2011 (11) TMI 95 - AT - Service Tax

Levy of Service Tax on Prepayment charges and charges for resetting of interest rates under Banking & Other Financial Services. - Held that - When a borrower opts for prepayment of loan, the tenure of the loan, reason for the prepayment, track record of the borrower in servicing loan, the interest rate existing at the time of lending and at the time of closure, and the loss to the lender because of prepayment are taken into account. - 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 in the nature of interest. - In the case of resetting, the relationship between the lender and the borrower does not cease to exist and loan also continues. Therefore, resetting of interest rate can be definitely considered as a service rendered by the appellant in relation to lending and is covered by Service Tax definition. - Levy of service tax upheld - Decided against the assessee. Extended period of limitation - held that - plea of bonafide has to be considered in the light of decision of the Tribunal in the case of SPIE CAPAG S.A. Vs CCE Mumbai (2009 -TMI - 75146 - CESTAT, MUMBAI), is appropriate. In that case, while dealing with the plea of bonafide belief, the Tribunal observed that the least that was expected of the appellant to discharge the plea of bonafide belief was to make enquiries from Central Excise authorities or some reputed legal firm regarding dutiability of items manufactured by it. - demand for extended period for Service Tax and interest thereon has to be upheld. - However penalty set aside.

Issues Involved:

1. Prepayment charges and reset charges liability under 'Banking and other financial services'.
2. Nature of reset charges/prepayment charges as interest.
3. Applicability of Service Tax on agreements entered prior to 10.09.2004.
4. Invocation of extended period of limitation.
5. Invocation of Section 80 for waiver of penalties.

Issue-wise Detailed Analysis:

1. Prepayment Charges and Reset Charges:

The appellant argued that prepayment charges and reset charges are not related to 'Banking and other financial services' and hence not liable for Service Tax. They relied on various cases including the European Court of Justice's decision in Societe thermale d'Eugenie-les-Bains and the Tribunal's decision in the case of SIDBI. However, the Tribunal noted that the definition of 'Banking and other financial services' was expanded by the Finance Act, 2004 to include lending. The Tribunal concluded that prepayment charges and reset charges are services related to lending and thus taxable under 'Banking and other financial services'.

2. Nature of Reset Charges/Prepayment Charges as Interest:

The appellant contended that reset charges and prepayment charges are additional interest and not liable for Service Tax. The Tribunal disagreed, stating that these charges are for services provided in relation to lending, such as processing prepayment requests or resetting interest rates. The Tribunal emphasized that these charges are not interest but fees for additional services provided to borrowers.

3. Applicability of Service Tax on Agreements Entered Prior to 10.09.2004:

The appellant argued that charges related to agreements entered before 10.09.2004 should not be taxable. The Tribunal clarified that the charges for prepayment and reset are levied only when the borrower opts for these services, which brings these charges under the taxable scope post-10.09.2004. Therefore, the clarification issued by the Board for hire-purchase agreements does not apply to lending services.

4. Invocation of Extended Period of Limitation:

The appellant argued against the invocation of the extended period of limitation, citing their status as a wholly owned Government company. The Tribunal noted that being a Government company does not exempt them from compliance with tax laws. The Tribunal found that the appellant did not declare the income received from prepayment and reset charges nor sought clarification from the Department, thus justifying the invocation of the extended period for suppression of facts.

5. Invocation of Section 80 for Waiver of Penalties:

While upholding the demand for Service Tax and interest, the Tribunal considered the appellant's status as a wholly owned Government company and the acceptance of their accounting treatment by the Income Tax department as reasonable causes. Therefore, the Tribunal invoked Section 80 of the Finance Act, 1994, to set aside the penalties imposed under various sections of the Act.

Conclusion:

The Tribunal upheld the demand for Service Tax and interest on prepayment charges and reset charges, affirming their classification under 'Banking and other financial services'. The invocation of the extended period of limitation was also upheld. However, penalties were waived under Section 80 of the Finance Act, 1994, considering the appellant's reasonable cause for non-compliance.

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