Customer Evaluation & Loan Recovery for Banks Squarely Falls Under BAS: CESTAT Dismisses Appeal [Read Order]

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has upheld the levy of service tax on the appellant, a service provider engaged by banks and financial institutions for customer evaluation and recovery-related activities. Dismissing the appeal, the Tribunal reaffirmed that such services fall squarely within the ambit of Business Auxiliary Service (BAS) and noted that the assessee’s contentions had already been rejected in an earlier order concerning the same activity and facts.

The Bench delivered the ruling while considering the challenge to an Order-in-Appeal dated November 26, 2015, which had upheld the service tax demand of ₹24,85,489 for the period April 2010 to March 2011 along with interest and penalties.

M/s Srivari Enterprises functioned as an outsourcing agency for various banks and finance companies, assisting them in evaluating prospective customers and collecting payments from defaulters.

The Department viewed these activities as auxiliary to the core lending operations of the banks and raised periodical show cause notices. The adjudicating authority confirmed the tax demand and imposed penalties under Sections 76 and 77 of the Finance Act, 1994, following which the Commissioner (Appeals) upheld the order, leading to the present appeal before the Tribunal.

The appellant argued that the show cause notice was vague and did not specify the exact sub-clause of BAS under which the activity was allegedly taxable. It was contended that the services provided were to the banks, not to their customers, and therefore could not be classified under clauses that refer to services provided “on behalf of the client.”

The appellant further submitted that the adjudicating authority and the appellate authority had classified the activity under different sub-clauses of BAS, rendering the proceedings inconsistent and beyond the scope of the show cause notice.

It was also argued that the activity was more appropriately classifiable under “Support Services of Business or Commerce,” and hence the BAS classification was unsustainable. Lastly, the appellant urged that penalties should be waived, considering the interpretational nature of the dispute.

The Department countered that the activity clearly fell within BAS since customer evaluation and recovery support are incidental and auxiliary to the primary business of lending by banks. The show cause notice, though not expressly listing the sub-clauses, referred to Section 65(19) and extracted the text of clause (vii), indicating the Department’s intent to classify the services under that category.

After examining the records, the Tribunal, comprising P. Dinesha (Judicial Member) and Vasa Seshagiri Rao (Technical Member), noted that the show cause notice explicitly referenced Section 65(19)(vii) by reproducing its text and that the absence of a sub-clause number did not render the notice vague. The adjudicating authority had correctly held that the appellant’s services were incidental or auxiliary to the main business of banks, thereby falling under Section 65(19)(vii).

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The Tribunal placed significant emphasis on the fact that the appellant’s own case for an earlier period had already been decided against them on identical facts, and that decision had attained finality as no further appeal was shown to have been filed. With no change in circumstances or new evidence to justify a departure, the Tribunal held that judicial discipline required the Bench to follow its earlier ruling.

Consequently, the Tribunal affirmed the classification under BAS and upheld the demand of service tax along with interest and penalties. The appeal was accordingly dismissed.

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