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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 ..... 0, 5603 1400 of the Central Excise Tariff, 1985, and for payment of Central Excise duty and for compliance with the law, they are registered with the jurisdictional Commissionerate vide Central Excise registration No. AAECG7615AEM001 and Service Tax Registration No. AAECG7615ASD001. The appellants also avail CENVAT credit of duty paid on inputs and service tax paid on input services. 2.3 During the course of audit of records of the assessee, it was noticed by the audit officers of the department that the appellants have taken loans from different Banks agreeing to different terms and conditions of the contract/agreement entered with them for sanction of loans. The appellants had taken credit of service tax paid by the banks on the service charges 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C and SBBJ), the rate of interest was 13.30%; the said rate was sum total of Base rate of 9.80% fixed by RBI plus 3.50% rate charged by the banks, which was later on reduced to 12.80% due to reduction in base rate of RBI to 9.30%. Further, the appellants were able to get further lesser rate of interest at 10% per annum on subsequent loan arrangement dated 25.10.2016 with consortium of ICICI Bank and Axis Bank. In order to save the cost of financing loan for running their business, the appellants have refinanced the previous loan with new loan arrangement, by pre-closure of the loan held with SBI, OBC and SBBJ banks as per loan agreement dated 21.09.2013 on payment of pre-payment charges. As the banks have paid service tax on such pre-payment 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pre-closure of loan as an input service, for taking CENVAT credit. The department had interpreted that the input service of foreclosure of loan is not covered under the definition of 'input service' and therefore, service tax paid on such input service is not eligible for taking CENVAT credit. The learned Commissioner (Appeals) had in the impugned order had treated the foreclosure of loan as a service since the same amounted to tolerance of an act, by the consortium banks, who are the service providers. However, he had held that such service is not covered by the definition of 'input service' under Section 2(l) of the CENVAT Credit Rules, 2004. 8.1 In order to appreciate the issue under dispute, the specific legal provisions of the Finance Act, 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, wholl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts or a provider of output service shall be allowed to take credit (hereinafter referred to as the CENVAT credit) of- (i) the duty of excise specified in the First Schedule to the Excise Tariff Act, leviable under the Excise Act: ... (ix)the service tax leviable under section 66 of the Finance Act; (ixa)the service tax leviable under section 66A of the Finance Act; (ixb)the service tax leviable under section 66B of the Finance Act; paid on- (i) any input or capital goods received in the factory of manufacture of final product or by the provider of output service on or after the 10th day of September, 2004; and (ii) any input service received by the manufacturer of final product or by the provider of output services on or after the 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 & Jaipu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er even though such activity of pre-closure is a service and the appellant is a receiver of the said service cannot be considered as input service for the appellant in terms of Section 2(l) of CCR,2004..... 7. Moreover, the foreclosure or pre-closure is an activity which can be considered a declared service under Section 66(E) (v) of the Finance Act, 1994 inasmuch as it is a case of any kind of tolerance by the lending banks to compensate the loss of interest that would have accrued to them had the appellant continued with the lending given by those banks. Thereby the foreclosure is activities where the lending banks do tolerate anything but compensate themselves for loss of interest they otherwise would have received from the client in way 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 ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rect 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. 8.4 I find that the SCN dated 19.06.2019 had rightly invoked Rule 14(1)(ii) of CCR, 2004 for recovery of CENVAT credit which was taken and utilised by the 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, there is no breach and no claim arises." Restatement (Second) of Contracts § 236 cmt. a (1979)." 34. Sir Guenter Treitel has, in his book "The Law of Contract", described the manner in which a breach of contract can be remedied. The injured party can be placed in the same position in which he would have been if the contract was not made or the injured party can be placed in a position in which he would have been if the contract had been performed. The former protects "restitution" or "reliance interest", while the latter protects "expectation interest". The paragraphs dealing with the aspect are reproduced : "Remedies for breach of contract are discussed in Chapter 21; but one fundamental point relating to them must be made at this 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated prematurely. In fact, foreclosure charges seek to deter the borrowers from switching over to cheaper available sources of loan, as has been so clearly stated in the Circular dated 26 June, 2012 issued by the Reserve Bank of India. 36. The basis for charging foreclosure amount has also been explained by the Karnataka High Court in M/s. Hotel Vrinda Prakash and Another v. KSFC and Another [ILR 2008 KAR 1311]. The writ petitioner had borrowed a loan from the Karnataka State Financial Corporation but before the period of loan could expire made an application for foreclosure of the loan. The Corporation, however, demanded premium on the advance payment/foreclosure amount which demand was challenged in the writ petition. The High Court, after 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 bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns any other stipulation by way of penalty, the party complaining of the breach is entitled whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for. Explanation. - A stipulation for increased interest from the date of default may be a stipulation by way of penalty. Explanation. - xxxxx Explanation. - xxxxx" 41. Compensation for damages in the eventuality of breach of contract clearly contemplates that the sum of damage is named in the agreement. The section itself would be applicable only in cases where the eventuality of damage and the quantification for 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an option to the parties to either perform or not perform/violate. xxx xxx xxx 51. It is not possible to accept the reasoning given by the Bench in Hudco in view of the discussions made above. The amount of damages is clearly stipulated in the contracts and no element of service is sought to have been rendered by the banks to borrowers. In fact, as noticed above, the contract has been broken by the borrowers for which the banks are entitled to claim damages. The foreclosure charges are nothing but damages which the banks are entitled to receive when the contract is broken. The amendment made in Section 65(12) of the Finance Act in the definition of "banking and other financial services" by addition of "lending" is not relevant at all for 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, fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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