The Mumbai bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that the penal interest and bouncing charge received as consideration from the borrower are leviable to service tax under section 66E(e ) of the Finance Act,1944. The Bench held that activity of appellants in tolerating the act of ‘default and non-payment and late payment in payment of EMI by the borrowers and customers and dishonor of payment instruments given by them towards repayment of loan installments’ as ‘Declared Service’ and 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 under bonafide belief that the penal interest collected by the assessee was in the nature of additional interest on the loans/advances provided by them and the same was exempt from payment of service tax.
Further submitted that the assessee under bonafide belief that bounces charges collected from their customers/borrowers was merely like penalty or liquidated damages or compensation for the breach of the terms and conditions of the loan agreement and the same was not leviable to service tax.
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 service tax on the penal interest and bounce charges received by the appellants from their customers/borrowers during the relevant period as part of taxable services.
The Bench observed that the penal charges and bounce charges paid by the borrower for default in payment of EMI/dishonor of payment instrument was a consideration and such a default/delay/non-payment/dishonor of payment instrument was tolerated by the appellants on payment of an amount as agreed upon in the agreement and it is a declared service of ‘agreeing to tolerate an act or a situation’ under section 66 E(e) of the Finance Act and leviable to service tax.
The two-member bench comprising S.K Mohanty (Judicial) and M.M Parthiban (Technical) held that penal charges and bounce charges are like consideration for having agreed to tolerate an act or a situation and thus it was a declared service of ‘agreeing to tolerate an act or a situation’ and leviable to service tax.
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