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TMI Blog2025 (2) TMI 740X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arges involved in obtaining such loan from them, under the taxable category of Banking and Financial services; further, the appellants have also taken credit of service tax paid on penalty/penal charges for pre-payment or foreclosure of loan. However, the department had objected to such availment of service tax on the ground that payment of penalty on pre- payment of loan does not qualify as input service in terms of Rule 2(l) of CENVAT Credit Rules, 2004. Accordingly, the department had initiated show cause proceedings by issue of Show Cause Notice dated 19.06.2019 for demanding inadmissible CENVAT credit of Rs.14,81,175/- under Rule 14(1)(ii) of CENVAT Credit Rules, 2004 read with Sections 73 and 75 of the Finance Act, 1994 along with interest and proposed for imposition of penalty under Rule 15 ibid read with Section 76 ibid. The said SCN was adjudicated by the original authority i.e., Assistant Commissioner, Nashik-II division in confirmation of the proposals made in the SCN by issue of Order-in-Original No.05/AC/NSK-II/ADJ/2021-22 dated 03.09.2019. Being aggrieved with the above order dated 03.09.2019, the appellants have filed an appeal before the Commissioner (Appeals), Nash ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charges treating the same as leviable to service tax, in respect of the input service of financing of loan they had taken CENVAT credit. Therefore, they claim that there is no basis for demand of CENVAT credit which they claimed that it has been rightly taken by the appellants. 3.3 In support of their stand the learned Advocate had relied upon the following judgements: (i) Doypack Systems (Pvt.) Limited Vs, Union of India - 1988 (36) E.L.T. 201 (S.C.) (ii) Commissioner of Central Excise and Customs Vs. Switchgear Ltd. - (2008) 17 SCC 71 (iii) Commissioner of Service Tax-IV Vs. Rosy Blue (India) Pvt. Ltd. - 2018 (13) G.S.T.L. 257 (Bom.) (iv) Bajaj Finance Ltd. Vs. Commissioner of Central Excise, Pune - I - 2018 (10) G.S.T.L. 251 (Tri. Mum.) (v) Pahwa Chemicals Pvt. Ltd., Vs. Commissioner of C. Ex., Delhi - 2005 (189) E.L.T. 257 (S.C.) (vi) Uniworth Textiles Ltd. Vs. Commissioner of C. Ex., Raipur - 2013 (288) E.L.T. 161 (S.C.) 4.1 On the other hand, learned Authrorised Representative (AR) appearing for Revenue stated that recovery of CENVAT credit in the impugned order has been done on grounds that the disputed services cannot be considered as 'input service' in terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1994 and CENVAT Credit Rules, 2004 dealt with in the impugned order are extracted and herein given below for ease of reference: Chapter V of the Finance Act, 1994 "Declared services. Section 66E. The following shall constitute declared services, namely:- (a) renting of immovable property; (b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion certificate by the competent authority. (c) ... (d) ... (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;... CENVAT CREDIT RULES, 2004 Definitions. "Rule2. In these rules, unless the context otherwise requires,- .... (l) "input service" means,- (i) services provided or agreed to be provided by a person located in non- taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India where service tax is paid by the manufacturer or the provider of output servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10th day of September, 2004,...." 8.2 The learned Commissioner (Appeals) in the impugned order had examined the issue under dispute in detail and have given specific findings as follows: "6. The moot issue that needs to be decided is whether the appellant is entitled to cenvat credit on service tax paid on foreclosure amount of loan taken by them from consortium of lenders banks (like Oriental Bank of Commerce & State Bank of Bikaner & Jaipur) considering the said pre- closure as an input service... .... 6.3 Upon considering the rival contentions it is manifest that the primary question on which the entire case hinges is whether the pre- closure (or foreclosure) of loan can be considered as an input service for the appellant or otherwise. The lower authority in its findings has been categorical that even through banking and financial service has been included in the definition of input services and credit on the said service can be taken and utilized for payment of service tax on output service, payments of penalty on pre-closure of loan does not qualify as input service in terms of the said Rule 2(l), ibid. Since the lower authority has not specifically clarified the reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such charging of foreclosure amount. Harmonious reading of Rule 2(1), Section 65(12), Section 66E(e) and the Repco Home Finance Ltd. case (Supra) would lead to the conclusion that the services rendered by the consortium banks during the period September 2016 to June 2017 to the appellant even though is a service the said service cannot be construed as input service contemplated under Rule 2(1) of CCR, 2004. Considering the above I find there is nothing on record to interfere with the findings of the lower authority. Accordingly, I pass the following order - ORDER The Order in Original No. 05/AC/NSK-II/ADJ/2021-22 dated 02.06.2021 passed by the Assistant Commissioner, CGST & Central Excise, Nashik-II Division, Nashik, is upheld and the appeal filed by the appellant is rejected." On perusal of the above 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 'declare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellants, since the department had found the same to be inadmissible. Therefore, I do not find any infirmity in the orders passed by the authorities below, in confirmation of the demands. 