By TIOL News Service

MUMBAI, MAR 14, 2012: J.M. Financial Services P. Ltd. is before the CESTAT with an application for Stay against the order of the Commissioner of Service Tax, Mumbai wherein a total of more than rupees Five crores is adjudged as payable. Inasmuch as it is held that the services rendered by the applicant are leviable to Service Tax under the category of "Business Auxiliary Services" and "Business Support Services".

The various heads under which Service Tax has been demanded and confirmed and the findings of the CESTAT are as under -

"3.1 IPO Financing Fees – The demand has been confirmed against the applicants for IPO finance under the head "Business Auxiliary Services" to the tune of Rs. 84,81,472/-. This demand has been confirmed on the activity undertaken by the applicants where they are financing to their clients through Non Banking Finance Company (NBFC, in short) which are sister concerns of the applicants and share the income of interest earned by these NBFC on revenue sharing basis. There was a MOU between the applicants and the NBFC in terms of which NBFC were to arrange finance for the applicant's clients. As per the above said MOU, the applicants and the NBFC company were to share the income earned from this activity after deducting the expenses. The department is of the view that the said activity is covered under the "Business Auxiliary Services" as the applicants are promoting the business of these NBFC's by way of performing the activity of introducing its corporate clients to their NBFC's.

We find that as per the MOU, the applicants have agreed to compensate these NBFC's, if any demand arises. In that situation the applicants have not acted as a commission agent, therefore, they are doing business with these NBFC's on principal to principal basis and sharing their profits. Therefore, we are of the view that the applicants are not rendering any service under the category of "Business Auxiliary Services". Accordingly, they have made a strong prima facie case for waiver of pre-deposit of demands adjudged by the impugned order for this activity.

3.2 The processing fee - This activity is that where the applicants are collecting money on behalf of the company (who issues IPOs). The money collected by the applicants is to be deposited in a designated bank assigned by the IPO issuing company. The applicants deposited the money in the designated bank and as the bank earns the interest on the deposit made by the applicants, therefore, the Banks shares interest earned by them with the applicants. The Revenue is of the view that it is an activity of promotion of the business of the Banks, therefore, they are liable to pay service tax under the category of "Business Auxiliary Services".

Prima facie, we find that the activity undertaken by the applicants for the investments in the bank assigned by the IPO issuing company. The amount of interest income which the bank shares with the applicant is not because applicant is promoting or marketing of any of the services provided by the bank. Therefore, the applicants are not liable to pay service tax in this category also and made out a case for 100% waiver of pre-deposit.

3.3 Recovery of Common expenses - These expenses recovered by the applicants from the co-user of the premises on actual basis. As the applicants are doing these expenses on behalf of the co-user and recovering the same from the co-user as per their usage. The department is of the view that the recovery of the expenses are covered under the category of infrastructural support service as the applicants are providing infrastructure support service to the co-user.

On going through the records, we find that these activities is also not covered under the "Business Support Services" as the applicants are paying the expenses incurred by them on all the premises and thereafter recovered from the co-user on actual usage basis. Prima facie, we are of the view that the applicants are not rendering any service at all, therefore, the applicants have made out a case of 100% as waiver."

Holding that the applicant has made out a prima facie case for complete waiver of the pre-deposit of service tax demand, interest thereon and penalties imposed, the Bench waived the pre-deposit, granted a stay and directed the registry to list the appeal for final hearing.

Ears of experience!

(See 2012-TIOL-325-CESTAT-MUM)