By TIOL News Service

MUMBAI, FEB 10, 2016: AGAINST an order passed by the Commissioner Service Tax, Mumbai the appellant is in appeal against the confirmed demand of service tax amounting to Rs.2.66 crore son advisory fees, retainer-ship fees, merchant banking service fees, other miscellaneous fees and imposition of penalty u/ss 76, 78 & interest u/s 75 of FA, 1994.

Revenue is in appeal against the vacation of demand of Rs.3.67croreson advisory fees for mergers and acquisitions, software development project fees, fees on services provided by appellant's subsidiary.

The Department's stand is that all services except Underwriting services related to Stockbroker services are covered under ‘Management Consultancy Service'.

However the appellant's stand is that they were liable to pay service tax only from August 2001 under the category of ‘Banking and Financial services' that were brought into the service tax net from 16.07.2001. The period of dispute is April 2000 Dec 2001 for services of Mergers and Acquisitions (M&A) and Merchant Banking Services (MBS) and Jan - Dec 2001 for the other services. The SCN was issued in Oct 2004.

In the matter of the Stay application filed by the appellant, the Bench had while waiving the requirement of pre-deposit & granting a stay in the matter observed

Very purpose of issue of s. 37B Circular is to ensure that there is uniformity in the classification of excisable goods, in this case service tax - if there were divergent views necessitating the need for an issue of 37B Circular, prima facie , the appellant have made out a case to show that they were under bona fide belief that the services rendered by them were not taxable stay granted: CESTAT [ para 5, 6 ]

We reported this order as 2007-TIOL-584-CESTAT-MUM.

The appeal was heard recently.

The appellant narrated the sequence of events preceding the issuance of the SCN and submitted that that there are no elements of fraud, collusion, willful misstatement, suppression of facts etc. and, therefore, the extended period of five years under the proviso is not invokable. It is further informed that at every step they declared to the department that they are rendering Financial Advisory Services as Merchant Bankers as well as in connection with Mergers and Acquisitions. It was informed in their letter dt.1.2.2000 to the DG Service Tax that they are a merchant banker and carry out all activities of a merchant banker being registered with the SEBI. It was also informed that they are registered with SEBI as a stock broker and an underwriter. Therefore, there was no concealment of their activities which are stated by the Department to be covered under ‘Management Consultancy Services', Underwriting services and Stock broker services. In their letter to the DG Service Tax, they had enclosed their letters addressed to M/s L&T, Digital Equipment (India) Ltd and other companies expressing their consent to act as exclusive financial advisors.

It is further submitted that once SCNwas issued on 17.9.2001 demanding duty of Rs. 31.73 lakhs on the activity of advise rendered in relation to M&A for the period 16.10.1998 to 31.3.1999 and all the activities being in the knowledge of the department, the subsequent demand issued on 20.10.2004 for the period April 2000 to December 2001 on several activities becomes time bared as all the information was already available with the department. Reliance is placed on the decision in Nizam Sugar Factory 2006-TIOL-56-SC-CX.

The AR argued that in the grounds of appeal it is mentioned that no services were provided during the period December 1999-March 2000 and, therefore, it is not possible for the department to presume that the appellant had intention to provide services during the period April-June 2000 unless declared in the ST-3 Return. Further, finality on the issue for the period October 1998 to March 1999 in appellant's own case will not come in the way of invoking extended time period as the value of services was not declared. The case law cited was distinguished as not being applicable to the facts of the case.

The Bench inter alia observed

Limitation:

+ We find that, amongst many petitioners who may have represented to the Board in pursuance of the High Court Order 07.11.2000, one petitioner were the appellant. In pursuance to the High Court Order, the CBEC gave a clarification dt. 27.6.2001 stating that the said services are in the nature of Management Consultancy Services . Having received this clarification in pursuance of High Court Orders, the appellant who themselves had approached the High Court cannot turn their back to the High Court directions and now take a stand that the confusion was still prevailing and, therefore, they could not deposit the tax for the period April June 2001.

+ It is a different matter that the Banking service was introduced from 16.7.2001, which covered under its ambit the various financial services rendered by the appellant. But the question remains why the appellant after pursuing with the High Court which ordered the CBEC to issue a circular which was done, chose not to pay service tax under the category of Management Consultancy Service for the period April-June 2000.

+ Even if activities are rendered by the appellant, the department does not know whether the activities are performed and payments for all the activities were received during the period April-June 2000. This knowledge can only be sourced from the ST returns. It must be appreciated that in the returns no payments are shown to have been received prior to April 2000. Therefore, Department had no knowledge that services continued to be rendered during April-June 2000.

+ In case the ST-3 Returns do not indicate value of certain services, it will amount to suppression of facts. In the present case the appellant had declared the value of financial services for the period July 2000 onwards in the ST-3 Return for the period April September 2000, but they failed to declare the value of services rendered during the April-June 2000 in the same return.

+ In the present case, the fact that services having value were rendered became known to the department only when audit was conducted in 2002 and it was then discovered that the appellant had failed to declare the value of services rendered during the period April-June 2000. Therefore, the judgments cited by the Counsel cannot be relied upon in facts of the present case.

