By TIOL News Service

MUMBAI, NOV 10, 2016: THE appellant borrowed funds for the 4000 MW Ultra Mega Power Project at Mundhra under the External Commercial Borrowing (ECB) scheme from overseas lenders and were contractually obliged to pay (i) commitment charges (ii) up-front fee (iii) arrangement fee (iv) agency fee and (v) out-of-pocket expenses for the period from April 2008 to March 2011 which the tax authorities alleged to be consideration for the rendering of 'Banking and Other Financial services', and liable to tax under reverse charge. Appellant had discharged tax liability on payments made under one or more of the above heads to the consortium of lenders but not for two viz. Asian Development Bank (ADB) and International Financial Corporation (IFC).

In near similar circumstances, the CESTATin M/s. Tata Steel v. Commissioner of Service Tax, Mumbai -I - 2015-TIOL-2464-CESTAT-MUM held thus -

ST - Appellant borrowing, by way of 'syndicated loans' for international acquisition and capital expansion, from various overseas banks - Arrangement fee paid to various banks abroad is taxable under reverse charge under 'Banking & Other Financial services' from 18.04.2006: CESTAT by Majority

Against the confirmation of service tax demands in excess of Rs.8crores and penalties and interest, the appellant is before the CESTAT and submitted that the appellant in re Tata Steel did not transact with institutions that the appellant did and claimed that the provider of the service was immune to taxation owing to the statutes enacted by the sovereign legislative organ that, in pursuance of international agreements entered into by the Government of India, were intended to prevail over any other law.

The appellant also cited -

+ Section 5 of the Asian Development Bank Act,1966 which provides "Conferment of status and certain immunities, exemptions and privileges on Bank and conferment of certain immunities, exemptions and privileges on its officers and employees".

+ The corresponding provisions in the International Finance Corporation (Status, Immunities and Privileges) Act, 1958 in section 3 are identical save that the expression 'Bank' is substituted by 'Corporation'.

+ Article 56 of Chapter VIII (dealing with Status, Immunities, Exemptions and Privileges) covers exemption from taxation extended to Asian Development Bank.

+ In Section 9 of Article VI of the Schedule in the International Finance Corporation (Status, Immunities and Privileges) Act, 1958, the Corporation, its assets, property, income and its operations and transactions shall be exempt from all taxation and from all customs duties.

Inasmuch as exemptions are claimed by the appellant in respect of the transactions of the Bank and Corporation respectively. They also refer to Article 253 of the Constitution.

The Bench after considering the submissions observed -

++ It is settled law that, in India, the power to enter into treaties and agreements is, in the absence of any legislation under Article 246 of the Constitution, vested in the Executive and that treaties and agreements are merely binding contracts between the signatory states. To give effect to those treaties and agreements, legislative sanction is a constitutional necessity. In particular, citizens or residents can seek enforcement of such agreements or treaties only in accordance with consequential legislation by Parliament. [Article 253 (Legislation giving effect to international agreements)refers.It is left to legislation to enact manner in which specific exemptions are conferred but where a clarification is wanted, the Agreement itself must be referred to so that the objectives of the Agreement may not be compromised.]

++ The immunity from tax is sufficiently broad to encompass all taxes - direct and indirect - and, in that context, the restrictions in the proviso have to be interpreted literally and not liberally in favour of Revenue.

++ The Agreement imposes self-limitations on the immunity to taxes by the three clauses in the proviso. The first component of the proviso permits Governments to impose restrictions on further dealing with goods imported free of duty. The second debars claims to escapement from duties on goods that were subsumed in the price of the goods. The third likewise debars claims of escapement when such duties or taxes are palpably compensation for services. The contention (of Counsel for Revenue) that converse inference from these restrictions in the proviso compels separate exemptions in the law for levy and collection of excise duty and the law for levy and collection of service tax is not tenable owing to the specific meaning and assignable to each of the restrictions.

++ That Asian Development Bank and International Finance Corporation are existing entities in the eyes of the sovereign legislature cannot be in doubt in view of the legislation pertaining to these bodies.

