2023 (2) TMI 896 - AT - Service Tax

Levy of service tax - Banking and Other Financial Services or not - Foreclosure charges collected by the banks and non-banking financial companies on premature termination of loans - HELD THAT - The Larger Bench in the case of COMMISSIONER OF SERVICE TAX, CHENNAI VERSUS M/S REPCO HOME FINANCE LTD. 2020 (7) TMI 472 - CESTAT CHENNAI has considered the issue and held that such charges are not liable to service tax. The demand cannot sustain and requires to be set aside - Appeal allowed - decided in favor of appellant.

Summary

Issues: Whether foreclosure charges collected by banks and non-banking financial companies on premature termination of loans are subject to levy of service tax under "Banking and Other Financial Services" as defined under Section 65(12) of the Finance Act, 1994.

Analysis:
1. Facts of the Case: The appellant, a Non-Banking Financial Company, collected foreclosure charges along with penal charges on outstanding amounts from customers who availed loan/hire-purchase facilities. The Department contended that service tax was applicable on these charges, leading to a demand notice, interest, and penalties.

2. Legal Arguments: The appellant argued that the issue was settled by a Larger Bench decision in the case of Commissioner of Service Tax, Chennai Vs REPCO Home Finance Ltd. The Larger Bench had held that foreclosure charges were not liable to service tax.

3. Larger Bench Decision: The Larger Bench analyzed the definition of "banking and other financial services" under Section 65(12) of the Finance Act. It concluded that foreclosure charges did not fall under the ambit of service tax as they were not considered as interest but as charges for premature closure of loans, involving a service element in considering borrower requests, calculating charges, and closing loans.

4. Relevant Legal Provisions: The Tribunal noted the amendment in Section 65(12) of the Finance Act, which included "lending" as part of banking and financial services. However, it emphasized that foreclosure charges were distinct from interest and were akin to damages claimed by banks when contracts were broken, not falling under the scope of service tax.

5. Decision and Rationale: Based on the Larger Bench decision and legal analysis, the Tribunal held that foreclosure charges collected by banks and non-banking financial companies were not subject to service tax under the definition of "banking and other financial services." Consequently, the demand for service tax, interest, and penalties was set aside, and the appeals were allowed.

6. Conclusion: The judgment clarified the non-applicability of service tax on foreclosure charges, aligning with the interpretation provided by the Larger Bench decision. The ruling provided relief to the appellant, emphasizing the distinction between foreclosure charges and interest within the realm of banking and financial services, as defined by the Finance Act.

Judgment Date: 22.02.2023