CESTAT Chennai Sets Aside Service Tax on Dealer Incentives and Forfeited Car Advances

IIFL Holding Ltd. Vs Commissioner of CGST & Central Excise (CESTAT Mumbai)

Summary: M/s. Jubilant Motor Works (South) Pvt. Ltd. was engaged in sales and service of AUDI brand cars and provided services including Authorised Service Station Service and Business Auxiliary Service. The company was established in December 2015 and took over the Chennai operations of M/s. Jubilant Motor Works Pvt. Ltd. from December 2015, along with assets and liabilities relating to those operations.

Following investigation, the Department alleged that the appellant had not declared its entire service income in ST-3 returns and had availed CENVAT credit on common input services used for taxable services and trading activities. The Department also alleged that incentives received from Volkswagen and Castrol and amounts representing forfeited car booking advances were liable to service tax. A show cause notice dated 18.10.2016 proposed service tax demand for April 2011 to March 2016 and recovery of 5%, 6% or 7% of the value of exempted services in relation to CENVAT credit.

The original authority confirmed service tax of Rs. 10,71,78,845/- under the proviso to Section 73(1) of the Finance Act, 1994, ordered recovery of Rs. 6,58,91,965/- under Rule 14(1)(ii) of the CENVAT Credit Rules, 2004 read with the proviso to Section 73(1), and imposed interest and penalties.

The appellant submitted that it could not be liable for the period before it took over the Chennai business, that the show cause notice did not specify the relevant sub-clause of Section 65(19) for the Business Auxiliary Services allegation, and that incentives received from Volkswagen and Castrol were trade discounts arising from principal-to-principal sale transactions. It also submitted that forfeited booking advances represented liquidated damages or penalty and were not consideration for any service. Regarding CENVAT credit, the appellant submitted that it had reversed proportionate credit with interest and that the requirement of prior intimation under Rule 6 was procedural.

The Department submitted that the appellant had taken over the predecessor’s business as a going concern and was liable for the earlier period. It contended that the incentives were consideration for sales promotion services and that forfeited advances were taxable. It also submitted that, since the appellant had not intimated its option to reverse proportionate credit, it was required to pay 5%, 6% or 7% of the value of exempted trading turnover.

The Tribunal held that the incentives and discounts received from Volkswagen and Castrol could not be subjected to service tax under Business Auxiliary Services. It noted the principal-to-principal relationship and found that the incentives linked to sales targets were not consideration for providing services to Volkswagen or Castrol. The Tribunal also held that service tax on advance amounts forfeited on cancellation of car bookings could not be sustained.

On CENVAT credit, the Tribunal held that the requirement of prior intimation regarding the option under Rule 6(3)(ii) was procedural and that the Department could not deny the option merely because prior intimation had not been given where proportionate credit had been reversed. The Tribunal therefore held that the demand of 5%, 6% or 7% of the value of exempted services could not be sustained.

As the substantive demands were found unsustainable, the Tribunal considered further discussion on the appellant’s liability for the period before December 2015 unnecessary. It set aside the impugned order and allowed the appeal with consequential reliefs, if any.

Background and Service Tax Demand

The appellant was engaged in the sale and service of AUDI brand cars and had obtained service tax registration. M/s. Jubilant Motor Works Pvt. Ltd. had earlier carried out the Chennai operations. The appellant company was incorporated on 03.11.2015 and, according to the appellant’s submissions, took over the Chennai operations with effect from 21.12.2015 under a Business Transfer Agreement dated 18.12.2015.

The investigation indicated that certain income recorded in the books had not been declared in ST-3 returns. The Department also examined CENVAT credit availed on common input services used in showrooms and service centres involved in both trading and provision of taxable services.

The Department alleged non-payment of service tax on various incentive receipts, including incentives from Volkswagen and Castrol, and on car booking advances forfeited following cancellation. It also proposed recovery relating to CENVAT credit under Rule 6 of the CENVAT Credit Rules, 2004.