++ Section 66A(of FA, 1994) is a special provision to attract tax as a countervailing measure to cover circumstances that general taxing provision, section 66, does not encompass. The mechanics of implementation of the special provision are embodied in the Rules.

++ A legislation that admits to status, privileges and immunity of providers within the territory of India stands on a better footing as having jurisdictional presence than administratively ascertained characteristics such as establishment and place of residence. Hence we conclude that the Asian Development Bank and International Finance Corporation do have an existence in India, even if not corporeally, by legislative acknowledgement. The services rendered by them are not de hors the provider as to require recourse to section 66A to be subject to taxation. It is section 66 that is to be invoked.

No need for separate exemption

++ The Agreement incorporated in the Schedule to the two Acts specifically provide that

" The Bank shall also be immune from liability for the collection or payment of any duty or tax."

And that

"The Corporation shall also be immune from liability for the collection or payment of any duty or tax."

++ With the provider being not only immune from taxation but also absolved of any obligation to collect and deposit any tax, there is no scope for subjecting the recipient to tax in the absence of inclusion in the definition of 'person liable to pay tax' in rule 2 of Service Tax Rules, 1994. This would preclude tax on services rendered by the two entities under section 66 even if these were otherwise taxable and the immunity does not have to emanate from the provisions of Finance Act, 1994 but from the statutes governing the Asian Development Bank and the International Finance Corporation. The two statutes do not predicate the immunities to the presence of the two entities in India but to wherever they may be located in relation to tax liability in India.

++ As adduced supra while analyzing section 66A of Finance Act,1994, the fiction of taxable service is legislated and thereafter the recipient is legislated as tax payer. When the enactments that honour international agreements specifically immunize the operations of the service provider from taxability, a law contrary to that in the form of Section 66A which legislates such operations into tax net will not prevail.

++ We do not concur with the need for a separate exemption as held in the impugned order. The existing laws enacted by the sovereign legislature of the Union suffice for the purpose of giving effect to Agreements. And to attain that end, the taxing statute, if it offers the scope, must be so interpreted.

Confirmation of demands of tax, interest thereon and imposition of penalties were set aside as being without the authority of law.The appeals were allowed with consequential relief.

Before parting:

Incidentally, while granting Stay in the matter - 2012-TIOL-765-CESTAT-MUM, the Bench had observed thus -

And the CBEC had given its opinion, but the Bench while not accepting it observed -

++ It would appear from the communication placed before us that Central Board of Excise & Customs does not admit to the existence of any general exemption from service tax for the two service providers in this dispute and that services received by the United Nations, and these two bodies, are exempt under notification no. 25/2012-ST dated 20th June 2012.

++ Inviting our attention to Star Industries v. Commissioner of Customs (Imports), NhavaSheva [Final Order No. A/322/2013-WZB/C-I(CSTB)] wherein the Tribunal relied upon judgements of the Hon'ble Supreme Court to hold that, while circulars of Central Board of Excise & Customs are not binding on the Tribunal, interpretation by those whose duty it is to construe, execute and apply a statute should be accorded appropriate weightage. He urged us to accept the opinion of the Central Board of Excise & Customs. ++ We are not impressed by his urgings. We perceive this is also a case of mistaken identity. The principle of 'administrative construction' espoused by the Hon'ble Supreme Court in KP Verghese v. Income Tax Officer - 2002-TIOL-128-SC-IT and reiterated in Collector of Central Excise, Guntur v. Andhra Sugar Ltd - 2002-TIOL-513-SC-CX has been reserved for those concerned with law-making which, inter alia, includes notifications.

++ The Central Board of Excise & Customs is not the authority for issue of notifications; that is the preserve of the Central Government. An attached or subordinate office is not synonymous with Central Government. We have the highest of regard for the technical domain knowledge of the Central Board of Excise & Customs - collegially and individually - but it is not within the meaning of 'authority issuing the notification' and is, in any case, the umbrella organisation for one of the litigants before us. To accept its interpretation, even in a persuasive light, would be improper.

(See 2016-TIOL-2925-CESTAT-MUM)