Is the assessee liable to pay service tax on the commission received by RBI for collecting taxes and crediting the same into the consolidated fund on it’s behalf?

Case:-COMMISSIONER OF C. EX. & S.T., CHANDIGARH-II VersusSTATE BANK OF PATIALA
Citation:-2016 (45) S.T.R. 333 (Tri. - LB)
Brief facts:-This Larger Bench was constituted on administrative order of the Hon’ble President. The Referral Bench vide Miscellaneous Order No. 798/2014, dated 26-8-2014 [2015 (37)S.T.R.284 (Tribunal)] has referred the issue for consideration which as under :-
“Whether qua Notification No. 22/2006-S.T., dated 31-5-2006, the commission received from the Reserve Bank of India by a scheduled bank (entrusted with functions of transaction of Govt. business) for rendition of “Banking or Financial” service is entitled to exemption from service tax on the ground that the banking company providing such taxable service is an agent of the Reserve Bank of India and thus entitled to exemptions specified in clause (i) of Notification No. 22/2006-S.T., dated 31-3-2006.”
Appellant’s contention:-Learned Commissioner (DR) while opening the arguments for Revenue submits that the factual matrix which according to him is that State Bank of Patiala is a banking company registered under Companies Act, 1956 and regulated by the Reserve Bank of India (hereinafter referred to as RBI) as per the provisions of Banking Regulations Act, 1949; The RBI in exercise of its authority conferred by Section 45 of Reserve Bank of India Act, 1934 appointed the respondent-assessee as an agent to receive remittances of taxes on RBI’s behalf to credit the same into consolidated fund; for which a commission was paid by RBI; which was sought to be taxed by Revenue authorities.
It is the claim of the respondent-assessee that the amount received as commission is not liable to tax in view of Notification No. 22/2006-S.T., dated 31-5-2006 and applied for refund of the service tax remitted by them.
After giving the factual matrix, the learned DR has read Notification No. 22/2006-S.T. and submits that the said Notification is very clear and it exempts only the taxable services provided by RBI. It is his further submission that the law is settled and too well-established that exemption notification are to be strictly interpreted for which proposition he relies upon the decision of the Apex Court in the cases of Commissioner of Cus. (Prv.), Amritsar v. Malwa Industries Ltd. - 2009 (235)E.L.T.214 (S.C.) and Uttam Industries v. Commissioner of Central Excise, Haryana - 2011 (265)E.L.T.14. (S.C.). It is his submission that the Referral Bench had correctly doubted the judgment of the Tribunal in the case of Canara Bank v. Commr. of Service Tax, Bangalore - 2012-TIOL-790-CESTAT-AHM = 2012 (28)S.T.R.369 (Tribunal), as to how a public sector bank can be an agent of RBI and even if they are agent, is the agent entitled to exemption which is confined to principle only. It is his submission that power to grant exemption from liability to tax is prerogative of the Govt. of India and exercising such powers, the Central Govt. has issued Notification No. 22/2006-S.T., for exempting the services provided to and by RBI. It is his further submission that reliance placed by the Bench in the case of Canara Bank (supra) on the judgment of the Apex Court in the case of State of Madras v. Cement Allocation Coordinating Organisation - (1971) 2 SCSS/587 is not applicable as the specific provisions of Finance Act will prevail over the general observations made by the Apex Court in that case.
It is his further submission that the respondent herein, i.e., State Bank of Patiala is not the same as RBI is not Banking Company as defined under the provisions to Section 65(11) of the Finance Act, 1994 as RBI is not constituted under the provisions of the Banking Regulation Act, 1949 nor under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 but was constituted under RBI Act, 1934.
It is his submission that in the light of above, reference be answered in favour of the Revenue.

