9911796707
TMI Blog2019 (8) TMI 1029X X X X Extracts X X X X X X X X Extracts X X X X ..... making available the clean line of credit facility available to their client/ customer. There are no merits in the submissions of the appellant that the commitment fees charged by them for extend clean line of credit facility to CCIL is interest charge or in nature of liquidated damages. The reliance placed by the counsel for appellant on the decision of this tribunal in case of COLLR. OF C. EX., BOMBAY VERSUS RAM DECORATIVE INDUSTRIES LIMITED [ 1998 (2) TMI 402 - CEGAT, NEW DELHI] is not of any help. In that decision the tribunal was dealing with goods which are tangible in nature and were produced for sale to the customer on an agreed price. The charges which were collected towards the goods not actually lifted by the buyer were held not to be added to the value of the goods that were actually lifted by the buyer - In the case of services, which are intangible in nature the same principle cannot apply. For levy of liquidated damages the existence of specific contract, whose performance has been vitiated by the actions of the parties to the contract need to be established. In the present case appellants have not been able to establish existence of such a contract whereby ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic sector bank and is providing Banking and Financial Services as defined by Section 65(12) of the Finance Act, 1994. 2.2 As per the intelligence gathered the Appellant had entered into a credit facility agreement with M/s Clearing Corporation of India Ltd (CCIL) under which M/s CCIL were required to pay a commitment fee to the Appellant, as fixed percentage, per annum, of fund based limit. The said commitment fee was directly being debited to the account, by the Appellant, without raising any invoice. The said service of lending was a taxable service, w.e.f 11.09.2004 under the category of Banking and Other Financial Services . However appellants had not taken any registration or paid service tax in respect of the services so rendered. 2.2 After completion of investigations a Show Cause Notice dated 26.12.2006, was issued to them asking them to show cause as to why i. the service tax including education cess amounting to ₹ 3,30,031/- (Rupees Three Lakhs thirty thousand and thirty one only), as detailed in Annexure I, should not be assessed and recovered from it under proviso to section 73 read with Section 66 and 68 of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as CCIL had not utilized the facility, in the hands of appellant these so named commitment fees charges are in fact, in terms of banking practices, minimum interest and not bank charges. The facility so extended by the appellant is disaster management facility only and cannot be termed as lending. This is further strengthened by the fact that CCIL had never utilized this facility by drawing any amount out of ₹ 100 Crore extended by them during the entire period. They are one of the six promoters of CCIL and hence CCIL cannot be considered as one of the Banking Customer for them. Thus relevant provisions of Section 65 (105)(zm) do not apply in their case. Cum Tax Benefit as per Section 67(2) should have been allowed to them. Penalties under Section 76, 77 78 should not have been imposed, also benefit of Section 80 should have been extended to them. Simultaneous penalties under Section 76 and 78 should not have been imposed [The Financers [2007 (80 STR 7 (T-Del)], Kamal Photo Studio and Color Lab [2007 (7) STR 307 (T-Mum)] They being public sector bank, o malafide intentions can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could not have been lended against the interest to other borrowers. [M/s Cheshire and Fifoot, 7th Edition, The Law of Contract page 561 to 565, Ansons Law of Contract 28th Edition J Beatson page 624 625, McGregor on Damages, 20th edition by James Edelman para 16.033 16.034 page 517 518] Issue on the payment of damages has been considered and decided by the Australian GST {Shaw V Director of Housing Anor (No 2) [2001 ATC 4054]. Further in case of Ram Decorative Industries Limited [2000 (124) ELT 659 (T)] it has been held that commitment charges collected from the buyers of excisable goods who failed to lift the entire quantity are in nature of liquidated damages and not includible in assessable value. Commitment charges for un-availed portion of facilities fall within broad meaning of interest and same is excluded from the purview of the service tax. Board has vide letter F No B2/8/2004-TRU dated 10.09.2004 sated The interest on loans has been specifically excluded by way of amendment to the provisions relating to the valuation. All such interests that are in nature of interest on loan would thus remain excluded from taxable value. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.1 We have considered the impugned order along with the submissions made in appeal and during the course of argument of appeal. 5.2 Undisputedly Appellants had extended the Line of Credit facility under a written agreement to Clearing Corporation of India Ltd (CCIL). (CCIL) was set up in April, 2001 to provide guaranteed clearing and settlement functions for transactions in Money, G-Secs, Foreign Exchange and Derivative markets. The Core Committee, appointed at the behest of Reserve Bank of India for setting up CCIL, identified six core promoters for CCIL - State Bank of India, IDBI Bank Ltd.