CESTAT: Late Payment Charges in the Nature of Interest Not Taxable as Declared Service

Last updated: 11 September 2026

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Quick Summary

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has ruled that late payment charges, even if labelled as interest, are not subject to service tax. The Tribunal affirmed that for a charge to be considered a taxable declared service, there must be 'consideration' for a service provided. Payments made as damages due to a breach or delay, rather than for a specific service, lack this essential element of consideration. Therefore, such charges cannot be taxed as declared services.

Court :
Ahmedabad

Brief :
The CESTAT, Ahmedabad, in Inox Air Products Pvt. Ltd. v. Commissioner of CGST & Central Excise, Surat, pronounced on 8 September 2026, examined whether late payment charges received by the assessee on supplies of industrial gases constituted a “declared service” under Section 66E of the Finance Act, 1994.

Citation :
Service Tax Appeal No. 10768 of 2020-DB

The Department sought to levy service tax on such charges, treating them as consideration for agreeing to tolerate an act or situation under the declared-service provisions.

CESTAT relied upon its earlier decision in Lanxess India Pvt. Ltd., wherein it held that the existence of “consideration” is an essential element of a service, including a declared service. The Tribunal observed that damages or amounts arising as a consequence of breach or an undesired/ unanticipated event are not consideration for any service.

Applying this principle, the Tribunal held that payments in the nature of damages, even where described as interest, do not constitute consideration for a declared service. Consequently, such amounts cannot be subjected to service tax under the declared-service provisions.

CESTAT Ruling

Following its earlier decision, the Tribunal held that the issue was no longer res integra. The impugned order was set aside and the appeal was allowed.

Key Takeaway: Merely because a contractual payment is labelled as interest or late payment charges, it does not automatically become consideration for a taxable declared service. Where the payment is in the nature of damages arising from an undesired breach or delayed performance, the essential element of consideration for a service is absent.

This AI-generated summary is for informational purposes only. Please view attached original judgment for the complete text and authoritative interpretation.

FAQ :

No, the CESTAT has ruled that late payment charges, when they are in the nature of damages for a breach or delay, are not taxable as declared services because they lack the essential element of 'consideration' for a service.

The key principle is that 'consideration' is essential for a charge to be considered a service. Damages or amounts arising from a breach or an undesired event are not considered consideration for any service.

No, merely labelling a contractual payment as interest or late payment charges does not automatically make it consideration for a taxable declared service.

The CESTAT set aside the impugned order and allowed the appeal, meaning the service tax could not be levied on the late payment charges.

Attached File : 459474_6116_582180.pdf

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