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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 ..... UDICIAL) 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 Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oviding a declared service in terms of Section 66E(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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Section 66(E)(e) of the Finance Act, 1994 read with Section 65B(22) of the Act and 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.5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s merely, -- (i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or (ii) such transfer, delivery 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iii) education as a part of an approved vocational education course; (m) services by way of renting of residential dwelling for use as residence; (n) services by way of-- (i) extending deposits, loans or advances in so far as 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, buria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost for agreed periodical repayments in the form of EMI period/due dates, the later represent the cost for period of delay or additional time taken for repayment of EMI, beyond the due date. Thus, we find that both the principal interest and penal interest is covered under the scope of the term "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing charging of penal interest in respect of delay in payment of EMI, had been examined by the Ministry of Finance in the context of applicability of GST and it was clarified vide CBIC Circular No. 102/21/2019-GST dated 28.06.2019, that the transaction of levy of additional/penal interest does not fall within the ambit of entry 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 / Directo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay in payment. Case - 2: X sells a mobile phone to Y. The cost of mobile phone is Rs 40,000/-. Y has the option to avail a loan at interest of 2.5% per month for purchasing the mobile from M/s ABC Ltd. The terms of the loan from M/s ABC Ltd. allows Y a period of four months to repay the loan and an additional / penal interest @ 1.25% per month for any delay in payment. 4. As per the provisions 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 66E(e) of the Finance Act, on which service became taxable w.e.f. July 1, 2012, has already been decided by Principal Bench of this Tribunal in the case of M/s. South Eastern Coalfields Ltd. Vs. Commissioner of Central Excise and Service Tax in Final Order No. 51651/2020 dated 22.12.2020. In this case, the Tribunal had held that 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. 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 afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent has to be read as a whole so as to gather the intention of the parties. The intention of the appellant and the parties was for supply of coal; for supply of goods; and for availing various types of services. The consideration contemplated under the agreements was for such supply of coal, materials or for availing various types of services. The intention of the parties certainly was not for flouting the terms of the agreement so that the penal clauses 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellip;………J. [B.V. NAGARATHNA] ……………………………………………………………… [PRASHANT KUMAR MISHRA] NEW DELHI JULY 11, 2023 13. We also find that the question regarding taxability of an activity or transaction as the supply of service of agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act was examined by the CBEC and they had issued certain guidelines to the field formations clarifying the legal position for determining whether tax on an activity can be imposed, in its Circular No.178/10/2022-Service Tax dated 03.08.2022. The relevant portion of the above circular dealing with 'cheque dishonor fine/penalty' is extracted below: "Cheque dishonor fine/ 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have taken place unless there are two parties, one of which expressly or impliedly agrees to do or abstain from doing something and the other agrees to pay consideration to the first party for doing or abstaining from such an act. Such contractual arrangement must be an independent arrangement in its own right. There must be a necessary and sufficient nexus between the supply (i.e. agreement to do or to abstain from doing something) and the consideration. 5. The issue also came up in the CESTAT in Appeal No. ST/ 50080 of 2019 in the case of M/s Dy. GM (Finance) Bharat Heavy Electricals Ltd in which the Hon'ble Tribunal relied on the judgement of divisional bench in case of M/s South Eastern Coal Fields Ltd Vs. CCE Raipur {2021(55) G.S.T.L 549(Tri-Del)}. Board has decided not to file appeal against the CESTAT order ST/A/50879/2022CU[DB] dated 20.09.2022 in this case and also against Order A/85713/2022 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pply of service, but Learned Counsel for the appellant has pointed out that the said order was rectified subsequently by the Appellate Authority for Advance Ruling Maharashtra in its order dated December 12, 2019 [2020 (41) G.S.T.L. 651 (App. A.A.R. GST - Mah.)] and it was held. "We hereby hold that the additional/Penal interest recovered by the Applicant from their customers against the delayed payment of monthly instalments of the load extended to such customers, would be exempt from GST in terms of Sl. 27 of the Notification No. 12/2017-C.T. (Rate), dated 28-6-2017." 22. Thus, for all the reasons stated above, it is not possible to sustain the impugned order dated June 18, 2015 passed by Commissioner. It is, accordingly, set aside and the appeal is allowed." 16. In view of the above discussions and findings recorded in the preceding paragraphs, as well as on the basis of decisions of the Tribunal and higher judicial 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing various types of services for breach of the terms and conditions of the contract; and (iii) Liquidated damages from the suppliers of materials for breach of the terms and conditions of the contract. 14. Liability has been fastened upon the appellant under section 65B read with section 66E(e) of the Finance Act for the period from July 2012 till March 2016 for the reason that by collecting the said amount the appellant had agreed to the obligation to refrain from an act or to tolerate the non-performance of the terms of the contract by the other party. 15. Section 65B (44) defines 'service' to mean any activity carried out by a person for another person for consideration, and includes a declared service. Under section 66E (e), a declared service shall constitute agreeing to the obligation to refrain from an act, or to tolerate an act or situation, or to do an act. Section 66 B provides that service tax shall be levied at the rate of 12 per cent 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. Section 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or should flow from the service recipient to the service provider and should accrue to the benefit of the latter. In the said decision, the Larger Bench made reference to the concept of "consideration', as was expounded in the decision pertaining to Australian GST Rules, wherein a categorical distinction was made between "conditions' to a contract and "consideration for the contract". It has been prescribed under the said GST Rules that certain "conditions' contained in the contract cannot be seen in the light of "consideration' for the contract and merely because the service recipient has to fulfil such conditions would not mean that this value would form part of the value of the taxable services that are provided. 