Demand on Volkswagen and Castrol Incentives

The show cause notice treated various incentives received from Volkswagen and Castrol as consideration for sales promotion and marketing services falling under Business Auxiliary Services. The Tribunal noted that although the show cause notice alleged that the activities were promotion and marketing falling under Business Auxiliary Services, it did not specify the particular sub-clause of Section 65(19).

The Tribunal reproduced the definition of Business Auxiliary Service under Section 65(19) and also considered the definition of “service” under Section 65B(44) for the period after 01.07.2012.

Principal-to-Principal Transactions

The Tribunal observed that the agreements clearly stated that the relationship between the appellant and Volkswagen or Castrol was on a principal-to-principal basis. It noted that the adjudicating authority had itself accepted that the sale took place on a principal-to-principal basis but had treated that relationship as limited to the purpose of sale.

The Tribunal did not agree with that approach. It observed that in a principal-to-principal transaction the appellant purchased the cars or products by paying the sale consideration, became the owner and thereafter resold them to customers. According to the Tribunal, the appellant was interested in selling more cars for its own profit, and the incentives linked to achievement of sales targets could not be treated as consideration for providing services to Volkswagen or Castrol.

The Tribunal followed the decision in M/s. S.K. Cars India (P) Ltd. Vs. Commission of GST and CE, which dealt with incentives received by an automobile dealer from the manufacturer.

The Tribunal also referred to the treatment of incentives as trade discounts in trade discount jurisprudence discussed in the supplied material.

Period After 01.07.2012

For the period after 01.07.2012, the Tribunal considered the definition of service under Section 65B(44). It found that there was no element of service in the incentives and discounts, which were based on sales rather than consideration for providing a service of promoting the business of Volkswagen or Castrol.

The Tribunal consequently held that the demand of service tax on incentives and discounts received from Volkswagen and Castrol could not be sustained and required to be set aside.

Forfeited Car Booking Advances

The appellant collected advances from customers booking cars. Where a customer cancelled the booking, a portion of the advance was retained and recorded as forfeiture income. The appellant submitted that these amounts represented liquidated damages or penalty and were not consideration for any service.

The appellant further submitted that the show cause notice did not specifically classify the alleged service in respect of forfeiture income and that the adjudicating authority had travelled beyond the show cause notice by treating the amount, for the period after 01.07.2012, as consideration for a declared service under Section 66E(e).

The Tribunal considered the decision in Lemon Tree Hotel Vs. Commissioner, GST CE & Customs, Indore 2020 (34) GSTL 220 (Tri -Delhi), concerning amounts retained on cancellation of advance hotel bookings. It also considered the decision concerning liquidated damages in South Eastern Coalfields Ltd. v. Commissioner of Central Excise and Service Tax, Raipur.

The Tribunal found the above decisions applicable to the advance amounts forfeited upon cancellation of car bookings and held that the service tax demand could not be sustained. The issue was decided in favour of the appellant and against the Department.

CENVAT Credit under Rule 6

The appellant had availed CENVAT credit on common input services used for taxable services and trading activities. During the proceedings, the appellant reversed proportionate CENVAT credit of Rs. 15,69,836/- and paid interest of Rs. 10,71,903/-.

The Department nevertheless demanded Rs. 6,58,91,965/- on the ground that the appellant had not maintained separate accounts and had not given prior intimation of its option to reverse proportionate credit under Rule 6(3)(ii). According to the Department, the appellant was consequently required to pay 5%, 6% or 7% of the value of exempted trading services.

Prior Intimation as a Procedural Requirement

The Tribunal noted that the issue of whether failure to give prior intimation prevents an assessee from adopting proportionate reversal had already been considered in various decisions. It referred to Mercedes Benz India (P) Ltd. V. Commissioner of C. Ex., Pune-I 2015 (40) S.T.R. 381 (Tri. – Mumbai) and M/s. Cranes and Structural Engineers Vs. CCE 2016 (8) TMI 387 – CESTAT, Bangalore.

Following those decisions, the Tribunal held that the requirement of giving intimation was procedural and that the Department could not deny the option available under Rule 6(3)(ii) merely because the procedural requirement of prior intimation had not been complied with.

