Penal interest and liquidated damages are not taxable services under Section 66E(e); CSR expenditures may constitute taxable sponsorship service under Section 65(99a) based on brand visibility.

Per Mr. VASA SESHAGIRI RAO

The Appellants, M/s. City Union Bank Limited (CUB) and M/s. Karur Vysya Bank Limited (KVB), are scheduled banking companies engaged in providing Banking and Other Financial Services to customers across India. Both Banks were holding centralised Service Tax registrations during the relevant periods and were regularly filing ST-3 returns, discharging service tax wherever applicable, and availing CENVAT credit in accordance with the law.

1.2 Both the Banks were subjected to periodic departmental audits, and their books of accounts and statutory records were made available to the Department during the course of such audits.

2. The period involved in the appeal filed by City Union Bank Limited is 01.04.2014 to 30.06.2017.

2.1 During verification of the financial records of the Bank, the Department noticed the following: -

i. the Bank had collected penal interest from borrowers on account of delay or default in payment of EMIs in respect of term loans; and ii. the Bank had incurred expenditure under Corporate Social Responsibility (CSR) and allied activities, which according to the Department involved sponsorship services, attracting service tax under Reverse Charge Mechanism (RCM).

2.2 The Department took the view that penal interest collected by the Bank constituted consideration for “tolerating an act”, taxable as a declared service under Section 66E (e) of the Finance Act, 1994 .

2.3 In respect of CSR expenditure, it was alleged that wherever such expenditure involved display of the Bank’s logo, name or brand visibility, or where documentation evidencing pure donation was allegedly insufficient, the activity amounted to “sponsorship service” as defined under Section 65 (99a) of the Act.

2.4 Accordingly, a Show Cause Notice 35/COMMR/ST/2019 dated 15.10.2019 was issued proposing to demand: Service Tax of ₹6,45,91,501/- on penal interest; Service Tax of ₹3,90,56,551/- plus ₹98,686/- under RCM on CSR/sponsorship expenditure; and Interest under Section 75 ; and Penalties under Sections 77 and 78, by invoking the extended period of limitation under the proviso to Section 73 (1) of the Finance Act, 1994 .

2.5 Vide the impugned Order-in-Original 01/COMMR/ST/2020 dated 31.01.2020, the Commissioner of Central Excise, Trichy confirmed the demand of service tax of Rs 5,67,61,006/- on penal interest and demand under RCM of Rs 1,99,01,781/-&Rs 98,686/- on CSR/sponsorship expenditure; appropriated minor amounts already paid; and imposed penalties under Sections 77 and 78 of the Finance Act, 1994 .

2.6 Aggrieved by the said order, City Union Bank Limited has preferred the present appeal before this Tribunal.

3. The period involved in the appeal filed by Karur Vysya Bank Limited is October 2013 to June 2017.

3.1 During audit and verification of records, the Department observed that:

i. the Bank had collected penal interest from borrowers on delayed payment of EMIs;

ii. the Bank had recovered liquidated damages / notice period pay from employees who resigned without serving the stipulated notice period; and iii. the Bank had incurred CSR expenditure, part of which allegedly constituted sponsorship services attracting tax under RCM.

3.2 The Department alleged that both penal interest and liquidated damages were taxable as consideration for tolerating an act under Section 66E (e).

3.3 In respect of CSR expenditure, it was alleged that wherever there was reciprocity, brand visibility or lack of adequate documentation, the same was liable to tax as sponsorship service under Section 65 (99a) read with RCM provisions.

3.4 Accordingly, a Show Cause Notice No 02//COMMR/ST/2019 dated 15.04.2019 was issued proposing demand of: Service Tax of ₹18,28,78,0