(formerly Industrial Development Bank of India), ICICI Bank Ltd, Life Insurance Corporation of India (LIC), Bank of Baroda and HDFC Bank Ltd. 5.3 CCIL had vide its letter No CCIL/L7S/o6/265 dated 17.11.2006 in response to summons dated 09.11.2006 issued to them submitted the details sating that- Appellants recovered interest on the line of credit (LOC) amount utilized by it in form of LOC utilization charges; The LOC utilization charges were recovered by CCIL from its defaulting members; No bills were raised b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly are associated with unused credit lines or undisbursed loans. The terms committed and uncommitted facilities are used to refer to the terms and conditions of capital funding for short- or long-term agreements. A committed facility is a credit source that has committed to providing a loan to a company. In committed facilities, the borrowing company must meet specific requirements set forth by the lending institution in order to receive the stated funds. Once the terms and conditions of the loan contract have been agreed upon, the lender must advance money to the borrower when requested. In return, the borrower pays the lender a commitment fee a fee payable to a lender on available but undrawn amounts and calculated as a percentage of those undrawn funds from time to time. With a committed facility, the bank agrees to provide funds up to a maximum limit for a specified period of time and at an agreed interest rate. Although the terms and conditions are stringent and specific on how the funds are to be used, borrowing firms receive a guaranteed source of funding for the duration of the agreement. A commitment fee generally is specified as eith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is either uncertain or difficult to quantify , (b) the amount is reasonable and considers the actual or anticipated harm caused by the contract breach, the difficulty of providing the loss, and the difficulty of finding another, adequate remedy; and (c) the damages are structured to function as damages, not as a penalty, which applies to the Appellant s case. 11. The opening of a line of credit by the Appellant, for loan to the potential borrower, M/s. CCIL, is in itself part of the taxable service of lending, provided by the Appellant to M/s. CCIL, and as per banking practices they, as lender, have charged the commitment fee either as liquidated damages for breach of contract or as compensation for earmarking the funds for loan to the said borrower. Commitment fees, are therefore distinct and separate from interest and are thus part of the taxable service charges which are liable to service tax. Further, M/s. CCIL is an independent company, and even if they had been promoted by the Appellant, as claimed, it does not mean that M/s. CCIL cannot be a customer of the Appellant, for the purpose of providing taxable services, as argued in their submission. The c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against agreed consideration. Thus in our view the findings recorded by the Commissioner in this respect cannot be faulted with. 5.8 In view of discussions as above we do not find any merits in submissions of the Appellant, relying on the Hon ble Apex Court decision in case of Bhayana Builders. In this case there is clear nexus between the service provided and the consideration received. In case of HUDCO, Tribunal has held as follows: 8. This definition of Banking and other financial services was amended by Finance Act, 2004 and the present definition as amended reads as under : banking and financial services means - (a) the following services provided by a banking company or a financial institution including a non banking financial company or any other body corporate or commercial concern, namely :- (i) financial leasing services including equipment leasing and hire purchase; (ii) credit card services; (iii) merchant banking services; (iv) securities and foreign exchange (forex) broking; (v) asset management including portfolio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the prepayment, track record of the borrower in servicing loan, the Interest rate existing at the time of lending and at the time of closure, and the loss to the lender because of prepayment are taken into account. Admittedly, the prepayment charges vary from borrower to borrower, according to the appellant themselves. Further, it is collected for premature closure of the loan and it is not the interest factor that is taken into account. It has to be noted that when a borrower makes a prepayment and therefore pays interest separately up to the date of payment, that amount is shown separately as interest and prepayment charges are not collected as interest, but collected as prepayment charges. Further, even though the borrower has already borrowed the money and the process is over, when prepayment is proposed, borrower is expected to make a request which has to be considered by lender, charges worked out and informed and paid along with principal and interest up to the date of payment. Therefore, there is definitely an element of service involved in considering the request of the borrower for prepayment of loan, fixing of prepayment charges, collection of the same and closure of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered the issue and come to the conclusion that the activity of foreclosure is amounting to withdrawal of the service and not providing any service at all and therefore, the decision of the Tribunal in the case of SIDBI would be still applicable even though the definition was different. At this stage, we have to take note of the fact that in the case of SIDBI, the Department had not even indicated as to which part of the definition, the activity of foreclosure