Whether brokerage received from borrower for arranging finance covered under BAS?

PJ/Case Law /2016-17/3232

Case:-FULCHAND TIKAMCHAND VERSUS COMMISSIONER OF C. EX. & CUS., NAGPUR

Citation:-2016 (42) S.T.R. 1063 (Tri. - Mumbai)

Brief Facts:- The brief facts of the case are that M/s. Fulchand Tikamchand, styling itself as a finance broker, is before Tribunal challenging the decision of Commissioner of Central Excise, Nagpur in Order-in-Original No. 3/ST/2011-12/C, dated 30th June, 2011 by which the appellant has been held liable to service tax of Rs. 70,79,542/- as provider of ‘business auxiliary service’ for the period between 2005-06 and 2009-10 along with appropriate interest besides being penalized under Sections 76, 77 and 78 of the Finance Act, 1994.
Appellant’s Contention:- The appellant claims that, as a broker, they have an empanelled list of potential financiers and that, on being approached by potential borrowers, the details of offering of these financiers are made available to those in need of finance. Thereafter, the potential borrower and the potential financier settle the terms of loan following which the appellant issues a memo of interest which shows the details of interest to be paid by the borrower to the financier, the amount of commission/brokerage to be paid to the appellant and the tax amount liable to be deducted at source. Appellant receives its brokerage from the borrower. It is the claim of the appellant that no other activity is performed by them then or at any other stage.
Respondent’s Contention:- The respondent appears to believe that the appellant is a commission agent while, at the same time, inclining to defer to rulings of this Tribunal in Commissioner of Central Excise v Sanfin [2009 (19) STT 107 (CESTAT) = 2009 (13) S.T.R. 551 (Tribunal)] and in Auto Worldv. Commissioner of Central Excise, Allahabad [2008 (12) S.T.R. 74 (Tri.-Del)] as well as the clarification issued by the Central Board of Excise and Customs in Circular No. 87/05/2006-S.T., dated 6th November, 2006, opining that appellant undertakes services that are best described in Section 65(19)(vii) of Finance Act, 1994. It would appear that the lower authority has determined taxability on the ground that appellant is an agent and appears convinced that an entity once categorized as an agent is liable to be fitted as one intended to be covered by Section 65(19)(vii) that reads as :

“(vii) a service incidental or auxiliary to any activity specified in sub-clauses (i) to (vi), such as billing, issue or collection or recovery of cheques, payments, maintenance of accounts and remittance, inventory management, evaluation or development of prospective customer or vendor, public relation services, management or supervision,….”

A plain reading of the section, however, indicates that a commission agent is also deemed to be a provider of ‘business auxiliary services’ in addition to others who may be fitted in the seven sub-categories.

Reasoning of Judgement- Learned counsel for the appellant relies on the decision of this Tribunal in Interocean Shipping Co. v. Commissioner of Service Tax, New Delhi [2013 (30) S.T.R. 244 (Tri.-Delhi)] to contend that brokers are not agents acting on behalf of either party in a loan transaction and thus eliminating the deeming of the appellant as a commission agent. Further reliance was placed on the decision of Hon’ble High Court of Bombay in Commissioner of Sales Tax v Pandurang Tukaram Dalal [AIR 1957 Nag 61]. The decision of the Hon’ble High Court of Karnataka in N. Ayyanna Setty & Sons and Others v. State of Mysore [(1961) 12 STC 731 (Kar)] was produced before Tribunal.
The case laws relied upon by the adjudicating authority stand on a different footing inasmuch as the providers therein received commission from clients whose commercial outputs were placed with final consumers. The appellant, on the other hand, receives commission from the borrower who does not have either a product or a service to place in the market. The consideration is, thus, not connected with the sale of a product or service belonging to the person who makes over the consideration. The appellant, therefore, does not find fitment in Section 65(19)(vii) as provider of ‘business auxiliary service.’
In view of the above findings, the appeal is allowed.
Decision:- Appeal allowed.
Comment:- The crux of the case is that no service tax was payable under BAS as the ingredients of BAS were not present. It was observed that the appellant does not enter into any contract, written or implied, with either the financier or the borrower; nor is there any responsibility cast upon the appellant in the event of default on the part of financier or the borrower. The appellant was solely engaged in arranging finance for the borrower for brokerage. Accordingly, the appellant fails the test of description as agency or agent for classification as commission agent under Section 65(19) of Finance Act, 1994. Moreover, the appellant, receives commission from the borrower who does not have either a product or a service to place in the market. The consideration is, thus, not connected with the sale of a product or service belonging to the person who makes over the consideration. The appellant, therefore, does not find fitment in Section 65(19)(vii) as provider of ‘business auxiliary service.’
Prepared by:- Akshit Bhandari

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PJ/Case Law /2016-17/3232

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