The Tribunal therefore held that the demand requiring payment of 5%, 6% or 7% of the value of exempted services could not be sustained where proportionate credit had already been reversed. The issue was decided in favour of the appellant and against the Department.

Liability for Period Prior to December 2015

The appellant submitted that it was incorporated only in 2015 and took over the Chennai operations from 21.12.2015. It therefore contended that service tax for the period before the transfer could not be demanded from it.

The appellant relied upon Section 68 of the Finance Act, 1994 and submitted that the liability to pay service tax rested on the person providing the taxable service. It also relied upon decisions concerning Section 87(c), successor liability and recovery of dues from a predecessor.

The Department submitted that the appellant had taken over the business of M/s. Jubilant Motor Works Pvt. Ltd. as a going concern and was therefore liable for the earlier period.

The Tribunal did not consider it necessary to decide this issue. It observed that the demands for the periods before and after 2015 had already been found unsustainable on merits and therefore further discussion on the issue of liability for the earlier period would be of no consequence.

Final Decision

The Tribunal held that the confirmation of service tax demand, interest and penalties could not be sustained. The impugned order was set aside and the appeal was allowed with consequential reliefs, if any.

The order was pronounced in court on 05.02.2024.

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FULL TEXT OF THE CESTAT MUMBAI ORDER

Service Tax Appeal No. 87042 of 2018 has been file d by M/s IIFL Holding Limited, Mumbai (herein after, referred to as ‘the assessee-appellants’), assailing the Order-in-Original No.53/COMMR/(Dr.KNR)/CGST & CX/MC/2018 dated 13.12.2017 (herein after, referred to as ‘the impugned order’) passed by the Commissioner of CGST & Central Excise, Mumbai C entral, Mumbai. Further, another Service Tax Appeal No. 88412 of 2018 has be en filed by the department against the impugned order on the basis of Order No.15/Review/CCO/2018-19 dated 21.06.2018 in exerci se of powers for review of the impugned order under Section 86(2) of the Finance Act, 1994, in respect of the demand of service tax dropped in the adjudication proceedings. The assessee-appellants have also filed a Cross Obj ection in Appeal No. ST/88412/2018 in the above case. All these appeals are taken together for disposal by this Tribunal.

2.1. Briefly stated, the facts of the case are that the assessee-appellants herein are inter alia, engaged in the business of stock broking i.e., purchase and sale of securities for the client and other related services. For providing taxable services of ‘Banking and Other Financial Services’, the assessee- appellants are registered with the service tax department and were filing periodical returns. The assessee-appellants have various subsidiaries, which are running independent businesses and have been paying service tax, wherever applicable. The subsidiaries avail fund-based and non-fund based credit facility from banks. The assessee-appellants provide corporate guarantees to banks for the purpose of sanctioning credit facility to the subsidiary companies. As per RBI Guidelines, the assessee-appellants cannot charge any amount to the subsidiary company for the purpose of providing corporate guarantees to banks. Therefore, there is no consideration for corporate guarantee provided by the assessee-appellants for the purpose of giving loan to subsidiary companies. The assessee-appellants are also maintaining records such as a register in Form MBP-2 pertaining to corporate guarantees issued to Other parties, in terms of Notification dated 31.03.2014 issued by the Ministry of Corporate Affairs, New Delhi, wherein individual details regarding loan that have been given, guaran tees being given and providing of security to such parties are entered in such register.

2.2 On the basis of intelligence received by the Department, investigation was initiated against the assessee-appellants to verify whether appropriate service tax have been duly paid in respect of various services rendered by them. On scrutiny of the documents submitted by the assessee -appellants, the Department had interpreted that corporate guarantee is a guarantee, provided by a company agreeing to be held responsible for completing duties and obligation of debtor to a lender, in the event of the debtor failing to fulfil the terms and conditions of the debtor-lender contact. Thus, the Department had alleged that the service of giving bank guarantee is covered under the taxable services under clause (ix) of Section 65 (12) of the Finance Act, 1994 and thus, become liable for payment of service tax under the taxable category of ‘banking and other financial services’ on the corporate guarantees given to the subsidiaries by the assessee-appellants.

