Sundaram Finance Ltd. Vs Commissioner of GST & Central Excise (CESTAT Chennai)
No service tax liability on foreclosure charges collected by banks and NBFCs on premature termination of loans
The CESTAT, Chennai in M/s Sundaram Finance Ltd. [Service Tax Appeal No. 646 and 647 of 2012 dated February 22, 2023] has set aside the orders passed by the Revenue Department levying service tax on Foreclosure Charges (“FC”) collected by the assessee. Held that, the FC collected by banks or Non-Banking Financial Company (“NBFC”) on premature termination of loans cannot be subject to service tax under “Banking and Other Financial Services (“BOF Services”) as defined under Section 65 (12) of the Finance Act, 1994 (“the Finance Act”).
Facts:
M/s Sundaram Finance Ltd. (“the Appellant”) is a NBFC, engaged in the business activity of financing the purchase of commercial vehicles, cars, houses and also provide the services of Software Solutions, Business Process Outsourcing, Hire Purchase and Leasing including Equipment Leasing. The Appellant has a system whereby the customer who avails the loan / hire-purchase facility is permitted to pay-up ahead of the scheduled EMI, part of or the entire outstanding principal, i.e. “Preclosure/Foreclosure” of the loan. The Appellant at the time of accepting the part payment for preclosure, in addition, also collects penal charges @ 3% on the outstanding amount as FC penalty.
The Revenue Department (“the Respondent”) was of the opinion that, the Appellant is liable to pay Service Tax on the FC penalty collected by them, as the same would fall under the BOF Services and subsequently, issued Show Cause Notices dated October 19, 2010 and May 25, 2012 (“the Impugned SCNs”) proposing to demand Service Tax on such FC along with interest and also for imposing penalties Thereafter, vide Orders dated August 29, 2012 (“the Impugned Orders”), the Respondent confirmed the demand along with interest and penalty.
Being aggrieved this appeal has been filed.
Issue:
Whether the FC collected by the banks and NBFCs on premature termination of loans is subject to levy of Service Tax under “BOFS” as defined under Section 65 (12) of the Finance Act?
Held:
The CESTAT, Chennai in Service Tax Appeal No. 646 and 647 of 2012 held as under:
