Rajasthan Financial Corporation Vs Addl. Commissioner (CESTAT Delhi)
CESTAT Delhi 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.
Facts- The department issued a show cause notice dated 18.10.2010 for demanding aggregate service tax of Rs.48,51,115/- in respect of rent collected on immovable property let out for commercial use; selling loan application form; financial/ foreclosure charges on account of premature repayment of loans by the borrowers; financial charges on account of service charges against working capital term loans; etc.
The demand was confirmed and equal penalty was imposed. 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 17.02.2012. Hence, the demand is not liable to be confirmed again for the same period. The remaining service tax demand of Rs. 46,92,738/- was confirmed. The penalties u/s. 76, 77 and 78 of the Act was set aside by extending the benefit of section 80 of the Act.
Conclusion- We note that this issue stands decided by the Tribunal vide its order in the case of Sadhana Educational & People Development Services Pvt. Ltd. wherein it has held that amount collected for sale of forms prospectus etc. would not be includible in the taxable value for levy of service tax. Accordingly, we hold that the sale of loan application forms is not a taxable service and therefore, no demand is leviable on such sale of loan forms.
It is amply clear that though the term used in ‘service charge’ but the underlying nature of the 1% and 10% is nothing but interest on the seed capital loan, extended to the entrepreneurs. Therefore the same is not liable to service tax. As observed, it is a settled principle of law that interest on loans is not taxable to service tax.
We hold 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.
FULL TEXT OF THE CESTAT DELHI ORDER
This appeal has been filed to assail the order No. 89-90 (SLM)/ ST/ JPR/2015 dated 23.03.2015 passed by the Commissioner (Appeals) confirming service tax demand of Rs.46,92,738/- on banking and other financial services for the period 2005-06 to 2009-10. An equal amount of penalty was also imposed.
2. The appellant is the State Financial Corporation / 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 and are taxable under section 65(105) (zm) of the Act. During the course of audit of service tax records, the service tax department observed the following:
(i) The appellant was collecting rent of its immovable property let out for commercial use.
(ii)The appellant was selling loan application forms, on which no service tax was paid.
(iii) The appellant was collecting service charges against seed capital assistance sanctioned to the new entrepreneurs.
(iv) The appellant was collecting financial/foreclosure charges on account of premature repayment of loans by the borrowers.
(v) The appellant had been collecting financial charges on account of service charges against Working Capital Term Loans.
3. Thereafter, the department issued a show cause notice dated 18.10.2010 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. Vide the Order–in-Original No. 113 (ST) JPI/2012-ADC dated 29.11.2012, the demand was confirmed and equal penalty was imposed. 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 17.02.2012. Hence, the demand is 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. He noted that the appellant had cooperated with the Department and deposited the entire service tax demand along with the interest before passing the adjudication order. Hence there is no mens rea involved.
4. The appeal against the order of Commissioner (Appeals) was filed on 19.06.2015. The learned counsel appearing for the Appellant presented his arguments on each issue:
(i) Service Tax on renting of immovable property
In this regard, the learned counsel informs that the appellant had already deposited the service tax consequent to the adjudication order passed by the Adjudicating Authority. He also submitted that the Commissioner (Appeals) had already dropped the demand of Rs. 1,58,377/- for the period 01.06.2007 to 31.03.2009 which has been accepted by the department. In respect of demand of Rs. 16,117/- for the period 01.04.2009 to 31.08.2009, learned counsel has submitted that the appellant is not pressing this issue.
(ii) Service Tax on sale of loan application forms
The learned counsel of the appellant submitted that the sale of loan application forms to the customers is not a service as such and therefore, no service tax is chargeable on sale amount for selling loan application forms. He also pointed out that the person buying loan application form may not necessarily apply for loan., therefore the sale of application form is not a taxable service.
He also drew the attention to Tribunal’s order in the case of Sadhana Educational & People Development Services Pvt. Ltd. Vs. CCE, Pune-III2 wherein it was held that the amount collected on sale of forms, prospectus etc. would not be includible in the value on which service tax is demanded.
(iii) Service tax of Rs. 3,32,612/- against concessional interest charged under Seed Capital Assistance Scheme
The learned Counsel submits that the appellant acts as an agent of IDBI, for the implementation of the Seed Capital Scheme of IDBI.
The Scheme is operated by notified State Industrial Development Corporations (SIDCS) and State Financial Corporations (SFCs) as agents of IDBI. The appellant being a State Financial Corporation of the Rajasthan Government helps the new entrepreneurs to start or enlarge their industrial activity through sanctions of seed capital. The main beneficiaries are new entrepreneurs or the small scale industries. Learned Counsel drew the attention of the Bench to Seed Capital Scheme and specifically to paragraph 4 of the scheme which provides that the amount of seed capital assistance per concern shall not exceed 10% of project cost and is subject to ceiling of Rs.15 lacs. As per paragraph 7(i) of the said Scheme, seed capital loan will carry a nominal service charges of 1% per annum for the first five years and interest @10% per annum thereafter. 3/4th of 1% on the amount disbursed by IDBI to the State Financial Corporation for the first five years and thereafter 9.5% per annum was to be deposited with IDBI, as interest. It is well settled principle that interest on loans are not taxable under the ‘Banking and other Financial Services’ category.
