By TIOL News Service

BANGALORE, AUG 12, 2015: APPELLANT is engaged in microfinance lending activities to poor women in rural areas. SKS provides small value collateral free loans up to Rs. 25,000/- (Rupees Twenty Five Thousand only) to the poor women who are in organized groups. During the course of verification of records, it was found that SKS had received not only interest amount on loans given to the borrowers but also amounts towards consideration received for the loan assets assigned to banking and financial institutions.

The definition of 'taxable service' under Section 65 (105) (zzzl) of Finance Act 1994 provides that 'taxable service' means any service provided or to be provided to a banking company or financial institution including a non-banking financial company or any other body corporate or a firm, by any person, in relation to recovery of any sums due to such banking company or financial institution, including a non-banking financial company, or any other body corporate or a firm in any manner.

Taking the differential interest as the consideration for service provided by the appellant under the category of Recovery Agent Service, service tax of Rs. 34,24,93,571/- (Rupees Thirty Four Crores Twenty Four Lakhs Ninety Three Thousand Five Hundred and Seventy One only) for the period from 2007 to 2012 has been demanded and penalties also have been imposed besides demanding interest.

The Tribunal noted the facts as:

There is no dispute that the loan given by the appellant to the poor women have no collateral security and therefore have to be treated as actionable claims. There are three possibilities when an actionable claim is sold or assigned or transferred.

The first category is that the assigned portfolio is simply sold and the entire consideration is paid to SKS and the assignee takes over the portfolio and recovers the amount themselves. In this case when the assignee recovers the amount by its own effort, it will be self service and whatever profit is earned, there will be no tax liability on the assignee.

The second possibility is after getting the assignment of portfolio, the assignee appoints a recovery agent, who, for a consideration as per the agreement recovers the amount and pays to the assignee. In such cases, person appointed, has to pay service tax as a provider of recovery agent service.

In the third category which is the issue under consideration is the case where after taking over the loans, the assignee hands over the amount of consideration back to the assignor and consider it as a loan with a specific rate of interest for which a collateral is also provided by the appellant. This loan carries a specified rate of interest. By a separate deed of agreement, the appellant is appointed as a servicer and appellant continued to recover the amount from the women who have taken the loan and pays back the principal and interest applicable to the assignee.

The differential interest between the interest payable to the assignee and the interest charged to the women is the profit according to the appellant and service charges according to Revenue.

The Tribunal observed,

"It can be seen that when the assignee appoints a different person as a servicer if service tax is payable, question arises why there should be a difference if the assignee himself acts as a servicer. We do not find any logic in taking a view that in such a situation assignee is not liable to pay tax. In the normal course when a loan is assigned, the consideration is paid by the assignee and that is the end. In this case the assignor collects the principal and interest and since they have received a loan from the bank equal to the amount or more than the amount of portfolio transferred, the assignee or the servicer pays the principal and the interest charged by the bank to the bank. In case where the servicer is a different person, the appellant will be simply paying back the loan with interest charged by the bank and will have nothing to do with the rural women who have received the loan.

In view of the factual situation discussed above, we do not find that appellant has a prima facie case on merit. Nevertheless whether extended period could have been invoked and penalty could have been imposed will require more detailed consideration of all aspects of the matter which can be taken up at the time of final hearing. The learned counsel fairly admitted that the demand for the normal period would come to Rs. 3.5 Crores (Rupees Three Crores Fifty Lakhs approximately) and the financial position of the appellant cannot be pleaded as a defense since appellants have made a profit in the current year. Having regard to the nature of dispute, arguments advanced, we consider that appellant should deposit an amount of Rs. 3,00,000,00/- (Rupees Three Crores only)."

(See 2015-TIOL-1672-CESTAT-BANG)