By TIOL News Service

MUMBAI, NOV 17, 2014: THE applicants are in the business of lending securities and earning interest on lending and borrowing business. Therefore, they are required to pay service tax under the category of Banking and Financial Institution Service. The applicants are having the arrangement for finance against the government securities held by the ‘Clearing Corporation of India Ltd. (CCIL)'. The CCIL is having collateral borrowing and lending obligations. As per the obligation, any financial institution who is in need of money, pledge their securities with CCIL and CCIL asks some banking and financial company who is having surplus money with them to lend the money to the borrower for certain period of time.

Admittedly, if the value of the securities is Rs.100/-, the lender shall pay certain amount e.g. Rs.10/- as their charges for lending and remaining Rs.90/- they lend to the borrower. For this, CCIL issues a certificate certifying the amount of security amount lent and the charges. After the maturity period, the borrower will pay the amount written on the face value of the security. In case of default, CCIL will auction the security in the open market and what amount is fetched in the auction is given to the lender. On these transactions, the revenue wants to levy service tax on the part of the amount retained as charges by the lender for providing the loan to the borrower.

It is the Revenue view that this part retained does not constitute interest and, therefore, service tax is leviable in terms of Rule 6 of Service Tax (Determination of Value) Rules, 2006 which exempts interest of loan only.

The Bench observed that the transaction by CCIL for collateral borrowing and lending obligation is nothing but giving loans and advance against securities; therefore, prima facie the amount of charges retained by the lender constitute as interest on loan and hence the applicants are not required to pay service tax.

The second issue is that the applicant discounts the account receivable (invoice) of their client and at the time of maturity, they get full value of the amount of the invoice. Revenue is of the view that as they have discounted the invoice, the same does not form part of the interest, the same is “commission” earned by them for discounting the invoice. That on this transaction termed as factoring i.e. a financial transaction in which a business in need of funding sells its accounts receivable as discount, service tax is payable.

The Bench observed -

"7. We have seen the Notification 29/2004-ST dated 22.09.2004. As per the said notification, discount of bill is exempted from levy of service tax. The only contention of the revenue is that while discounting the applicant has earned commission. We have seen the said notification. As per the Notification, it deals only the interest for lending the money for certain period of time. In the facts of the case, the discount is nothing but interest for lending the money. Therefore, the applicants have made out a case for complete waiver of pre-deposit on this issue."

There is also another Service Tax demand confirmed against the applicant on the penal interest charged on bills of exchange discounted by them. It is the Revenue view that penal interest recovered by the appellant is not interest on loan and, therefore, they are required to pay service tax on the said amount.

In this regard, the CESTAT observed -

"9. We have heard the parties for the issue. Prima facie we are of the view that the penal interest is payable on delay of the advance given by the applicant to their clients. Therefore, same also form part of the interest of loan. Accordingly, service tax is not payable. In these circumstances, the applicant has made out a case for complete waiver of pre-deposit on this issue also."

In fine, as on all counts the CESTAT observed that the applicants have made out a prima facie case, pre deposit was waived and stay was granted from recovery of the adjudged dues.

(See 2014-TIOL-2285-CESTAT-MUM)