2024 (11) TMI 58 - AT - Service Tax

Service tax on charging of liquidated damages/penal interest over and above the applicable interest in the event of any default in the payment - HELD THAT - It is imputably clear that the liquidated damages/penal interest charged by the appellant @2% cannot be construed as additional consideration but is a penal interest on account of delayed payment of loans on which no service tax can be levied. The nature of delayed payment charges as well as of the liquidated damage/ penalty interest is the same as both are being charged in the event of delay being made by the clients of the appellants and are, therefore, penal in nature. We, accordingly, hold that the liquidated damages/penal interest charged by the appellant are not exigible to service tax as per the provisions of the Act for the simple reason that such charges are not relatable to taxable service being rendered by the appellant. It has also been settled that such liquidated damages/penal interest do not form part of the declared service as given under section 66(E) of the Act, as the activity contemplated under section 66E(e), i.e. when one party obligates to refrain from an act or to tolerate such an act or situation or to do an act or the activities when an agreement refers to such an agreement and there is flow of consideration for this activity, which in the present case, we do not find so. In the present case, there is no separate agreement between the respondent and the borrower for any such liability. Since the issue has been decided on merit in favor of the appellant, the other consequential issue of extended period of limitation, interest and penalty does not require any consideration.

Summary

Issues:
- Whether charging of liquidated damages/penal interest over and above the applicable interest in the event of default in payment is exigible to service tax.

Detailed Analysis:
1. The Revenue appealed against the Order-in-Original dropping the demand towards service tax, arguing that the respondent, engaged in banking and financial services, charged liquidated damages/penal interest in case of default in payment, which should be taxable under section 66E(e) of the Act.
2. The department claimed a demand of Rs. 20,42,52,714/-, contending that the liquidated damages/penal interest constituted additional consideration. However, the Adjudicating Authority dropped the demand, citing the Tribunal's decision in Religare Securities Ltd., stating that such charges were contingent on the occurrence of an event and not referable to any taxable service.
3. The issue was extensively discussed, referencing various judicial pronouncements, including decisions like South Eastern Coalfields Ltd., Northern Coalfields Ltd., and Religare Securities Ltd., which established that such charges were not exigible to service tax.
4. The Tribunal referred to the Larger Bench's decision in LSE Securities Ltd., which set parameters for determining taxable amounts, emphasizing that only commission or brokerage charged by a service provider should be considered for service tax, not other receipts.
5. The Tribunal acknowledged that the issue of delayed payment charges (DPC) had been settled in favor of the appellant in previous decisions, such as Religare Securities Ltd., where DPC was deemed not to be commission/brokerage for securities transactions.
6. The Tribunal delved into the concept of liquidated damages and non-performance payments, citing the South Eastern Coalfields Ltd. case to explain that consideration must flow from the service recipient to the provider for it to be taxable, emphasizing the distinction between contractual conditions and considerations.
7. Subsequent decisions like M/s Bajaj Finance Ltd., Western Coalfields Ltd., and others followed the principles laid down in the South Eastern Coalfields case.
8. Circular No. 214/01/2023-S.T. clarified that activities under section 66E required specific agreement references and consideration flow, which were not present in the case of liquidated damages/penal interest charged by the appellant.
9. The Tribunal concluded that the charges were penal in nature, not additional consideration for taxable services, hence not liable for service tax, as they were not related to the services provided by the appellant.
10. It was held that the charges did not fall under the declared service under section 66E of the Act, as there was no separate agreement for such liability between the respondent and the borrower.
11. As the issue was decided in favor of the appellant, the consequential issues of extended limitation period, interest, and penalty were not considered.
12. The impugned order was upheld, and the appeal by the Revenue was dismissed.