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TMI Blog2024 (11) TMI 404X X X X Extracts X X X X X X X X Extracts X X X X ..... AL) AND MR. RAJU, MEMBER (TECHNICAL) Ms. Dimple Gohil, Advocate appeared for the Appellant Sh. Himanshu P. Shrimali, Superintendent (Authorized Representative) for the Respondent ORDER The issue involved in the present case is that whether interest charged by the appellant to their customer against the sale of the goods for delayed payment can be classified as declared service under Section 66E(e) of the Finance Act as agreeing to the obligation to tolerate an Act and consequential liable to service tax or otherwise. 2. Ms. Dimple Gohil, learned counsel appearing on behalf of the appellant, at the outset, submits that the issue is no longer res integra as in numerous judgments this issue has been considered. She placed reliance on the following judgments: a) South Eastern Coalfields Ltd. 2021 (55) GSTL 549 (Tri. Del.) b) Repco Home Finance Pvt. Ltd. 2020 (42) GSTL 104 (Tri. Del.) c) K.N. Food Industries Pvt. Ltd. 2020 (38) GSTL 60 (Tri.-All.) d) M.P. Poorva Kshetra Vidyut Vitran Co. Ltd. 2021 (46) GSTL 509 (T.Del.) e) Steel Authority of India Ltd. 2021 (55) GSTL 34 (Tri. Chennai) f) Ruchi Soya Industries Ltd. 2022 (56) GSTL 303 (Tri. Del.) g) Lemon Tree Hotel [2020 (34) GSTL 200 (T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e) of the Finance Act, 1994 read with Section 174 (2) CGST Act, 2017. 7. On perusal of the records of the case, it transpires that during an audit conducted on the records of the appellants, the agreements entered by the appellants with their customers/borrowers were examined and the audit wing of the department had identified non-payment of service tax, both (i) on penal interest/penal charges collected in case of default/delay in payment of EMI and (ii) on charges recovered for bouncing/dishonour of the repayment instruments, cheque, ECS or other electronic or clearing mandate, in respect of loans and advances given to their customers/borrowers. The Department has interpreted that, as per Section 66B which was introduced with effect from 01.07.2012, read with Section 65B(44) of the Finance Act, 1994, any activity carried on by a person for another for consideration , will be levied to service tax, unless otherwise excluded or covered by the negative list of services. On the basis of various clauses in the agreement entered into by the appellants with their customers/borrowers, the Department alleged that recovery/earning of an extra/surplus (i.e., penal interest/penalty) being ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd thereby Service in terms of Section 65B(44) of the Finance Act, 1994 and taxable service in terms of Section 65(51) of the Finance Act, 1994 and penal and bounce charges paid by the Borrowers and Customers in lieu is the consideration for the services rendered as above; b) I confirm the Show Cause Notice No. Show Cause Notice SCN No.07/R-I/DN-V/GST-I/AUDIT-I/COMMR/2017-18 issued F. No. V (ST)15-17/Commr/Audit-I/17-18 dated 15.01.2018 and determine the demand of Service Tax amounting to Rs.53,87,14,050/- [Rupees Fifth three crores eighty seven lakhs fourteen thousand and fifty only], not paid by M/s Bajaj Finance Limited on the peal and bounce charges received from the Customers and Borrowers during the period from 01.07.2012 to March 2016, under the provisions of Section 73(2) of the Finance Act, 1994. c) I confirm the demand of interest on the amount of Service tax confirmed as detailed in Sr. No.(b) above, as the applicable rates, and order recovery of the same from M/s Bajaj Finance Limited, under the provisions of Section 75 of Finance Act, 1994. d) I also impose a penalty of Rs.53,87,14,050/- [Rupees Fifth three crores eighty seven lakhs fourteen thousand and fifty only], o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or (iii) a transaction in money or actionable claim; (b) a provision of service by an employee to the employer in the course of or in relation to his employment; (c) fees taken in any Court or tribunal established under any law for the time being in force xx xx xx xx xx (51) taxable service means any service on which service tax is leviable under section 66B; 66B. Charge of service tax on and after Finance Act, 2012. There shall be levied a tax (hereinafter referred to as the service tax) at the rate of fourteen percent. on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed. 66D. Negative list of services . The negative list shall comprise of the following services, namely: (a) services by Government or a local authority excluding the following services to the extent they are not covered elsewhere (i) services by the Department of Posts by way of speed post, express parcel post, life insu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the consideration is represented by way of interest or discount; (ii) inter se sale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange or amongst banks and such dealers; (o) service of transportation of passengers, with or without accompanied belongings, by (i) a stage carriage; (ii) railways in a class other than (A) first class; or (B) an air conditioned coach; (iii) metro, monorail or tramway; (iv) inland waterways; (v) public transport, other than predominantly for tourism purpose, in a vessel between places located in India; and (vi) metered cabs, radio taxis or auto rickshaws; (p) services by way of transportation of goods (i) by road except the services of (A) a goods transportation agency; or (B) a courier agency; (ii) by an aircraft or a vessel from a place outside India up to the customs station of clearance in India; or (iii) by inland waterways; (q) funeral, burial, crematorium or mortuary services including transportation of the deceased. 