Delay Payment Charges Not Taxable as Declared Service Under Section 66E(e): CESTAT [Read Order]

The Delhi bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) held that delay payment charges are not taxable as a declared service under Section 66E(e) of the Finance Act, 1994.

In this case, the assessee, M/s. Balajee Loha Pvt. Ltd. had appealed against the order passed by the Commissioner (Appeals), which upheld the order passed by the Assistant Commissioner. In the order in the original, the Assistant Commissioner had confirmed a demand of service tax of Rs. 2,21,045 and Rs. 1,75,155 on the appellant under the proviso to section 73(1) of the Finance Act, 1994, along with interest and penalties.

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The appellant is registered with the service tax department and offers taxable services such as insurance, transportation, and weigh bridge. The department found that the appellant had earned ‘other income’ from delayed payment charges, which they considered taxable as a declared service under Section 66E(e) of the Finance Act from July 1, 2012.

A show cause notice (SCN) dated 30-8-2016 was issued to the assessee by invoking the extended period of limitation under the proviso to section 73(1) of the Finance Act, demanding service tax with interest and proposing the imposition of penalties.

One of the demands imposed was with respect to the amounts received on account of delayed payments. The appellant received the above-mentioned amount when its buyers delayed payments. Revenue demanded service tax on these amounts under section 66E(e) of the Finance Act as ‘agreeing to refrain from an act or to tolerate an act’ which is a declared service.

The department’s counsel strongly relied on the impugned order.

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CESTAT noted that since 1-7-2012, some services have been specifically listed as ‘Declared Services’ under Section 66E of the Finance Act, 1994, and are taxable. One such service is agreeing to refrain from or tolerate an act. But as clarified by the Tribunal in several cases, this applies only when the agreement is clearly meant to tolerate the act.

The bench further noted that “if the purpose of the agreement is not tolerate an act but any amount is paid as compensation for default (such as delayed payments in this case), such amounts cannot be called as amounts collected to tolerate an act under section 66E (e) of the Finance Act.”

Delhi CESTAT, comprising Rachna Gupta (Judicial Member) and P.V. Subba Rao (Technical Member), allowed the assessee’s appeal and set aside the impugned order.

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