Service Tax Not Payable On The Service Charges For Prepayment Of Loan Amount By The Customer: CESTAT

The Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that service charges for pre-payment or foreclosure of loan amounts by the customer cannot be treated as taxable services and are not chargeable to service tax.

The two-member bench headed by Justice Dilip Gupta (President) and Hemambika R. Priya (Technical Member) has observed that foreclosure charges collected by the banks and non-banking financial companies on premature termination of loans are not leviable to service tax under "banking and other financial services" as defined under Section 65(12) of the Finance Act.

The appellant/assessee is the State Financial Corporation or undertaking of the Government of Rajasthan and has been formed for non-business or non-commercial purposes to facilitate the growth of the industry in Rajasthan. The appellant was registered with the Service Tax Department for providing "banking and other financial services" as defined in Section 65(12) of the Finance Act, 1994, and those services are taxable under Section 65(105)(zm) of the Act.

During the course of the audit of service tax records, the service tax department observed that the appellant was collecting financial/foreclosure charges on account of the premature repayment of loans by the borrowers. The department issued a show-cause notice demanding the service tax on service charges for pre-payment or foreclosure of the loan amount by the customer.

The appellant contended that the foreclosure charges are in the nature of liquidated damages to recover the possible loss of interest revenue that would otherwise have been earned by the banker or financial institution in case the loan is repaid as per its normal time frame. The liquidated damages or compensation received by the appellant for the foreclosure of the loan is not against any service provided by the appellant to the customer and certainly does not fall within the category of "banking and other financial services.".

The tribunal relied on the Larger Bench decision of the CESTAT, Chennai, in the case Commissioner of Service Tax, Chennai vs. Repco Home Finance Ltd., in which it was held that foreclosure charges are nothing but damages that the banks are entitled to receive when the contract is broken by the borrower.

Case Title: Rajasthan Financial Corporation Versus Additional Commissioner

Citation: Service Tax Appeal No. 52298 Of 2015

Date: 13.03.2023

Counsel For Appellant: S C Kamra, N D Dubey

Counsel For Respondent: Radhe Tallo

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