Delayed Payment Charges On Stock Broking Advances Are Interest, Not Taxable Service: CESTAT

The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that delayed payment charges collected by a stock broker from clients for delayed settlement of share purchase amounts cannot automatically be treated as consideration for “tolerating an act” under the service tax law. The bench of Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member) ruled that the charges, when linked to deployment of the broker’s own funds for purchase of shares on behalf of clients, essentially represent the time value of money and therefore acquire the character of interest rather than taxable consideration for a declared service. The dispute arose in an appeal filed by Steel City Securities Ltd against an order confirming service tax demand on delayed payment charges recovered from customers. During departmental audit proceedings, it was noticed that apart from stock broking commissions and DEMAT account charges, the company collected additional amounts described as “penalties” or “delayed payment charges” from customers who failed to make timely payments. The department observed that while service tax had earlier been paid on such amounts, the company had discontinued payment from September 2011 onwards. According to the tax department, following the introduction of the negative-list regime from July 1, 2012, such amounts became taxable under Section 66E(e) of the Finance Act, 1994 as a “declared service,” namely agreeing to tolerate an act or situation for consideration. The department alleged that by permitting delayed payment by clients and charging a fee for it, the broker was effectively tolerating default for consideration and therefore rendering a taxable service. Steel City Securities argued that these delayed payment charges were not consideration for any independent service. It submitted that while purchasing shares for clients, the broker often used its own funds to settle obligations with stock exchanges. Where customers delayed repayment, the charges merely compensated the broker for use of its funds for an additional period and represented nothing more than the time value of money. The company relied on provisions excluding interest from taxable value and argued that the amounts fell under the negative-list exemption relating to loans, advances and interest. The Tribunal examined whether such delayed payment charges could indeed be characterized as consideration for a declared service. It noted that in stock broking transactions, the broker effectively deployed its own money on behalf of clients while settling share purchases with stock exchanges. The additional amounts recovered for delayed payment were therefore closely linked with use of those funds and not with any separate service of tolerating customer default. The Bench observed that where money is lent, advanced or allowed to be retained, compensation for such use generally takes the character of interest. It held that the concept of deposits, loans and advances should be interpreted broadly and include situations where funds are used on behalf of another person, even if not directly transferred into the hands of the customer. The Tribunal also referred to CBIC Circular No.102/21/2019-GST, which clarified under the GST regime that additional or penal interest does not fall within the scope of “agreeing to tolerate an act.” Although issued under GST law, the Tribunal found the clarification persuasive because of the similarity between the language of the GST provision and Section 66E(e) of the Finance Act. However, the Bench distinguished delayed payment charges collected in relation to DEMAT account maintenance services. It observed that such charges did not arise from deployment of funds on behalf of customers and therefore could not be equated with interest. Since the charges arose merely because customers delayed payment of maintenance charges, the Tribunal held that they represented consideration for tolerating delayed payment and would continue to attract service tax. While partly allowing the appeal, the Tribunal set aside service tax demand on delayed payment charges relating to stock broking transactions together with corresponding penalties. However, it upheld service tax liability and equal penalty on delayed payment charges relating to DEMAT account services. Case Details Case Title: M/s Steel City Securities Ltd. Versus Commissioner of Central Tax Visakhapatnam - GST Citation: JURISHOUR-1290-CES-2026(HYD) Case No.: Service Tax Appeal No. 30893 of 2018 Date: 15.05.2026 Counsel For Appellant: Abhishek Rastogi, Advocate Counsel For Respondent: K. Sreenivasa Reddy, AR Click Here To Read Order Read More: American National of Indian Origin Arrested at Delhi Airport with 3.565 Kg Smuggled Gold Worth Crores

Delayed Payment Charges On Stock Broking Advances Are Interest, Not Taxable Service: CESTAT

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