Service Tax on Foreclosure charges - No charges for foreclosing Litigation
AS per the erstwhile Section 65(12) of the Finance Act, 1994 (as amended), "banking and other financial services" inter alia included lending. Ministry of Finance vide letter F. No. 345/6/2008-TRU dated 11-06-2008 clarified that pre-closure/foreclosure charges collected for early payment of loans, are leviable to Service Tax.
The CAG's Audit pointed out that a unit in Pune I Commissionerate collected Rs. 12.38 crore on account of foreclosure charges of loans during April 2007 to March 2011, on which Service Tax amounting to Rs. 1.41 crore was not paid which was recoverable along with interest.
The Commissioner promptly issued a Show Cause Notice for recovery of nearly Rs. 1.5 Crores.
But the Board took a different view and informed the CAG that the foreclosure charges are treated as loss of interest. As interest is excluded from the levy of Service Tax, this does not amount to service as per the provisions of the Finance Act 1994. The Ministry further added that CESTAT New Delhi had taken the same view in the case of SIDBI vs CCE Chandigarh - 2011-TIOL-581-CESTAT-DEL
Audit is in no mood to accept Board's explanation. “What about your clarification?”, asks the CAG. Audit has also observed that in the case of HUDCO vs Commissioner of Service Tax Ahmedabad, CESTAT, Ahmedabad - 2011-TIOL-1606-CESTAT-AHM had held that Service Tax is leviable on the reset charges and pre-payment charges paid by the customers. (Against this favourable order, Revenue went in appeal to the High Court as the Tribunal had dropped penalties)
So, now we have two contradictory orders from two Benches of the CESTAT:
1. SIDBI vs CCE Chandigarh -
2. HUDCO vs Commissioner of Service Tax Ahmedabad, CESTAT, Ahmedabad 2011-TIOL-1606-CESTAT-AHM
In , the Tribunal observed, “Two decisions of this Tribunal in Small Industries & Development Bank of India vs. CCE, Chandigarh - and in Housing & Dev. Corporation Ltd. vs. CST, Ahmedabad - have recorded conflicting views and conclusions on the issue whether foreclosure charges fall within the ambit of "banking and financial" services. The earlier judgment ruled that these do not fall within the ambit of the taxable service while the later distinguished the earlier judgment in SIDBI and concluded that foreclosure charges come within the ambit of "banking and other financial" service.”
When there are two conflicting decisions, why is the matter not referred to a Larger Bench? Maybe because this was only a Stay stage, they granted waiver of pre-deposit and matter will be referred to the Larger Bench after ten years.
The Tribunal, Chennai Bench in , followed the HUDCO decision and order pre-deposit of two crores of rupees.
Now, the CAG wants the Board to give a clarification regarding the applicability of TRU letter F. No. 345/6/2008-TRU dated 11 June 2008 keeping in view the various CESTAT decisions on the subject.
Now, what can the poor Board do? Reiterate its own circular or follow one of the two decisions of the Tribunal.
Litigation assured for the next twenty years - on an issue, which can be settled with one sensible sentence. Who will deliver that?