The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Hyderabad has clarified the taxability of delayed payment charges levied by stock brokers, distinguishing between charges linked to margin financing and those tied to DEMAT account maintenance. This ruling redefines the scope of 'declared service' under the Finance Act, 1994, and reinforces the boundaries of the negative list exemption for interest-like payments.
Background & Facts
The Dispute
M/s Steel City Securities Ltd, a stock broker operating in Visakhapatnam, provided two primary services: (1) stock broking services, for which it collected commission, and (2) DEMAT account services, for which it charged maintenance fees. In addition, the company levied delayed payment charges of Rs.50 per day for every lakh rupees of outstanding pay-in amount from clients who failed to settle trades or pay maintenance charges within stipulated timelines. These charges were recorded in the books as 'penalties' or 'delayed payment charges'. The department assessed service tax on these charges from 2013-14 onwards, arguing they constituted a 'declared service' under Section 66E(e) of the Finance Act, 1994.
Key Facts
- The appellant collected delayed payment charges of Rs.50 per day per lakh of unpaid amount for both trading settlements and DEMAT maintenance dues.
- Service tax was paid on these charges until August 2011, after which payments ceased.
- The department relied on Section 66E(e), which deems 'agreeing to tolerate an act or situation' as a declared service.
- The appellant contended that these charges were interest on delayed payments, exempt under Section 66D(n) of the negative list.
- The appellant relied on CBEC Circular No.137/25/2011-ST dated 03.08.2011, which held that delayed payment charges by brokers were not includable in the value of taxable services.
- The appellant had been paying service tax on stock broking commission and DEMAT maintenance charges but not on the delayed payment component.
- The disputed period was from 2013-14 to 2017-18.
Procedural History
- 09.01.2017: Order-in-Original issued by the Commissioner of Central Tax, Visakhapatnam, demanding service tax and penalty on delayed payment charges.
- 15.05.2018: Commissioner (Appeals) dismissed the appellant’s appeal, upholding the demand.
- 22.01.2026: Hearing before CESTAT Hyderabad, Division Bench.
- 15.05.2026: Final order passed by CESTAT.
The Parties' Positions
For the Appellant
- Argued that delayed payment charges were interest for use of funds advanced to settle trades on behalf of clients, falling under Section 66D(n) (negative list).
- Relied on Circular No.137/25/2011-ST, which was not withdrawn and provided binding guidance.
- Contended that the charges were not consideration for any service but compensation for time value of money.
- Invoked Rule 6 of the Service Tax (Determination of Value) Rules, 2006, excluding interest from taxable value.
- Cited Saci Allied Products, SD Fine Chem Ltd, and Reliance Port & Terminals Ltd to support non-taxability.
- Asserted that the SCN and adjudication diverged: SCN invoked Section 66E(e) as declared service, but the order relied on integration with stock broking service.
For the Respondent
- Maintained that tolerating delayed payment constituted a distinct service under Section 66E(e).
- Argued that Circular No.137/25/2011-ST was rendered obsolete by the introduction of the negative list on 01.07.2012.
- Held that the appellant’s act of advancing funds to stock exchanges on clients’ behalf was not a loan or advance but a commercial accommodation.
- Emphasized that DEMAT-related delayed charges had no nexus with margin financing and were clearly consideration for tolerating non-payment of service fees.
Relief Sought
The appellant sought: (1) quashing of the demand for service tax on delayed payment charges for both stock broking and DEMAT services; (2) cancellation of penalty under Section 78; and (3) setting aside the extended period of limitation.
The Legal Issue
The central question was whether delayed payment charges collected by a stock broker for non-payment of trading settlements or DEMAT maintenance fees constitute a taxable 'declared service' under Section 66E(e) of the Finance Act, 1994, or whether they qualify as interest exempt under Section 66D(n) of the negative list.
Arguments Presented
For the Appellant
The appellant argued that delayed payment charges were not consideration for any service but compensation for the time value of money advanced to settle trades. It relied on Circular No.137/25/2011-ST, which explicitly excluded such charges from service tax. It further contended that the charges were akin to interest, falling squarely under Section 66D(n), which excludes 'interest or discount' from the definition of service. The appellant emphasized that Rule 6 of the Service Tax (Determination of Value) Rules, 2006, barred inclusion of interest in taxable value. It also challenged the adjudication for going beyond the scope of the SCN, which invoked Section 66E(e), while the order relied on the integration of charges with the main service.
