2025 (3) TMI 1185 - AT - Service Tax

Revenue fails to prove service tax liability on loan portfolio assignment income under Rule 6(2)(iv)

CESTAT Kolkata dismissed Revenue's appeal regarding service tax on income from loan portfolio assignment. The respondent sold loan portfolios to ... Levy of service tax - income from assigned portfolio, when the said amount represents consideration acting as a ‘Collection agent’ / ‘Servicer’ - extended period of limitation - HELD THAT:- In this case, the Respondent has sold/assigned the portfolio of loan comprising of loans provided to various small borrowers, to the banks/financial institutions by entering into assignment agreements, for the purpose of raising funds. Upon assignment of such loan portfolio, the Respondent immediately receives the principal amount of the loan portfolio or the amount as may be agreed with the assignee and the asset pool is removed from the books of the Respondent as the same becomes the property of the assignee to which the portfolio has been assigned - The Respondent has entered into separate ‘Collection agency agreement’ with the assignee for the same, which is ancillary to the main contract of assignment. Further, a nominal fee has been earmarked for the activities covered under the ‘Collection Agency agreement’. The Respondent is paying service tax on the nominal fees received for collection of the amount. However, the Revenue is of the view that the excess interest spread, i.e. the difference between the interest amount payable by the borrowers in respect of the loans and the yield payable to the assignee, recorded as 'Income from assignment of loan’ is the actual consideration of the Recovery service undertaken by the respondent for the banks/financial institutions. The contention of the Revenue is that the respondent in the present case is not merely transferring loans but is actively servicing and collecting the principal and interest amount on behalf of respective banks as a recovery agent. There are no merit in the contention of Revenue. It is pertinent to note that borrowers are not a party to the assignment agreements entered by the Respondent with various banks/financial institutions. The Respondent is collecting the principal and interest amounts in instalments, not in the capacity of a Recovery Agent, but in the capacity of the lender who originally gave the loan to the borrower. Therefore, it is observed that there is no service element involved in this transaction and the interest amount retained by the Respondent cannot be considered as 'consideration' towards rendering the service of collection of the principal and interest for the assignees. The issue is no longer res integra as a similar issue has already been examined by the Tribunal at Chennai in the case of Commissioner of Central Excise & Service Tax, LTU, Chennai v. Sundaram Finance Ltd. & vice-versa [2017 (11) TMI 1002 - CESTAT CHENNAI] where it was held that 'the tax entries relied upon by Revenue are not squarely covering the activity which are in any case between principal to principal. The cheques and other bills collected by the appellant-assessee are on their own account which are further passed on in terms of agreement with the ICICI bank. The conditions of transaction and schedule of payment will not influence the nature of activity as agreed upon between the two contracting parties. We find no element of Business Auxiliary Service in such arrangement.' Conclusion - The income from the assignment of loans is interest income exempt from service tax under Rule 6(2)(iv) of the Service Tax (Determination of Value) Rules, 2006. Appeal of Revenue dismissed. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment are:Whether the income from the assignment of loans recorded by the Respondent should be subject to service tax as consideration for providing 'Recovery Agent Services' under Section 65(105)(zzzl) of the Finance Act, 1994.Whether the differential interest retained by the Respondent qualifies as interest exempt from service tax under Rule 6(2)(iv) of the Service Tax (Determination of Value) Rules, 2006.Whether the Show Cause Notice (SCN) issued was valid and sufficiently detailed to inform the Respondent of the allegations against it.Whether the extended period of limitation could be invoked for the demand of service tax.ISSUE-WISE DETAILED ANALYSIS1. Taxability of Income from Assignment of Loans- Relevant Legal Framework and Precedents: The Finance Act, 1994, specifically Section 65(105)(zzzl), imposes service tax on 'Recovery Agent Services.' Rule 6(2)(iv) of the Service Tax (Determination of Value) Rules, 2006, excludes interest on loans from the value of taxable service.- Court's Interpretation and Reasoning: The Tribunal determined that the income from the assignment of loans is primarily interest income, which is excluded from service tax under Rule 6(2)(iv). The Tribunal emphasized that the Respondent's role in collecting installments is not as a recovery agent but as the original lender, maintaining its status with the borrowers.- Key Evidence and Findings: The Respondent's agreements with banks included a separate collection agency agreement, indicating a nominal fee for collection services. The Tribunal found that the differential interest is the excess interest spread, not a fee for services.- Application of Law to Facts: The Tribunal applied the exclusion under Rule 6(2)(iv) to the differential interest, treating it as non-taxable interest income.- Treatment of Competing Arguments: The Tribunal rejected the Revenue's argument that the Respondent acted as a recovery agent, noting the lack of evidence showing the Respondent as an agent post-assignment.- Conclusions: The Tribunal concluded that the income from the assignment of loans is exempt from service tax as it constitutes interest income.2. Validity of the Show Cause Notice- Relevant Legal Framework and Precedents: The purpose of a Show Cause Notice is to inform the assessee of the allegations, allowing for a defense. The ITC Ltd case was cited, emphasizing clarity in SCNs.- Court's Interpretation and Reasoning: The Tribunal found the SCN sufficiently detailed, outlining the Revenue's stance and the service tax demand, despite not explicitly mentioning the specific provision under the Finance Act.- Key Evidence and Findings: The SCN detailed the alleged service tax liability and the nature of the services provided.- Application of Law to Facts: The Tribunal considered the SCN valid, as it adequately informed the Respondent of the allegations and allowed for a defense.- Treatment of Competing Arguments: The Tribunal dismissed the Respondent's claim of vagueness, citing the SCN's clarity in presenting the Revenue's case.- Conclusions: The SCN was deemed valid, providing sufficient information for the Respondent to respond.3. Invocation of Extended Period of Limitation- Relevant Legal Framework: The extended period of limitation applies when there is evidence of willful misstatement or suppression of facts.- Court's Interpretation and Reasoning: The Tribunal found no evidence of manipulation or evasion by the Respondent that would justify invoking the extended period.- Key Evidence and Findings: The nominal fees and differential interest were accounted for transparently, without any indication of tax evasion.- Application of Law to Facts: The Tribunal held that the extended period was not applicable, as the Respondent's actions did not constitute suppression or misstatement.- Treatment of Competing Arguments: The Tribunal rejected the Revenue's claim of manipulated fees, finding no basis for such an assertion.- Conclusions: The demand was barred by limitation, and the extended period was not applicable.SIGNIFICANT HOLDINGS- The Tribunal upheld that the income from the assignment of loans is interest income exempt from service tax under Rule 6(2)(iv) of the Service Tax (Determination of Value) Rules, 2006.- The SCN was valid and sufficiently detailed, allowing the Respondent to prepare a defense.- The extended period of limitation was not applicable, as there was no evidence of willful misstatement or suppression by the Respondent.- The Tribunal upheld the impugned order, rejecting the Revenue's appeal and disposing of the Respondent's cross-objection.