The Delhi bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has ruled in favour of SMC Global Securities Ltd., setting aside a demand of over Rs. 5.7 crore in service tax on “Delayed Payment Charges” (DPC) levied on clients who defaulted in timely payments for securities transactions.
The bench of Binu Tamta (Judicial Member) and Hemambika R. Priya (Technical Member) has observed that the appellant/Stock Broker had made payments to Stock Exchanges on behalf of their clients, who delayed the payments against their transactions of securities and the appellant charged the DPC from the said clients by making debit entries in their ledger, which cannot be termed as consideration for the service rendered. On the same analogy, it was held that it cannot be considered as service of tolerating or refraining from an act or to tolerate an act or situation, or to do an act and accordingly and the demand of service tax was therefore, set aside.
The the appellant/Stock Broker has challenged the Show Cause Notice issued by the Directorate General of GST Intelligence (DGGI), which alleged that the interest collected by SMC Global from defaulting clients constituted consideration for a “declared service” under Section 66E(e) of the Finance Act, 1994 — specifically, “agreeing to tolerate an act”.
The adjudicating authority had upheld part of the demand—Rs. 5,70,31,779 out of the original Rs. 9.18 crore—along with interest and penalty.
The Tribunal held that the DPC collected by the appellant does not amount to consideration for any taxable service. It observed that the appellant, as a stockbroker, paid the due amount to the stock exchange on behalf of its clients to avoid default, and subsequently charged the defaulting clients an interest rate of 18% for the delayed payments. Such charges, it held, are compensatory in nature and not for “tolerating” any act.
The Tribunal drew on several precedents, including rulings in Globe Capital Market Ltd., Religare Securities Ltd., and IIFL Holdings Ltd., and relied heavily on the Supreme Court’s affirmation in South Eastern Coalfields Ltd. that penalty clauses in commercial contracts are not taxable services under Section 66E(e).
Case Details
Case Title: SMC Global Securities Limited Versus Additional Directorate General
Case No.: Service Tax Appeal No. 50997 of 2020
Date: 24.06.2025
Counsel For Appellant: A.K. Batra, Chartered Accountant
Counsel For Respondent: Jaya Kumari, Authorised Representative
