By TIOL News Service

MUMBAI, OCT 07, 2014: TWO years ago we reported the stay order in this case.

The appellant had availed the services of Non-Resident service providers, who did not have offices in India and they had paid certain fees/charges to such non-resident service providers for facilitating issue of Global Depository Shares (GDS).

Revenue took a view that the service rendered is taxable under 'Banking and Other Financial Services' as 'Merchant Banking Services'.

Accordingly, a SCN dt. 13.1.2009 demanding ST of Rs.1.67 crores was issued and the Commissioner of Service Tax, Mumbai-I vide order dated 23.02.2012 confirmed the demand and imposed an equivalent penalty etc.

The Bench while ordering pre-deposit observed -

"5…. Records of the case revealed that applicant has offered issue of Global Depository Receipts in July 2007 for which they have appointed non-residents to act as Joint Bank runners and Joint Lead Managers with conditions agreed between them. As per agreement non-residents will be entitled to withhold from the proceeds of the transaction a commission out of the gross proceeds of the GDR sold in the offering. After deducting the commission, the net proceeds were transferred back to the applicant by the non-residents. We find that these services are issue management related services and issue management related service provided by merchant bankers are classifiable under banking and other financial service of the Finance Act. We also find that facts of the present case are similar to the case of Jubilant Life Sciences Ltd. - 2012-TIOL-199-CESTAT-DEL wherein the Tribunal has ordered the pre-deposit in that case. We find that applicant has not been able to make a strong prima facie case in their favour. In view of the above, the applicant is therefore directed to deposit an amount of Rs. 50,00,000/- (Rupees fifty lakhs only) within a period of eight weeks and report compliance."

We reported this order as - 2012-TIOL-1513-CESTAT-MUM.

Incidentally, noting that the applicant had not complied with the order of pre-deposit, the appeal was dismissed by the Tribunal vide order 2012-TIOL-1878-CESTAT-MUM.

Later, it turned out that the applicant had in fact deposited the amount of Rs.50 lakhs on 26.10.2012 itself and, therefore, the order of dismissal of appeal dated 03.12.2012 was recalled and the appeal was restored. This order dated 11.12.2012 was reported as 2013-TIOL-41-CESTAT-MUM.

The appeal was heard in the month of April and the final order was passed recently.

The appellant inter alia submitted that the activities undertaken by M/s. Citigroup Global Markets Ltd. and M/s. Goldman Sachs International was "underwriting service" under Section 65(105)(z) of Finance Act, and since the same was provided fully outside India (i.e. in USA and UK), the provisions of Rule 3(ii) of Taxation of Service (Provided from Outside India and Received in India) Rules, 2006 would apply and hence, service tax is not applicable to the present case. It was also submitted that the demand is time barred.

After hearing the extensive arguments made by the appellant and the pithy submission of the AR, the Bench held -

++ From the definitions, it is evident that for purposes of Finance Act, 1994, "Underwriting" means an agreement with or without conditions to subscribe to the securities of a body corporate when the existing shareholders of such body corporate or the public do not subscribe to the securities offered to them. Thus in our view first and foremost condition is that securities are offered to the public or existing shareholders. The next requirement is an agreement to subscribe to the securities when the public or existing shareholders do not subscribe to the securities offered to them. This agreement is to be between the body corporate (whose securities are offered for sale) and the underwriter. Thus in brief, underwriting service as per Finance Act, 1994, would imply an agreement to subscribe the unsubscribed securities which were offered for sale to public or existing shareholders.

++ From the agreements (dated 8 th June, 2007 and 23 rd July, 2007) it is evident that appellant has issued and sold the GDRs to Joint Lead Manager who in turn would resell, all or a portion of the offered GDRs by making an offering to the subsequent purchasers. This is not what is envisaged in "underwriting" as defined under Finance Act, 1994. What is envisaged is to make offer to public or existing shareholders, whatever is not subscribed that has to be purchased/subscribed in terms of an agreement by a person i.e. underwriter. Thus the 'Joint Lead Manager' who purchased GDR's cannot be considered as underwriter providing underwriting service. Even the agreement dated 23.07.2007 is titled as "Purchase Agreement". We, therefore, hold that services provided by M/s Citi and M/s Goldman Sach Ltd. are not underwriting service within the meaning of Finance Act, 1994.

++ Once the terms 'underwriter' and 'underwriting' are defined in the Finance Act, 1994, meaning and scope as per that definition alone has to be taken. We also note that definition and scope in the Finance Act, 1994 read with SEBI (Underwriting) Rule, 1993 is not vague or ambiguous but clear and precise. Under these circumstances, we do not consider it necessary to discuss the scope as per the definition in the laws of USA or UK or Law Dictionary.

++ In the context of the Tribunal decision cited in M/s Jubiliant Life Science Ltd. - 2013-TIOL-580-CESTAT-DEL Bench observes that the issues raised were different and case proceeded on the assumption that one of the services provided by the Joint Lead Manager is "underwriting"; that since the issue whether the service provided by the service provider can be considered as underwriting service within the meaning of Finance Act, 1994 was neither raised nor discussed in the said case, the same does not help the cause of appellant and the said judgement has to be considered as per incuriam.

++ A perusal of provisions [65(12) & 65(105)(zm) of FA, 1994] do not indicate that for charging Service Tax, merchant bankers or body corporate or commercial concern is required to be registered with SEBI. As long as the said service is being provided, Service Tax will be chargeable. Further, a perusal of the said definition indicates that services received by the appellant from M/s Citi and M/s Goldman Sach Ltd. will get covered by the scope of the service. We, therefore, hold that service received by the appellant is covered by the scope "Banking and other financial services".

In the matter of the submissions made that the demand is time barred, the Bench observed -

"Appellant has argued that notice is time barred as extended period of limitation cannot be invoked as issue of GDRs was known to everyone and receipts have been shown in their Balance Sheets and audit party has audited their records. We note in this case GDR's were issued in July, 2007 and these would be available in Balance Sheets of 2007-08 which will normally be available after Sept. 2008. Even this Balance Sheet is not required to be submitted to the Range Supdt. /Asst. Commissioner. We also note that demand notice is issued on 13.01.2009. What is required is whether details were mentioned in the ST-3 returns filed and if so, when? Clearly, no such details were mentioned in ST-3 returns. Department was also not informed about the service received and the payment made thereon in connection with issue of G.D.R. Even the ST-3 returns are self-assessed by the appellants. Thus overall department was not aware or in knowledge of the facts relating to service received from abroad…Since there was suppression of facts, we hold that extended period is correctly invoked. We also uphold penalties under Section 77 and 78 of the Finance Act, 1994."

In fine, the order passed by the CST, Mumbai-I was upheld and the appeal was dismissed.

(See 2014-TIOL-1926-CESTAT-MUM)