Respondent’s contention:-Learned Counsel appearing on behalf of the State Bank of Patiala would draw our attention to the decision of the Tribunal in the case of Canara Bank (supra). It is her submission that the Tribunal subsequently in the case of Union Bank of India - 2013-TIOL-343-CESTAT-MUM = 2015 (40)S.T.R.308 (Tri.-Mum.), has followed the decision given by the Tribunal in the case of Canara Bank and held that the service tax liability does not arise on the bank which is receiving commission for collecting and remitting the taxes to consolidated fund of India on behalf of the RBI. She would extensively read from the decision of the Bench in the case of Canara Bank (supra). Subsequently, she has drawn our attention to provisions of RBI Act, 1934, and more specifically to Section 21 and submits that the RBI is the only bank allowed to transact Government business of Centre and State. She also read Section 21B of the said Act and submits that the RBI Act has provisions for effect of agreement made between the banks and certain States. She further submits that as per the provisions of Section 45 of the RBI Act, the RBI is authorized for appointing agent or any Bank constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or as defined in the State Bank of India (Subsidiary Banks) Act, 1959, for receiving on behalf of RBI any payment required to be made into the Bank or any bill, or any other security required to be delivered into the Bank. She has also submitted that the very same provisions were considered by the Tribunal in the case of Canara Bank (supra) and held in favour of the respondent. It is her submission that the definition of assessee means “a person liable to pay service tax and includes his agent”. It is her further submission that as per the Finance Act, 1994, the assessee, State Bank of Patiala (in the case in hand), being appointed as an agent and is also eligible for the benefit of Notification No. 22/2006-S.T. It is her submission that undisputedly, the assessee is a National Bank and registered under provisions of Companies Act, 1956, and regulated by the RBI under provisions of the Banking Regulation Act, 1949.

Reasoning of judgment:-The Tribunal considered the submissions made at length by both sides and perused the records.
The issue that falls for consideration of this Larger Bench is whether the respondent herein is eligible for the benefit of exemption Notification No. 22/2006-S.T., dated 31-5-2006. The respondent herein is a public sector/nationalized bank established under Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and as defined in the State Bank of India (Subsidiary Banks) Act, 1959 and is authorized to collect the taxes payable by the citizen of India to the Government of India. The respondent herein collects the taxes and remits to RBI, for which action, the RBI extends a percentage of amount collected as commission. It is the case of the Revenue that such commission is taxable in the hands of the respondent under the category of “Banking and other Financial Services”.
Judicial notice is being taken that the RBI is constituted under RBI Act, 1934, and is banker of the nation. As per Section 20 of the RBI Act, the RBI is mandated to accept the monies for the account of Government of India and to make payment and other activities like foreign exchange remittances and other banking operations including the management of debt of the Govt. of India.

The provisions of Section 21 of the RBI Act has categorically stated that right to transact Govt. transaction in India is only given to RBI. The said section is reproduced :-
“21. Bank to have the right to transact Government business in India.- (1) The (Central Government) shall entrust the Bank, on such conditions as may be agreed upon, with all (its) money, remittance, exchange and banking transactions in India, and, in particular, shall deposit free of interest all (its) cash balances with the Bank :
Provided that nothing in this sub-section shall prevent the (Central Government) from carrying on money transactions at places where the Bank has no branches or agencies, and the (Central Government) may hold at such places such balances as (it) may require.”
It may be noticed from the reproduced section, only RBI can transact the Government business in India which is to receive and also remit all the money on behalf of the Government of

