Recovery-agent services used by an NBFC for loan recovery qualify as eligible input services.

M/s. TVS Credit Services Ltd., an NBFC providing banking and financial services, extended vehicle loans to customers on a hypothecation basis. It paid service tax on processing, documentation and administrative charges, but the lending activity itself was treated as falling within the negative list under Section 66D(n)(i) of the Finance Act, 1994. The appellant engaged recovery or collection agents to recover defaulted instalments and, where necessary, repossess hypothecated vehicles. From 11 July 2014, it discharged service tax under reverse charge on the agents’ charges

During July 2011 to March 2015, the appellant availed CENVAT credit of the service tax paid on the recovery agents’ services, restricting the credit to 50% under Rule 6(3B) of the CENVAT Credit Rules, 2004. The Department alleged that the recovery services were obtained only after the loan had been disbursed and were therefore not used for providing the output service of lending. A demand of ₹2,03,91,255 was consequently raised under Rule 14 of the CENVAT Credit Rules, together with interest and penalty

The adjudicating authority held that the recovery agents’ services were not input services because they were not used for providing an output service, upheld the demand and invoked the extended limitation period on the ground of suppression of facts. Similar disputes and penalties arose in the three connected appeals.

The four appeals were heard together because they involved the same legal issue.

1. Whether service tax paid on commission to recovery or collection agents engaged by the appellant constituted “input service” under Rule 2(l) of the CENVAT Credit Rules, 2004, thereby making the CENVAT credit admissible?

2. Whether the finding that lending activity, to the extent consideration was represented by interest, did not qualify as an “output service” under Rule 2(p) travelled beyond the scope of the show cause notice?

3. Whether the extended period of limitation under the proviso to Section 73(1) of the Finance Act, 1994 was validly invoked in respect of the principal show cause notice?

4. Whether the penalties imposed under Rule 15(3) of the CENVAT Credit Rules and Sections 76 and 78 of the Finance Act were sustainable?

Rule 3(1) of the CENVAT Credit Rules, 2004 permits a provider of output service to avail credit of service tax paid on an “input service”; Rule 2(l) defines input service through both the “means” clause—services used for providing an output service—and the “includes” clause, covering services used in relation to, inter alia, “security” and “financing”.

The Tribunal relied on Bajaj Finance Ltd. v. Commissioner of Central Excise, Pune-I, 2018 (10) GSTL 251 (Tri.-Mum.), and subsequent consistent decisions, holding that recovery of loan instalments is an integral part of the continuing activity of lending and that recovery-agent services may therefore qualify as input services.

Rule 6(3B), being a special non-obstante provision applicable to banks, financial institutions and NBFCs engaged in extending loans or advances, permits the prescribed treatment of CENVAT credit.

Under the proviso to Section 73(1) of the Finance Act, extended limitation requires fraud, collusion, wilful misstatement, suppression or contravention with intent to evade tax; a mere interpretational dispute or omission, without positive suppression, is insufficient.

The Tribunal further applied the principle that an adjudicating authority cannot travel beyond the allegations contained in the show cause notice, relying on Commissioner of Central Excise, Nagpur v. Ballarpur Industries Ltd., 2007 (215) ELT 489 (S.C.), and Commissioner of Central Excise, Bhubaneswar-I v. Champdany Industries Ltd., 2009 (241) ELT 481 (S.C.).

The Tribunal held that lending is not completed merely upon disbursement of the loan. It is a continuing commercial activity that remains open until the principal and applicable return are realised, whether through voluntary repayment or recovery and enforcement of the security upon default. Recovery of instalments and repossession of the hypothecated vehicle were therefore inherent and inseparable incidents of the appellant’s lending business, rather than independent post-completion activities.

Applying the “means” clause of Rule 2(l), the Tribunal found that the recovery agents’ services were used for providing the output service of lending. It additionally observed that the services fell within the “includes” clause as services relating to “security” and “financing”, although this alternative basis was not necessary to decide the appeals.

The Tribunal also noted that the show cause notice challenged only whether recovery-agent services were used for providing the output service; it did not allege that the appellant’s lending activity itself was excluded from “output service” under Rule 2(p). The adjudicating authority therefore could not sustain the demand on that additional ground.

Since the dispute involved a bona fide and previously contested interpretation of the CENVAT provisions, and no positive act of suppression or intent to evade was established, the extended limitation period was unavailable.

The absence of an underlying inadmissible credit and the failure to establish suppression also removed the basis for the penalties.

The demands for reversal of CENVAT credit consequently failed on merits. In any event, the extended limitation period was held to be invalid because the Department had not established suppression or intent to evade tax. The finding based on the alleged non-qualification of interest-based lending as an output service was also beyond the scope of the show cause notice. The impugned orders, including the demands, interest and penalties, were set aside, and all four appeals were allowed with consequential relief in accordance with law.