2018 (3) TMI 116 - AT - Service Tax

Levy of service tax - commitment charges - Board vide Circular dated 10.9.2004 - Held that - It is brought out from the records that while paying commitment charges the subsidiary companies deduct TDS considering it to be payment of interest. The Board vide its Circular dated 10.9.2004 has clarified that no service tax is leviable on interest in the category of Banking and Financial service. The respondent is receiving 2% as guarantee commission and 1% as commitment charges. The term interest has not been defined in the Finance Act, 1994. However, interest on loans has been specifically excluded from the ambit of service tax which has been clarified by the Board vide Circular dated 10.9.2004. It is clarified that commitment charges are in the nature of interest on unutilized portion of credit facilities. The department has proceeded to demand service tax only for the reason that the respondent has accounted it as guarantee commission. When the charges have been received separately under the head of guarantee commission as well as commitment charges, merely by accounting the same as guarantee commission, the amount received cannot be subjected to levy of service tax if the nature of the amount received is not a commission but interest of unused credit. The commitment charges being in the nature of interest cannot be subject to levy of service tax - appeal dismissed - decided against Revenue.

Summary

Issues:
1. Whether commitment charges received by the respondent are liable to service tax?
2. Interpretation of commitment charges as interest for tax liability.

Issue 1: Whether commitment charges received by the respondent are liable to service tax?
The case involved the respondent providing various services and receiving guarantee commission and commitment charges. The department issued a show cause notice demanding service tax on the commitment charges, which was confirmed in the Order-in-Original. However, the Commissioner (Appeals) set aside the demand, interest, and penalties. The department appealed to the Tribunal, arguing that commitment charges should be subject to service tax as they are not interest but guarantee commission. The respondent contended that commitment charges are considered as interest and not liable for service tax. The Tribunal analyzed the nature of commitment charges in detail, considering the agreements, accounting treatment, and relevant circulars. It was observed that commitment charges were akin to interest on the unutilized credit portion and not subject to service tax. The Tribunal upheld the Commissioner (Appeals) decision, dismissing the appeal by the Revenue.

Issue 2: Interpretation of commitment charges as interest for tax liability
The department argued that commitment charges should be treated as guarantee commission and subjected to service tax, contrary to the respondent's claim that they are interest and exempt from service tax. The respondent explained that commitment charges were considered as interest based on agreements with subsidiary companies and accounting treatment. The Tribunal examined the definition of interest, relevant circulars, and precedents. It was clarified that commitment charges were in the nature of interest on unutilized credit facilities. The Tribunal highlighted that the charges were not defined as commission but as interest, as per the Circular dated 10.9.2004. The Tribunal emphasized that commitment charges, being akin to interest, were not liable for service tax. The decision was based on a detailed analysis of the nature of commitment charges and their treatment in the context of tax liability.

In conclusion, the Tribunal ruled in favor of the respondent, holding that commitment charges, being in the nature of interest, were not subject to service tax. The decision was based on a thorough examination of the agreements, accounting treatment, circulars, and legal interpretations regarding the tax liability of commitment charges. The appeal by the Revenue was dismissed, upholding the Commissioner (Appeals) decision to set aside the demand for service tax on commitment charges.