No service Tax Leviable on Penalty/compensation for Breach of Contract Which is not a Consideration for any Service: CESTAT [Read Order]

The Mumbai bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that no service tax leviable on the penalty or compensation for the breach of contract which was not a consideration for any service. The Bench held that when there was any consideration for any service it will be taxable under the prescribed law. 

Bajaj Finance Ltd, the appellant assessee was providing taxable services under the category ‘Banking and Other Financial Services’ as per the Finance Act, 1994 and engaged in the business of providing various types of finance such as auto loans, personal loans, consumer durable loans, loans against property, etc. to various customers/borrowers. 

The assessee had entered into agreements with their customers/borrowers for providing loans to them and collected various charges from customers/borrowers such as processing fees, documentation fees, logging fees, loan statement issuance charges, etc. as per terms and conditions of the loan agreement. 

The assessee appealed against the order passed by the Commissioner of Central Tax and Goods and Service Tax for confirming the demand for service tax and the imposition of penalty along with interest. 

Vinay Jain, the counsel for the assessee contended that there was only one contract between the assessee and the borrower, which was the agreement for a loan, for which consideration is payable by the borrower in the form of interest. Upon breach of contract, the liquidated damages become payable not as a consideration for the contract but as compensation for damage suffered due to breach of the contract. 

Further submitted that their agreement was for the performance of the contract and not for its breach thus the provisions of Section 66E(e) of the Finance Act were not applicable in the present case. 

Nitin Ranjan, the counsel for the department relied on the decisions made by the lower authorities and contended that the assessee was liable to pay the demand of service for the penal charge and bouncing charge which was received from the borrowers and these were considered as consideration of the service. 

The Bench observed that the damages/penalty/compensation for breach of contract was not consideration for any service and thus not leviable to service tax and the assessee was receiving the amount as the compensation which was not considered as a consideration for any service. 

The two-member bench comprising S.K Mohanty (Judicial) and M.M Parthiban (Technical) held that the compensation for breach of contract was not a consideration for any service and the assessee was not liable to pay the service tax. 

To Read the full text of the Order CLICK HERE

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