66E. Declared services. The following shall constitute declared services, namely: (a) renting of immovable property xx xx xx xx xx (e) agreeing to the obligation to refrain from an act, or to toler ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erm interest under Section 65B(30) ibid. 10.1. In the context of the above issues under dispute, we note that the banking and monetary policy framework are being designed by the Reserve Bank of India (RBI) in exercise of the powers vested with it under the Reserve Bank of India Act, 1934 and various policy circulars in this regard are being issued from time to time by RBI. Accordingly, all banks/ banking company dealing with banking business are required to charge interest on loans / advances / cash credits / overdrafts or any other financial accommodation granted / provided / renewed by them or discount usance bills in accordance with the directives on interest rates on advances issued by Reserve Bank of India from time to time. The Master Circular issued by RBI in this regard vide RBI/2010-11/72 DBOD.No.Dir.BC.9 /13.03.00/2010-11 dated 01.07.2010 deals, inter-alia, with the issue of penal interest, as follows: 2. Guidelines 2.1. General 2.1.1. Banks should charge interest on loans / advances / cash credits / overdrafts or any other financial accommodation granted / provided / renewed by them or discount usance bills in accordance with the directives on interest rates on advances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry 5(e) of Schedule II of the CGST Act i.e. agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act , as this levy of additional/penal interest satisfies the definition of interest as contained in Notification No.12/2017-Central Tax (Rate) dated 28.06.2017. Accordingly, it was clarified that penal interest charged on a transaction would not be subject to GST. The said circular is extracted below: Circular No. 102/21/2019-GST F. No. CBEC- 20/16/04/2018 GST Government of India Ministry of Finance Department of Revenue Central Board of Indirect Taxes and Customs GST Policy Wing **** New Delhi, Dated the 28th June, 2019 To, The Principal Chief Commissioners / Chief Commissioners / Principal Commissioners / Commissioners of Central Tax (All) The Principal Director Generals / Director Generals (All) Madam/Sir, Subject: Clarification regarding applicability of GST on additional / penal interest reg. Various representations have been received from the trade and industry regarding applicability of GST on delayed payment charges in case of late payment of Equated Monthly Instalments (EMI). An EMI is a fixed amount paid by a borrower to a lende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of sub-clause (d) of sub-section (2) of section 15 of the CGST Act, the value of supply shall include interest or late fee or penalty for delayed payment of any consideration for any supply . Further in terms of Sl. No. 27 of notification No. 12/2017- Central Tax (Rate) dated the 28.06.2017 services by way of (a) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services) is exempted. Further, as per clause 2 (zk) of the notification No. 12/2017-Central Tax (Rate) dated the 28th June, 2017, interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) but does not include any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised; . 5. Accordingly, based on the above provisions, the applicability of GST in both cases listed in para 3 above would be as follows: Case 1: As per the provisions of sub-clause (d) of sub-section (2) of section 15 of the CGST Act, the amount of penal interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est of the appellant and it cannot, by any stretch of imagination, be said that recovering any sum by invoking the penalty clauses is the reason behind the execution of the contract for an agreed consideration. It is not the intention of the appellant to impose any penalty upon the other party nor is it the intention of the other party to get penalized. Hence, it was held by the Tribunal that it is not possible to sustain the view that penalty amount, forfeiture of earnest money deposit and liquidated damages have been received by the appellant towards consideration for tolerating an act leviable to service tax under section 66E(e) of the Finance Act. The relevant paragraphs in the above order of the Tribunal are extracted below: 24. What follows from the aforesaid decisions of the Supreme Court in Bhayana Builders and Intercontinental Consultants, and the decision of the Larger Bench of the Tribunal in Bhayana Builders is that consideration must flow from the service recipient to the service provider and should accrue to the benefit of the service provider and that the amount charged has necessarily to be a consideration for the taxable service provided under the Finance Act. Any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... auses get attracted. The penal clauses are in the nature of providing a safeguard to the commercial interest of the appellant and it cannot, by any stretch of imagination, be said that recovering any sum by invoking the penalty clauses is the reason behind the execution of the contract for an agreed consideration. It is not the intention of the appellant to impose any penalty upon the other party nor is it the intention of the other party to get penalized. 28. It also needs to be noted that section 65B(44) defines service to mean any activity carried out by a person for another for consideration. Explanation (a) to section 67 provides that consideration includes any amount that is payable for the taxable services provided or to be provided. The recovery of liquidated damages/penalty from other party cannot be said to be towards any service per se, since neither the appellant is carrying on any activity to receive compensation nor can there be any intention of the other party to breach or violate the contract and suffer a loss. The purpose of imposing compensation or penalty is to ensure that the defaulting act is not undertaken or repeated and the same cannot be said to be towards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penalty 7.3 No supplier wants a cheque given to him to be dishonoured. It entails extra administrative cost to him and disruption of his routine activities and cash flow. The promise made by any supplier of goods or services is to make supply against payment within an agreed time (including the agreed permissible time with late payment) through a valid instrument. There is never an implied or express offer or willingness on part of the supplier that he would tolerate deposit of an invalid, fake or unworthy instrument of payment against consideration in the form of cheque dishonour fine or penalty. The fine or penalty that the supplier or a banker imposes, for dishonour of a cheque, is a penalty imposed not for tolerating the act or situation but a fine, or penalty imposed for not tolerating, penalizing and thereby deterring and discouraging such an act or situation. Therefore, cheque dishonor fine or penalty is not a consideration for any service and not taxable. 