The New Delhi bench of the Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ) has held that liquidated damages/penal interest charges are not exigible to service tax merely because such charges are not relatable to taxable service.
M/s. Power Finance Corporation Ltd. are engaged in the business of providing services under the category of banking and other financial services under the Finance Act, 19942 by extending rupee term loan, short term loan, equipment lease financing and transitional financing etc. for various power purchase in generation, transmission and distribution sector. For rendering the services, the respondent has been charging interest and other fee income on such loans as per the terms of the loan agreement.
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The case of the department is that during audit, it was observed that he respondent was charging liquidated damages/ penal interest @ 2% over and above the applicable interest rate in the event of any default in payment of principal and interest. The amount received by way of liquidated damages/penal interest amounts to additional consideration which is chargeable to service tax under section 66E(e) of the Act.
Show cause notice was issued, raising a demand of Rs. 20,42,52,714/- alongwith interest and penalty. On adjudication, the entire demand was dropped relying on the decision of the Tribunal in the case of Religare Securities Ltd. The Adjudicating Authority also recorded the finding that the liquidated damages or penal interest charged by the appellant was contingent by occurrence of an event in the form of penalty on the part of the borrowers to make the payment within the stipulated time frame and hence, the liquidated damages/ penal interest are not referable to any taxable service.
The issue whether the charging of liquidated damages/penal interest over and above the applicable interest in the event of any default in the payment, the same is exigible to service tax is no longer res integra and has been decided by various judicial pronouncements, the ratio thereof is squarely applicable in the present case.
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The Larger Bench of the Tribunal in LSE Securities Ltd had laid down the parameters to ascertain whether any amount/payment received is chargeable to service tax after considering various decisions, the Circulars issued by the Board from time to time and also relying on the Budget’s Speech of the Finance Minister.
The Authorized Representative very fairly conceded that the issue of demand of service tax towards delayed payment charges ( DPC ) is covered by the decisions of the Tribunal in favour of the appellant. On the issue of liquidated damages/ payment for nonperformance of contract has been considered by this Tribunal in certain recent decisions.
“Considering the law laid down in the various decisions, it is imputably clear that the liquidated damages/penal interest charged by the appellant @2% cannot be construed as additional consideration but is a penal interest on account of delayed payment of loans on which no service tax can be levied. The nature of delayed payment charges as well as of the liquidated damage/ penalty interest is the same as both are being charged in the event of delay being made by the clients of the appellants and are, therefore, penal in nature. “, the bench viewed.
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A two member bench of Binu Tamta, Member ( Judicial ) P.V. Subba Rao, Member ( Technical ) held that the liquidated damages/penal interest charged by the appellant are not exigible to service tax as per the provisions of the Act for the simple reason that such charges are not relatable to taxable service being rendered by the appellant.
It has also been settled that such liquidated damages/penal interest do not form part of the “declared service” as given under section 66(E) of the Act, as the activity contemplated under section 66E(e), i.e. when one party obligates to refrain from an act or to tolerate such an act or situation or to do an act or the activities when an agreement refers to such an agreement and there is flow of consideration for this activity, which in the present case, we do not find so.
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