Profit From Securitisation/Sell-Down Of Loan Receivables Not Taxable As Service: CESTAT Chennai

Ajayan T.V. (Judicial Member) and Vasa Seshagiri Rao (Technical Member) opined that there is no element of service in respect of the incomes received in the form of upfront fee and Excess Spread Income on Sell down, which are essentially income generated through sale of future receivables, and service tax cannot be demanded on the same.

In the case at hand, the assessee/respondent entered into loan/hire purchase/leasing transactions with their customers and receives the principal and interest amounts in equated monthly instalments (EMI).

The assessee securitises/sells down the 'receivables' whereby the future EMIs to be received from the customers are sold to a trust or assigned to a buyer as per the guidelines of the Reserve Bank of India relating to 'Priority Sector Lending'.

It was alleged that the activity performed by the assessee in helping the Banks to fulfil their legal obligation of 'Rural Lending' and 'Lending to Priority Sector' as stipulated by the Reserve Bank of India, would be covered by the category of services provided in relation to business or commerce.

The services would fall under the broad category of 'Business Support Services' prior to 01.07.2012 and would also constitute a service as per the definition of 'service' laid down under Section 65B(44) of the Finance Act, 1994, from 01.07.2012 onwards.

A show cause notice was issued to the assessee demanding service tax on Profit on Securitisation, Profit on Sell-down and Excess Spread Income Sell-Down, amounting to a total service tax of Rs.32,95,51,059/- along with interest and penalty.

The Commissioner of Central Excise and Service Tax, Chennai, dropped the demands raised in the show cause notice and confirmed the interest only on the delayed payment of Service Tax on the Sell Down Servicing Fee.

The assessee submitted that the profit on the sale of current assets, i.e., secured loan receivables, is outside the ambit of service tax.

The issue before the bench was whether the assessee is liable to pay service tax under the categories of profit on securitisation or Profit on sell-down, and Excess Spread Income on sell-down.

The Tribunal, after referring to the relevant RBI Circulars, noted that the securitisation market is primarily intended to redistribute the credit risk away from the Originator to a wide spectrum of investors who can bear the risk, thus aid financial stability and provide an additional source of funding.

The Tribunal further opined that The difference between the actual interest collected from the receivables sold to the Trust under PTC route and that is retained by the Trust for disbursement to the investors/consortium of banks who had purchased the debtors covered under the pool from the Respondent /NBFC is booked as "excess spread income" every month until the end period of the loan receivables, which is nothing but profit on sale.

Since such excess spread income is the profit portion on sale of receivables, it doesn't form part of "Service" and Service Tax is not payable thereon, added the bench.

The Tribunal held that the securitisation/sell-down or assignment are only sales and transactions in money and cannot be subjected to Service Tax.

The bench further held that service Tax cannot be levied on Excess Spread income and Upfront Fees, which are in the nature of profit on the Sale of receivables.

In view of the above, the Tribunal dismissed the revenue's appeal.

Case Title: Commissioner of GST and Central Excise v. M/s. Sundaram Finance Ltd.

Case Number: Service Tax Appeal No. 40272 of 2022

Counsel for Appellant/ Department: Anoop Singh

Counsel for Respondent/ Assessee: G. Vardini Karthick

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