2014 (11) TMI 250 - AT - Service Tax

Valuation of service - Whether commitment charges recovered by the Bank are to be added to the taxable service for charging service tax or these charges are to be treated as interest and no service tax was to be levied on such charges - Held that - commitment charges are the Charges imposed on the client who decide not to draw the amount of loan that has been at their disposal. These charges are basically to compensate for the loss of interest that the bank would have earned if the customer had drawn money from loan account. It is seen that the charges are related to lending of money to the client and; in order to give limit/overdraft facility, the bank keeps the fund available for the same. Under such circumstances, it is evident that such charges are integrally connected with the lending which is a taxable service. Therefore, commitment charges cannot be separated from lending service. I, therefore, hold that the commitment charges are chargeable to service tax and the amount of ₹ 46,902/- is recoverable from them. - Decided against assessee.

Summary

Issues:
1. Whether commitment charges and facility Cancellation Charges should be considered as interest for service tax purposes.
2. Whether the invocation of extended time limit for raising demand is justified.
3. Whether commitment charges recovered by the Bank are to be added to the taxable service for charging service tax.

Analysis:

1. The Appellant argued that commitment charges and facility Cancellation Charges should not be treated as interest for service tax purposes, as they are penalties for denying/receiving agreed services, not interest accrued at a pre-determined rate. They referred to relevant definitions and contested the invocation of extended time limit for raising demand due to the grant of benefit under section 80. The Respondent, however, cited a Tribunal decision stating that charges calculated based on outstanding loan amount and interest rate do not convert to interest. The Tribunal's judgment was deemed applicable to the case, and the demand was upheld.

2. The Tribunal examined whether the commitment charges recovered by the Bank should be considered part of the taxable service for service tax purposes. The Tribunal referred to a previous judgment regarding the applicability of service tax on charges related to lending arrangements. It was concluded that commitment charges, imposed to compensate for potential interest loss, are integral to the lending service provided by the Bank. Therefore, the commitment charges were deemed chargeable to service tax, and the demand was upheld.

3. The Tribunal found no reason to intervene in the Commissioner (Appeals) order confirming the demand for service tax amounting to &8377; 46,902. The appeal was rejected based on the conclusion that commitment charges are connected to the lending service provided by the Bank and are subject to service tax. The Tribunal's decision was based on the interpretation that such charges cannot be separated from the lending service, leading to the affirmation of the demand for service tax.

This detailed analysis of the judgment highlights the arguments presented by both parties, the legal interpretations applied by the Tribunal, and the ultimate decision regarding the treatment of commitment charges for service tax purposes.