CESTAT Chandigarh Quashes Service Tax Demands on Cheque Bouncing Charges, Foreclosure Charges & Operating Lease Rentals: Clix Capital Services Pvt. Ltd. Case
Overview of the Ruling
In a significant ruling pronounced on 23rd May 2025, CESTAT Chandigarh delivered a comprehensive verdict in favour of Clix Capital Services Pvt. Ltd., allowing both appeals filed by the assessee and setting aside the entire service tax demands, along with interest and penalties, that had been confirmed through impugned orders dated 07.11.2012 and 28.07.2015. The Tribunal addressed multiple contentious issues spanning cheque bouncing charges, foreclosure charges, operating lease rentals, import of services under reverse charge, and interest on CENVAT credit utilisation — ruling in favour of the assessee across all heads, both on merits and on the ground of limitation.
Background: Corporate History and Appeal Details
The assessee before the Tribunal was originally known as GE Capital Transportation Financial Services Ltd., which was amalgamated with GE Capital Services India pursuant to an order dated 03.09.2009 passed by the High Court. Following the amalgamation, the name was subsequently changed to Clix Capital Services Private Limited. CESTAT, through orders dated 02.08.2023 and 27.04.2018, had already permitted the change of name in both pending appeals.
The two appeals — ST/55729/2013 and ST/54344/2015 — arose from adjudication orders passed by the Commissioner of Central Excise, Panchkula. Given the substantial overlap of issues across both appeals, CESTAT Chandigarh consolidated them for a joint hearing and decision.
Financial Demands at Stake
| Appeal No. | Period of Dispute | Demand Confirmed | Penalties Imposed |
|---|---|---|---|
| ST/55729/2013 | 2006-07 and 2007-08 | Rs. 88,72,130 under Section 73 of the Finance Act, 1944 |
Rs. 5,00,000 under Rule 15(2) of the Credit Rules; Rs. 5,000 under Section 77; Rs. 88,72,130 under Section 78 |
| ST/54344/2015 | Oct 2007–June 2008 (cheque bouncing & foreclosure); 2007-08 to 2009-10 (import of services) | Rs. 18,66,403 under Section 73 of the Finance Act, 1944 |
Rs. 5,000 under Section 77; Rs. 18,66,130 under Section 78 |
Show cause notices (SCNs) were issued on 21.10.2011 and 22.04.2013, following a departmental audit. The demands were proposed on the basis that cheque bouncing charges, foreclosure charges, and operating lease rentals were leviable to service tax under the category of Banking and Other Financial Services (BOFS), that service tax on import of services had not been discharged, and that interest was payable on CENVAT credit allegedly utilised against exempt output services.
Issue 1: Service Tax on Cheque Bouncing and Foreclosure Charges
Legal Position Argued by the Assessee
The assessee's counsel drew the Tribunal's attention to a prior decision delivered in the assessee's own case — covering appeals ST/881/2008 and ST/1915/2010 — wherein CESTAT had already ruled in its favour vide Final Order No. 60102-60103/2023 dated 20.04.2023. The Tribunal had held in those proceedings that amounts recovered as cheque bouncing charges and foreclosure charges could not be subjected to service tax under the BOFS category.
With respect to foreclosure charges specifically, the Tribunal had relied upon the Larger Bench ruling in Commissioner of Service Tax, Chennai Vs Repco Home Finance Ltd., 2020 (42) GSTL 104 (Tri.-LB), which conclusively held that:
Foreclosure charges cannot be viewed as alternative mode of performance of the contract because they arise upon repudiation of specified terms of contract and are intended to compensate the injured party i.e. banks and non-banking companies.
The assessee further brought to the Tribunal's notice that the Revenue had challenged the earlier CESTAT ruling before the Supreme Court, which dismissed the Department's appeal vide order dated 29.07.2024 in Civil Appeal No. 8066-8067 of 2024, thereby affirming the Tribunal's findings.
CESTAT's Finding
CESTAT Chandigarh noted that both issues stood conclusively decided in favour of the assessee in its own prior proceedings. The Tribunal observed:
- Cheque bouncing charges are penal in nature and do not constitute consideration for any service rendered. Accordingly, they cannot be brought within the ambit of service tax.
- Foreclosure charges arise due to the repudiation of contractual terms and are compensatory, not transactional. These cannot be treated as an alternative form of service rendered under the loan agreement.
With the Supreme Court having upheld the Tribunal's earlier order, the demands on both counts were set aside without reservation.
Issue 2: Service Tax on Operating Lease Rentals
Nature of the Transaction
In ST/55729/2013, the Department had confirmed a demand of Rs. 35,47,359/- on lease rentals recovered by the assessee from customers in connection with equipment such as laptops, computers, and desktops, leased over a period of 33 months.
The assessee argued that its lease arrangements were operating leases and not financial leases — a critical distinction since only financial leasing was taxable under BOFS during the relevant period.