Order Date – 22 February 2023

Parties: M/s. Sundaram Finance Ltd. Vs The Commissioner of GST & Central Excise

Facts –

• The Appellant, M/s. Sundaram Finance Ltd., is a Non- Banking Financial Company. The Appellant at the time of accepting the part payment for preclosure, in addition, also collects penal charges @ 3% on the outstanding amount. The said amount was mentioned as (Finance Charges) FC penalty in the settlement working sheet.
• A Show cause notice was issued proposing to demand service tax on such foreclosure charges along with interest and also for imposing penalties on the ground that the FC penalty collected by them would fall under the “Banking and Other Financial Services (BOFS).

Issue –

• Whether the Foreclosure charges is subject to levy of service tax under “Banking and Other Financial Services”?

Order –

• The Tribunal held that the Larger Bench in the case of Repco India Ltd. has considered the issue and held that such charges are not liable to Service tax. 
• The Larger Bench has held that “in fact, as noticed above, the contract has been broken by the borrowers for which the banks are entitled to claim damages. The foreclosure charges are nothing but damages which the banks are entitled to receive when the contract is broken. The amendment made in Section 65(12) of the Finance Act in the definition of “banking and other financial services” by addition of “lending” is not relevant at all for the purpose of determining whether Service tax can be levied on foreclosure charges.”
• Hence the demand cannot sustain and requires to be set aside. The impugned orders are set aside. The appeals are allowed.