No Service Tax on Interest earned on gold loans

Indian Overseas Bank Vs Commissioner of GST & Central Excise (CESTAT Chennai)

Interest earned on gold loans is taxable and does not fall within negative list as Section 66D(n) of the Act excludes interest earned only on monetary Loans and advances, but not to lending of Gold.

Revenue is of the opinion that only if the loan is in the form of Indian rupee and interest is earned on that, then alone under the provisions of Valuation Rules or Section 66D of Finance Act, 1994 interest is not to be treated as part of consideration for determination of service tax. We do not find any support from any of the provisions of law for such contention by Revenue. There is no provision in the law to hold that interest identified by Valuation Rules or Section 66 is interest only on cash loan. We therefore hold that service tax confirmed on interest earned by the appellant by providing metal as loan is not sustainable. We therefore set aside such demand on the interest with interest and penalty.

The Appellant is rendering safe-vault services to the Foreign Sellers. The Profit Margin is liable to service tax as it is the consideration for safe-keeping services rendered to the foreign suppliers

Revenue does not have any figure of the consideration alleged to have been received by the appellant from the foreign suppliers of gold for providing safe vault service which is very clear from the finding of the original authority in para 26 as reproduced above. We are, therefore, of the opinion that the Revenue did not have any case for raising demand of service tax on providing safe vault service on the appellant. The onus was on Revenue to identify the consideration, if any, received by appellant for providing service. Without any consideration there is no service tax payable. We therefore set aside the impugned orders for demand in all the appeals in respect providing Safe Vault Service and allow the appeals in respect of safe vault services.

FULL TEXT OF THE CESTAT JUDGEMENT

This appeal seeks the quashing of the order dated 27.11.2017 passed by the Commissioner (Appeals), by which the order dated 20.02.2017 passed by the Additional Commissioner confirming the demand of service tax with interest and penalty has been upheld, and the appeal has been dismissed.

2. M/s Indian Overseas Bank¹ is a Nationalized Bank engaged in providing ‘Banking and Other Financial Services.’ The dispute in the present appeal relates to a demand of service tax levied for the period from 01.04.2014 to 31.03.2015 under the Finance Act, 1994². The details are as follows:

3. As noticed above, the demands relate to interest earned from lending of gold and safe-vault services alleged to have been provided to the foreign sellers.

4. In regard to the first dispute, the appellant accepts deposits from customers in the form of gold bar and lends the gold to jewellers in the form of gold only, along with a charge of interest on such lent gold.

5. In regard to the second dispute relating to services alleged to have been rendered to foreign sellers, the appellant as one of the nominated banks authorized by Reserve Bank of India to import and trade in gold has been authorized to grant Gold (Metal) Loans to jewellery manufacturers (domestic manufacturers and exporters) as per Circulars dated 05.09.2005 and 03.04.2007. The appellant imports gold bars/coins from UBS AG and MKS Finance SA Switzerland respectively³ on consignments basis under a “Precious Metal Consignment Agreement”⁴ upon payment of applicable customs duty. The transaction is such that the Precious Metal is procured from foreign suppliers in bar/coin form under an agreement to sell at a future date. The appellant acquires only possessory rights but not rights of ownership over the Precious Metal. As and when a customer approaches the appellant for purchasing gold, a back-to-back transaction of purchase (from the foreign supplier) and sale (to the customer) is executed by the appellant. In the intervening period between receipt of the imported Precious Metal and sale to consumers, the appellant facilitates the safekeeping of the imported Precious Metal in its own vaults. The appellant sells the Precious Metal to its customer with a profit margin upon payment of applicable Sale tax.

6. According to the appellant, the following facts are undisputed:

i. The demand on ‘safe-vault’ services allegedly rendered to foreign sellers is made on the profit margin earned by the appellant from sale of imported gold.

ii. There is no consideration agreed between the appellant and the foreign sellers in the PMCA for allegedly rendering ‘safe-vault’ services.

iii. The demand on Gold Metal Loans is made on the interest earned by the appellant.

7. Ms. Krithika Jaganathan, learned counsel appearing for the appellant submitted that the aforesaid two demands have been considered by the Division Bench of the Tribunal in M/s. Indian Overseas Bank vs. The Commissioner of Central Excise and Service Tax⁵ and the appeal has been decided in favour of the assess. The submissions, therefore, is that in view of the aforesaid decision, of the Tribunal, the order impugned in the present appeal should be set aside.