2.3 Further, the assessee-appellants were also charging consideration from the customers in the name of delayed paying interest, for allowing the customers to pay certain amount at a later stage and for that tolerance of act, customers were charged some additional amount. Therefore, the Department interpreted this as a declared service of ‘agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’ covered by the definition of service under section 66E of the Finance Act, 1994. Accordingly show cause proceedings were initiated for demand of service tax for the disputed period i.e. from April, 2010 to March, 2015 along with interest under Section 73 ibid invoking extended period, besides seeking imposition of penalties under section 76, 78 ibid by issue of SCN dated 17.10.2015. After taking into account the detailed written submission s vide letter dated 16.12.2015 and after providing opportunity for personal hearing to the assessee-appellants on 17.01.2018, the learned Commissioner adjudicated the case by dropping the demand of service tax in respect of providing bank guarantees and by confirming the demand of service tax on tolerating the act of delay in payment and refraining from not selling of the shares, by treating the same as an activity which is different and distinct from share broking under Section 73(2) ibid along with interest, besides imposition of mandatory penalty under Section 78 ibid. Being aggrieved against the impugned order both the assessee-appellants and the Department have filed these appeals before this Tribunal.

3. Heard both sides and examined the case records along with the written paper books submitted by both the parties.

4.1 The Show Cause Notice dated 17.10.2015 was issued based on the results of investigation conducted by the department. In respect of the demand of service tax on provision of bank guarantee to their subsidiaries, it is claimed by the Department that the assessee-appellants have failed to classify the services provided by them and there was a failure to declare the value of services rendered by them and to pay appropriate service tax. On the other hand, the assessee-appellants have relied upon the guidelines issued by the Reserve Bank of India (RBI) which states that the system of obtaining guarantees should not be used by the Directors and Other Managerial Personnel as a Source of Income from the company an d the bank should also obtain an undertaking from the borrowing company as well as a guarantors that no consideration whether by way of commission, brokerage fee or any other form would be paid by the former or received by the latter directly or indirectly. Thus RBI prohibits collection of any consideration by any activity providing a corporate guarantee. In the absence of payment of a consideration, the learned Commissioner had concluded that it cannot be said that the service has been provided by the assessee-appellants to its group companies/subsidiary companies. Further, he had considered the guidelines issued by the RBI, whereby it specifically prohibit s collection of any consideration for providing corporate guarantee to the subsidiary companies. Further, he had also analysed the definition for ‘banking and other financial services’ provided under Section 65 (12) ibid, and as the same in clear terms mention only ‘providing bank guarantees’ and not ‘Other guarantee’; he had concluded that corporate guarantees cannot be brought within the scope of taxable services. Further in respect of the period after 01.07.2012, even though the taxable service has been defined in clause 44 of Section 65B ibid, as an activity carried on by a person for another for consideration and includes a declared service, inasmuch as the show cause notice itself states that no consideration has been paid by any of the subsidiary companies to the assessee-appellants for providing corporate guarantees, the demand cannot be sustainable.

4.2 On the other hand, the Committee of Chief Commissioners had expressed that though there is no visible consideration in the form of money or barter between the provider of the guarantee of the beneficiary, it however has benefited the subsidiary companies by way of improved credit rating which in turn has implicitly benefited the assessee-appellants though not visible in monetary terms. In this way the assessee-appellants have circumvented the prohibition imposed by RBI. It is claimed by the said Committee that this vital aspect has been ignored by the Commissioner in the impugned order and thus the act of providing corporate guarantee to the subsidiaries by the assessee-appellants is liable to service tax under the taxable category ‘banking and other financial services’.

