Prepayment charges are not in relation to Banking and other financial services and therefore not liable to Service Tax.

Case:- HOUSING & DEV CORPORATION LTD (HUDCO) VERSUS C.S.T., AHEMDABAD
Citation: - 2012 (26) S.T.R. 531 (Tri-Ahmd)
Issue: -The Appellant has filed the present appeal on the following issue :
(i) Prepayment charges are not in relation to Banking and other financial services and therefore not liable to Service Tax.
(ii) Reset charges are not in relation to Banking and other financial services and therefore not liable to Service Tax.
(iii) The reset charges/prepayment charges are not the consideration for providing any value addition to the services, therefore not liable to Service Tax.
(iv) Reset charges/prepayment charges charged to the customers by the appellant is in the nature of additional interest only and, therefore, not liable to Service Tax.
(v) The agreements of lending entered prior to 10-9-2004 by the appellants are not chargeable to Service Tax.
(vi) Extended period of limitation cannot be invoked as they are a wholly owned Government company and there cannot be any mala fide on their part to evade payment of tax.

Brief fact: - The Appellant is registered with the Department under the category of 'Banking and other financial services' and paying Service Tax on the services provided. The assessee is involved in the business of providing finance for housing and urban development. During the course of audit by the Department, it was also observed that the appellant had received the income under the head 'reset' charges and issued receipts to their customers as 'Reset charges' during the financial year 2004-05. It was also observed that during the financial year 2006-07 and 2007-08, the appellant was recovering prepayment charges, on pre-payment of part/full loan during the loan period, under the Head 'Additional Interest (prepayment) but were not paying any Service Tax on such charges.
A Show Cause Notice was issued for recovering the Service Tax pay-able on these reset charges and prepayment charges which were collected under the head 'Additional Interest' by considering the same as taxable value under the category of 'Banking and other financial services'. The said demand was confirmed by the Commissioner of Service Tax, Ahmedabad against which the appellant has filed the present appeal.

Appellant Contention :- The Appellant submitted that prepayment charges and reset charges are not in relation to 'Banking and other financial services' and therefore not liable to Service Tax at all. Reliance was placed on the decision of European Court of Justice in the case of Societe thermale d'Eugenie-les-Bains v. Ministere de l'Economie, des Finances et de l'industrie. In that case, it was held that when the client exercises cancellation option available to him in respect of hotel services and cancellation charges are retained by hotelier, it cannot be considered as having any direct connection with the supply of any service for consideration and there-fore not liable to value added tax. In the case of B.A.Z. Bausystem AG v. Finanzamt Munchen Fur Korperschaften [1982] 3 C.M.L.R. 688, it was revealed that where interest/damages plus interest are awarded for breach of contract, interest cannot be included in the taxable amount. In the Master Circular No. 96/7/2007-S.T., dated 23-8-07, it was clarified that the Service Tax is not liable on account of collection of surcharge for delayed payment of telephone bill. This was submitted to support the view that only those charges which have direct nexus/connection with the provisions of services are to be charged Service Tax. The appellant also relied upon the Circular of the Board No. 121 /3/2010-ST., dt. 26-4-10, to submit that the clarification given that the detention charges for containers is not chargeable to Service Tax, will be applicable to the issue in this case also. For income tax purpose, reset charges and prepayment charges are treated as interest and the appellant themselves have treated the same as interest. They also relied upon the decision of the Tribunal in the case of Small Industries & Development Bank of India (SIDBI for short) -2011 (23) S.T.R. 392 (Tri.-Del.), to support their submission that collection of prepayment charges and reset charges have nothing to do with any service and therefore is not covered under Banking and other financial services. It was also submitted that for the subsequent period, the Commissioner (Appeals) also followed this decision in his order DT. 10-8-11.
It was submitted that prepayment charges on the amount prepaid is dependent upon the tenure of loan, differential interest and the interest loss that may have to be borne by the appellant and further balance repayment period etc. According to the appellant, these charges are nothing but additional interest and they treat it as interest in-come and income tax department also treats it as interest income. In case of finance on fixed interest loan, rate of interest remains fixed for a period of 5 years. But, if the borrowers fulfil certain conditions before expiry of 5 years, the borrower is given an option to opt for floating rate of interest loan. At the time of conversion of fixed rate of interest loan into floating rate interest loan, reset charges are levied. Ld. Counsel for the appellant also explained that these calculations are made on certain parameters.
Appellant has contended that in the clarification issued by the Board vide Letter F.No. B.11/1/2001-TRU, dated 9-7-01, it has been held that the Service Tax would not be applicable on hire purchase agreements entered prior to imposition of levy. In their case, all charges have been collected in respect of lending arrangement which has been entered into prior to 10-9-04, when the lending services were made taxable.
It was submitted on behalf of the appellant that the appellant is wholly owned Government Company and therefore there cannot be mala fide intention on their part to evade payment of Service Tax.

