Tribunal Upholds Exemption for Sundaram Finance Ltd. on Grounds of Sale of Actionable Claims and Limitation
In a significant judgment, the Customs Excise and Service Tax Appellate Tribunal (CESTAT) Chennai Regional Bench has ruled in favour of M/s. Sundaram Finance Ltd., exempting them from the imposition of service tax on profits arising from securitization and sell-down of loan receivables. The judgment, delivered by a bench comprising Mr. Vasa Seshagiri Rao and Mr. Ajayan T.V., emphasized that such transactions are considered sales of actionable claims and do not fall under the definition of "service" as per the Finance Act, 1994.
The case centered around the demand for service tax by the Commissioner of GST and Central Excise, amounting to over Rs.64 crore, on the profits from securitization transactions conducted by Sundaram Finance Ltd. between 2011 and 2017. The revenue authorities had issued two show cause notices demanding service tax on profits from securitization, upfront fees, and excess spread income, categorizing them as "Business Support Services."
However, the tribunal observed that these transactions constitute a "sale" and not a "service," as they involve the sale of future receivables to banks or trusts, which are considered actionable claims. The tribunal noted that these profits are essentially the interest or profit portions arising from the sale of receivables, which do not involve any service element. Consequently, the tribunal upheld the Commissioner's earlier decision to drop the demands.
Furthermore, the tribunal addressed the issue of limitation, highlighting that the department was aware of such transactions as early as 2010. The issuance of a second show cause notice invoking the extended period was deemed legally untenable, as the facts were already known to the authorities, negating any allegation of suppression.
This ruling aligns with the Reserve Bank of India's guidelines on securitization and the CBEC's clarification that the sale, purchase, or assignment of secured debt constitutes a transaction in money, exempt from service tax. The tribunal's decision reinforces the distinction between sale and service, providing clarity to financial institutions engaged in securitization.
The judgment marks a critical precedent in interpreting tax liabilities associated with securitization transactions, underscoring the importance of distinguishing between service and sale in financial operations.
Bottom Line:
Service Tax is not leviable on profits arising from securitization/sell-down of loan receivables, as these transactions are considered as sale of actionable claims and do not constitute a service under Section 65B(44) of the Finance Act, 1994.
Statutory provision(s): Sections 65(104c), 65(105)(zzzq), 65B(44), 73(4B) of the Finance Act, 1994, RBI Guidelines
