial services" provided by banking companies or financial institutions. The definitions encompassed various financial activities, including leasing, credit cards, merchant banking, and asset management, among others. The Tribunal highlighted the definitions of 'banking,' 'banking company,' 'financial institution,' and 'non-banking financial company' as per the Banking Regulation Act, 1949, and Reserve Bank of India Act, 1934. Notably, the authorities did not specify the category under which the activity of foreclosure falls. The Tribunal opined that foreclosure represents the termination of a loan and does not constitute lending services to customers. It viewed foreclosure as the withdrawal of services at the customer's request, with the premium serving as compensation for potential interest revenue loss. Consequently, the Tribunal concluded that the foreclosure of loans does not qualify as "banking and financial services."

In the final decision, the Tribunal set aside the impugned order and allowed the appeal with consequential relief as per the law. The judgment emphasized that the activity of foreclosure of loans does not fall under the ambit of "banking and financial services," thereby relieving the appellant from the service tax demand on the pre-payment premium collected from customers.