5.1 From the facts of the case, we find that the department had accepted that the assessee-appellants had not charged any commission/fees to the overseas subsidiary companies as well as to the subsidiary companies situated in India for issuance of the corporate guarantee. However, the service tax demand was proposed on the basis of commissions usually charged by the commercial banks for providing bank guarantee. Further, we also find that the assessee-appellants did not charge any consideration for providing the corporate guarantees as stated in the SCN and as noted by the learned Commissioner in the impugned order. Insofar as levy of service tax is concerned, the same should be on the amount of consideration received for provision of such service. Thus, prima facie it appears that there is no element of service inasmuch as there is no consideration involved in providing corporate guarantee by the assessee appellants.

5.2 The relevant paragraph of the RBI instructions dated 01.07.2015 dealing with corporate guarantee is extracted and given below:

“C. Worth of the guarantors, payment of guarantee commission, etc

Where personal guarantees of directors are warranted, they should bear reasonable proportion to the estimated worth of the person. The system of obtaining guarantees should not be used by the directors and other managerial personnel as a source of income from the company. Banks should obtain an undertaking from the borrowing company as well as the guarantors that no consideration whether by way of commission, brokerage fees or any other form, would be paid by the former or received by the latter, directly or indirectly. This requirement should be incorporated in the bank’s terms and conditions for sanctioning of credit limits. During the periodic inspections, the bank’s inspectors should verify that this stipulation has been complied with. There may, however, be exceptional cases where payment of remuneration may be permitted e.g. where assisted concerns are not doing well and the existing guarantors are no longer connected with the management but continuance of their guarantees is considered essential because the new management’s guarantee is either not available or is found inadequate and payment of remuneration to guarantors by way of guarantee commission is allowed.”

From the above guidelines provided by RBI, it transpires that no consideration, by way of commission brokerage fees or any other form, shall be paid by the borrowing company to the guarantor. In the present case, since there is no involvement of any commission amount in the form of consideration, we are of the considered view that the assessee-appellants cannot be saddled with the service tax liability as demanded in the show cause proceedings.

6.1 We find that the issue involved in the present dispute is squarely covered by the decision of this Tribunal in the case of Commissioner of CGST & Central Excise Vs. Edelweiss Financial Services Ltd.,– 2022-VIL-998-CESTAT-MUMBAIService Tax, wherein it was held as under: –

“7. The adjudicating authority has, rightly, declined to be guided by the decision of the Tribunal in re Kaveri Agri Care Pvt Ltd as it is settled law that interim orders do not offer themselves as binding precedent and the lack of elaboration of the observation therein detracts from its employability to advance the case of Revenue. The decision of the Tribunal in re Neyveli Lignite Corporation Ltd deals with an entirely different set of facts and the explanation therein of ‘guarantee’, as commonly understood, for placing that dispute in a context is of no assistance here.

8. The criticality of ‘consideration’ for determination of service, as defined in section 65B(44) of Finance Act, 1994, for the disputed period after introduction of ‘negative list’ regime of taxation has been rightly construed by the adjudicating authority. Any activity must, for the purpose of taxability under Finance Act, 1994, not only, in relation to another, reveal a ‘provider’, but also the flow of ‘consideration’ for rendering of the service. In the absence of any of these two elements, taxability under section 66B of Finance Act, 1994 will not arise. It is clear that there is no consideration insofar as ‘corporate guarantee’ issued by respondent on behalf of their subsidiary companies is concerned.

9. The reliance placed by Learned Authorised Representative on the ‘non-monetary benefits’ which may, if at all, be of relevance for determination of assessable value under section 67 of Finance Act, 1994 does not extend to ascertainment of ‘service’ as defined in section 65B(44) of Finance Act, 1994. ‘Consideration’ is the recompense for the ‘contractual’ undertaking that authorizes levy while ‘assessable value’ is a determination for computing the measure of the levy and the latter must follow the former.”

