Repco Home Finance Ltd. – Chennai CESTAT

Whether service tax is leviable on ‘foreclosure charges’ levied by bank on loan pre-payment.

Chennai CESTAT held that there is a marked distinction between “conditions to a contract” and “considerations for the contract”. A service recipient may be required to fulfill certain conditions contained in the contract but that would not necessarily mean that this value would form part of the value of taxable services that are provided. Foreclosure charges are recovered as compensation for disruption of a service and not towards “lending” services. Foreclosure is anti-thesis to lending and, therefore, cannot be construed to be “in relation to lending”. The phrase “in relation to lending” cannot be so stretched so as to bring within its ambit even activities which terminate the activity.

The foreclosure charges are nothing but damages which the banks are entitled to receive when the contract is broken. Hence, no Service Tax is leviable.

The above decision though rendered under a positive list service tax regime may have bearing to present GST Regime also.

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