14. We further find that the issue of liability of service tax on the declared service of Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act under clause (e) of Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2022 dated 12.8.2022 in case of M/s Western Coalfields Ltd. Further, Board has decided not to pursue the Civil Appeals filed before the Apex Court in M/s South Eastern Coalfields Ltd. supra (CA No. 2372/2021), M/s Paradip Port Trust (Dy. No. 24419/2022 dated 08-08-2022), and M/s Neyveli Lignite Corporation Ltd (CA No. 0051-0053/2022) on this ground. 6. In view of above, it is clarified that the activities contemplated under section 66E(e), i.e. when one party agrees to refrain from an act, or to tolerate an act or a situation, or to do an act, are the activities where the agreement specifically refers to such an activity and there is a flow of consideration for this activity. Field formations are advised that while taxability in each case shall depend on facts of the case, the guidelines discussed above and jurisprudence that has evolved over time, may be followed in determining whether service tax on an activity or transaction needs to be levied treating it as service by way of agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. Contents of Circular No. 178/10/2022-GST dated 3rd August, 2022, may also be referred to in this reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forum, we are of the considered view that the impugned order holding that penal interest and bouncing charges received by the appellants as consideration for tolerating an act , and are leviable to service tax under section 66E(e) of the Finance Act, 1994, cannot be sustained. 17. In view of the above, the appeals filed by the appellants are allowed by setting aside the impugned order dated 24th August, 2018. In the case of South Eastern Coalfields Ltd. 2021 (55) GSTL 549 (Tri. Del.) following has been observed: 10 . The issue that is involved is whether the appellant is providing a declared service contemplated under section 66E(e) of the Finance Act, which service became taxable w.e.f July 1, 2012. The period of dispute in the present appeal is from July 2012 to March 2016. 11 . Section 65B(44) of the Finance Act defines service to mean any activity carried out by a person for another for consideration, and includes a declared service, but does not include what is mentioned in a,b and c . The relevant portion of the definition of service is reproduced below: Section 65B(44) service means any activity carried out by a person for another for consideration, and includes a declared s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed. Section 66D contains a negative list of services, while section 66E contains a list of declared services. 16. Section 67 of the Finance Act deals with valuation of taxable service for charging service tax. It is reproduced below:- 67. (1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference to its value, then such value shall,- (i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him; (ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money, with the addition of service tax charged, is equivalent to the consideration; (iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner. ** ** ** ** Explanation. - For the purposes of this section,- (a) considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxable service and is not a consideration for the service provided does not become part of the value which is taxable under Section 67. The observations are: The amount charged should be for for such service provided : Section 67 clearly indicates that the gross amount charged by the service provider has to be for the service provided. Therefore, it is not any amount charged which can become the basis of value on which service tax becomes payable but the amount charged has to be necessarily a consideration for the service provided which is taxable under the Act. By using the words for such service provided the Act has provided for a nexus between the amount charged and the service provided. Therefore, any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which is taxable under Section 67. The cost of free supply goods provided by the service recipient to the service provider is neither an amount charged by the service provider nor can it be regarded as a consideration for the service provided by the service provider. In fact, it has no nexus whatsoever with the taxable services for whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he service provider and should accrue to the benefit of the service provider and that the amount charged has necessarily to be a consideration for the taxable service provided under the Finance Act. Any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which is taxable. It should also be remembered that there is marked distinction between conditions to a contract and considerations for the contract . A service recipient may be required to fulfil certain conditions contained in the contract but that would not necessarily mean that this value would form part of the value of taxable services that are provided. 25 . It is in the light of what has been stated above that the provisions of section 66E(e) have to be analyzed. Section 65B(44) defines service to mean any activity carried out by a person for another for consideration and includes a declared service. One of the declared services contemplated under section 66E is a service contemplated under clause (e) which service is agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. There has, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... breach or violate the contract and suffer a loss. The purpose of imposing compensation or penalty is to ensure that the defaulting act is not undertaken or repeated and the same cannot be said to be towards toleration of the defaulting party. The expectation of the appellant is that the other party complies with the terms of the contract and a penalty is imposed only if there is non-compliance. 