6.2 We further find that the order of the Tribunal (supra) was affirmed by the Hon’ble Supreme Court vide judgement dated 17.03.2023 in dismissing the Civil Appeal filed by the Commissioner of CGST & Central Excise. The relevant paragraph in the said judgement is extracted herein below:

“7. The above would suggest that this was a case where the assessee had not received any consideration while providing corporate guarantee to its group companies. No effort was made on behalf of the Revenue to assail the above finding or to demonstrate that issuance of corporate guarantee to group companies without consideration would be a taxable service. In these circumstances, in view of such conclusive finding of both forums, we see no reason to admit this case basing upon the pending Civil Appeal No. 428 @ Diary No. 42703/2019, particularly when it has not been demonstrated that the factual matrix of the pending case is identical to the present one.”

6.3 We further find that the Co-ordinate Bench of this Tribunal had examined the issue of levy of service tax on provision of corporate guarantees by a company to its subsidiaries, on the basis of notional value equivalent to commission charged by banks for providing bank guarantees, in the case of M/s UltraTech Cement Ltd. Vs. Versus Commissioner of CGST & CX, Mumbai East in Service Tax Appeal No. 86341 of 2019 vide Final Order No. A/86800/2023 dated 09.10.2023. In this case, the Tribunal had held that “insofar as levy of service tax is concerned, the same should be on the amount of consideration received for provision of such service. In the present case, since there is no involvement of any commission amount in the form of consideration, the appellants cannot be saddled with the service tax liability as demanded in the impugned order.” Thus, we find that our above views on the issue have been duly supported by the decision of the Tribunal in the above order.

7.1. In respect of the second issue i.e., demand of service tax on delayed payment charges, we find that the learned Commissioner has dismissed the contention of the assessee-appellants that only the service of stock broking is provided by them, and held that service of stock broking ends with buying/selling of shares; tolerating the act of delay in payment and refraining from not selling off the shares is an activity different and distinct from share broking. Hence he confirmed the adjudged demands in respect of such services along with interest and imposed penalties under section 78 (1) ibid.

7.2 We find that the above issue has been examined by the CBIC at length and necessary instructions have been issued to the field formations vide Circular dated 28.02.2023. Accordingly, the field formations were directed to follow the guidelines discussed in the said circular and jurisprudence that has evolved over time, in determining whether service tax is payable in respect of taxable services under the category “Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”. The relevant paragraphs of the said instructions of CBIC is extracted below:

“CIRCULAR NO. 214/1/2023-SERVICE TAX [F.NO. CBIC-
110267/14/2023-CX-VIII SECTION-CBEC], DATED 28-2-2023

An issue has arisen on the levy of service tax on liquidated damages arising out of breach of contract, forfeiture of salary or payment of bond amount in the event of the employee leaving the employment before the minimum agreed period and similar other issues arising out of clause (e) of section 66E of the Finance Act, 1994. Reference has also been invited to Circular No. 178/10/2022-GST, dated 3rd August, 2022 regarding applicability of GST on liquidated damages, compensation and penalty arising out of breach of contract or other provisions of law, and its applicability to service tax related issues.

2. It may be seen that “Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” is a Declared Service as per clause (e) of section 66E of the Finance Act, 1994. A service conceived in an agreement where one person agrees to an obligation to refrain from an act or to tolerate an act or to do an act, would be a ‘declared service’ under section 66E, read with section 65B(44) and would be leviable to service tax.

3. The description of the declared service in question, namely, agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act is similar in GST. “Agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act” has been specifically declared to be a supply of service in para 5 (e) of Schedule II of the CGST Act, 2017.

4. As can be seen, the said expression has three limbs: —

(i) Agreeing to the obligation to refrain from an act,

(ii) Agreeing to the obligation to tolerate an act or a situation,

(iii) Agreeing to the obligation to do an act. Service of agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act is nothing but a contractual agreement. A contract to do something or to abstain from doing something cannot be said to 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/50879/2022-CU[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 8-8­2022), and M/s Neyveli Lignite Corporation Ltd. (CA No. 0051-0053/2022) on this ground.

