Pranav B Prem

The Delhi Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has ruled that India Infoline Limited (IIFL) is not liable to pay service tax on Delayed Payment Charges (DPC) collected from clients towards credit facilities. The tribunal held that the amount collected as DPC cannot be treated as consideration for a separate service and, therefore, does not attract service tax liability.

Background of the Case

IIFL, a registered stockbroker, provides stock brokerage services, facilitating the sale and purchase of securities on stock exchanges for its clients in exchange for brokerage fees. The company was paying service tax on the brokerage income it received. However, an investigation by the Directorate General of Central Excise Intelligence (DGCEI) revealed that IIFL was also collecting Delayed Payment Charges (DPC) from clients who failed to make timely payments but was not paying service tax on this amount.

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The department alleged that the collection of DPC amounted to consideration for extending a credit facility, which is a separate service distinct from stock brokerage. Based on the amendment introduced in Rule 6(1) of the Service Tax (Determination of Value) Rules, 2006, effective from July 1, 2012, the department contended that IIFL was liable to pay service tax on DPC. The adjudicating authority upheld this view, holding that DPC was consideration for a separate taxable service.

IIFL's Contentions

IIFL challenged the demand, arguing that DPC was wrongly classified as consideration for a separate service. The company asserted that it was merely a penal charge imposed on clients who failed to make timely payments, ensuring financial discipline. The primary obligation of a stockbroker is to settle transactions on behalf of its clients by making timely payments to stock exchanges. If a client delays payment, IIFL has to manage the financial risk by levying DPC, which is not a service in itself but a deterrent for delayed payments.

IIFL further emphasized that:

1. DPC is only charged when clients fail to make payments within the stipulated time.

2. The charge is not levied on all clients but only on defaulters, indicating it is not a fee for a separate service.

3. No service tax was collected from clients on the DPC amount, reinforcing that it was not a taxable service.

CESTAT’s Observations and Ruling

The CESTAT bench, comprising Judicial Member Rachna Gupta and Technical Member Hemambika R. Priya, ruled in favor of IIFL. The tribunal noted that the adjudicating authority had erroneously disregarded the department's own circular regarding DPC. The ruling emphasized the following key points:

1. DPC Is Not a Consideration for a Separate Service: The tribunal found that IIFL had a single contract with its clients for stock brokerage services, and the contract itself provided for the imposition of penal charges in case of delayed payments. This negated the department’s argument that DPC constituted consideration for an independent service.

2. Nature of DPC as a Penal Charge: The tribunal observed that the purpose of DPC was to ensure that clients adhered to payment timelines. The charge was automatically debited from the client’s account at the end of the month if dues were unpaid. This made it clear that DPC was not a charge for any additional service but merely a deterrent against delayed payments.

3. Payment to the Stock Exchange as Part of Brokerage Service: The tribunal acknowledged that stockbrokers are legally bound to pay the stock exchange for transactions executed by their clients. If a client defaults, the broker still has to meet its obligations, and DPC serves as a measure to mitigate the financial risk.

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Allowing IIFL’s appeal, the tribunal held that DPC does not constitute a separate taxable service and, therefore, is not subject to service tax.

Appearance

Present for the Appellant: Shri Pritesh Mehta, Chartered Accountant

Present for the Respondent: Shri Rohit Issar, Authorized Representative

Cause Title: M/s India Infoline Limited V. Additional Director General (Adjudication) New Delhi

Case No: Service Tax Appeal No. 53305 of 2018

Coram: Hon’ble Dr. Rachna Gupta [Member (Judicial)], Hon’ble Ms. Hemambika R. Priya [Member (Technical)]

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