2023 (7) TMI 65 - HC - Service Tax

Waiver of penalty u/s 76, 77 and 78 of the Finance Act, 1994 - demand of service tax on prepayment charges upheld - Banking and other financial services - HELD THAT - Reliance placed in an order passed by the CESTAT in the case of M/S SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA VERSUS CST AHMEDABAD 2014 (12) TMI 668 - CESTAT AHMEDABAD , whereby the issue in regard to whether foreclosure charges collected by the Banks and Non-banking Financial Companies on premature termination of loans attract a levy of Service Tax under the heading Banking and other financial services as defined under Section 65(12) of the Finance Act 1994, came to be referred to the Larger Bench of the Tribunal. There were two decisions which were in favour of the assessees, firstly, in the case of M/S SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA VERSUS CCE, CHANDIGARH 2011 (1) TMI 495 - CESTAT, NEW DELHI also subsequently the decision in M/S. MAGMA FINCORP LTD. VERSUS COMMISSIONER OF SERVICE TAX, KOLKATA AND VICE-VERSA 2016 (4) TMI 21 - CESTAT KOLKATA . On the backdrop of conflicting views, the Larger Bench of the Tribunal adjudicated such issue in the case of Commissioner of COMMISSIONER OF SERVICE TAX, CHENNAI VERSUS M/S REPCO HOME FINANCE LTD. 2020 (7) TMI 472 - CESTAT CHENNAI whereby it was held that the view taken by the Tribunal in the case of M/S HOUSING DEVELOPMENT CORPORATION LTD (HUDCO) VERSUS CST, AHMEDABAD 2011 (11) TMI 95 - CESTAT, AHMEDABAD was not the correct view. It was held that service tax cannot be levied on the foreclosure charges levied by the banks and nonbanking financial companies on premature termination of loans under Banking and Other Financial Services as defined under Section 65(12) of the Finance Act and accordingly answered the question in favour of the assessees. Having considered the decision of the Larger Bench and the questions which otherwise would have fell for consideration in relation to both what has been held in the impugned order in favour of the revenue and against the assessee, and also in regard to the orders on penalty, on which the revenue is aggrieved, in our opinion, it is appropriate that these appeals are remanded to the Tribunal by setting aside the impugned orders subject matters of these appeals, with a direction that the Tribunal on remand reconsiders the issue in the light of the decision of the Larger Bench in the case of Repco Home Finance Limited. Appeal disposed off.

Summary

Issues:
The judgment involves appeals arising from a common order passed by the Customs Excise & Service Tax Appellate Tribunal (CESTAT), where penalties under Sections 76, 77, and 78 of the Finance Act, 1994 were set aside, but the demand of Service Tax and interest were upheld.

Summary:
1. The appeals before the High Court stemmed from a CESTAT order dated August 21, 2019, where penalties under Sections 76, 77, and 78 of the Finance Act, 1994 were set aside for the assessee, while the demand for Service Tax and interest was upheld. Two appeals filed by the assessee were dismissed.

2. The department's appeals seeking to impose penalties on the assessee and confirming that prepayment charges were subject to Service Tax levy were dismissed.

3. The High Court considered revised substantial questions of law, focusing on whether the impugned order should be set aside and the appeal remanded back to the Tribunal based on relevant legal precedents.

4. After hearing both parties and reviewing the orders and records, the High Court proceeded with the case.

5. The Court noted the conflicting views on whether foreclosure charges attract Service Tax, referencing decisions favoring the assessees. The Larger Bench's decision in Repco Home Finance Ltd. clarified that service tax cannot be levied on foreclosure charges by banks and non-banking financial companies, under "Banking and Other Financial Services" as defined by the Finance Act, 1994.

6. Considering the Larger Bench's decision and the issues favoring the revenue against the assessee, the High Court remanded the appeals to the Tribunal for reconsideration in light of the Repco Home Finance Ltd. case.

7. All contentions before the Tribunal were kept open for further consideration.

8. The appeals were disposed of with a direction to the Tribunal to reconsider the issues expeditiously and pass appropriate orders within six months, with no costs imposed.