6. In view of above, it is clarified that the activities contemplated under section 66E i.e. when one party agrees to refrain from an act, or to tolerate an act or a situation, or to do an act, are the activities where the agreement specifically refers to such an activity and there is a flow of consideration for this activity. Field formations are advised that while taxability in each case shall depend on facts of the case, the guidelines discussed above and jurisprudence that has evolved over time, may be followed in determining whether service tax on an activity or transaction needs to be levied treating it as service by way of agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. Contents of Circular No. 178/10/2022-GST, dated 3rd August, 2022, may also be referred to in this regard.”

From the above instructions of CBIC, it is clear that in the present case in the absence of any contractual obligation or flow of consideration for the specific act of tolerating an act etc., it cannot be said that such delayed charges in payment by a client in payment for purchase of shares could be said to be a service under the category of declared service for the purpose of levy of service tax, that is separate from the stock broking services.

7.3. We also find that the issue of Delayed Payment Charges (DPC) arising in the context of purchase of shares have been addressed by the Co-ordinate Bench of this Tribunal in the case of Religare Securities Limited Vs. Commissioner of Service Tax, Delhi – 2014 (36) S.T.R. 937 (Tri. – Del.) by holding that the same is not liable to service tax. The relevant paragraphs of the said order is extracted below:

“10. After appreciating the submissions made by both the sides, we find that the dispute to be decided in the appeal is as to whether the DPC collected by the appellants from their clients in those cases where the appellants have already made payments to the Exchange but has not recovered the same from their clients, are required to be considered as a part of the value of the services, so as to levy the Service Tax in respect of the same. We find that there is not much dispute on the facts. The DPCs are being collected by the appellants only from those clients, who have not paid them well within the time-limit period and the appellants being under a legal contract with the Exchange, had to deposit the value of the securities, sold or/and purchased by their clients. As such, the nature of the said DPCs being a penal charge, is established. Where there is no delay in making payments by the clients, no DPC is being charged from them. As such, one thing becomes clear that such DPC is not on account of any stock­broking services being provided by the appellants.

In terms of clause 45 of the agreement entered by the appellants with investors, – “any amount overdue towards trading or any other reason will be charged with delayed payment charges”. Perusal of the said clause reveals that the DPCs are collected only in case of overdue payments. The reasoning of the Commissioner that the origin of the DPC has taken place on account of business or service of sale/purchase of securities by a stock­broker and the same has to be considered as a part of the service does not appeal to us, for the simple reason that such DPC collection has got nothing to do with the sale/purchase of the securities, a service which the appellants is rendering as a stock-broker but admittedly is a charge recovered from only those customers, who delayed the payments of the securities value and is in fact is a penal interest, for compensating the assessee for the payments already made by them, to the Exchange, on behalf of their clients.

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11. As is seen from the above, the mandate of Section 67 of the Act is that it is only the commission/brokerage, which is liable to Service Tax and no other recovery made by the stock-broker can be held to be a part of the value of the service. The Tribunal very clearly observed that the receipts not in the nature of commission/brokerage should not be taxed in disguise. Inasmuch as, we have already held that DPC is not a commission or a brokerage for sale/purchase of securities, as the same is not being collected from each and every customers but is relatable to only delayed payments by some of the customers, there is no justification for inclusion of the same in the value of the services.

12. Apart from the above, we note that the issue stands clarified by the C.B.E. & C. vide their letter dated 3-8-2011, relating to the DPCs recovered by the stock-broking service, the Board observed as under :-

“Subject: Section67-Clarificationregarding Service Tax on delayed payment charges collected by the service provider in respect of Stock Broker’s services – Reg.

Representations have been received seeking clarification regarding leviability of Service Tax on the additional amount that is collected towards the delay in making payment to the stock-brokers by their customers (delayed payment charges) in respect of Stock Broker’s services.

2. The matter has been examined. Clarifications issued by the Board in the past on similar issues are summed up below :-

(i) Circular No. 96/7/2007 at para 002.01 clarifies that an amount collected for delayed payment of a telephone bill is not to be treated as consideration charged for provision of telecom service and therefore, does not form a part of the value of taxable service.