India. Section 21A of the RBI Act also empowers the RBI to transact Government business of States on agreement. Holistically, reading of Sections 20, 21 and 21A of the RBI Act, would mean that RBI is supposed to receive all money on behalf of Govt. of India and remit the same and no one else is authorized to do so. If this be so, various taxes like collection of central excise, customs and service tax and amounts collected by sale of public deposit, RBI bonds, special discount scheme, and payment of pension, etc., has to be done only by RBI. Considering the nature of enormous transactions involved in collection of taxes, Section 45 of the RBI Act has provided as under :-
“45. Appointment of agents.- (1) Unless otherwise directed by the Central Government with reference to any place, the Bank may, having regard to public interest, convenience of banking, banking development and such other factors which in i ts opinion are relevant in this regard, appoint the National Bank, or the State Bank, or a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of undertakings) Act, 1970 (5 of 1970), or a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), as its agent at all places, or at any place in India for such purposes as the Bank may specify.
(2) When any bank is appointed by the Bank as its agent under sub-section (1) to receive on behalf of the Bank any payment required to be made into the Bank, or any bill, hundies or other securities required to be delivered into the Bank, under any law or rule, regulations or other instructions having the force of law, the same may be paid or delivered into the bank so appointed as the agent of the Bank.
(Emphasis supplied)
On careful reading of above reproduced Section 45, it can be noticed that, RBI, under the direction of Central Government of India having regard to public interest, convenience of banking and other factors, can appoint a national bank or the State Bank to transact business as its agent at any place in India. Drawing power from this Section, RBI appoints various national banks/ public sector banks for collection of various taxes and making payment of pension, etc. This would mean that various national banks are agents of the RBI.
The Central Govt. of India by Notification No. 22/2006-S.T. has given exemption from the payment of service tax of any taxable services provided to or by RBI either in India or under Reverse Charge Mechanism. In our view as the respondent-assessee is an agent of RBI, exemption granted by Notification No. 22/2006-S.T., needs to be extended to respondent. In our view the claim of the respondent from exemption of the service tax on the commission received for undertaking the activity of receiving various taxes on behalf of the Govt. of India, seems to be justified inasmuch as that the provisions of Section 45 of RBI Act categorically mandated for appointing national bank or a State Bank by the RBI for specified purposes as directed by Government; and the said Section also mandates that such Banks will be agents of RBI. As whether an agent will be eligible for exemption or otherwise is being contested in the appeal, in our view the question does not arise as Chapter V of the Finance Act, 1994, in Section 65(7), the term assessee has been defined which is reproduced :-
“Section 65 (7) - “Assessee” means a person liable to pay the service tax and includes his agent”
It can be seen from the above reproduced definition, the Finance Act itself acknowledges the fact that the person who is liable to pay service tax includes its agent which would mean in the case in hand that in the absence of Notification No. 22/2006-S.T., RBI would be liable to pay service tax as also banks which are appointed by RBI as agent under Section 45 of RBI Act. Applying the same analogy, if RBI is exempted from the service tax liability in respect of various services, its agent for doing such services also needs to be extended the same benefit.
The present controversy may also be looked from another angle. State Bank of Patiala has been appointed by RBI as its agent under Section 45 of the RBI Act. RBI itself has been entrusted by the Central Government to transact Government business. Hence, once State Bank of Patiala has been appointed as agent of RBI, it is transacting Government business which is in the nature of a sovereign function performed on behalf of the Government and hence not liable to Service Tax.
In our considered view the judgment of the Tribunal in the case of Canara Bank [2012-TIOL-790-CESTAT-AHM = 2012 (28)S.T.R.369 (Tri.-Ahmd.)], has correctly interpreted Notification No. 22/2006-S.T. and is correct exposition of the law. The tribunal held that the said judgment did not require any reconsideration.
As regards the case law cited by the learned DR and reliance placed in the case of Malwa Industries Ltd. (supra), in that case, the Apex Court was considering the situation of exemption by a notification from a countervailing duty. Learned Commissioner (AR) was relying upon this decision to canvass his point that exemption notification should be read literally and should be construed liberally once it is concluded that benefits the notification is applicable. The Tribunal did not find any merits in the said submission made by the learned DR inasmuch as that the definition of assessee in the Finance Act in Section 65(7) clearly states that “assessee means a person liable to pay service tax and includes his agent”. In the case in hand RBI a person liable to pay tax as an assessee but for exemption, will include their agents viz. Banks appointed under Section 45 of RBI Act, to execute functions of RBI. Accordingly, the ratio of the judgment of the Apex Court as cited by learned AR may not be applicable in the facts of this case. In our view the reliance placed by the learned Commissioner (AR) in the case of Uttam Industries (supra) may also not carry the case of revenue any further as facts were totally different, than the facts in the case in hand.
In view of the foregoing discussion, the Tribunal answered the reference in favour of the respondent and held that the law as laid down by the Tribunal in the case of Canara Bank (supra) is correct exposition of law. Present appeal did not have any merit and was dismissed.

Decision:-Appeal dismissed.
Comment:-The gist of the case is that the assessee is a State bank and it received commission from the Reserve Bank of India. The RBI appointed the assessee as an agent to receive remittances of taxes on RBI’s behalf and to credit the same into consolidated fund. The RBI paid commission to the assessee for the aforesaid service. The Revenue demanded service tax on the same. It was held that since, the scheduled bank was an agent of RBI under Section 45 of RBI Act, 1934 and it collected various taxes and did other activities which could be done only by RBI according to Sections 20, 21 and 21A of RBI Act, 1934, hence, the assessee was entitled to exemption under Notification No. 22/2006-S.T. on taxable services provided to or by RBI. Further, as per Section 65(7) of Finance Act, 1994, the assessee includes their agents also. So, as an agent of RBI, the scheduled bank was transacting sovereign Government business which is also not liable to Service Tax.
Prepared by:-Praniti Lalwani

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