Custom, Excise & Service Tax Tribunal
Sundaram Finance Ltd vs Principal Commissioner Of Central ... on 25 June, 2025
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
CHENNAI
REGIONAL BENCH - COURT No. III
Service Tax Appeal No. 40362 of 2024
(Arising out of Order-in-Appeal No.49/2024 (CTA-1) dated 31.01.2024
passed by Commissioner of GST & Central Excise (Appeals-I),
26/1, Mahatma Gandhi Road, Nungambakkam, Chennai-600 034.)
M/s.Sundaram Finance Ltd. .... Appellant
No.21, Patullous Road,
Chennai 600 002.
VERSUS
The Commissioner of GST &
Central Excise, ... Respondent
Chennai North Commissionerate,
No.26/1, Mahatma Gandhi Road,
Nungambakkam,
Chennai 600 034.
APPEARANCE :
Ms. G. Vardini Karthik, Advocate for the Appellant
Ms. O.M. Reena, Authorized Representative for the Respondent
CORAM :
HON'BLE MR. P. DINESHA, MEMBER (JUDICIAL)
HON'BLE MR. VASA SESHAGIRI RAO, MEMBER (TECHNICAL)
FINAL ORDER No.40661/2025
DATE OF HEARING : 10.06.2025
DATE OF DECISION :25.06.2025
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Per: Shri P. Dinesha
This appeal is filed against the Order-in-Appeal
No.49/2024 (CTA-1) dated 31.01.2024 passed by
Commissioner of GST & Central Excise (Appeals), Chennai.
The undisputed facts are that the Appellant is a Non-banking
Financial Company engaged in the business activity of
financing the purchase of vehicles like cars, commercial
vehicles, immovable properties like houses, apart from
providing the other services of Software Solutions, Business
Process Outsourcing, Hire-purchase and Leasing, including
equipment leasing etc. While rendering the money-lending
service where a customer avails loan/hire-purchase facility,
such customer could pay-up part or entire outstanding
principal, which would amount to 'pre-closure/foreclosure' of
the loan. For this, such customer would end up paying
additional charges and this condition is clearly part of the
Agreement between the Appellant and its customer. The
Revenue treated such pre-closure/foreclosure as 'liquidated
damages' and demanded service tax on the same.
2. Initially, two separate Show Cause Notices came to be
issued covering the periods July 2001 to March 2010 and
April 2010 to March 2011 demanding the service tax as
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above along with interest and penalty which resulted in
passing the respective Orders-in-Original by the
Commissioner and it appears that the Appellant remitted the
service tax as demanded in the above orders under protest
and also challenged the above demands by filing appeals
before the Tribunal. The Tribunal vide its order dated
22.02.2023, in its Final Order Nos.40067-40068/2023
having allowed the appeals, it appears that the Appellant
filed claims which appears to have been entertained by the
Revenue by granting refund. In respect of another demand
for later periods, the Service Tax having been remitted by
the Appellant, similar refund applications appear to have
been made seeking refund of the Service Tax remitted under
protest for the period April 2011 to June 2017, which came
to be rejected on the ground that the same was not covered
in the order of Tribunal. Against the said denial, the
Appellant filed an appeal before the Commissioner (Appeals)
which was also rejected by the Commissioner(Appeals),
leading to the present appeal before us.
3. Heard Ms. G. Vardini Karthik, ld. Advocate for the
Appellant-Assessee and Ms. O.M. Reena for the Revenue -
Respondent. We have considered the rival contentions and
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we have very carefully considered the documents placed on
record, apart from various judicial decisions relied upon
during the course of arguments. Upon hearing both sides,
the only issue to be decided by us is, "whether the denial of
refund is in accordance with law?"
4. Facts are not disputed; there is also no dispute as to
the granting of refund as a consequence of the order of the
Tribunal supra. Admittedly, in the above order, after
following decision of a Larger Bench, it has been held that
foreclosure charges collected by a Non-banking Financial
CoAmpany is not liable to Service Tax under "Banking and
Financial Services". This very foreclosure charge was treated
as payment towards liquidated damages in the present
dispute the refund of which was denied by the Department.
We find that even the charge of the Revenue for treating the
same as 'liquidated damages' would not survive in view of
the very Larger Bench decision in Commissioner of
Service Tax, Chennai Vs. Repco Home Financial
Limited - 2020 (42) G.S.T.L. 104 (Tri.-LB). Considering the
relevant legislations, after hearing the parties and after
referring to various judicial precedents, Bench has held as
under: -
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"37. The foreclosure of loan is, therefore, a material
breach of contract as it curtails the loan service period
unilaterally, which can prompt the promisor to claim
damages. Damages can be determined by Courts or they
can also be incorporated in the loan agreements and
other commercial contracts so as to ensure certainty in
dealings and also serve as a deterrent measure. This
aspect of damage is known as liquidated damages.
.........
43. A penalty is a sum of money so stipulated in terrorem, and liquidated damages are a genuine pre- estimate of damages. So far as the law in India is concerned there is no qualitative difference in the nature of liquidated and unliquidated damages, as Section 74 eliminates the somewhat elaborate refinement made under the Common Law between stipulations providing for payment of liquidated damages and stipulations in the nature of penalty, which under the Common Law is stipulation in terrorem; a genuine pre-estimate of damages is regarded as liquidated damages, and is binding."
5. Further, the Delhi Bench of the Tribunal considered the levy of Service Tax for liquidated damages within the meaning of Section 66E(e) of the Finance Act, 1994 in the case of South Eastern Coalfields Limited Vs CCE & ST Raipur - 2021 (55) G.S.T.L. 549 (Tri.-Del.) and relevant observations of the Bench are as under: -
6"28. It also needs to be noted that Section 65B(44) defines "service" to mean any activity carried out by a person for another for consideration. Explanation (a) to Section 67 provides that "consideration" includes any amount that is payable for the taxable services provided or to be provided. The recovery of liquidated damages/penalty from other party cannot be said to be towards any service per se, since neither the appellant is carrying on any activity to receive compensation nor can there be any intention of the other party to breach or violate the contract and suffer a loss. The purpose of imposing compensation or penalty is to ensure that the defaulting act is not undertaken or repeated and the same cannot be said to be towards toleration of the defaulting party. The expectation of the appellant is that the other party complies with the terms of the contract and a penalty is imposed only if there is non-compliance.
.........
43. It is, therefore, not possible to sustain the view taken by the Principal Commissioner that penalty amount, forfeiture of earnest money deposit and liquidated damages have been received by the appellant towards "consideration" for "tolerating an act" leviable to service tax under Section 66E(e) of the Finance Act."
6. The above ratio was followed by Chennai Bench in the case of Nayveli Lignite Corporation Ltd. Vs CCE & ST Chennai - 2021 (53) G.S.T.L. 401 (Tri.-Chennai) and hence, 7 we are of the view that the denial of refund by treating the receipt as 'liquidated damages' liable to Service Tax does not have any legal sanctity. Therefore, we accept the case of the Appellant and consequently, set aside the impugned order.
7. Resultantly, the appeal stands allowed with consequential benefits, if any.
(Order pronounced in open court on 25.06.2025 ) (VASA SESHAGIRI RAO) (P. DINESHA) Member (Technical) Member (Judicial) gs