8.5 I also find that 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 (42) G.S.T.L. 104 (Tri. LB), 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. The relevant paragraphs of the said order is extracted and given below: "32. What needs to be noted from the aforesaid definition of consideration under Section 2(d) of the Contract Act is that consideration should flow at the desire of the promisor. Thus, if the consideration is not at the desire of the promisor, it ceases to be a consideration. The banks and non-banking financial companies are promisors and the promisees are the borrowers. The contractual r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s stage. Such remedies might attempt to do one of two things. First, they might attempt to put the injured party into the position in which he would have been if the contract had never been made. This would require the party in breach to restore anything that he had received under the contract, and also to compensate the injured party for any loss that he had suffered by acting in reliance on the contract. Such remedies are said to protect the injured party's restitution and reliance interest. But remedies for breach of contract go beyond the pursuit of these objectives. Their distinguishing feature is that they seek to put the injured party into the position in which he would have been if the contract had been performed. If, for example a seller agrees to sell goods for less than they are worth, and then fails to deliver them, he must compensate the buyer for not having received goods which are worth more than he had agreed to pay for them. Conversely, if a buyer contracts to buy goods for more than they are worth, and then fails to pay for them, he is liable for the agreed price. It is quite immaterial that the value of the goods with which the seller has parted was lower than th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r noticing that the contract contained a clause giving discretion to the Corporation to impose premium on the balance amount of loan, observed that granting of loans is a business of the Corporation and if the loan is prepaid, the Corporation may have to suffer loss. It is to overcome this situation that premium is charged. The observations are as follows; "13......................Therefore, the granting of loans or advances is one of the business of the Corporation. As stated above, the Corporation borrows funds from the financial institution at the prevailing rate of interest. If an account is prepaid/foreclosure when the interest rates are falling, the Corporation may have to suffer loss. To overcome this situation, if a premium is charged on the outstanding loan being prepaid, the same cannot be found fault with. I am of the considered view that the Corporation has the power and authority to levy prepayment/foreclosure premium." 37. The foreclosure of loan is, therefore, a material breach of contract as it curtails the loan service period unilaterally, which can prompt the promisor to claim damages. Damages can be determined by Courts or they can also be incorporated in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r damages is specified in the agreement. 42. To attract the provisions of Section 74 of the Contract Act it is not necessary that the entire contract should come to an end; the breach of each term thereof can be visualised in advance and taken care of by providing an adequate clause for liquidated damages so that the parties to the contract can proceed to work out the contract in future and settle the question of damages that have accrued on the basis of the rate that has been put as a pre-estimate at the commencement of the contract. This was so held by the Bombay High Court in Indian Drugs and Pharmaceuticals Ltd. v. Industrial Oxygen Co. Ltd. [AIR 1985 Bom 186]. 43. A penalty is a sum of money so stipulated in terrorem, and liquidated damages are a genuine pre-estimate of damages. So far as the law in India is concerned there is no qualitative difference in the nature of liquidated and unliquidated damages, as Section 74 eliminates the somewhat elaborate refinement made under the Common Law between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty, which under the Common Law is stipulation in terrorem; a genuine pre-estimate o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of determining whether service tax can be levied on foreclosure charges. 52. The submission of the Learned Authorised Representative of the Department that premature closure is a facility available to a borrower at a price in the same manner as a facility for availing a loan for a price and, therefore, the activity would fall within the ambit of "banking and other financial services" cannot, therefore, be accepted. 53. Thus, for all the reason stated above, it is not possible to subscribe to the view taken by the Bench of the Tribunal in Hudco. Service tax cannot be levied on the foreclosure charges levied by the banks and non- banking financial companies on premature termination of loans under "banking and other financial services" as defined under Section 65(12) of the Finance Act. 54. The reference is, accordingly, answered in the following terms; "Foreclosure charges collected by the banks and non-banking financial companies on premature termination of loans are not leviable to service tax under "banking and other financial services" as defined under Section 65(12) of the Finance Act." 9. From the above discussion and on the basis of the Order passed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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