2013 (10) TMI 1113 - AT - Service Tax

Finance Charges - Application for Early Disposal - There is a total demand of service tax along with interest and penalties for the period on the amount collected by the applicant as finance charges for pre-closure/foreclosure of hire purchase on leasing transaction Held that - The Tribunal in the case of Housing & Dev. Corporation Ltd. (HUDCO) Vs CST Ahmedabad 2011 (11) TMI 95 - CESTAT, AHMEDABAD decided the appeal and held that service tax would be leviable on pre-payment of loan or foreclosure charges - service tax is leviable on foreclosure or pre-payment charges and in Indusind bank Ltd. Vs CST Chennai 2009 (9) TMI 48 - CESTAT, CHENNAI directed pre-deposit of 50% of tax - The applicant failed to make out a prima facie case for waiver of predeposit of entire amount of tax along with interest and penalties Appellant was directed to pre-deposit the amount and upon such submission rest of the duty to be stayed partial stay granted.

Summary

Issues:
1. Early hearing of appeals due to common order
2. Service tax demand on finance charges for pre-closure/foreclosure of hire purchase on leasing transaction
3. Interpretation of service tax applicability on pre-payment or foreclosure charges

Analysis:
1. The judgment pertains to two applications for early hearing of appeals arising from a common order. The applications were filed by a non-banking financial company regarding service tax demands totaling Rs.4,54,51,620/- on finance charges for pre-closure/foreclosure of hire purchase on leasing transactions. However, as stay petitions were already taken up for hearing, the applications for early hearing were deemed infructuous and disposed of accordingly.

2. The applicant argued that the charges imposed on customers for pre-paying part/full loan amounts before the scheduled EMI date were interest income on foreclosure of hire purchase on leasing transactions and hence not subject to service tax. The counsel relied on a Tribunal decision in a similar case involving Small Industries and Development Bank of India. On the other hand, the Revenue contended that service tax was applicable on pre-payment or foreclosure charges based on a different Tribunal ruling involving Housing & Development Corporation Ltd. and Indusind Bank Ltd. The Tribunal, after considering both sides, held that service tax was indeed leviable on foreclosure or pre-payment charges, distinguishing the case cited by the applicant.

3. The Tribunal's decision was based on the understanding that prepayment charges are not in the nature of interest but rather charges for allowing the facility of prepayment of a loan. The Tribunal emphasized that prepayment charges do not equate to interest as they involve payment before the scheduled time, which should ideally result in a refund of interest rather than a demand for more interest. Consequently, the applicant failed to establish a prima facie case for a waiver of the entire tax amount and was directed to deposit Rs.2,00,00,000/- within 8 weeks. Upon compliance, the pre-deposit of the remaining tax, interest, and penalties would be waived, with recovery stayed during the pendency of appeals.

This judgment highlights the nuanced interpretation of service tax applicability on charges related to pre-closure or pre-payment of loans in financial transactions, emphasizing the distinction between interest income and charges for facilitating early payments.