ST - 'Cash management' as understood in common parlance would not embrace chit fund business: SC
By TIOL News Service
NEW DELHI, JULY 10, 2017: In Master Circular 96/7/2007-ST dated August 23, 2007 the CBEC had offered the following clarification -
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034.04 / 23.08.07
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Services provided by banking company or a financial institution including a non-banking financial company or any other body corporate or commercial concern in relation to asset management including portfolio management, and all forms of fund management, is leviable to service tax under "banking and other financial services" [section 65(105)(zm) and section 65(12)]. The said taxable service also includes cash management services provided.
Services are provided in relation to chit funds. Chit Funds are of two types, namely:-
(a) Simple Chit Funds: In this case, members agree to contribute to the fund a certain amount at regular interval. Lots are drawn periodically and the member, whose name appears, gets the periodical collection. No separate amount is charged from the members.
(b) Business Chit Funds: In this case, there is a promoter known as foreman who draws up the terms and conditions of the scheme and enrolls subscribers. Every subscriber has to pay his subscription in regular installments. The foreman charges a separate amount for the services provided. Some States prescribe a ceiling limit for the amount to be charged by such promoter for the services provided. Commission amount is retained by the promoter as consideration for providing the services in relation to chit fund.
Whether services provided in relation to chit fund is leviable to service tax under "banking and other financial services" or not?
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Reserve Bank of India has clarified that the business of a chit fund is to mobilize cash from the subscribers and effectively cause movement of such cash to keep it working and, therefore, the activity of chit funds is in the nature of cash management.
(a) In the case of Simple Chit Funds, no consideration is paid or received for the services provided and, therefore, the question of levy of service tax does not arise.
(b) In the case of Business Chit Funds, cash management service is provided for a consideration and, therefore, leviable to service tax under "banking and other financial services".
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Based on the above, the Revenue had called upon the assessees to pay service tax on the running of chit funds under 'BOFS'.
Plea of the assessees was that the chit fund business does not amount to any service.
The High Court accepted the plea of the assessee and thereby quashed the Circular dated August 23, 2007 and consequently proceedings dated December 18, 2007.
Revenue is, therefore, in appeal before the Supreme Court.
Incidentally, the same issue had been considered by Delhi High Court in the case of Delhi Chit Fund Association v. Union of India = 2013-TIOL-331-HC-DEL-ST and came to the conclusion that it was not a service as per the definition of 'service' contained in Section 65B(44) of the Act. Pertinently, SLP (C) No. 24998 of 2013 filed by the Revenue against the aforesaid judgment of Delhi High Court has been dismissed by this Court vide order dated January 7, 2014.
Be that as it may, in the present case, the apex court inter alia observed thus -
Whether chit fund activity can be treated as business of cash management?
+ The nature of chit transactions is lucidly explained in the case of Shriram Chits and Investment (P) Ltd. v. Union of India & Ors. 1993 Supp. (4) SCC 226
+ Chit is somewhat like a recurring deposit with the bank.
+ The funds of the chit fund belong to the entire lot of subscribers. A chit fund transaction is not a case of borrowing, nor is it a loan transaction. If a subscriber advances any amount, he does so only to one of the members.
+ There is no definition of cash management in the Act.
+ In common parlance as well as in banking field, cash management is understood as managing the surplus cash of a person or a company.
+ Cash management deals with optimisation of cash as an asset and for this purpose various decisions are to be taken for proper management thereof. The cash management schemes are, thus, built around two goals: (a) to provide cash needed to meet the obligations and (b) to minimise the idle cash held by the business.
+ Having kept in mind the aforesaid nature of the chit fund business, it becomes difficult to hold that such business amounts to 'cash management'.
Held : The term 'cash management' as understood in common parlance would not embrace chit fund business.
Whether chit fund can be treated as a form of fund management?
+ The entire case of the Revenue was that chit fund amounts to cash management and cash management is one of the forms of fund management. Once we have held that chit fund business is not cash management or a business of managing cash, no further discussion on this issue is even required.
+ However, dehors the issue of cash management, we are of the view that activity of managing chit fund does not amount to management of any type of fund.
+ Even as per the definition from dictionary relied upon by the Revenue, "fund" is an aggregation or deposit of resources from which supplies are or may be drawn for carrying on any work, or for maintaining existence.
Held: Chit fund cannot be treated as fund management as understood in the sense the term is known in business parlance. The chit fund business was not covered by sub-clause (v) of sub-section 12 of Section 65 even after its amendment by Finance Act, 2007.
In fine, the conclusion in the impugned judgment of the Andhra Pradesh High Court was affirmed.
The Revenue appeals were dismissed.
In passing:
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Union Budget 2015 - Changes in Service Tax - reg.
F.No. D.O.F. No. 334/5/2015-TRU Dated 28 February 2015
5.2 Further amendments in Chapter V of the Finance Act, 1994:
(ii) The intention in law has been to levy Service Tax on the services provided by:
(a) chit fund foremen by way of conducting a chit.
(b) distributor or selling agents of lottery, as appointed or authorized by the organizing state for promoting, marketing, distributing, selling, or assisting the state in any other way for organizing and conducting a lottery.
However, Courts have taken a contrary view in some cases, while in some cases the levy has been upheld.
An Explanation is being inserted in the definition of "service" to specifically state the intention of the legislature to levy Service Tax on activities undertaken by chit fund foremen in relation to chit, and lottery distributors and selling agents, in relation to lotteries [section 65 B (44)]. Further, an explanation is being added in entry (i) of section 66D to specifically state that these activities are not covered by the Negative List
(Clauses 105 and 107 of the Bill refers)
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(See 2017-TIOL-240-SC-ST)
