2025 (6) TMI 1168 - AT - Service Tax

Levy of service tax - banking and other financial services - service provided by the Appellant as collection charges and other related services - Jurisdictional issue - classification of services - Transactions whether amounts to service and its value (consideration) - Determination of rate of duty - Taxability on liquidity facility service. Jurisdiction - legality of issue of SCN as Commissioner Service Tax Mumbai-I without a formal appointment/notification of the CBEC appointing him as Central Excise Officer in terms of Rule 3 of the Service Tax Rules 1994 - HELD THAT - Reliance placed in the case of Standard Chartered Bank and Others Vs. Commissioner of Service Tax 2013 (7) TMI 240 - CESTAT MUMBAI in which it has been held that inherent power was available with him to issue show-cause notice. In the grounds of appeal Assessee- Appellant only stated that inherent power theory is questionable and specific jurisdiction has to be assigned to him to assume jurisdiction for issue of show-cause notice but neither party argued on this issue of jurisdiction with respect to any justifiable ground as to why precedent decision of Tribunal is not to be followed on the issue that was preliminary in nature and therefore it would go by the Principal Commissioner s order that relied on the CESTAT s decision that Commissioner of Service Tax has inherent jurisdiction as Central Excise Officer to issue show-cause notice. Classification - collection charges and related services - fall under banking and other financial services or otherwise? - HELD THAT - As could be noticed Respondent had classified the service under Banking and Other Financial Services that was brought into the purview of service tax by way of amendment made in to the Finance Act in 2007 under Section 65(12) of the said Act in which cash management service which was specifically excluded from the scope of banking and financial services were deleted and the resultant effect runs with the clarification issued by the CBEC explaining changes proposed in the Financial Bill 2007 justifying applicability of Service Tax on Cash Management Services in which collection of receivables execution of payments management of liquidity and providing customised Management Information System (MIS) reports etc. were included as service rendered by banks to its corporate clients. This clarification since issued prior to passing of the said Amended Act would go to justify that collection of receivables is a service covered under banking and other financial services though such collection can also be treated as collection agency service that was defined under Business Auxiliary Service but since in the present case Appellant itself is a non-banking financial company classification made in respect of such service of collection of receivable etc. rendered by Appellant would fall in the category of banking and other financial services for which it is concurred with the findings of the Commissioner regarding classification of service rendered by Appellant. Transactions whether amounts to service and its value (consideration) - HELD THAT - The collection of money/receivables that is been done by Appellant is independent of the transactions concerning assignment which Appellant can collect or any other Agent appointed thought Collection Agency Agreement may also collect and since it is a non-banking financial institution confirmation of demand for such payment of Service Tax under banking and other financial services is held to be a valid demand. The case law of Commissioner of CGST Central Excise Mumbai East Vs. Edelweiss Financial Services Ltd. 2022 (2) TMI 1359 - CESTAT MUMBAI on which Appellant has placed heavy reliance since deals with issue service without payment of consideration has no application to this appeal. Determination of rate of duty - HELD THAT - Both show-cause notice and adjudication order had proposed and determined the rate of duty on the basis of Rule 3 of the Service Tax (Determination of Value) Rules 2006 and best judgement method prescribed under Section 72 of the Finance Act 1994. Appellant objects the same on the ground that Rule 3 before it had undergone amendment w.e.f. 01.07.2012 including consideration received which are not ascertainable by wholly or partly consisting of money and no money would not be applicable to the Appellant for the disputed period commencing from 2008 and in any event Best Judgment method as provided under Section 72 of the Finance Act 1994 was arbitrarily used in taking just average of the percentage of principal outstanding that would vary between nil and 2% of the outstanding principal receivable - It would be worth mentioning that Appellant s own request made for valuation on the basis of weightage average can t be ignored for the reason that when Assessee s assessment is to be rejected the Assessing Officer can put-forth his / her own assessment. It would also be worthwhile to record his answer in accepting part of the request made by the Assessee that relates to weightage average but non-acceptance of their views in respect of taking average for the entire transaction period covering more than 5 years and accepting only last available transaction amount towards collection charges for the extended period - this is the best way to put an end to the litigation in re-calculating the entire value again from nemours transactions that had taken place during the period. Taxability on liquidity facility service - HELD THAT - The fixed deposit or bank guarantee which were allegedly made by the Appellant to secure the receivables of the Appellant are just a kind of guarantee only and there is no data available as to if in any specific month such facility has been utilised and more importantly in all incidents collection agent and liquidity facility provider were one and same to which effect no input is available. It is not inclined to interfere with the order passed by the Commissioner in not confirming Service Tax on liquidity facility but the reasoning available in this order that payment made against extension of liquidity facility is taken from the same amount collected by the Appellant is not proper as only from the surplus available with the Appellant is being Taxed in which deduction of proportionate amount towards liquidity facility if availed has also been taken into consideration. Conclusion - i) The Principal Commissioner s jurisdiction to issue the notices and adjudicate the matter upheld. ii) The collection of receivables by a non-banking financial company falls within banking and other financial services rather than collection agency services. iii) The appellant s collection charges were either explicitly invoiced or embedded in the purchase consideration (yield spread) thereby constituting consideration for taxable services. iv) Valuation of taxable services under Rule 3 of the Service Tax (Determination of Value) Rules 2006 and best judgment assessment under Section 72 of the Finance Act 1994 applied on a weighted average basis for each financial year represents a reasonable and just method for determining service tax liability over multiple transactions and years. v) It is not inclined to interfere with the order passed by the Commissioner in not confirming Service Tax on liquidity facility but the reasoning available in this order that payment made against extension of liquidity facility is taken from the same amount collected by the Appellant is not proper as only from the surplus available with the Appellant is being Taxed in which deduction of proportionate amount towards liquidity facility if availed has also been taken into consideration. Both the appellant s and the Revenue s appeals are dismissed.