Respondent contention :- It was submitted on behalf of the Revenue that the decision in the case of SIDBI, would not be applicable since it was rendered when the definition of service itself was different. Further, by referring to the definition as per Finance Act, 1994, it was submitted that any service in relation to lending would attract Service Tax and prepayment charges and reset charges are definitely relatable to lending.
Revenue relied upon the decision of the Tribunal in the case of Bharat Petro Corporation Ltd. v. CCE, Nasik 2009 (242) E.L.T. 358 (Tri.-Mum.), wherein the Tribunal upheld the submission that BPCL is a Government owned company had suppressed the fact and therefore, just because it is wholly owned Govt. company, it cannot be said that bona fide can be presumed. He also submitted that blind belief cannot be a ground for non-payment of taxes.

Reasoning of Judgment: The Revenue has a better case in respect of reset charges since the issue is not at all covered by the decision of the Tribunal in the case of SIDBI as far as resetting charges are concerned. Further, in the case of resetting, the relationship between the lender and the borrower does not cease to exist and loan also continues. Therefore, resetting of interest rate can be definitely considered as a service rendered by the appellant in relation to lending and is covered by Service Tax definition. It was submitted by the appellant that resetting charges were not being collected by them after 2004-2005. However, it was submitted by the Id. A.R. appearing for the Department that in the financial year 2005-06, 2006-07, 2007-08, the appellant had changed the head of income from resetting charges to additional interest. The Tribunal find that this submission was not made before the original adjudicating authority and further Tribunal also find that in Para 5 wherein the Service Tax liability has been worked out in the table, in the first year, it has been shown as reset charges whereas in the year 2005-06, it has been shown as additional interest charges. In the year 2006-07 and 2007-08, it has been specifically indicated as additional interest (prepayment). This gives an impression that contrary to the submission made by the Id. A.R. appearing for the Department, the Department's contention was that in the year after 2005-06, the appellant did not collect any reset charges. In any case, in view of the conclusion Tribunal have reached that the service tax is payable on reset charges as well as prepayment charges, and consider that it is not necessary for them to go into this aspect.
In the case of lease or hire purchase arrangements, Service Tax is leviable on lease management fee/processing fee/documentation charges (re-covered at the time of entering into agreement) and on the finance/interest charges (recovered in equated monthly instalments). The clarification was given in respect of finance/interest charges which were recovered in equated monthly instalments after the date of agreement since other charges are recovered at the time of agreement itself. The logic behind the clarification is that since interest is already decided at the time of agreement but collected subsequently in the form of equated monthly instalments, the date of agreement would be considered as the date of rendering service though charges are recovered subsequently. In the case of lending services, the charges for prepayment and reset are levied only if the borrower chooses to prepay his loan or restructure his loan. The service comes into being only when the borrower opts for either of them. Thus, the clarification issued by the Board in the case of lease or hire purchase agreements cannot be applied to the issue at hand.

Tribunal find that the appellants have treated the amount of prepayment charges as additional interest and reset charges as additional interest from 2005-2006. It was also submitted that Income Tax Department has accepted such treatment given by them. The fact remains that after definition of lending was amended, and the service tax definition included in the activity in relation to lending for liability to Service Tax, appellant should have intimated the fact to the Department and checked up whether such collection of amount in relation to lending would be liable to tax or not. It is settled law that Government company is not Government and it has to be taken note that even Government departments make the payments for the services received from another department. Telecommunication department used to provide telecommunication ser-vices to other departments and other departments paid for the telecom services rendered and even for the services rendered by Railways, Postal and other departments, payments are made. Therefore, the fact that the appellant is a wholly owned government company, does not mean that they need not have to follow the law of land or take it lightly and plead ignorance of law or being a wholly government company, seek differential treatment. The fact remains that the appellant was required to declare the income received once the law was amended and they were required to seek clarification, if there was doubt. Even if they felt that the activity did not attract Service Tax, ST-3 returns should have been filed/or Department addressed intimating that these services are not liable to tax. In this case, the submission made by the Id. A.R. that plea of bona fide has to be considered in the light of decision of the Tribunal in the case of SPIE CAPAG S.A. v. CCE Mumbai - 2009 (243) E.L.T. 50 (Tri.-Mum.), is appropriate. In that case, while dealing with the plea of bona fide belief, the Tribunal observed that "the least that was expected of the appellant to discharge the plea of bona fide belief was to make enquiries from Central Excise authorities or some reputed legal firm regarding dutiability of items manufactured by it." Therefore, Tribunal find themselves in agreement with the submissions that the appellant could not have interpreted the law according to their understanding without taking sufficient care for their interpretation, is correct. In the absence of any evidence to show that the appellant had intimated the Department or had obtained legal opinion invocation of extended period on the ground of suppression of facts has to be upheld.

Therefore demand for extended period for Service Tax and interest thereon has to be upheld.
The Tribunal consider that the appellant being a wholly owned government company and the fact that they did not pay Service Tax on prepayment charges and reset charges and also in view of the fact that accounting treatment given to these items as additional interest has been accepted by the Income Tax department, in our opinion, would be sufficient for invoking provisions of Section 80 of Finance Act, 1994. Accordingly, while up-holding the demand of Service Tax and interest, penalties imposed under various Sections of Finance Act, 1994 are set aside.

Decision: -Appeal disposed off

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PJ/Case Laws/2012-13/1176

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