2024 (11) TMI 404 - AT - Service Tax

Classification as declared service u/s 66E(e) of the Finance Act as agreeing to the obligation to tolerate an Act and consequential liable to service tax or otherwise - interest charged by the appellant to their customer against the sale of the goods for delayed payment - appellant are a manufacturer of excisable goods and selling the same on principal to principal basis to their customers - HELD THAT - From the judgments including the Apex Court, judgment in South Eastern Coalfields Ltd. 2023 (8) TMI 606 - SC ORDER it is settled that penal interest charged for delayed payment cannot be liable to service tax under Section 66E(e) of Finance Act, 1994. Following the ratio of the above judgment in the present case also, the interest charged on the delayed payment of the sale proceed is not liable to service tax. Accordingly, we set aside the impugned order and allow the appeal with consequential relief.

Issues Involved:
1. Whether interest charged for delayed payment on the sale of goods can be classified as a declared service under Section 66E(e) of the Finance Act, 1994, and consequently liable to service tax.

Issue-Wise Detailed Analysis:

1. Classification of Interest on Delayed Payment as Declared Service:

The central issue in this case is whether the interest charged by the appellant to their customers for delayed payment on the sale of goods can be considered a "declared service" under Section 66E(e) of the Finance Act, 1994, which pertains to "agreeing to the obligation to tolerate an act" and thereby be liable to service tax.

The appellant argued that this issue is no longer res integra, meaning it has been settled in numerous judgments. The appellant relied on several precedents, including decisions from the Tribunal and courts, which have consistently held that such interest charges do not constitute a service under Section 66E(e) and are not subject to service tax. The judgments cited include South Eastern Coalfields Ltd., Bajaj Finance Ltd., and others, which have established that interest on delayed payments is a financial charge related to the sale of goods and not a service.

The Tribunal examined the nature of the transaction and concluded that the interest charged is directly connected to the sale of goods and is merely a financial charge for the retention of sale proceeds by the customer. It cannot be categorized as a service under the declared service provision of the Finance Act, 1994. The Tribunal noted that the intention behind charging such interest is not to provide a service of tolerating an act but to compensate for the financial cost of delayed payments.

2. Precedents and Legal Interpretations:

The Tribunal referenced several judgments, including Bajaj Finance Ltd., where it was determined that penal interest and bouncing charges collected during the disputed period were not liable to service tax as they did not constitute a declared service. The Tribunal emphasized that for an activity to be classified as a declared service under Section 66E(e), there must be a contractual agreement with a specific consideration for tolerating an act or situation, which was not present in this case.

The Tribunal also referred to the CBIC Circular No. 102/21/2019-GST, which clarified that penal interest does not fall within the ambit of "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation" under the GST regime, further supporting the view that such interest is not a service.

3. Analysis of Contractual Obligations and Consideration:

The Tribunal analyzed the contractual obligations and the nature of consideration involved. It was highlighted that a service, as defined under Section 65B(44), involves an activity carried out for consideration. The Tribunal found that the interest charged for delayed payment is not a consideration for any service provided but rather a financial charge for the use of money beyond the agreed credit period.

The Tribunal reiterated the distinction between "conditions to a contract" and "considerations for the contract," emphasizing that the penal interest charged does not constitute a service but is a condition of the contract to safeguard the appellant's financial interests.

Conclusion:

The Tribunal concluded that the interest charged on delayed payments is not liable to service tax under Section 66E(e) of the Finance Act, 1994. The impugned order was set aside, and the appeal was allowed with consequential relief. The Tribunal's decision aligns with established legal precedents and clarifications provided by the CBIC, reinforcing that such interest charges are not taxable as declared services.

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