By TIOL News Service

MUMBAI, JULY 04, 2013: THE appellant were registered with the department under the "stock broking service" during the year 1998-99 & 1999-2000. The appellant collected placement fee of Rs. 10 lakhs and Rs. 4,27,90,000/- for private placement of unlisted shares. Since the placement of listed shares was only taxable, the appellant did not discharge any service tax on the unlisted shares.

A show-cause notice dt. 04/01/2002 was issued to the appellant demanding service tax on the above transaction amounting to Rs.21,89,500/- alongwith interest for the delayed payment amounting to Rs. 12,02,278/- up to January 2002. Interestingly, the show-cause notice did not mention under what category the service tax demand was made.

The appellant vide letter dated 01/02/2002 wrote back to the department stating that the above proceeds have been received by the appellant in respect of sale or purchase of securities not listed in a recognized stock exchange and therefore, they are not liable to discharge any service tax on the said activity undertaken by them under the category of ‘stock broking service'.

Another show-cause notice dated 30/09/2002 was issued which was identically worded to the earlier SCN dated 04/01/2002. This SCN too was issued without specifying the category of taxable service under which the demand had been made.

The Adjudicating authority held that the activity undertaken by the appellant comes under the category of "Management Consultancy Service" and, therefore, the appellant is liable to pay service tax on the said activity under the said category. It was also held that the appellant had suppressed facts of rendering advisor and financial services in respect of aforesaid transaction and therefore, the extended period of time is invocable. Accordingly, demands were confirmed along with interest and penalty.

Since the lower appellate authority upheld the demands, the appellant is before the CESTAT.

It is submitted that during the year 1998-99 and 1999-2000 the transaction undertaken by them was private placement of shares, which were not listed in any recognized stock exchange; that as per the definition, "Taxable service" means any service provided to an investor, by a stock-broker in connection with the sale or purchase of securities listed on a recognized stock exchange and "recognized stock exchange" has the meaning assigned to it in the Clause (f) of Section 2 of the Securities Contracts (Regulation) Act, 1956. Inasmuch as the shares involved in the present transactions were not listed in any recognized stock exchange, the appellant was not liable to discharge any service tax liability on the said activity undertaken by them. It is also submitted that since 2001, in respect of similar activity undertaken, they have registered themselves with the department under banking and other financial services as a Merchant Banker and have been discharging service tax liability, which has been accepted by the department without any dispute. Furthermore, the activity does not involve any management consultancy. Reliance is also placed on the decision in CCE, Chennai Vs. Sundaram Finance Ltd., (2007-TIOL-837-CESTAT-MAD) where in a similar set of facts the activity of advising and financial transaction, portfolio administration, etc., were held to be classifiable under "Business Auxiliary Service" and not under the Management Consultancy Service.

The Revenue representative submitted that the lower authorities had correctly held the appellant liable to Service Tax.

The Bench observed -

"6.1 From the two show-cause notices issued for the same transaction, it is seen that no attempt has been made by the Revenue to classify the service first and then demand service tax thereon. Therefore, the principles of natural justice have been clearly violated as the primary requirement is to put the appellant to notice under what taxable service category, he is liable to service tax. Be that as it may, we now examine whether the activity undertaken by the appellant can be considered as "management consultancy service" at all. The activity undertaken by the appellant is private placement of shares which have not been listed in any recognized stock exchange. This activity comes under the category of Merchant Banking activity which includes management of any issued including preparation of prospectus, gathering information relating to the issue, determining financing structure, tie up of financiers, final allotment and refund of excess application money, investment advisor, manager, consultant or adviser to any issue including corporate advisory services and consultant or advise activities. The said activities are governed by Merchant Banker(s) Regulations, 1962. The appellant also holds a certificate of registration under the said regulations. The activity undertaken by the appellant, for the period 2001 onwards, in identical circumstances, have been accepted by the department to be that of a Merchant Banker and no dispute has been raised by the department. If that be so, for the period prior to 2001, we do not understand how the department can classify the same activity under Management Consultancy service. By placing shares in the private domain, no advice or technical assistance, relating to conceptualizing, devising, development, modification, rectification or up-gradation of any working system of any organization could said to have been rendered by the appellant. The decision of this Tribunal in the Sundaram Finance case (supra) also supports his view. In view of the above, we find that the classification done by the department of the transaction of private placement of shares under management consultancy service has no basis and is not in accordance with the law. Accordingly, we set aside the impugned order and allow the appeal with consequential relief, if any, in accordance with the law. Since, we have allowed the appeal on merits, there is no need to go into other issues involved in the matter."

In passing: Another demand bites the dust…in private!

(See 2013-TIOL-1010-CESTAT-MUM )