8. Shri Vikas Jhajaria, learned Authorized Representative appearing for the Department has, however, supported impugned order.

9. The Tribunal in Indian Overseas Bank considered both the issues. In regard to the second dispute, the following observations were made:

“3. The first issue involved is whether the appellant is providing any safe vault service to Union Bank of Switzerland, Zurich and MKS Finance, Geneva. The appellant imports gold from Union Bank of Switzerland and MKS Finance, Geneva and holds the same with them till such time they find a customer. After the customer is identified and the price of the gold is confirmed, they have their mark up, collect money from customer and send the money to the suppliers such as Union Bank of Switzerland or MKS Finance and at that point of time purchase the gold which is already in their physical custody. Immediately on purchase of gold, the same gold is delivered to their customers. It appeared to Revenue that after the import of gold and till such time customer is identified, gold is being held by appellant and during said period the ownership of gold is with the Union Bank of Switzerland or MKS Finance, as the case may be, and therefore appellant is providing Safe Vault Service which is part of other financial services to Union Bank of Switzerland or MKS Finance as the case may be.

4. Heard Shri Raghavan Ramabhadran, Ld. Counsel for the appellant. He has submitted that as per the order of adjudicating authority, the profit earned by the appellant is consideration for charging service tax whereas the fact is that such profit is earned from Indian customer and allegation is about providing Safe Vault Service to foreign gold supplier.

5. ************

6. After considering the submissions from both sides and on perusal of record, we note that Revenue does not have any figure of the consideration alleged to have been received by the appellant from the foreign suppliers of gold for providing safe vault service which is very clear from the finding of the original authority in para 26 as reproduced above. We are, therefore, of the opinion that the Revenue did not have any case for raising demand of service tax on providing safe vault service on the appellant. The onus was on Revenue to identify the consideration, if any, received by appellant for providing service. Without any consideration there is no service tax payable. We therefore set aside the impugned orders for demand in all the appeals in respect providing Safe Vault Service and allow the appeals in respect of safe vault services.

(emphasis supplied)

10. In regard to the first dispute, the Tribunal observed:

7. The other issue involved in the present appeals is whether service tax is payable on interest received by the appellant. The appellant is providing metal as loan to the customers. Such metal is required to be returned to the appellant by their customers. Further, as consideration for use of such metal by their customers, customers were required to pay interest to the appellant. Revenue considered such interest as consideration for demand of service tax.

8. Heard Shri Raghavan Ramabhadran, Learned. counsel for the appellant. He has submitted that w.e.f. 1..7.2012 ‘interest’ has been defined under clause (30) of Section 65B of Finance Act, 1994. Further, he has submitted that the contention of Revenue is that under clause (n) of Section 66D interest is exempted from service tax and that interest is to be treated as interest earned on cash loan. Further, he has submitted that contention of Revenue is that at subrule (2) clause (iv) of Rule 6 of Service Tax (Determination of Value) Rles,2006 which provides that interest on loan shall not be included in assessable value deals only with interest on cash loan given. He further submitted that contention of Revenue in the present case is that since metal was given as loan the said provisions are not applicable and therefore, Revenue has demanded service tax on interest. He has submitted that there is no such distinction in the Act on interest.

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10. After considering the submissions from both sides, and on perusal of record, we note that the Revenue is of the opinion that only if the loan is in the form of Indian rupee and interest is earned on that, then alone under the provisions of Valuation Rules or Section 66D of Finance Act, 1994 interest is not to be treated as part of consideration for determination of service tax. We do not find any support from any of the provisions of law for such contention by Revenue. There is no provision in the law to hold that interest identified by Valuation Rules or Section 66 is interest only on cash loan. We therefore hold that service tax confirmed on interest earned by the appellant by providing metal as loan is not sustainable. We therefore set aside such demand on the interest with interest and penalty.

(emphasis supplied)

11. Thus, in view of the aforesaid decision of the Tribunal, the impugned order cannot be sustained and is set aside. The appeal is, accordingly, allowed.

(Pronounced in open Court on 22.07.2021)