2014 (12) TMI 666 - AT - Service Tax

Banking and Financial Institution Service - Business of lending securities and earning interest - Held that - Transaction held by the CCIL for collateral borrowing and lending obligation is nothing but giving loans and advance against securities. Therefore, prima facie the amount of charges retained by the lender constitute as interest on loan. In these circumstances, the applicants are not required to pay service tax. Another issue for demand of service tax is that the applicant, HDFC Bank Ltd., discounts the account receivable (invoice) of their client and at the time of maturity, they get full value of the amount of the invoice. Revenue is of the view that as they have discounted the invoice, the same does not form part of the interest, the same is commission earned by them for discounting the invoice. The revenue has termed this transaction as factoring i.e a financial transaction in which a business in need of funding sells its accounts receivable as discount. On that they are required to pay service tax. As per the Notification 29/2004-ST dated 22.09.2004, discount of bill is exempted from levy of service tax. The only contention of the revenue is that while discounting the applicant has earned commission. We have seen the said notification. As per the Notification, it deals only the interest for lending the money for certain period of time. In the facts of the case, the discount is nothing but interest for lending the money. Therefore, the applicants have made out a case for complete waiver of pre-deposit on this issue. Penal interest is payable on delay of the advance given by the applicant to their clients. Therefore, same also form part of the interest of loan. Accordingly, service tax is not payable. In these circumstances, the applicant has made out a case for complete waiver of pre-deposit on this issue also - Stay granted.

Summary

Issues:
1. Waiver of pre-deposit of demands confirmed by the impugned order.
2. Liability to pay service tax under the category of Banking and Financial Institution Service.
3. Whether charges retained by the lender constitute interest on loan.
4. Liability for service tax on discounting invoices.
5. Charging penal interest on bills of exchange discounted.

Analysis:

1. The applicants, HDFC Bank Ltd. and ICICI Prudential Life Insurance Co. Ltd., sought waiver of pre-deposit of demands confirmed in the impugned order. As the issue was common, the stay applications were disposed of through a common order.

2. The applicants engage in lending securities and earning interest, necessitating payment of service tax under Banking and Financial Institution Service. The Clearing Corporation of India Ltd. (CCIL) facilitates finance against government securities, with a collateral borrowing and lending obligation. The revenue sought to levy service tax on charges retained by the lender for providing loans, contending it does not constitute interest.

3. The Tribunal found the CCIL transactions akin to giving loans against securities, with charges retained by the lender prima facie constituting interest on the loan. Consequently, the applicants were not liable to pay service tax on these transactions.

4. Regarding the discounting of invoices by HDFC Bank Ltd., the revenue argued that the commission earned did not qualify as interest but as a factoring transaction. However, a notification exempted bill discounting from service tax, considering it as interest for lending money, leading to a waiver of pre-deposit on this issue.

5. The third demand involved penal interest charged by HDFC Bank Ltd. on discounted bills of exchange. The revenue contended that penal interest did not constitute interest on the loan, hence subject to service tax. The Tribunal, however, viewed penal interest as part of the loan interest, warranting a waiver of pre-deposit on this issue as well.

6. Ultimately, the Tribunal granted a complete waiver of pre-deposit for both applicants, including service tax, interest, and penalties, staying the recovery during the appeal's pendency.