2025 (2) TMI 740 - AT - Central Excise

CENVAT Credit - input service or not - service tax paid on payment of penalty on pre- payment of loan - Rules 2(l) 3 of the CENVAT Credit Rules 2004 - HELD THAT - On perusal of the impugned order it transpires that the disputed service of foreclosure charges or pre-payment premium had been considered as not part of banking and other financial service and thus the service tax paid thereon has been considered as not eligible for availing as CENVAT Credit. However at one another place the order states that the disputed service could be considered as declared service . Therefore to the extent of such inconsistency with the other findings of the impugned order and inasmuch as this disputed issue had already been decided by the Larger Bench of the Tribunal it is not found the impugned order as correct. Therefore such findings which do not find a bearing on the final decision ordered by the learned Commissioner (Appeals) in the impugned order are not taken up for examination. On initial reading it may appear that the pre-payment premium or foreclosure charges forms part of the financial arrangements of availing loan by the appellants from the banks. However since there is no separate or distinct service being offered by such banks for taking the pre-payment premium it would be correct to state that these are not related to the service of financing the loans which the appellants have taken from these consortiums of banks. Rather it is clear that those banks are compensating themselves for the loss of interest which otherwise would have been paid by the appellants in the normal course of financing arrangement as per agreed contract if the prepayment was not effected by the appellants. Hence the factual matrix of the case clearly reflects that the prepayment premium paid by the appellants do not have any relation to the financing services availed from the banks. This aspect of the financial arrangements have been discussed at length by Larger Bench of the Tribunal in the case of Commissioner of Service Tax Chennai Vs. Repco Home Finance Ltd. 2020 (7) TMI 472 - CESTAT CHENNAI wherein it has been held that service tax cannot be levied on the foreclosure charges levied by the banks and non-banking financial companies on premature termination of loans under the taxable category of banking and other financial services as defined under Section 65(12) of the Finance Act 1994. Conclusion - The disputed CENVAT credit taken on input services of foreclosure charges or pre- payment premium and availed by the appellants is not admissible as CENVAT benefit to the appellants inasmuch as there is no service tax payable on such services which could be considered as permissible credit in terms of Rule 3 of the CENVAT Credit Rules 2004. The appeal filed by the appellants is dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal question considered by the Tribunal was whether the appellants, M/s Global Nonwovens Limited, were entitled to avail CENVAT credit on the service tax paid on foreclosure charges or pre-payment premiums related to loans taken from a consortium of banks. This issue involves interpreting the definition of 'input service' under Rule 2(l) of the CENVAT Credit Rules, 2004, and determining if the foreclosure charges qualify as such.

ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents:

The relevant legal framework includes the CENVAT Credit Rules, 2004, particularly Rule 2(l), which defines 'input service,' and Rule 3, which allows manufacturers or service providers to avail CENVAT credit. Additionally, the Finance Act, 1994, particularly Section 66E, which lists 'declared services,' is pertinent. The Tribunal also referenced the Larger Bench decision in the case of Repco Home Finance Ltd., which addressed the nature of foreclosure charges.

Court's interpretation and reasoning:

The Tribunal examined whether the foreclosure charges could be considered an 'input service' under Rule 2(l) of the CENVAT Credit Rules, 2004. It noted that while the activity of pre-closure is a service under Section 66E(e) of the Finance Act, 1994, it does not qualify as an 'input service' because it does not contribute to the manufacture of final products or the provision of output services. The Tribunal relied on the Repco Home Finance Ltd. decision, which concluded that foreclosure charges are not subject to service tax under 'banking and other financial services.'

Key evidence and findings:

The Tribunal considered the loan agreements between the appellants and the consortium of banks, which included clauses on pre-payment and foreclosure charges. It found that these charges were not related to the financing services provided by the banks but were instead compensation for the loss of interest due to premature loan termination.

Application of law to facts:

The Tribunal applied the legal definitions and precedents to the facts of the case, concluding that the foreclosure charges did not qualify as 'input services' because they were not related to the manufacturing process or output services. Instead, they were seen as compensatory charges for the banks, not directly linked to the appellants' business activities.

Treatment of competing arguments:

The appellants argued that the foreclosure charges were part of the financial services availed for their manufacturing business and thus qualified as input services. They cited various judgments to support their claim. However, the Tribunal rejected these arguments, emphasizing the distinction between services directly related to manufacturing and those merely compensatory in nature.

Conclusions:

The Tribunal concluded that the foreclosure charges did not qualify as 'input services' under Rule 2(l) of the CENVAT Credit Rules, 2004, and thus the appellants were not entitled to avail CENVAT credit on the service tax paid on these charges.

SIGNIFICANT HOLDINGS

The Tribunal upheld the decision of the Commissioner (Appeals) and the original authority, confirming the denial of CENVAT credit on the service tax paid on foreclosure charges. It emphasized that foreclosure charges are not 'input services' as they do not contribute to the manufacture of final products or the provision of output services.

Core principles established:

The decision reinforced the principle that not all services related to financial transactions qualify as 'input services' for CENVAT credit purposes. Only those services that directly relate to the manufacture of goods or provision of output services are eligible.

Final determinations on each issue:

The Tribunal determined that the foreclosure charges were compensatory in nature and not related to the appellants' manufacturing activities. As such, the service tax paid on these charges was not eligible for CENVAT credit. The appeal filed by the appellants was dismissed, and the impugned order dated 12.11.2021 was upheld.