falls under. The observations of the Tribunal in the order start with this sentence. There was no discussion as to the nature of payment, method adopted, how it is covered under the definition and why it is taxable. When the definition itself did not cover the lending activity itself, the question as to whether the prepayment of loan is a part of service or not, was not considered and could not have been considered. The observations of the Tribunal have to be considered in the context in which they were made and in line with which provisions they were made and it is also to be taken note that the decision is in the light of the submissions made by both sides. In this connection, we find it appropriate to take note of the deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f loan or reset of interest would also be chargeable. In fact, we are unable to see what is the difference between the liability of Service Tax in respect of application of a loan where the processing fee is charged which is independent of loan and over and above the interest, when we see here also it is over and above the interest. The processing fee is charged for considering the various aspects such as credit worthiness of the borrower repaying capacity of the borrower, period of loan vis- -vis repaying capacity of the borrower, quality of assets of the borrower etc. When the proposal is made for prepayment of loan or resetting, processing the application is involved. Therefore, there is definitely an element of service in prepayment of loan or resetting of interest. As already discussed earlier, the definition covers any activity in relation to lending. 15. Even though, we have not discussed the charges levied for resetting the loan in detail, the principle underlining reset of interest and prepayment of loan are same. The Revenue has a better case in respect of reset charges since the issue is not at all covered by the decision of the Tribunal in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reset charges and prepayment charges can be considered as the cost incurred by the borrower towards value added services like restructuring of the loan and prepayment of loan. Hence, the same charges are liable for Service Tax. 18.1 Reset charges/prepayment charges charged to the customers by the appellant is in the nature of additional interest only and therefore not liable to Service Tax. 18.2 The appellant has contended that the said charges are calculated taking into consideration the rate of interest and loan amount. Thus, they are in the nature of additional interest and not liable to Service tax. 18.3 It has already been discussed that the prepayment charges are the charges for allowing the facility of prepayment of loan. Similarly, reset charges are the charges levied by the appellant for restructuring the interest rate. The method of calculating the charges has no bearing on the nature of service provided. Just because the charges have been calculated based on the outstanding loan amount and the interest rate prevalent at that time will not change the head of income from service charges to interest. 18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant is wholly owned Government Company and therefore there cannot be mala fide intention on their part to evade payment of Service Tax. Revenue relied upon the decision of the Tribunal in the case of Bharat Petro Corporation Ltd. v. CCE, Nasik 2009 (242) E.L.T. 358 (Tri.- Mum.), wherein the Tribunal upheld the submission that BPCL is a Government owned company had suppressed the fact and therefore, just because it is wholly owned Govt. company, it cannot be said that bona fide can be presumed. He also submitted that blind belief cannot be a ground for non-payment of taxes. In this case, we find that the appellants have treated the amount of prepayment charges as additional interest and reset charges as additional interest from 2005-2006. It was also submitted that Income Tax Department has accepted such treatment given by them. The fact remains that after definition of lending was amended, and the service tax definition included in the activity in relation to lending for liability to Service Tax, appellant should have intimated the fact to the Department and checked up whether such collection of amount in relation to lending would be liable to tax or not. It is settled law tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal has in case of HUDCO held as follows: 22. An alternative submission was made that the provisions of Section 80 are invocable in this case. According to Section 80 of Finance Act, 1994, provision of Section 76, 77 or 78, no penalty shall be imposable on the assessee for any failure referred to any such provision, if the assessee prove that there was a reasonable cause for the said failure. We consider that the appellant being a wholly owned government company and the fact that they did not pay Service Tax only on prepayment charges and reset charges and also in view of the fact that accounting treatment given to these items as additional interest has been accepted by the Income Tax department, in our opinion, would be sufficient for invoking provisions of Section 80 of Finance Act, 1994. Accordingly, while upholding the demand of Service Tax and interest, penalties imposed under various Sections of Finance Act, 1994 are set aside. 5.13 In our view when he have held the invocation of extended period of limitation in terms of proviso to section 73(1), penalty under Section 78 should follow in view of the decision of Hon ble Apex Court in c ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
