2020 (3) TMI 151 - AT - Service Tax

Demand of service tax - receipts generated from securitization agreements entered into by the appellant prior to February 2006 that continued to subsist during the period of dispute - Proceedings were initiated against the appellant on the ground that the receipts from special purpose vehicles were not included in the assessable value even though this constituted consideration that could not be construed as interest on loans which were exempt. HELD THAT - Barring a bald assertion that cash management has been undertaken, the adjudicating authority has not made any effort to analyse the nature and circumstances in which the contract with special purpose vehicles undertook to provide such facility. On the most superficial evaluation, we take note that there is a facility that may be drawn upon by the utilising entity with the ceiling linked to the collectables for the specified period and interest liability arising therefrom. It would appear to be nothing other than an overdraft and the attempt to levy a tax on the consideration earned by the bank is in breach of the exemption afforded to interest. It would also appear that the primary purpose of providing such liquidity is to make the derivative issued by special purpose vehicles more attractive to investors and, in the process, enhance the value to be realized by the bank on sale of the securitized asset. Consequently, it would appear that the beneficiary of the facility is not the special purpose vehicle but the appellant themselves. This clearly does not conform to the concept of service which must, necessarily, be rendered to another person. Rendering of cash management services - HELD THAT - It is worth noting that the transfer to special purpose vehicle is not of the loan customers of the appellant but of the assets including such loan accounts. The relationship between the bank and its loan customers does not alter; all that the bank has undertaken, by affording liquidity facility , is to ensure that the collections that would otherwise have accrued to the bank is transferred at the specified intervals to the special purpose vehicle and the facility extended is the contractual undertaking to do so - the bank is merely fulfilling such obligation and not rendering service to any other person. There is nothing on record in the impugned order to substantiate the finding that the claim of the appellant herein of having extended an overdraft facility on which interest is chargeable to the extent of availment is not tenable on facts and law. In the absence of such legally valid conclusion, the claim of the appellant does not merit disregard. Even if, while enhancing the marketability, the securitization terms are made attractive for better returns to the appellant, the special purpose vehicle too finds itself blessed with brighter prospects of attracting investors for the pass through certificates a service with the potential of taxability under some other enumeration in section 65(105) of Finance Act, 1994 - there is neither notice nor finding on the taxability or consideration for a valid confirmation of demand. The levy of tax and imposition of detriment in the impugned order is without authority of law - Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Non-payment of tax on receipts from securitization agreements.
2. Validity of invoking Section 72 of Finance Act, 1994 for best judgment assessment.
3. Applicability of Service Tax (Determination of Valuation) Rules, 2006.
4. Nature of 'liquidity facility' and its taxability.
5. Allegation of rendering 'cash management services'.

Detailed Analysis:

1. Non-payment of tax on receipts from securitization agreements:
The appellant, a licensed banking company, was aggrieved by the confirmation of a demand of ?25,35,06,456 for the period between October 2007 and March 2012, along with accrued interest and penalties under Section 78 of the Finance Act, 1994. The demand arose from the alleged non-payment of tax on receipts from securitization agreements entered into before February 2006, which continued during the dispute period. The securitization involved pooling assets underlying loans for transfer to 'special purpose vehicles' (SPVs), which then issued 'pass through certificates' to investors. The appellant received fees for collections on behalf of SPVs and provided a 'liquidity facility' to avoid partial default in returns to investors.

2. Validity of invoking Section 72 of Finance Act, 1994 for best judgment assessment:
The appellant contended that the demand was ill-founded as the agreements pre-2006 incorporated a one-time upfront fee not billed or paid by SPVs, and tax liability did not exist under the law prevailing until 2011, which required discharge of tax on a receipt basis. The adjudicating authority invoked Section 72 for 'best judgment' assessment, arguing the fees for collection post-2006 indicated consideration charged by the bank, which was not reflected in the half-yearly returns. The Tribunal noted that Section 72 is linked to returns filed under Section 70 and is meant for scrutiny assessment, not as an alternative to recovery provisions under Section 73. The Tribunal concluded that the Commissioner lacked authority to invoke Section 72 without evidence of suppression or misrepresentation, leading to the failure of the determination of tax liability.

3. Applicability of Service Tax (Determination of Valuation) Rules, 2006:
The Tribunal found that Rule 3 of the Service Tax (Determination of Valuation) Rules, 2006, intended for assigning value to non-monetary consideration, was not applicable. The impugned order proposed to vivisect consideration into sale value and service compensation, which is a mathematical segregation, not a valuation. The Tribunal ruled that the rules were not applicable to the present dispute.

4. Nature of 'liquidity facility' and its taxability:
The appellant argued that the 'liquidity facility' was akin to an overdraft limit, compensating the bank with interest, not constituting 'cash management services'. The Tribunal noted that the facility was a temporary shortfall cover, not for recurring expenses or final repayments, and was akin to an overdraft, exempt from tax as interest. The primary purpose was to enhance the marketability of the SPVs' securities, benefiting the appellant, not constituting a service to another person.

5. Allegation of rendering 'cash management services':
The Tribunal found no evidence supporting the allegation of 'cash management services'. The transfer to SPVs was of assets, not loan customers, and the bank's role was to ensure collections were transferred to SPVs, fulfilling contractual obligations, not rendering services to another. The Tribunal concluded that the claim of extending an overdraft facility was tenable and the impugned order lacked evidence for a valid confirmation of demand.

Conclusion:
The Tribunal set aside the levy of tax and imposition of penalties, finding the demand without authority of law, and allowed the appeal.