By TIOL News Service

MUMBAI, JUNE 28, 2012: THE facts of the case are that the appellant had borrowed funds under the scheme of External Commercial Borrowing (ECB) from various foreign lenders including International Finance Corporation (IFC) and Asian Development Bank (ADB) to augment fund requirement for its upcoming UMPP at Mundra. In respect of the loans taken from ADB and IFC apart from the payment of interest, the appellant also made certain other payments i.e commitment charges, up-front fee, arrangement fee, agency fee and out of pocket expenses to the lenders.

It is the stand of the department that as per the provisions of section 68 of the Finance Act, 1994 in relation to the payments made towards commitment charges, up-front fee, arrangement fee, agency fee and out of pocket expenses paid to ADB and IFC, the appellant had not discharged their service tax liability on import of service under the category “Banking and Financial Services” on reverse charge mechanism.

Three show-cause notices were issued for the period March 2008 to September 2010 demanding service tax of more than Rs.8.22 Crores and the same were confirmed along with imposition of various penalties and interest by the Commissioner of Service Tax, Mumbai.

The appellant is before the CESTAT and makes the following submissions -

a)  Service Tax is exempted on transactions undertaken with ADB and the IFC

b)  Neither proviso (c) of section 5(1) of the ADB Act nor proviso (c) of section 3 of the IFC Act impose any restriction on the service tax exemption.

c)  Neither Article 56(3) & (4) of the ADB Act, nor section 9(c) & (d) of the IFC Act are relevant for considering whether or not the transaction in question should be eligible for tax benefit.

d)  Article 56 of ADB Act and section 9 of the IFC Act would override the Finance Act, 1994 as the same are in conformity with the Constitutional framework as per Article 253 of the Constitution.

The Revenue representative submitted that the CESTAT is created under the Customs Act/Excise Act and is having limited powers to exercise and discharge the functions covered by these Acts only and has no power to deal with issue of ADB/IFC Act. It is further submitted that the ADB/IFC has been made by the Indian Parliament and limited to Indian territory; as the service has been availed by the appellant outside India, therefore, as per the provisions of section 66A of the Finance Act, the appellants are liable to pay service tax on reverse charge mechanism. Inasmuch as the appellant needs to be directed to make pre-deposit of the entire amount of service tax confirmed against them, submitted the representative.

The Bench observed -

"7. As per Article 56 of the Schedule to the ADB Act, the bank, its assets, property, income and its operations and transactions shall be exempt from all taxation and from all customs duties. The Bank shall also be exempt from any obligation for the payment, withholding or collection of any tax or duty and Section 5 of the ADB Act clearly says that notwithstanding anything to the contrary contained in any other law, the provisions of the agreement set out in the schedule shall have the force of law in India. Article 56 of ADB Act provides that the bank is exempted from duties or taxes. Corresponding provisions are also incorporated in the IFC Act also. As per the United Nations (Privileges and Immunities) Act, 1947, clause 3 says that wherein in pursuance of any international agreement, convention or other instrument it is necessary to accord to any international organization and its representatives and officers privileges and immunities in India similar to those contained in the provisions set out in the Schedule, the Central Government may, by notification 2 in the official gazette, declare that the provisions set out in the schedule shall subject to such modifications, if any, as it may consider necessary or expedient for giving effect to the said agreement, convention or other instrument, apply mutatis mutandis to the International Organization specified in the notification and its representatives and officers, and thereupon the said provisions shall apply accordingly and notwithstanding anything to the contrary contained in any other law, shall in such application have the force of law in India and as per the Notification 16/2002-Service Tax dated 02.08.2002, the Government of India has exempt all the taxable services specified in section 65 of the said Act provided by any person, to the United Nations or an International Organisation from the whole of the service tax leviable under section 66 of the said Act and “International Organisation' means an international organization declared by the Central Government in pursuance of section 3 of the United Nations (Privileges and Immunities) Act, 1947.

8. We have seen that the power to levy service tax admittedly arises under entry 97 & 92 of List 1, Seventh Schedule of the Constitution of India read with Article 246. Article 246 forms part of Chapter 1, Part XI of the Constitution. This Chapter deals with Legislative Relations - Distribution of Legislative Powers. However, Article 253 (which forms part of the aforementioned chapter) specifically provides as follows:

"Notwithstanding anything in the foregoing provisions of this Chapter, Parliament has power to make any law for the whole or any part of the territory of India for implanting any treaty, agreement or convention with any other country or countries or any decisions made at any international conference, association or other body."

9. From the above, it is clear that powers of Parliament under Article 253 are wide and the non obstante clause at the beginning of the Article, leaves no room for any doubt that such power can have an overriding effect over powers available to the Parliament under Article 246.

10. In view of these observations, we find that the issue involves interpretation of various provisions of law such as Article 246, 253 of the Constitution of India, the various provisions of ADB and IFC Act and the provisions of United Nations (Privileges and Immunities) Act, 1947 and Finance Act, 1994. Therefore, we are prima facie of the view that the appellant has made out a case for 100% waiver of pre-deposit, accordingly, we waive the requirement of pre-deposit of entire amount of service tax, interest and various penalty and recovery thereof stayed during the pendency of the appeal."

The order of the Bench did not end here. It was further directed as under -

"11. Registry is directed to send a copy of this order to Chairman, CBE & C for obtaining an opinion and come up with a clear stand whether the activity involved in the matter is taxable or not."

Reverse logic - as argued, if the appellate authority does not have authority, then even the powers of the jurisdictional authorities in issuing SCN and the adjudicating authority would come under scanner!

In passing -

Shambhu Dayal vs. UOI [Civil Misc. Writ Petition No. 8248 of 2002, decided on 9-4-2002 by Allahabad High Court]

"14. We are reminded of an incident in English history. In 1616 A.D. James I of England told the Chief Justice Lord Coke that the King would like to decide a case (the Commendam case) as he was the fountain of justice and the Judges were only his delegates. When Lord Coke objected, the King asked him why? Lord Coke replied that the King was not competent to decide cases, as he was not trained in law."

(Pronounced in Court)

(See 2012-TIOL-765-CESTAT-MUM)