2025 (3) TMI 574 - AT - Service Tax

Valuation of service tax - inclusion of Delayed Payment Charges (DPC) received by the appellant a stockbroker from their clients in the assessable value - whether consideration for providing a separate service of settling the account of clients with stock exchanges as different from the service of stock broking for the purpose or is not the amount of consideration which is liable to be taxed? - HELD THAT - Section 67 of the Finance Act deals with the concept what constitutes consideration for service. Service tax is leviable only when an activity is considered to be a service. There has to be a consideration for the provision of such service. Only an amount payable for the service would be consideration. Consideration must flow from the service recipient to the service provider and should accrue to the benefit of the service provider. There is a marked distinction between conditions to a contract and consideration. A ruling by the Larger Bench of the Tribunal Bhayana Builders (P) Limited Vs. Commissioner of service tax 2013 (9) TMI 294 - CESTAT NEW DELHI-LB wherein it was observed that any consideration (whether monetary or otherwise) should have flown or should flow from the service recipient to the service provider and should accrue to the benefit of the latter. Larger Bench of Tribunal in Service Tax Appeal No. 511 of 2011-LB with Service Tax Cross Application No. 40320 of 2018 2020 (7) TMI 472 - CESTAT CHENNAI holds that foreclosure charges collected by banks and NBFCs on premature termination of loans is not leviable to service tax; analyses what constitutes consideration for service and damages for breach of contract. The Tribunal observed that the banks and NBFCs are promisors and they would not desire premature termination of the loan as it is in their interest that it runs the entire agreed tenure. Thus any income which gets generated up to the settlement of the agreement of rendering services which shall form the part of the taxable value of Section 67 of the Finance Act the service of stock broker gets completed when the terms and conditions of the contract entered with the client for sale/purchase of securities are completely accomplished. Thus the payment of outstanding amount to the stock exchange on behalf of the clients is the part of service relating to stock broker service which gets completed when the transaction for the same are finally settled. Circular 137/25/2011 dated 03.08.2011 clarifies that Delayed Payment Charges (DPC) received by the stock brokers are not includible in taxable value as the same are not be charged for providing taxable services. Such charges are on account of delay in making payments by the service recipient to the service provider and are in the nature of a penal charge for not making the payment within stipulated time. Such amounts are not includible in the taxable value for charging service tax. The issue of Delayed Payment Charges (DPC) arising in the context of purchase of shares has been addressed by the Co-ordinate Bench of this Tribunal in the case of Religare Securities Limited Vs. Commissioner of Service Tax Delhi 2014 (4) TMI 588 - CESTAT NEW DELHI by holding that the same is not liable to service tax. The adjudicating authority having ignored the department s own circular about the collection of DPC has wrongly held the amount to be the consideration for providing a separate activity. It has absolutely been ignored that there was only one contract of appellant with their client for sale/purchase of security and the said contract itself has talked about penal charges to have been collected from the clients in case the payments are delayed. DPC are wrongly held to be taxable. Demand is held to have been wrongly confirmed. Conclusion - Penal charges for delayed payments such as DPCs do not constitute consideration for a separate service and are not includible in the taxable value under Section 67 of the Finance Act. The impugned order set aside - appeal allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal question considered was whether the Delayed Payment Charges (DPC) received by the appellant, a stockbroker, from their clients should be included in the taxable value for service tax purposes. Specifically, the issue was whether DPC constituted a separate service or was merely a penal charge for delayed payments, thus not subject to service tax.

ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

The legal framework involved the interpretation of Section 67 of the Finance Act, which defines "consideration" for service tax purposes. The Tribunal also referenced Rule 6(2) of the Service Tax Valuation Rules, 2006, and several precedents, including the Supreme Court's decision in Commissioner of Service Tax v. M/s Bhayana Builders and the Tribunal's decision in Religare Securities Limited v. Commissioner of Service Tax, Delhi.

Court's Interpretation and Reasoning

The Tribunal interpreted "consideration" under Section 67 to mean any amount payable for the service that flows from the service recipient to the service provider, benefiting the latter. The Tribunal emphasized that DPC is not a consideration for the stockbroker service but a penal charge for delayed payment by the clients. The Tribunal relied on the CBEC Circular No. 137/25/2011, which clarified that DPCs are not includible in the taxable value as they are penal charges, not charges for providing taxable services.

Key Evidence and Findings

The Tribunal noted that the appellant had a single contract with their clients for the sale/purchase of securities, which included a clause for penal charges in case of delayed payments. The DPC was collected only from clients who delayed payments, reinforcing its nature as a penal charge rather than a service fee. The Tribunal found that the adjudicating authority ignored the department's own circular, which supported the appellant's position.

Application of Law to Facts

The Tribunal applied the legal principles from the Finance Act and relevant case law to conclude that DPCs are not part of the taxable value for service tax purposes. The Tribunal reasoned that since DPCs are not collected from all clients and are contingent on delayed payments, they do not constitute consideration for a separate service.

Treatment of Competing Arguments

The Tribunal considered the Department's argument that DPCs represented a separate service of extending credit facilities. However, it rejected this view, emphasizing that DPCs are penal charges for non-compliance with payment schedules and not a separate service. The Tribunal also noted that similar demands had been dropped in other cases, including one involving the appellant.

Conclusions

The Tribunal concluded that the DPCs are not taxable under the service tax regime as they do not constitute consideration for a separate service. The demand for service tax on DPCs was deemed incorrectly confirmed by the adjudicating authority.

SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning

The Tribunal held: "The amount of DPCs are not collected from all the clients to whom the stock broker service are rendered by the appellant. These amounts are being collected only from those clients who have not paid the appellant within the time limit... To our opinion, the nature of amount of such DPCs is nothing beyond a penal charge."

Core Principles Established

The core principle established is that penal charges for delayed payments, such as DPCs, do not constitute consideration for a separate service and are not includible in the taxable value under Section 67 of the Finance Act.

Final Determinations on Each Issue

The Tribunal set aside the impugned order confirming the demand for service tax on DPCs, interest, and penalties. The appeal was allowed, and the demand was held to have been wrongly confirmed.