In a recent ruling, the Delhi bench of the Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ) held that the 2% penal interest charged over the applicable interest rate was not subject to service tax under Section 66 E(e) of the Finance Act, 1994.
The revenue has appealed against the order passed by the adjudicating authority, which dropped the service tax demand imposed by the department. The respondent, M/s. Power Finance Corporation Ltd., is engaged in the business of providing services under the category of banking and other financial services under the Finance Act, 1994.
Master GST Notice Replies – Drafting 20 Notices, Including Appeals – Register Now
The respondent used to charge interest and fees on loans as per the loan agreement. During the audit proceedings, it was noted by the revenue that the respondent was also charging liquidated damages/penal interest of 2% above the applicable rate for payment defaults. It was contended by the revenue that the penal interest charged by the respondent amounts to additional consideration, which is chargeable to service tax under Section 66E(e) of the Finance Act, 1994.
By issuing a show cause notice ( SCN ) dated 18.04.2016, a demand of Rs. 20,42,52,714 was raised along with interest and penalty. The adjudicating authority dropped the entire demand, relying on the decision of CESTAT in the case of Religare Securities Ltd.
The revenue that was aggrieved by the above order, appealed before the CESTAT.
Master GST Notice Replies – Drafting 20 Notices, Including Appeals – Register Now
The CESTAT bench, by referring to various judgments, held that no service tax can be levied on the liquidated damages/penal interest charged by the respondent. This is because the liquidated damages/penal interest charged by the appellant at 2% cannot be construed as additional consideration as it is a penal interest on account of delayed payment of loans.
The CESTAT bench, comprising Mr. Binu Tamta ( Judicial Member ) and Mr. P V Subba Rao ( Technical Member ) dismissed the appeal filed by the revenue.
The appellant was represented by Mr. Manoj Kumar, Authorized Representative for Revenue and the respondent by Atul Gupta, Chartered Accountant.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
