Service tax not leviable on penal interest and bounce charges

The CESTAT, Mumbai, in M/s Bajaj Finance Ltd. v Commissioner of Central Excise and GST [Service Tax Appeal No. 90043 of 2018 dated August 07, 2023] set aside the impugned order and held that the assessee is not receiving penal interest and bouncing charges as a consideration for tolerating an act. Thus, service tax cannot be demanded.

Facts

M/s Bajaj Finance Ltd. ("the Appellant"), a non-banking financial company, providing various types of loan such as auto loans, loan against the property, personal loans, consumer durable goods loans, etc. to their customers. 
The Appellant entered into an agreement with their customers for providing loan and collecting various charges such as processing fees, documentation fees etc. as per the terms and conditions of the loan agreement.
As per the agreement the Appellant will collect penal interest as an additional interest for the number of days delay in payment of EMI and will also collect bounce charges on account of dishonor of cheque given by the customers which is in line with agreed terms and conditions.

A Show Cause Notice was issued dated January 15, 2018 ("the SCNs") by the Revenue Department ("the Respondent") demanding the service tax on the amount received on account of penal interest and bouncing charges on the ground that the said charges are leviable to service tax in terms of Section 66(E)(e) read with section 65B (22) of the Finance Act, 1994 ("the Finance Act").

The Adjudicating Authority vide an order ("the Order") imposed the demand of service tax on penal interest and bouncing charges collected by the Appellant.

Aggrieved by the Order, the Appellant filed an appeal before the Appellate Authority who vide an order in appeal dated September 07, 2018 ("the Impugned Order") confirmed the demand of service tax.

Aggrieved by the Impugned order, the Appellant filed an appeal before the CESTAT, Mumbai praying for quashing the Impugned order on the ground that penal and bounce charges were not consideration for service thus, not leviable to service tax.

Issue

Whether the penal interest and bounce charges collected by an NBFC attracts service tax?

Held

The CESTAT, Mumbai, in Service Tax Appeal No. 90043 of 2018 held as under:

• Noted that, the government had excluded the interest on delayed payment from the scope of payment of service tax as per the clause (iv) to sub-rule 2 to Rule 6 of the Service tax Rules, 2006 notified vide Notification No. 24/2012- S.T. dated June 06, 2012.
• Relied upon the Judgement of CESTAT, Dehradun in M/s Rohan Motors v Commissioner of Central Excise wherein it was held that the bouncing charges are penal in nature and thus are not towards consideration of any service.
• Held that, the Penal interest and bouncing charges received by the Appellant as consideration for tolerating an act are not leviable to service tax.
• Set aside the impugned order.

Our comments

In order to reduce the litigation under the GST regime, the CBIC vide Circular No. 178/10/2022-GST dated August 03, 2022 has clarified that the fine or penalty that the a banker imposes, for dishonour of a cheque, is a penalty imposed not for tolerating the act or situation but a fine, or penalty imposed for not tolerating, penalizing and thereby deterring and discouraging such an act or situation. Meaning thereby, the cheque dishonor fine or penalty is not a consideration for any service and thus, not taxable.