+ In the present case it was the duty of the appellant to pay the tax for April-June 2001 after receiving Board's clarification dt.27.6.2001 which was issued on the directions of the Hon'ble High Court of Bombay. [HSBC Securities and Capital Markets (I) P Ltd refers]

+ Therefore, in our considered view, the extended period of limitation is invokable in the present case. [Nizam Sugar Factory distinguished]

On merits:

I. Merchant Banking Services (MBS)

+ We find that in the present case the dispute is for the period April 2000 to December 2001 whereas Section 65A was inserted in the Finance Act, 1994 only 14.5.2003. Therefore, obviously the said Section cannot be applied in the present case and the judgment in the case of HSBC (supra) cannot be relied upon. In this view of the matter, the specific classification has to be decided and cannot be left to two alternatives.

+ We find much reason in the argument of the Counsel that post 16.7.2001 the language of the definition of ‘Management Consultancy Service' remained the same. Therefore clearly when a specific entry has been introduced as clauses (iii) and (vi) of the definition of Banking service during the relevant period, it becomes apparent that the same cannot be classified under “Management Consultancy Services”.

+ In reaching this conclusion, we find support in the language of the Finance Bill, 2001, which refers to a new service tax entry of ‘Banking and other Financial services'. The TRU Circular F.No.B11/1/2001-TRU also terms the entry as a new service entry.

+ In our considered view the very term ‘management consultancy' refers to a consultancy regarding the affairs of an organization and not to activities of merchant banking which find specific mention in the definition of banking services.

+ MBS(Merchant Banking Services) cannot be classified under Management Consultancy Service and, therefore, no service tax is payable.

II. Advisory and Retainership Fees received for providing independent/stray opinions.

+ These activities are squarely covered under the definition of Banking and other Financial Services and, therefore, our views given above in the case of Merchant Banking Services would hold in this case also.

III. Fees earned by the subsidiary of the appellant.

+ The subsidiary is a separate legal entity under the Companies Act. The fees earned is not the income of the appellant company. Merely because the income is shown in the consolidated financial statement of the company and its subsidiary, the same cannot be a ground for demanding service tax from the company. The requirement to publish the consolidated financial statement is a statutory requirement on the basis of a listing agreement with SEBI. The Commissioner has rightly held that nowhere it is alleged that the appellant received the said amount.

+ In the present case, the subsidiary is the service provider and, therefore, tax, if any, is payable by the subsidiary. Therefore, we hold that service tax is not payable on this amount.

IV. Services performed in relation to software development projects. (Revenue appeal)

+ Revenue has not given any sustainable reason to show that the service is not covered under Consulting Engineer Service. It is seen that vide Notification No.4/99 dt. 28.2.99 the taxable service provided by consulting engineer in relation to computer software was exempted. The service that is “Information Technology Service” was specifically excluded from the scope of “Business Auxiliary Service (BAS)”. Both these facts indicate Government's intention to classify the service under “Consulting Engineer Service” or under BAS. Therefore we are inclined to give the benefit to the appellant and hold that service tax is not payable on the service in question under “Management Consultant Service”.

V. Fees for underwriting government securities.

+ Board Circular 126/8/2010-ST dt.10.8.2010 clarifies that service tax liability does not arise on underwriting fees during the course of dealing in government securities. Therefore, service tax is not payable on these services.

VI. Service charges:

(i) Gained on squared of transactions;

(ii) Write back of credit balances in payable A/c;

(iii) Recovery of expenses from client;

(iv) Recovery of bad debts;

+ As the very nomenclature shows, these charges are actual adjustments of expenses/debts etc. There is no service involved in these activities. Therefore no service tax is payable on these activities.

VII. Merger and Acquisition services dropped by the Commissioner on the grounds of limitation Revenue in appeal.

+ The whole concept of management consultancy as related in the definition of ‘Management Consultant' does not give an impression that specific services such as Mergers and Acquisitions is covered by it.

+ The concept of Management Consultancy is clearly consultancy and technical assistance in the running of the affairs of an organization. The definition itself refers to various aspects of the working system of any organization. Whereas “Mergers and Acquisitions” is a highly technical and restrictive term. Mergers refer to the mergers of organizations. Similarly, the word “acquisition” refers to acquisition of another entity by a company. Mergers and acquisitions cannot be related to the running of the affairs of an organization.

+ If such a wide view is taken then, practicing Chartered Accountants [Section 65(83)], Cost Accountants [Section 65(84)], and Secretaries [Section 65(85)] would all get covered under the definition of ‘Management Consultancy Service'. It would render many entries otiose. It is settled law that a service tax entry should be interpreted a contextual manner. [Board of Control for Cricket in India 2007-TIOL-684-CESTAT-MUM refers]

+ The new entry of Mergers and Acquisitions extends the coverage of service tax and is not the result of carving out a new entry from the Management Consultancy Service.Consequently service tax is not payable on M&A Services prior to 16.7.2001 under the category of ‘Management Consultancy Service'.

Conclusion:

++ As the service tax is held not payable, the question of imposition of penalties does not arise.

++ Appeal of appellant DSP Merrill Lynch Limited is allowed. Revenue's appeal is dismissed.

In passing comments of Bench: Having decided on merits, our findings on limitation would have no relevance. The aspect of limitation was considered by us in some detail because learned Counsel had, at the outset, strongly contended that the major portion of the demand is hit by time limitation and the case could be decided on this basis alone.

(See 2016-TIOL-382-CESTAT-MUM)