Order Date – 07 August 2023

Parties: M/s Bajaj Finance Ltd. Vs Commissioner of Central Excise & GST, Pune-I

Facts –

• The Appellant, M/s Bajaj Finance Ltd., are a Non-Banking Financial Company (NBFC) and collect ‘penal interest’ as an additional interest in case of delay in payment of EMI. They also collect ‘bounce charges’ on account of dishonour of cheque/ ECS or any other electronic or clearing mandate given by the customers/ borrowers as per the loan agreement.
• A show cause notice was issued alleging that the penal interest and the bounce charges collected are not part of consideration for declared services provided by the appellants i.e., service of tolerating the act of delay/default by customers/borrowers.
• The show cause notice was adjudicated by the learned Commissioner in concluding that the service provided by the appellant is 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 thereby treating it as ‘service’ in terms of Section 65B(44) and ‘taxable service’ under Section 65B(51) of the said Finance Act.

Issue – 

• Whether the service tax is liable to be paid on penal interest and bounce charges collected by the appellant? 

Order – 

• The Tribunal observed that the Master Circular issued by RBI in this regard vide RBI/2010-11/72 DBOD.No.Dir.BC.9 /13.03.00/2010-11 dated 01.07.2010 provide for charging interest on loans and advances also provide for levy of penal interest for default in repayment or non-submission of instruments of repayment of loan in time. The appellants being a Non-Banking Financial Institution governed by the regulatory frame work of RBI had followed the guidelines and hence there is no extra consideration that flows in such payments made on account of penal interest/delayed payment charges.
• Further find that clause (iv) to sub-rule 2 to Rule 6 of the Service Tax (Determination of Value) Rules, 2006, notified vide Notification No.24/ 2012 - S.T. dated 06.06.2012 had excluded the interest on delayed payment from the scope of payment of service tax. It was also clarified vide CBIC Circular No. 102/21/2019-GST dated 28.06.2019, that the transaction of levy of additional/penal interest does not fall within the ambit of entry 5(e) of Schedule II of the CGST Act.
• The demand of service tax in respect of the amount collected on account of bouncing of cheques, the issue has already been decided by the Principal Bench of this Tribunal in the case of M/s. Rohan Motors Ltd. Vs. Commissioner of Central Excise, Dehradun in Final Order No. 51620/2020 dated 05.10.2020 reported in 2021 (45) G.S.T.L. 315 (Tri. - Del.) holding that these charges are penal in nature and thus are not towards consideration for any service.
• Hence it was held that the impugned order holding that penal interest and bouncing charges received by the appellants as “consideration” for “tolerating an act” and are leviable to service tax under section 66E(e) of the Finance Act, 1994, cannot be sustained.