Stock Broker's Charges For Clients' Delayed Share Payments Not Service Taxable: CESTAT Hyderabad

The Hyderabad Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has partly allowed Steel City Securities Ltd.'s appeal against a service tax demand on delayed payment charges collected from clients, setting aside the demand relating to stock broking transactions while upholding the levy on delayed payments linked to DEMAT account services.

A bench of Judicial Member Angad Prasad and Technical Member A.K. Jyotishi held that delayed payment charges collected for late payment towards share purchases were relatable to interest on funds deployed by the broker and could not be treated as a taxable declared service.

The bench also relied on a 2019 CBIC clarification issued under the GST regime, which stated that additional or penal interest for delayed payment does not amount to “tolerating an act” and instead qualifies as interest.

“Therefore, though this clarification is in the context of GST Act, the activity is similar to the activity considered as declared service for the purpose of levying service tax as is evident from the wording of section 66E(e) and entry 5(e) of Schedule II to CGST Act. Therefore, we find that it has got persuasive value. In view of the same, we find that even this activity of delayed payment charges cannot be treated as declared service for the purpose of charging service tax,” the bench observed.

The dispute arose after the department noticed during an audit that the assessee, engaged in stock broking and DEMAT account services, was collecting delayed payment charges and penalties from clients who failed to make timely payments.

The department alleged that after the introduction of the negative list regime from July 1, 2012, such charges became taxable as consideration for tolerating delayed payments by clients. It argued that the assessee permitted payment defaults in return for consideration and that the charges therefore constituted taxable declared services.

The department also argued that the earlier CBEC Circular dated August 3, 2011, which clarified that delayed payment charges were not includible in taxable value, was no longer relevant after the statutory change.

Steel City Securities argued that the delayed payment charges relating to stock broking transactions merely represented compensation for use of the broker's own funds. It said it paid settlement dues to the stock exchange on behalf of clients. It contended that such charges represented the time value of money akin to interest.

The tribunal also noted that while the show cause notice proposed to tax the amounts as declared services, the adjudicating authority and Commissioner (Appeals) had gone beyond that case. They treated the charges as an integral component of stock broking and DEMAT services. The tribunal noted that the impugned order could not be sustained on that ground alone, but proceeded to examine the merits as well.

On merits, the tribunal held that the broker's use of its own funds to settle share purchases for clients amounted to an advance extended on their behalf. It said delayed payment charges recovered when clients failed to reimburse those sums within time were relatable to interest rather than consideration for tolerating a default.

At the same time, the tribunal distinguished delayed payment charges relating to DEMAT account maintenance services. It observed that such charges were linked to delayed payment of service fees and not to any loan or advance.

“These delayed payment charges are being collected in relation to providing DEMAT Account services and not towards margin fund provided by stock broker and therefore, the rationale for not charging service tax as applicable to delayed payment charges relating to delay in payment of money towards purchase of shares cannot be applied towards delay in payment of maintenance charges for DEMAT Account,” the bench said.

The tribunal observed that the primary business purpose in that segment was the provision of DEMAT account services for consideration. Delayed payment charges were collected when service fees were not paid in time.

It therefore held that “these charges were collected towards tolerating the act of default in payment as investor and hence, to that extent, the demand of service tax on account of delayed payment for DEMAT Account service will sustain”.

Accordingly, the tribunal set aside the service tax demand and penalty relating to delayed payment charges in stockbroking services. However, it upheld the demand and equal penalty relating to DEMAT account services.

For Appellant: Advocate Abhishek Rastogi

For Respondent: K. Sreenivasa Reddy, AR