Foreclosure Charges Collected by NBFC Not subject to Service Tax: CESTAT Quashes Demand Against Sundaram Finance [Read Order]

The demand notice against Sundaram Finance was quashed by the Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT ) on the grounds that the foreclosure fees collected by NBFCs are not subject to service tax.

The Chennai Bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT)  quashed the demand notice against Sundaram Finance on the grounds that the foreclosure charges collected by the Non Banking Financial Companies (NBFCs) are not subjected to service tax.

The issue is whether the "Banking and Other Financial Services" as specified in Section 65 (12) of the Finance Act, 1994, include foreclosure charges that are collected by banks and non-banking financial organisations on early loan termination.

The brief facts of the case are that the appellant M/s Sundaram Finance Ltd. is a Non- Banking Financial Company (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 client who uses the loan or hire-purchase facility is allowed to pay off a portion of or the entire outstanding principal prior to the scheduled EMI, a practise known in the financial world as "preclosing/foreclosing" of the loan.

Moreover, the appellant additionally collects penalty fees at a rate of 3% on the unpaid balance at the same time that it accepts a portion of the preclosure payment. The aforementioned sum was noted in the settlement working sheet as a (Finance Charges) FC penalty.

The Department was of the view that the appellant is liable to pay service tax on the FC penalty collected by them as the same would fall under the “Banking and Other Financial Services (BOFS) and a Show Cause Notice was issued imposing penalties.

The bench of Sulekha Beevi CS (Judicial Member) and Vasa Seshagiri Rao (Accountant Member) noted the Hudco Larger bench tribunal's ruling in the case Repco India Ltd and observed that service tax cannot be levied on the foreclosure charges levied by the banks and non-banking financial companies on premature termination of loans under “banking and other financial services” as defined under Section 65(12) of the Finance Act.

To Read the full text of the Order CLICK HERE

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