Summary

The core legal questions considered by the Tribunal in these appeals revolve around the following issues:

(a) Whether the adjudicating authority had jurisdiction to issue show-cause notices and adjudicate the service tax demand;

(b) The correct classification of the services rendered by the appellant, specifically whether the collection charges and related services fall under "banking and other financial services" or any other category such as "collection agency services" or "business support services";

(c) Whether the transactions undertaken by the appellant amount to taxable services and the appropriate valuation (consideration) for such services for the purpose of service tax;

(d) The determination of the applicable rate of duty and the methodology for valuation of taxable services;

(e) The taxability of the "liquidity facility" service extended by the appellant.

Issue-wise Detailed Analysis

(a) Jurisdictional Issue

The appellant challenged the issuance of show-cause notices by the Principal Commissioner of Service Tax on the ground that he was not formally appointed or notified as a Central Excise Officer under Rule 3 of the Service Tax Rules, 1994. The Tribunal referred to a precedent decision where it was held that the Commissioner of Service Tax possesses inherent jurisdiction to issue show-cause notices even in the absence of a formal appointment notification. Neither party argued against this precedent during the hearing. Consequently, the Tribunal upheld the Principal Commissioner's jurisdiction to issue the notices and adjudicate the matter.

(b) Classification of Services

The appellant contended that the dominant nature of the transaction was a "sale" of loan receivables (actionable claims) and that the collection of instalments was an inseparable part of this sale transaction. Accordingly, the appellant claimed that the collection service was either free or nominally charged and thus should not attract service tax. Alternatively, the appellant suggested classification under "collection agency services" or "business support services."

The adjudicating authority classified the services under "banking and other financial services" as defined under Section 65(12) of the Finance Act, 1994, following an amendment in 2007 which included cash management services (such as collection of receivables) within the scope of taxable banking services. The Tribunal noted that the appellant is a non-banking financial company authorized by the RBI to provide financial services and that the collection charges were either embedded in the purchase consideration or explicitly invoiced in certain cases. The Tribunal agreed with the Commissioner's classification, observing that collection of receivables by a non-banking financial company falls within "banking and other financial services" rather than "collection agency services."