For the Respondent
The respondent maintained that the appellant’s act of tolerating delayed payment constituted a distinct, independent service under Section 66E(e). It argued that the circular was issued before the negative list regime and could not override statutory provisions enacted after 01.07.2012. The department contended that the appellant was not extending loans but facilitating settlement, and the charges were not interest but penalties for breach of contractual obligations. It further asserted that the DEMAT-related charges had no connection to margin financing and were clearly consideration for the service of maintaining the account.
The Court's Analysis
The Tribunal undertook a two-pronged analysis: first, whether the charges fell under the negative list as interest; second, whether they constituted a declared service under Section 66E(e). The Court acknowledged the binding nature of Circular No.137/25/2011-ST but held that its applicability was superseded by the statutory change introduced on 01.07.2012, which redefined the scope of taxable services.
"The circular has not been withdrawn and we also find force in the judgment cited by the appellant that the said circulars are binding unless the context changes substantially so as to ignore the circular as not covering all aspects in the context of which circular has been issued."
However, the Court distinguished the context: the circular addressed pre-negative list conditions, whereas the current dispute arose under a statutory regime that explicitly deemed certain tolerances as services. The Tribunal then examined the nature of the charges in two distinct contexts.
For stock broking settlements, the Court found that the appellant advanced its own funds to settle trades on behalf of clients. When clients delayed payment, the appellant incurred an opportunity cost equivalent to interest on deployed funds. The Tribunal held that this arrangement was functionally equivalent to an advance extended to the client, and the delayed payment charge was compensation for the time value of money. The Court relied on CBIC Circular No.102/21/2019-GST, which clarified that penal interest on delayed payments does not constitute a declared service under Schedule II to the CGST Act - a provision identical in substance to Section 66E(e). The Tribunal found this guidance persuasive and concluded that the charges for trading settlements fell under Section 66D(n) and were exempt.
However, for DEMAT account maintenance charges, the Court found no nexus with margin financing. The delayed payment charges were levied solely for non-payment of account maintenance fees - a direct service fee. The Tribunal held that in this context, the appellant was not advancing funds but tolerating the client’s failure to pay for a service rendered. This constituted a clear case of 'tolerating an act' under Section 66E(e). The Court explicitly rejected the appellant’s argument that these charges were interest, noting that they were not calculated as a percentage of the maintenance fee but as a flat daily penalty.
The Court also upheld the invocation of the extended period under Section 73 and the imposition of penalty under Section 78, finding that the appellant was aware of the legal change post-2012 and deliberately ceased payment, indicating more than mere interpretational error.
The Verdict
The appeal was allowed partly. The demand for service tax on delayed payment charges relating to stock broking settlements is set aside, along with the penalty under Section 78. The demand for service tax on delayed payment charges relating to DEMAT account maintenance is upheld, along with an equal penalty under Section 78. The extended period of limitation is sustained for the DEMAT-related demand.
What This Means For Similar Cases
Delayed Payment Charges Are Not Automatically Interest
- Practitioners must analyze the nature of the underlying service: if the charge is tied to non-payment of a service fee (e.g., account maintenance), it may constitute a declared service.
- If the charge is tied to delayed settlement of a transaction involving fund deployment, it may qualify as interest under the negative list.
- The distinction hinges on whether the payment is for a service rendered or for the use of funds.
Circulars Are Not Absolute Shields Post-Statutory Change
- Pre-negative list circulars retain relevance only if the statutory context remains unchanged.
- Taxpayers cannot rely on outdated circulars to resist tax demands under new statutory regimes.
- Authorities may disregard circulars when the statutory definition of service has materially expanded.
DEMAT Services Carry Higher Tax Risk
- DEMAT-related delayed payment charges are now clearly exposed to service tax as declared services.
- Brokers must segregate accounting for trading settlements (potentially exempt) and account maintenance (taxable).
- Compliance systems must track and classify delayed payment charges by service type to avoid liability.
