Judgment Update | Larger Bench of CESTAT holds foreclosure charges not exigible to Service Tax
This is to apprise you regarding recent decision of Larger Bench of CESTAT in the case of REPCO Home Finance Limited v. Commissioner, 2020-VIL-309-CESTAT-CHE-ST. The Larger Bench has held that foreclosure charges collected for closing loans before stipulated period, are not towards rendition of any service. Accordingly, no Service Tax is payable thereon.
- The Appellant was inter alia engaged in provision of housing loans to its customers. It collected charges from customers on premature termination of loans.
- The revenue alleged that such charges were exigible to Service Tax as ‘Banking and Other Financial Services’ (‘BOFS’) under Section 65(12) of the Finance Act, 1994 (during positive regime of Service Tax). As per the revenue, it was facility available to a borrower to close the loan before stipulated period for a consideration.
‘Foreclosure charges’ are not towards rendition of BOFS nor exigible to Service Tax for the following reasons:
- There is no element of service in foreclosure charges. A service must accrue benefit to another person. Foreclosure charges do not benefit bank which loses interest that would accrue over a period of time.
- ‘Doctrine of expectation interest’ which is a measure for damages, provides that an amount can be considered as damages if it compensates expected interest. Foreclosure charges are in nature of damages which banks are entitled to receive on breach of contract. The charges are in nature of damages and not consideration.
- Foreclosure charges cannot be construed to be lending services as contract of loan does not contain option to perform or not to perform.
This ruling holds equal relevance under GST regime in as much taxability of damages is being disputed under GST regime as well.