2019 (8) TMI 1031 - AT - Service Tax

Valuation - nature of pre-pay penalty towards foreclosure of home loan - inclusion of commitment charges in assessable value - whether these are in nature of interest/ damages or not - case of appellant is that the commitment charges are in nature of interest charges or the damage charges made by them from their customer/ client for making available the said credit facility available to them - HELD THAT - In view of established practices in banking and financial industry we do not find any merits in the submissions of the appellant that the prepayment levy charged by them for foreclosure of loan is interest charge or in nature of liquidated damages. The basic nature of interest as is understood in the banking and financial industry is that its time value of the money held by the other person. In the case of foreclosure the customer is not holding any money of the appellant, but is returning back the same much before the appointed date. Hence the return of money cannot be subject to interest charge as claimed by the appellant, nor can it be the damages as claimed by them. We are not in position to agree with submissions of the appellant that these charges are in nature damages recovered from the customers. Since it was an option extended at the time of entering into the contract/ loan agreement, the same cannot also be termed as liquidated damages for non performance of the conditions specified in the contract. The contract specifies a charge levied for exercising the option the said charge cannot be penalty or liquidated damage to compensate the loss. Time limitation - HELD THAT - Appellants have not shown any bonafide reason to show that they entertained such a belief. Further if they claim the issue was clarified by CBEC only in 2011, then what made them pay the service tax in the year 2006. The arguments advanced by the appellants do not establish the existence of such a bonafide belief - the demand of Service Tax made by invoking the extended period of limitation is upheld. Demand of interest - HELD THAT - Also the demand made in respect of the interest at appropriate rate under Section 75 is upheld. Penalty - HELD THAT - When the invocation of extended period of limitation in terms of proviso to section 73(1) is upheld, penalty under Section 78 should follow - Also for various contraventions of the provisions of Chapter V of Finance Act, 1994, the penalties imposed under Section 76 and 77 too are justified - the case is fit where provisions of Section 80 should be invoked to set aside the penalties that are imposed under Section 76, 77 78 of Finance Act, 1994. Appeal allowed in part.

Issues Involved:
1. Taxability of prepayment charges under the Finance Act, 1994.
2. Nature of prepayment charges as penalty or service charge.
3. Jurisdiction of Commissioner Service Tax Mumbai.
4. Invocation of extended period of limitation.
5. Imposition of penalties under Sections 76, 77, and 78 of the Finance Act, 1994.
6. Applicability of Section 80 of the Finance Act, 1994 for waiver of penalties.

Detailed Analysis:

1. Taxability of Prepayment Charges:
The main issue was whether prepayment charges levied by the appellant for early repayment of loans are subject to service tax under the Finance Act, 1994. The tribunal held that prepayment charges are part of the taxable service of lending, as they are charges for an option provided to the borrower at the time of entering into the loan agreement. The charges are not penalties but fees for exercising an option, thus falling under the definition of "Banking and Other Financial Services" as per Section 65(105)(zm) of the Finance Act, 1994.

2. Nature of Prepayment Charges:
The appellant argued that prepayment charges are penalties for loss of interest and should not be subject to service tax. The tribunal disagreed, stating that these charges are not penalties but fees for an option extended to the borrower. The tribunal referenced the UK Supreme Court's decision in Cavendish Square Holdings BV v. Makdessi, which distinguishes between penalties and legitimate charges for options provided in a contract. The tribunal concluded that prepayment charges are not penalties but fees for exercising an option, and thus are taxable.

3. Jurisdiction of Commissioner Service Tax Mumbai:
The appellant contested the jurisdiction of the Commissioner Service Tax Mumbai to issue the Show Cause Notice. The tribunal did not find merit in this argument and upheld the jurisdiction.

4. Invocation of Extended Period of Limitation:
The appellant argued against the invocation of the extended period of limitation, citing a reasonable belief that no tax was payable. The tribunal found no merit in this argument, stating that the appellant did not provide sufficient evidence of a bona fide belief. The tribunal upheld the invocation of the extended period of limitation for the demand of service tax.

5. Imposition of Penalties:
The tribunal upheld the imposition of penalties under Sections 76, 77, and 78 of the Finance Act, 1994, due to the appellant's failure to pay service tax and disclose taxable activities. The tribunal referenced the decision in Rajasthan Spinning and Weaving Mills, which supports the imposition of penalties when the extended period of limitation is invoked.

6. Applicability of Section 80 for Waiver of Penalties:
The tribunal invoked Section 80 of the Finance Act, 1994, to set aside the penalties imposed under Sections 76, 77, and 78, considering that the appellant had paid the entire amount of service tax and interest. The tribunal referenced decisions in Adecco Flexione Workforce and Master Kleen, which support the waiver of penalties when the taxpayer has paid the taxes with interest.

Conclusion:
The tribunal upheld the demand for service tax and interest on prepayment charges, considering them part of the taxable service of lending. The tribunal set aside the penalties under Sections 76, 77, and 78, invoking Section 80 of the Finance Act, 1994, due to the appellant's payment of taxes and interest. The tribunal dismissed the appeals filed by both the appellant and the department, except for the waiver of penalties.

← Previous Next →