20. The Supreme Court in Commissioner of Service Tax vs. M/s Bhayana Builders [2018 (2) TMI 1325] , while deciding the appeal filed by the Department against the aforesaid decision of the Tribunal, also explained the scope of Section 67 of the Act. The Supreme Court observed that 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 obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any amount that is payable for the taxable services provided or to be provided. Since this definition is inclusive it will not be out of place to refer to the definition of "consideration" as given in section 2(d) of the Indian Contract Act, 1872 as follows- xxxxx xxxxx xxxxx (emphasis supplied) 23. It would, therefore, be appropriate to examine the definition of "consideration" in section 2(d) of the Contract Act, as the Contract Act deals with all kinds of contracts and pre-dates the Finance Act. The definition of "consideration"" is as follows:- "2(d) When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise."" 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of services. The intention of the parties certainly was not for flouting the terms of the agreement so that the penal clauses 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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no consideration for supplemental contract." (emphasis supplied) 32. In the present case, the agreements do not specify what precise obligation has been cast upon the appellant to refrain from an act or tolerate an act or a situation. It is no doubt true that the contracts may provide for penal clauses for breach of the terms of the contract but, as noted above, there is a marked distinction between 'conditions to a contract' and 'considerations for a contract'. 33. It would be apt to refer to a judgment of the European Court of Justice (First Chamber) in Case C-277/2005, in Societe Thermale d'Eugenic-les-Bains vs. Ministere de I'Economie, des Finances et de I'Industrie as it deals with the issue whether an obligation to refrain from an act or to tolerate an act or situation would result in supply of services when 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. Under Article 2(1) of the Sixth Directive, 'the supply of goods or services effected for consideration within the territory of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the mandatory rules of public policy - to define the terms of their legal relationship, including the consequences of a cancellation or breach of their obligations. Instead of defining their obligations in detail, they may nevertheless refer to the various instruments of civil law. 29. Thus the parties may make contractual provision - applicable in the event of non-performance - for compensation or a penalty for delay, for the lodging of security or a deposit. Although such mechanisms are all intended to strengthen the contractual obligations of the parties and although some of their functions are identical, they each have their own particular characteristics. xxxxxx xxxxxxx xxxxxxx 32. Whereas, in situations where performance of the contract follows its normal course, the deposit is applied towards the price of the services supplied by the hotelier and is therefore subject to VAT, the retention of the deposit at issue in the main proceedings is, by contrast, triggered by the client"s exercise of the cancellation option made available to him and serves to compensate the hotelier following the cancellation. Such compensation does not constitute the fee for a service and forms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation made) by the appellant does not undergo a change after receipt. Accordingly, I hold that no service tax is attracted under the provisions of Section 66 E(e) of the Finance Act. Accordingly, this ground is allowed in favour of the appellant." (emphasis supplied) 36. A Division Bench of the Tribunal in K.N. Food Industries examined the provisions of section 66E(e) in the context of an assessee manufacturing for and on behalf of M/s Parley and clearing the same upon payment of central excise duty. In a situation when the capacity of the assessee was not fully utilized by M/s Parley, ex-gratia charges were claimed so as to compensate the assessee from financial damage or injury. The Department invoked the provisions of 66E(e) to levy tax on the amount so received. The Tribunal held that the ex-gratia charges were for making good the damages due to the breach of the terms of the contract and did not emanate from any obligation on the part of any of the parties to tolerate an act or a situation and cannot be considered to be towards payment for any services. The relevant portion of the decision is reproduced below: "4. ******* ******* ******* We find that appellant is admit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submission is that the word "suffering" is synonymous to "tolerating" and the Supreme Court in Fateh Chand held that a reasonable compensation for breach of contract has to be proportionate to the actual injury suffered. Thus, according to the learned authorized representative of the Department it has been acknowledged by the Supreme Court that in a case of breach of contract, one party tolerates an act or situation. 38. The decision of the Supreme Court in Fateh Chand does not help the Department. The facts indicate that the Delhi Improvement Trust had granted lease hold rights for ninety years to Dr. M.M. Joshi in respect of a property. The relevant clauses of the agreement are:- i) The plaintiff has agreed to sell the building to the defendant for ₹ 1,12,500/-. ii) ₹ 1000, being earnest money deposit, was to be paid to the plaintiff at the time of the execution of the agreement. iii) The plaintiff had to deliver actual possession to the defendant on March 30 1949 and the defendant had to give ₹ 24,000/- out of the sale price. iv) The defendant had to get the sale deed registered by July 1, 1949. If, for any reason, the defendant failed to get the sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,000/-. 42. The conclusion drawn by the learned authorized representatives of the Department from the aforesaid decision of the Supreme Court that compensation received is 'synonymous' with 'tolerating' or that the Supreme Court acknowledged that in a breach of contract, one party tolerates an act or situation is not correct. 43. It is, therefore, not possible to sustain the view taken by the Principal Commissioner 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. 44. The impugned order dated December 18, 2018 passed by the Commissioner, therefore, cannot be sustained and is set aside. The appeal is, accordingly, allowed." 4.1 From the above judgments including the Apex Court, judgment in South Eastern Coalfields Ltd., 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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