CESTAT Dismisses Transport Finance Company's Plea, Confirms Taxability of Financial Collection Services [Read Order]
The bench found that the collection service was an independent activity for which Shriram Finance was entitled to retain a surplus from the collected amounts, which constituted consideration.
CESTAT - Dismisses Transport Finance Company's Plea - Taxscan
CESTAT - Dismisses Transport Finance Company's Plea - Taxscan
The Mumbai Bench of The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) dismissed an appeal filed by a non-banking financial company, upholding a substantial service tax demand on fees collected for financial services. The tribunal confirmed that the company’s activities of collecting loan instalments for banks constitute a taxable service under the category of "banking and other financial services."
The case involved Shriram Transport Finance Company Ltd., a company that finances commercial vehicles. Its business model involved lending to customers for vehicle purchases and then selling those loan portfolios to banks through a process called 'assignment.' A key part of these agreements was that Shriram Finance would continue to collect the Equated Monthly Instalments (EMIs) from the original borrowers on behalf of the banks that now owned the loans. For the period from April 2008 to March 2012, the company often performed this collection service for a nil or nominal fee, while from 2012 to 2015, it charged a fee ranging from 0.01% to 2% of the collected amount.
The tax department issued show-cause notices, arguing that these collection activities were a taxable service. The Principal Commissioner confirmed a demand of over ₹64 crore out of an original ₹182 crore, leading Shriram to appeal the decision at CESTAT. The revenue department also filed a cross-appeal challenging the dropping of a tax demand on a separate 'liquidity facility' service.
Shriram Finance argued that the collection activity was an inseparable part of the larger loan assignment transaction, which was a 'sale' of an actionable claim, and not an independent service. It contended that without a significant, separate consideration, the activity could not be taxed.
The Bench comprising Dr. Suvendu Kumar Pati, Member (Judicial), and Anil G. Shakkarwar, Member (Technical) however, disagreed. It meticulously examined sample agreements, noting that the 'Collection Agent Agreement' was a distinct contract separate from the 'Assignment Agreement.'
The bench found that the collection service was an independent activity for which Shriram Finance was entitled to retain a surplus from the collected amounts, which constituted consideration. It held that such services, when provided by a financial entity, correctly fall under "banking and other financial services." The tribunal distinguished the Edelweiss case, finding it inapplicable to the present facts.
On valuation, the tribunal upheld the Commissioner's method of using a weighted average of the collection fees for each financial year, applying a best judgment assessment under the law. Regarding the cross-appeal on the liquidity facility, the tribunal found no evidence of a separate consideration for this service and thus upheld its exclusion from the tax demand.
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