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2024 (5) TMI 795 - AT - Service TaxCENVAT Credit - exempt service or not - amount of interest received by the appellant on the delayed payment of the amount of consideration received from the sale of flats/villas/shops - HELD THAT - The penal interest clauses in the agreement are in the nature of providing a safeguard to the commercial interest of the contracting parties. Accordingly, in the present case, the interest amount received by the appellant is in form of compensation towards the loss suffered by the appellant due to such delayed payments on the part of the customers. Therefore, the subject amount of interest received by the appellant are merely flow of money to deter such acts and cannot be regarded as a consideration for any activity undertaken by it. Thus it is clear that appellant is rendering only one taxable service i.e. of Construction. No question arises for invoking Rule 6(1)(3) of Cenvat Credit Rules, 2004. Consequently, the appellant is not liable to make reversal of Cenvat Credit in respect of receipt of interest as per new Explanation 3 to Rule 6(1) of Cenvat Credit Rules. The impugned show cause notice has been issued based on a frivolous ground. Hence the same is held void. The findings arising out of such show cause notice are not sustainable. The order under challenge is therefore set aside - Appeal allowed.
Issues Involved:
1. Whether the interest received on delayed payments constitutes an exempted service under Rule 2(e) of the Cenvat Credit Rules, 2004. 2. Whether the appellant is liable to reverse Cenvat credit under Rule 6(3) of the Cenvat Credit Rules, 2004. 3. Whether the imposition of penalty is justified. Summary: Issue 1: Interest on Delayed Payments as Exempted Service The department contended that the interest received by the appellant on delayed payments from customers is an exempted service under Rule 2(e) of the Cenvat Credit Rules, 2004, and Section 65B(44) of the Finance Act, 1994. However, the Tribunal observed that the definition of "service" under Section 65B(44) does not include interest on delayed payments as it is not an activity carried out by a person for another for consideration. The interest received is considered a condition of the contract for sale of flats/villas/shops and is akin to liquidated damages or compensation for non-compliance with contract terms, not a consideration for a separate service. Issue 2: Liability to Reverse Cenvat Credit The department argued that the appellant must reverse Cenvat credit under Rule 6(3) of the Cenvat Credit Rules, 2004, based on Explanation 3 to Rule 6(1), which includes activities not defined as services but using inputs or input services. The Tribunal found that the interest on delayed payments does not constitute an activity performed by the appellant and thus cannot be considered an exempted service. The Tribunal referenced several judicial decisions and CBIC Circulars clarifying that such interest is not for tolerating an act but rather a deterrent for non-compliance. Issue 3: Imposition of Penalty The appellant argued against the penalty, citing the interpretational nature of the issue. The Tribunal agreed, noting that the penal interest clauses are safeguards for commercial interests and not considerations for any service. The Tribunal held that the appellant is only rendering the taxable service of construction, and no reversal of Cenvat credit is required. Conclusion: The Tribunal set aside the order under challenge, declaring the show cause notice void and based on frivolous grounds. The appeal was allowed, and the appellant was not liable to reverse Cenvat credit or pay any penalties. [Order pronounced in the open court on 16.05.2024]
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