Loan Prepayment Charges Not Admissible for CENVAT Credit: CESTAT [Read Order]

The bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Mumbai, has ruled that service tax paid on foreclosure or prepayment charges of business loans cannot be availed as CENVAT credit under the CENVAT Credit Rules, 2004.

M/s Global Nonwovens Limited, now a division of Jindal Poly Films Ltd., the appellant is engaged in the manufacture of nonwoven fabrics under Non Wovens Fabric 25 GSM, Non Wovens Fabric 150 GSM and other goods falling under Chapter Heading No. 5603 1100, 5603 1400 of the Central Excise Tariff Act, 1985, had availed CENVAT credit on service tax charged by banks on loan-related services.

The dispute arose when, during audit, the department noted that the company had also availed credit on service tax paid on penalty or foreclosure charges for pre-payment of loans.

The Assistant Commissioner, Nashik-II, confirmed a demand of inadmissible credit of ₹14,81,175/- under Rule 14(1)(ii) of CENVAT Credit Rules, 2004 read with Sections 73 and 75 of the Finance Act, 1994 along with interest and proposed for imposition of penalty under Rule 15 read with Section 76.

This order was upheld by the Commissioner (Appeals), CGST and Central Excise, Nashik, leading the appellant to approach the Tribunal.

Appearing for the Appellant, Jhamman Singh argued that financing is expressly included within the definition of “input service” under Rule 2(l) of the CENVAT Credit Rules, 2004. Since the loans were taken for the company’s manufacturing business, the related charges should be eligible for credit.

It was further argued that the show cause notice issued in June 2019 was time-barred, as the credit had been availed in January 2017. It was further contended that banks had themselves paid service tax on such charges, treating them as taxable services, and therefore, the corresponding credit taken by the appellant was legitimate.

Appearing for the Department, Dinesh Nanal, submitted that foreclosure or pre-closure charges cannot be treated as input service. It was contended that such charges represent compensation to banks for loss of interest, not a service directly or indirectly related to manufacturing. Therefore, these do not fall under the ambit of “input service” under Rule 2(l) of the CENVAT Credit Rules, 2004.

It was argued that the Commissioner (Appeals) had rightly concluded that the disputed services do not contribute to the manufacture of final products and hence credit is inadmissible.

The Bench of Member Technical, M.M. Parthiban held that foreclosure charges or prepayment premiums are not in the nature of services relating to financing but are instead in the nature of compensation or damages for premature termination of loan agreements.

Referring to Repco Home Finance Ltd. (2020), the Tribunal noted that foreclosure charges cannot be treated as taxable under “Banking and Other Financial Services” as defined under Section 65(12) of the Finance Act, 1994. Since no service tax is leviable on foreclosure charges, there can be no question of availing CENVAT credit on such amounts.

The Tribunal relied on loan agreements entered into by the appellant with a consortium of banks, which contained specific clauses on prepayment premiums. These contractual terms demonstrated that such charges were compensatory in nature, payable as liquidated damages for breach of the original loan tenure.

Accordingly, the order of the Commissioner (Appeals), which had sustained the demand and denial of CENVAT benefit, was upheld.

Thus, the appeal was dismissed.

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