(c) Whether Transactions Amount to Service and Valuation (Consideration)

The appellant argued that the entire transaction was a bundle of interconnected activities-sale of debts and related services-and that the collection of receivables was a precondition to the sale, not a separate service liable to tax. The appellant further contended that in many cases, no separate consideration was charged for collection services, thus negating tax liability as per CBEC Circular No. 62/11/2003-ST, which states that service tax is leviable only when consideration is received.

The Tribunal examined sample agreements, particularly the "Assignment Agreement" and the "Collection Agent Agreement" entered into with banks such as State Bank of Indore and HDFC Bank. The agreements clearly delineated the assignment of receivables as a separate transaction from the collection agency appointment. The collection agency agreement set out independent terms, duties, and remuneration for collection services, including the right to retain surplus collections. This contractual separation demonstrated that collection services were distinct and chargeable.

Moreover, the Tribunal found that the appellant's collection charges were either explicitly invoiced or embedded in the purchase consideration (yield spread), thereby constituting consideration for taxable services. The Tribunal rejected the appellant's reliance on a case concerning "service without payment of consideration," holding that it was inapplicable here due to the contractual and factual distinctions.

(d) Determination of Rate of Duty and Valuation Methodology

The appellant objected to the use of Rule 3 of the Service Tax (Determination of Value) Rules, 2006 and the best judgment method under Section 72 of the Finance Act for valuation, arguing that Rule 3 was amended only from 01.07.2012 and was thus inapplicable for the disputed period starting from 2008. The appellant also challenged the arbitrary application of best judgment assessment based on an average percentage of principal outstanding ranging from nil to 2%.

The adjudicating authority, while acknowledging the appellant's submissions, adopted a pragmatic approach. He accepted the appellant's proposal to use a weighted average rate for each financial year rather than a flat average for the entire period. For the period prior to March 2012, where data was unavailable, the rate for March 2012 was applied by analogy. This approach was deemed reasonable and consistent with the best judgment principle under Section 72, ensuring that valuation reflected the economic realities of varying lending rates and market conditions across years.

The Tribunal endorsed this methodology, considering it a balanced resolution to the complex valuation issue arising from numerous transactions over several years.

(e) Taxability of Liquidity Facility Service

The appellant had extended liquidity facilities to assignee banks, secured by fixed deposits or bank guarantees. The Revenue sought to tax such liquidity facility services, but the adjudicating authority dropped this demand on the ground that no specific consideration was stipulated in the agreements for liquidity facility services and that the collection agent and liquidity facility provider were the same entity, with no evidence of utilisation of such facilities.

The Tribunal concurred with the Commissioner's decision not to confirm service tax on liquidity facility services. It noted that the assignment agreements did not provide for liquidity facilities as part of the sale transaction and that the collection agent agreements referred to liquidity undertakings only in the context of reimbursement from collected amounts. The Tribunal, however, observed that the Commissioner's reasoning that payments for liquidity facility were deducted from the surplus available to the appellant was not entirely proper but did not warrant interference with the overall decision.

Significant Holdings

"The Commissioner of Service Tax has inherent jurisdiction as a Central Excise Officer to issue show-cause notices and adjudicate service tax demands even in the absence of formal appointment notification."

"Collection of receivables by a non-banking financial company authorized by the RBI constitutes 'banking and other financial services' under Section 65(12) of the Finance Act, 1994, and is taxable accordingly."

"The contractual separation between assignment of receivables and collection agency services establishes that collection services are independent taxable services, and consideration for such services may be embedded in the purchase consideration or explicitly charged."

"Valuation of taxable services under Rule 3 of the Service Tax (Determination of Value) Rules, 2006 and best judgment assessment under Section 72 of the Finance Act, 1994, applied on a weighted average basis for each financial year, represents a reasonable and just method for determining service tax liability over multiple transactions and years."

"Liquidity facility extended by the appellant is not taxable as no specific consideration was stipulated or evidenced, and the facility was not distinct from collection services in the agreements."

The Tribunal dismissed both the appellant's and the Revenue's appeals, confirming the adjudicating authority's order that partially confirmed the service tax demand and penalties, and upheld the dropping of service tax on liquidity facility services.