29 . The situation would have been different if the party purchasing coal had an option to purchase coal from A or from B and if in such a situation A and B enter into an agreement that A would not supply coal to the appellant provided B paid some amount to it, then in such a case, it can be said that the activity may result in a deemed service contemplated under section 66E (e). 30 . The activities, therefore, that are contemplated under section 66E (e), when one party agrees to refrain from an act, or to tolerate an act or a situation, or to do an act, are activities where the agreement specifically refers to such an activity and there is a flow of consideration for this activity. 31 . In this connection, it will be useful to refer to a decision of the Supreme Court in Food Corporation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffected for consideration within the territory of the country by a taxable person acting as such is subjected to VAT. Article 6(1) of the Sixth Directive provides that supply of services shall mean any transaction which does not constitute a supply of goods within the meaning of Article 5 and that such transactions may include inter alia an obligation to refrain from an act or to tolerate an act or situation. Under Article 11(A) (1) (a) of the Sixth Directive, the taxable amount in respect of supplies of services is to be everything which constituted the consideration which has been or is to be obtained by the supplier from the customer or a third party for such supplies . 34 . The question referred for preliminary hearing, in essence, in the aforesaid decision was whether a sum paid as a deposit by a client to a hotelier, where the client exercises the cancellation option available to him and that sum is retained by the hotelier, can be regarded as consideration for the supply of a reservation service, which is subject to VAT, or as a fixed compensation for cancellation, which is not subject to VAT. The Court found that there has to be a direct link between the service rendered an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fee for a service and forms no part of the taxable amount for VAT purposes (see, to that effect, as regards interest applied on account of late payment, Case 222/81 BAZ Bausystem [1982] ECR 2527, paragraphs 8 to 11). (emphasis supplied) 35 . Reference can also be made to a decision of the Tribunal in Lemon Tree Hotel. The issue that arose for consideration was whether forfeiture of the amount received by a hotel from a customer on cancellation of the booking would be leviable to service tax under section 66E(e). The Tribunal held that the retention of the amount on cancellation would not attract service tax under section 66E (e) and the relevant portion of the decisions is reproduced below: 3. So far as the first issue is concerned, the appellant, in the course of their business of running a hotel, offers advance booking to its customers, on payment of rent or deposit. Sometimes in the event of cancellation or of no show i.e. if the guest does not come for stay, the appellants retains the full or part of the amount towards cancellation charges. It is admitted that the appellant have paid service tax under Accommodation Services as and when they receive advance, availing the permis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is admittedly manufacturing confectionaries for and on behalf of the M/s Parle and is clearing the same upon payment of Central Excise duty on the basis of MRP declared by M/s Parle. It is only in situation when the appellants capacity, as a manufacturer, is not being fully utilized by M/s Parle, their claim of ex-gratia charges arises so as to compensate them from the financial damage/injury. As such, ex-gratia amount is not fixed and is mutually decided between the two, based upon the terms and conditions of the agreement and is in the nature of compensation in case of low/less utilization of the production capacity of the assessee. ******* ******* ******* In the present case apart from manufacturing and receiving the cost of the same, the appellants were also receiving the compensation charges under the head ex-gratia job charges. The same are not covered by any of the Acts as described under Section 66E (e) of the Finance Act, 1994. The said Sub-clause proceeds to state various active and passive actions or reactions which are declared to be a service namely; to refrain from an act, or to tolerate an act or a situation, or to do an act. As such for invocation of the said claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stipulated date, then the sum of ₹ 25,000/- (₹ 1000 received as earnest money deposit and the subsequent ₹ 24,000/- out of the sale price) would be forfeited and the agreement cancelled. 39 . The plaintiff received the agreed sum on March 25, 1949 and possession was delivered, but the sale of the property was not completed before the expiry of the stipulated period. The plaintiff, therefore, sought a decree for possession of land and building and a decree of ₹ 6500/- as compensation for use and occupation of the building. It was alleged that the agreement stood cancelled because the defendant committed a default in performing the agreement and the sum of ₹ 25,000/- paid by the defendant stood forfeited. 40 . It is in this context and in the context of section 74 of the Contract Act, that the Supreme Court observed: 20. Section 74 declares the law as to liability upon breach of contract where compensation is by agreement of parties pre-determined, or where there is a stipulation by way of penalty. But the application of the enactment is not restricted to cases where the aggrieved party claims relief as a plaintiff. The section does not confer a special ..... X X X X Extracts X X X X X X X X Extracts X X X X
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