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

1. ISSUES PRESENTED and CONSIDERED

The Tribunal considered the following core legal questions:

(a) Whether the Adjudicating Authority had jurisdiction to issue the show-cause notices and adjudicate the service tax demand against the Appellant;

(b) The proper classification of the services rendered by the Appellant, specifically whether the collection charges and related services fall under "banking and other financial services" or "collection agency services" or any other category;

(c) Whether the transactions undertaken by the Appellant amount to taxable services under the Finance Act, 1994, particularly focusing on whether the collection of receivables constitutes a service liable to service tax and the determination of the value (consideration) of such service;

(d) The correctness of the method adopted for determination of the rate of duty and valuation of taxable service, including the application of Rule 3 of the Service Tax (Determination of Value) Rules, 2006 and the use of best judgment method under Section 72 of the Finance Act;

(e) The taxability of the "liquidity facility" service extended by the Appellant and the legality of dropping the service tax demand on this component by the Adjudicating Authority.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Jurisdictional Issue

The Appellant challenged the jurisdiction of the Principal Commissioner to issue the show-cause notice on the ground that he was not formally appointed as a Central Excise Officer under Rule 3 of the Service Tax Rules, 1994. The Adjudicating Authority relied on a precedent decision of the Tribunal which held that the Commissioner of Service Tax has inherent jurisdiction as a Central Excise Officer to issue show-cause notices. Neither party advanced substantial arguments to deviate from this precedent. Consequently, the Tribunal upheld the jurisdiction of the Adjudicating Authority, affirming that inherent power suffices for assuming jurisdiction in such matters.

(b) Classification of Service

The Appellant contended that the dominant nature of the transaction was a "sale" of actionable claims (loans) under Section 3 of the Transfer of Property Act, 1882, supported by RBI guidelines on assignment of receivables. The collection of instalments was argued to be an integral, inseparable part of the sale transaction and, in many cases, was rendered for nil or nominal charges. The Appellant claimed that no service tax liability arises without consideration, citing Circular No. 62/11/2003-ST which clarifies that free services have zero taxable value.

The Adjudicating Authority and the Tribunal examined the agreements and found that collection charges were indeed part of the consideration, either explicitly or implicitly, through the "yield of the assignee" or as a component of the purchase consideration. The Tribunal noted that the Appellant, being a non-banking financial company, rendered collection services that fall within the ambit of "banking and other financial services" as defined under Section 65(12) of the Finance Act, 1994, especially after the 2007 amendment which included cash management services such as collection of receivables. The Tribunal rejected the Appellant's classification as "collection agency services" under "business auxiliary services" because the Appellant itself was a financial institution and the service rendered was banking-related. The Tribunal concurred with the Adjudicating Authority's classification, holding that the service rendered is taxable under "banking and other financial services."

(c) Transactions as Service and Consideration

The Appellant argued that the entire transaction was a composite package involving sale of debts and associated services, and that collection of receivables was merely a pre-condition or integral to the sale, not a separate taxable service. Further, it was contended that the banks (assignees) had agreed to purchase receivables on condition of providing collection services either free or at nominal charges, thus no separate consideration existed for collection services.

The Tribunal analyzed sample agreements, notably the "Assignment Agreement" and the "Collection Agent Agreement" with State Bank of Indore and HDFC Bank. It was observed that these were independent contracts with distinct terms. The collection agent agreement detailed duties, payment modalities, reimbursement to liquidity facility providers, and explicitly allowed the collection agent (Appellant) to retain surplus amounts as income. The assignment agreement transferred rights to the assignee and absolved the assignor of liabilities, indicating that collection services were separate and independent.

Therefore, the Tribunal concluded that collection of receivables was an independent service rendered by the Appellant, distinct from the sale of loans. The presence of collection charges, whether nominal or otherwise, constituted consideration for the service. The Tribunal rejected reliance on the case law cited by the Appellant concerning "service without payment of consideration," finding it inapplicable.

(d) Determination of Rate of Duty and Valuation

The Adjudicating Authority applied Rule 3 of the Service Tax (Determination of Value) Rules, 2006 and Section 72 of the Finance Act, 1994 to determine the taxable value of collection services. The Appellant objected to the use of Rule 3 for the pre-July 2012 period and to the arbitrary application of the best judgment method averaging percentages of principal outstanding.

The Tribunal noted that the Adjudicating Authority accepted the Appellant's request to apply a weighted average method for each financial year, which was more reasonable than a blanket average over the entire period. The Adjudicating Authority rejected the Appellant's proposal to apply a uniform weighted average across all years, citing variations in economic and lending conditions year to year. For the pre-March 2012 period, where no direct data was available, the Adjudicating Authority applied the weighted average of March 2012 as a proxy, invoking the best judgment method under Section 72.

The Tribunal found this approach balanced and justified, considering the complexity and volume of transactions. It agreed that this method ended the litigation on valuation fairly and in accordance with statutory provisions.

(e) Taxability of Liquidity Facility Service

The Adjudicating Authority dropped the service tax demand on the "liquidity facility" provided by the Appellant, reasoning that no specific monetary or non-monetary consideration was stipulated in the agreements, and the liquidity facility was essentially a guarantee secured by fixed deposits or bank guarantees. The collection agent agreement referred to reimbursement to liquidity facility providers to the extent of utilization, but no evidence was found of actual utilization or separate consideration.

The Revenue challenged this in appeal, but the Tribunal upheld the Adjudicating Authority's decision not to confirm service tax on liquidity facility. The Tribunal criticized the reasoning that payments made against liquidity facility were taken from the same amount collected by the Appellant, clarifying that only surplus amounts retained by the Appellant were taxed, with appropriate deductions for liquidity facility reimbursements if any. The Tribunal found no merit in disturbing the non-taxation of liquidity facility service.

3. SIGNIFICANT HOLDINGS

"The Commissioner of Service Tax has inherent jurisdiction as Central Excise Officer to issue show-cause notices and adjudicate service tax demands."

"The collection of receivables and related services rendered by a non-banking financial company fall within the ambit of 'banking and other financial services' under Section 65(12) of the Finance Act, 1994, and are taxable, even if collection charges are nominal or bundled within the purchase consideration of assigned loans."

"Collection services rendered under independent 'Collection Agent Agreements' are distinct from the sale of loan receivables and constitute taxable services for which consideration exists."

"Valuation of taxable service can be determined using weighted average percentages for each financial year, applying best judgment under Section 72 of the Finance Act, 1994, especially where direct data for certain periods is unavailable."

"Liquidity facility extended by the Appellant without specific consideration or evidence of utilization is not taxable as service under the Finance Act."

Final determinations:

- Jurisdiction of the Adjudicating Authority to issue show-cause notices was upheld.

- Classification of collection services as 'banking and other financial services' was affirmed.

- The transactions constituted taxable services with valid consideration.

- The valuation method adopted was reasonable and justified.

- Service tax demand on liquidity facility was correctly dropped.

Both appeals were dismissed, and the order of the Principal Commissioner confirming part of the service tax demand and penalties was upheld.