CESTAT: Service Charges for Pre-Payment or Foreclosure of Loan Amount by Customer Cannot be Treated as Taxable Service
The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), by its two-member bench comprising of Justice Dilip Gupta (President) and Hemambika R. Priya (Technical Member) held that service charges for pre-payment or foreclosure of loan amount by the customer cannot be treated as taxable service and is not chargeable to service tax.
The appellant/assessee is the State Financial Corporation or undertaking of the Government of Rajasthan and has been formed for non-business/non-commercial purposes to facilitate the growth of the industry in Rajasthan.
The appellant was registered with the Service Tax Department for providing “Banking and other Financial Services” as defined in section 65(12) of the Finance Act, 19941 (the Act) and was taxable under section 65(105) (zm) of the Act.
During the course of audit of service tax records, the service tax department observed that the appellant was collecting service charges against seed capital assistance sanctioned to the new entrepreneurs and furthermore, it was collecting financial/foreclosure charges on account of premature repayment of loans by the borrowers.
Following which, the department issued a show-cause notice demanding the service tax on service charges for pre-payment or foreclosure of the loan amount by the customer.
Thereafter, the department issued a show cause notice dated 18 October, 2010 for demanding aggregate service tax of Rs.48,51,115 in respect of above issues and sought to impose penalty under Sections 76, 77 and 78 of the Act.
The appellant filed an appeal before the Commissioner (Appeals) who set aside the service tax demand of Rs. 1,58,377 against renting of immovable property service on the ground that the same had already been confirmed vide an earlier Order-in Original dated 17 February, 2012. Hence, the demand was not liable to be confirmed again for the same period. The remaining service tax demand of Rs. 46,92,738 was confirmed.
The penalties under Sections 76, 77 and 78 of the Act was set aside by extending the benefit of section 80 of the Act with the findings that the appellant is an entity of State Government of Rajasthan and has been formed for nonbusiness/non-commercial purpose.
The bench after hearing the both sides proceeded to note that with respect to ‘Sale of Loan Forms’, the issue has already been decided in the case of Cerebral Learning Solutions Pvt Ltd vs. Commissioner of Central Excise and Service Tax, Indore which was upheld by the Supreme Court in the appeal filed by the Department viz., Commissioner of Central Excise and Service Tax, Indore vs. Cerebral Learning Solutions Pvt Ltd, that the sale of loan application forms is not a taxable service and therefore, no demand is leviable on such sale of loan forms.
With respect to Service tax on the service charge for prepayment/foreclosure of premature payment of loan, the CESTAT relied in the case of Commissioner of Service Tax, Chennai vs. Repco Home Finance Ltd (2020), observed that the service charges for pre-payment or foreclosure of loan amount by the customer cannot be treated as taxable service and is not chargeable to service tax.
Next the ITAT dealt with the issue of Service charge against Working Capital Term Loan, wherein on pursual of the scheme document, the ITAT opined that it had clearly differentiated between the interest liable to be charged on such loans and the service charges on such loan. Therefore, service charges of 1% indicated separately clearly showed that this amount was a consideration for the services being provided by the appellant to the borrowers. It was apparent that the said service charge was a financial charge on account of providing financial services of loans and advances.
In view of the same, ITAT held that service tax was leviable on the service charge, realized on Working Capital Term Loan by the appellant.
In view of the observations, the ITAT upheld the demand of Rs. 16,99,443 with interest and the remaining demand was set aside.