Interest Earned on Loans Not Consideration for Service Tax: CESTAT

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai Bench, has held that interest earned on loans cannot be treated as consideration for taxable services and therefore cannot be categorized as an “exempt service” for the purpose of reversal of Cenvat credit. The bench of P. Dinesha (Judicial Member) has observed that while the appellant was indeed providing taxable financial services, the activity of lending funds and earning interest did not amount to rendering an exempt service. Since the interest income was not a consideration for any taxable service, it could not be categorized as an exempt service under the credit rules. The appellant company, engaged in providing banking and financial services, primarily offered hire purchase financing services, on which it paid service tax. In addition to these taxable activities, the company also collected deposits from the public and lent funds to the Tamil Nadu Electricity Board (TNEB) and earned interest income from such lending. The company availed Cenvat credit on common input services such as advertisement, telephone services, and courier services, which were used for both its taxable financial services and activities related to lending. During verification of records, departmental officers observed that the company had not reversed proportionate Cenvat credit attributable to activities related to interest income, which the department treated as exempt or non-taxable services. Consequently, a show cause notice dated March 9, 2011 was issued proposing recovery of ₹1,34,714 for the period April 2008 to January 2011 under Rule 14 of the Cenvat Credit Rules read with Section 73 of the Finance Act, 1994, along with interest and penalty. The adjudicating authority confirmed the demand along with interest and imposed an equal penalty under Section 78 of the Finance Act, 1994. The Commissioner (Appeals) upheld the order, leading the assessee to approach the tribunal. The issue raised was whether interest income could be considered for valuation of taxable services and thereby treated as an exempt service for purposes of Rule 6 of the Cenvat Credit Rules. The bench referred to Rule 6(2)(iv) of the Service Tax (Determination of Value) Rules, 2006, which expressly provides that interest on loans is not included in the value of taxable services. Therefore, the tribunal observed that interest earned on lending activities is inherently non-taxable. The tribunal further noted that the legislative intent was also reflected in the negative list regime introduced under Section 66D(n) of the Finance Act with effect from July 1, 2012, which specifically excludes interest on loans from service tax. According to the tribunal, the lower appellate authority had referred vaguely to “other services” without identifying the nature of such services. In the absence of any identifiable exempt service, the tribunal held that there was no basis to invoke Rule 6 of the Cenvat Credit Rules requiring reversal of credit attributable to exempt services. The bench also noted that the adjudicating authority had not recorded any finding that it was unable to determine taxable income or that valuation of taxable services was difficult, which could otherwise have justified the application of Rule 6 provisions. The tribunal concluded that Rule 6 of the Cenvat Credit Rules was not applicable in the present case. Consequently, the demand for reversal of Cenvat credit, along with interest and penalty, was found to be unsustainable. The tribunal set aside the impugned order and allowed the appeal with consequential relief, providing relief to the appellant company. Case Details Case Title: M/s.Tamilnadu Power Finance and Infrastructure Development Co. Ltd. Versus The Commissioner of GST & Central Excise Citation: JURISHOUR-231-CES-2026(CHEN) Case No.: Service Tax Appeal No. 42064 of 2015 Date: 03.03.2026 Counsel For Petitioner: S. Suresh Chandrasekar, Advocate Counsel For Respondent: Anandalakshmi Ganeshram, Authorized Representative Click Here To Read Order Read More: Agricultural Income Return Insufficient to Prove ‘Agricultural Land’ In Absence Of Purchase Invoices Of Manure, Fertilizers: Supreme Court

Interest Earned on Loans Not Consideration for Service Tax: CESTAT

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