Recovery Agent Services For Defaulted Loans Eligible For CENVAT Credit: CESTAT Chennai

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on 8 September held that services of recovery or collection agents used by a Non-Banking Financial Company (NBFC) for recovering defaulted loans qualify as “input services” for claiming CENVAT credit.

A Bench comprising Judicial Member Ajayan T.V. and Technical Member Vasa Seshagiri Rao allowed four appeals filed by TVS Credit Services Ltd., which had availed CENVAT credit of service tax paid on services provided by recovery agents. The Tribunal observed:

“The business of lending money, whether by a bank or an NBFC, is not exhausted by the singular act of disbursement. It is, of its nature, a continuing exposure that remains open until the amount lent, together with the return thereon, is realised, whether by voluntary repayment or, on default, by recovery and enforcement of the security furnished for the loan.”

TVS Credit, which is engaged in providing banking and financial services, provided loans to customers for purchasing vehicles on a hypothecation basis. It engaged recovery agents to recover dues from defaulting borrowers and, where necessary, repossess the financed vehicles. It availed CENVAT credit of service tax paid on the services provided by these recovery agents.

The Department denied the credit on the ground that recovery services were used only after the loans had been disbursed. It contended that the lending service stood completed once the loan was disbursed and that subsequent recovery services could not be treated as input services.

Rejecting this contention, the Tribunal held that the business of lending does not come to an end with disbursement. It observed that recovery of the loan, including recovery from a defaulting borrower, forms an integral part of the lending activity.

It said that default and the consequent need for recovery cannot be separated from the business of lending. Treating loan disbursement and recovery as completely separate activities would artificially divide what is commercially a single and continuous activity.

Further, the Bench held that recovery agent services also fell within services relating to “security” and “financing”. Since the financed vehicles were hypothecated as security for repayment, engaging agents to recover dues or enforce that security was directly connected with the financing activity.

It therefore held that CENVAT credit of service tax paid on commission to recovery and collection agents was admissible. It also rejected the invocation of the extended limitation period. It held that an interpretational dispute, without any positive act showing suppression or an intention to evade tax, was insufficient to invoke the extended period.

Accordingly, the CESTAT set aside the impugned orders and allowed all four appeals filed by TVS Credit Services Ltd.

For the Appellant: Shri Raghav Rajeev, Advocate.

For the Respondent/Revenue: Shri M. Selvakumar, Authorised Representative.