(iv) Service tax of Rs. 25,30,960/- on foreclosure charges for premature payment of loans
The learned Counsel submitted that the foreclosure charges are in the nature of liquidated damages to recover the possible loss of interest revenue that would otherwise have been earned by the Banker/Financial Institution in case the loan is repaid as per its normal time frame. The liquidated damages or compensation received by the appellant for foreclosure of loan is not against any service provided by the appellant to the customer and certainly does not fall within the category of “Banking and other Financial Services”.
In this regard, the learned Counsel relied on the Larger Bench decision of the CESTAT, Chennai in the case Commissioner of Service Tax, Chennai Vs. Repco Home Finance Ltd.3 wherein it has been held that foreclosure charges are nothing but damages which the banks are entitled to receive when the contract is broken by the borrower.
(vi) Service tax on annual service charges against Working Capital Term Loan
The learned Counsel informed that the appellant sanctioned loans to the existing borrowers having good track record to meet their working capital requirement without insisting for any fresh security deposit. The appellant charge 1% of outstanding loan as on 31st March every year as service charges. These are not onetime/initial service charges against sanction of working capital loan to the borrower. These charges are in fact additional interest charged from the borrower on the amount of principal loan outstanding at the year end.
5. Learned Authorised Representative stated that the Commissioner (Appeals) has extended the benefit of Section 80 of the Finance Act, He stated that the Commissioner (Appeals) did not have the power to grant immunity to the appellant from imposition of penalty as the service tax law does not make a distinction between private sector and public sector for liability of interest and penalty.
6. He further argued that the Commissioner (Appeals) had erred in waiving the penalty under the aforesaid sections as the penalty cannot be reduced below the minimum penalty prescribed under Section 76, 77 & 78 of the Finance Act. Since the appellant has not been set up by an Act of Legislature, it cannot be considered a Governmental authority. He relied on the decision of M/s RIICO LTD Vs. Commissioner of C. , Jaipur-I4 The relevant paragraphs are as follows:
“22. However, regarding other services rendered by the appellant to the allottees in the industrial areas, we find no exemption is available. The claim of the appellant that they have undertaken the said maintenance as a Governmental authority and, hence, not liable to tax, is not tenable. The appellant is a corporate company, allotting industrial plots for commercial purpose. As a part of the arrangement of developing industrial areas, they have undertaken certain maintenance works in these industrial areas, which is in furtherance of commercial activity. There is no exemption available for such services prior to 1-4-2014. For the period 1-7-2012 to 30-1-2014 [negative list regime], the appellants claimed that the services rendered are not liable to tax as they are a Governmental authority in terms of Sl. No. 39 of Notification No. 25/2012-S.T., dated 20-6-2012. We note that services by Governmental authorities by way of any activity in relation to any function entrusted to a municipality under Article 243W of the Constitution, is exempted from Service Tax. However, term “Governmental authority” has been defined in the same notification, in para 2(s). For the period prior to 30-1-2014 the appellants are not covered by the definition of “governmental authority” as the same is an authority or any other body set up by an Act of State Legislature. The appellant are not set up by an Act of Legislature. They are a company incorporated by the Government of Rajasthan. However, the services rendered by the appellant after 30-1-2014 are eligible for exemption in terms of Sl. No. 39 of Notification No. 25/2012-S.T., dated 20-6-2012 as the said entry was substituted w.e.f. 30-1-2014, by Notification No. 2/2014-S.T., dated 30-1-2014. The substituted definition changed the scope of “governmental authority” to include any authority or any other body established by Government, with 90% or more participation by way of equity or control, to carry out any function entrusted to municipality under Article 243W of the Constitution. We have perused Article 243W of the Constitution. It empowers Legislature of a State by law endow the municipalities with such powers and authority as has been necessary to enable them to function as institution of Self-Government. The said Article provides for empowering committees to carry out the responsibilities including those listed in 12th Schedule. We have perused letter dated 21-1-2015 of Principal Secretary, Government of Rajasthan, Local Self-Government Department. It is clarified therein that the appellant are carrying out municipal function in their industrial areas as laid down in the Municipal Act, 2009 and the municipal body of the concerned area does not undertake such work in the industrial areas falling under the jurisdiction of the appellant. The matter was further clarified by the Ministry of Finance, Government of India, vide a letter dated 10-1-2017 of Joint Secretary (TRU – II), to the effect that the appellant shall be eligible for exemption from Service Tax in respect of functions entrusted to them in terms of Article 243W of the Constitution w.e.f. 30-1-2014. We note that the 12th Schedule of the Constitution specifies fire services/public amenities including street lightings, parking lights, public convenience etc. as the nature of services to be provided by the municipalities. As such we hold that appellant is liable to Service Tax for the period prior to 30-1-2004 as no exemption is available to them.”
Therefore, all the activities/services performed by the appellant are liable to be taxed unless there is implicit remission examination.
7. We have heard Shri S C Kamra & Shri N D Dubey, Advocates appearing for the appellant and Dr. Radhe Tallo, Authorized Representative for the Department.
8. So the issues for consideration before us are as tabulated below:
