No Service Tax Payable On Penal Interest & Cheque Bouncing Charges Received By Bajaj Finance: CESTAT

The Mumbai Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that penal interest and cheque bouncing charges received by Bajaj Finance as "consideration" for "tolerating an act" are not leviable to service tax under Section 66E(e) of the Finance Act, 1994.

The Bench of S.K. Mohanty (Judicial Member) and M. M. Parthiban (Technical Member) has observed that demand for service tax in respect of the amount collected on account of bouncing of cheques cannot be sustained as the charges are penal in nature and thus are not towards consideration for any service.

The appellant/assessee, Bajaj Finance, is a Non-Banking Financial Company (NBFC). It is 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 and borrowers.

The loan agreements provide for the repayment of the outstanding dues or Equated Monthly Instalments (EMI) through cheque, electronic clearing systems (ECS), or any other electronic or clearing mandate on the due dates stipulated in the agreement. In case of delay in payment of dues by the customers or borrowers, the appellants collect ‘penal interest’ as additional interest for the number of days of delay in terms of the agreement executed by the customers or borrowers.

The appellants collect ‘bounce charges’ on account of dishonour of a cheques, ECS, or any other electronic or clearing mandate given by the customers or borrowers, which is in line with agreed terms and conditions.

The Department had interpreted that the penal interest and bounce charges are not part of the EMI of the loan amount or principal loan amount, and these are extra amounts imposed by the appellants as penal interest and bounce charges, which are accounted for in the profit and loss accounts. Hence, the Department treated it as compensation received by the appellants on account of delay in payment of EMI by the customer or borrower, and these are partthe of consideration for declared services provided by the appellants, i.e., service of tolerating the act of delay or default by customers or borrowers.

The show cause proceedings were initiated for the recovery of service tax. The show cause notice was adjudicated by the Commissioner in concluding that the activity of appellants in tolerating the act of ‘default and non-payment and late payment in payment of EMI by the borrowers and dishonour of payment instruments towards repayment of loan instalments’ as ‘Declared Service’ of ‘agreeing to tolerate an act or situation’ in terms of Section 66(E)(e) read with Section 65B(22) of the Finance Act, 1994 and treating it as ‘service’ in terms of Section 65B(44) and ‘taxable service’.

The assessee contended that they were under the bona fide belief that the penal interest collected by them was in the nature of additional interest on the loans and advances provided by them and that the same was exempt from payment of service tax. The appellants were also under the bona fide belief that bounce charges collected from their customers or borrowers were merely in the nature of penalties, liquidated damages, or compensation for the breach of the terms and conditions of the loan agreement. It was not eligible for service tax.

The assessee urged that damages, penalties, or compensation for breach of contract are not consideration for any service and thus not leviable to service tax.

The department contended that an activity of tolerance of a situation of delay in payment of EMI is adequately covered in the second expression ‘to tolerate an act’ provided in clause 5(e) of Schedule II to the CGST Act, 2017, enumerating activities or transactions to be treated as supplies of goods or services. A tolerance of an activity of delay in payment is against the agreed consideration, and it is in the form of penal charges or penalties. It is agreed between appellant and borrower or customer that in case any delay has occurred, the appellants are entitled to recover the penal charges or penalty from defaulting borrowers.

The CESTAT held that the additional or penal interest recovered by the Applicant from their customers against the delayed payment of monthly instalments of the loan extended to such customers would be exempt from GST.

Case Title: M/s Bajaj Finance Ltd. Versus Commissioner of Central Excise & GST, Pune-I

Case No.: Service Tax Appeal No. 90043 of 2018

Date: 07.08.2023

Counsel For Appellant: Vinay Jain

Counsel For Respondent: Nitin Ranjan

Click Here To Read The Order