(ii) Circular No. 121/02/2010-S.T., dated 26-4-2010 clarifies that detention charges in respect of detained containers are not in respect of service provided on behalf of client (under BAS) nor it on account of infrastructure support services (under BSS). Such charges can at best be called as ‘penal rent’ for retaining the containers beyond the predetermined period. Therefore, the amount collected as ‘detention charges’ is not chargeable to Service Tax.

2.1 In a similar manner, delayed payment charges received by the stock-brokers are not includible in taxable value as the same are not the charges for providing taxable services. Such charges are on account of delay in making payments by the service recipient to the service provider and are in the nature of a penal charge for not making the payment within stipulated time. Such amounts are not includible in the taxable value for charging Service Tax. This principle will also apply to other service providers.

3. However, Section 67 of the Finance Act, 1994 provides that Service Tax is chargeable on taxable value which shall be the ‘gross amount charged’ by the service provider. Therefore, if in the account statement/invoice/bill, etc. issued by the service provider, only the gross amount is shown without indicating the delayed payment charges separately, the Service Tax would be payable on the entire amount. Delayed payment charges would not be includible in the ‘gross value charged’ only if these charges are shown separately in the account statement/invoice/bill etc.”

As is seen from the above, the DPCs recovered separately and shown separately in the invoices/bills cannot be held liable to payment of Service Tax. Admittedly, in the present case, such DPCs were being recovered by the appellants by issuing separate debit notes to their customers and by debiting the amounts in their running ledgers. As such, the clarification issued by the Board is fully applicable to the facts of the present case.

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14. In view of our foregoing discussions, we set aside the impugned order confirming the demand of Service Tax and interest and imposing penalties upon the appellants. Accordingly, their appeal is allowed with the consequential relief to them.”

8.1. In view of the foregoing discussions, we do not find any merits in the impugned order, insofar as it has confirmed the adjudged demand on the assessee-appellants in respect of delayed payment of charges paid by the clients for the actual delay, if any, in payment for the purchase of shares or other stocks, which are in no way can be considered as service of ‘tolerating or refraining from an act, or to tolerate an act or a situation, or to do an act”. Therefore, by setting aside the impugned order to this extent, the appeal is allowed in favour of the appellants.

8.2. As regards, the Revenue’s appeal, we find that the Commissioner has dropped the demands in respect of the assessee-appellants providing corporate guarantees to their subsidiary companies on the ground that it cannot be brought under the definition of ‘banking and other financial services’ provided under Section 65 (12) ibid, inasmuch as the same in clear terms mention only ‘providing bank guarantees’ and not ‘Other guarantees’ so as to include corporate guarantees. Hence, he concluded that corporate guarantees cannot be brought within the scope of taxable services. Further in respect of the period after 01.07.2012, even though the taxable service has been defined in clause 44 of Section 65B ibid, as an activity carried on by a person for another for consideration and includes a declared service, inasmuch as the show cause notice itself states that no consideration has been paid by any of the subsidiary companies to the assessee-appellants for providing corporate guarantees, by way of commission brokerage fees or any other form, the demand cannot be sustainable.

8.3 We do not find any infirmity in the said order of the Commissioner on the above issue at para 8.2. Admittedly, the Hon’ble Supreme Court vide judgement dated 17.03.2023 in the case of Commissioner of CGST & Central Excise Vs. Edelweiss Financial Services Ltd., (supra) while dismissing the Civil Appeal filed by the department had held that where the assessee had not received any consideration while providing corporate guarantee to its group companies and where no effort was made on behalf of the Revenue to assail the above finding or to demonstrate that issuance of corporate guarantee to group companies without consideration would be a taxable service, there is no need to entertain the appeal filed by the department. The Revenue in their Memo of Appeals has given no reasons to deviate from the above finding of the Commissioner and the aforesaid judgement of Hon’ble Supreme Court. Accordingly, the appeal filed by the Revenue is rejected.

9. Both the appeals are disposed of in the above manner. Cross-objection No. 86680 of 2018 filed in Service Tax Appeal No. 88412 of 2018 also stands disposed off.

(Order pronounced in open court on 19.02.2024)