Whether sale of RBI Bonds on commission basis liable to service tax under “Banking and Financial Services”?

PJ/CASE LAW/2014-15/2440

Case:-ENAM SECURITIES PVT, REEMA BUSINESS SERVICES PVT LTD Vs COMMISSIONER OF SERVICE TAX, MUMBAI

Citation:-2014-TIOL-2205-CESTAT-MUM

Brief fact:-There are three appeals involving a common issue. The appeal numbers, the orders from which they arise, period involved and the service tax demands confirmed are given in the table below:

S.No.	Appeal No.	Order-in-appeal No.	Period involved	Service tax Demand
1.	ST/450/10	SB(70)/STC/2010 dt. 15/06/2010	Sep 2002 to Mar 2004	13,19,158
2.	ST/224/11	M-I/AV/435/2010 dt. 15/12/2010	Aug 2003 to Oct 2004	25,92,462
3.	ST/89606/13	297/BPS/MUM/2013 dt. 24/07/2013	Sept 2002 to Oct 2004	7,18,681

The basic issue for consideration in all these appeals is whether the sale of RBI Bonds on commission basis would be liable to service tax under “Banking and other Financial Services” for the period prior to 10/09/2004 or not. The appellants herein, M/s. Enam Securities Pvt. Ltd. and M/s. Reema Business Services Pvt. Ltd. are registered with the Reserve Bank of India (RBI). They undertook sale of RBI Tax Savings Bonds 2003 and received commission from RBI. With effect from 10/09/2004, they discharged service tax liability on the commission received under “Business Auxiliary Service” (BAS). However, they were issued a show-cause notice dated 17/10/2008 demanding service tax for the period prior to 10/09/2004 under “Banking and other Financial Services”. These demands were adjudicated upon and were confirmed along with interest and imposing penalties. Hence, the appellants are before tribunal.

Appellant’s contention:-The learned Counsel for the appellants submit that the issue relating to liability to pay service tax on commission received has been considered by this Tribunal in the case of HDFC Bank Vs. CST, Mumbai - 2014-TIOL-27-CESTAT-MUMand Canara Bank Vs. CST, Bangalore - 2012 (28) STR 369 (Tri-Ahmd) = 2012-TIOL-790-CESTAT-AHM and this Tribunal has taken a consistent view that the activities are not taxable as the service relates to a sovereign function undertaken. Nevertheless, in order to buy peace, they have discharged the service tax liability under ‘BAS' from 10/09/2004 onwards when the levy of service tax on commission agent's service was made applicable to such activities rendered in an area other than agriculture; therefore, the impugned demands are not sustainable. He further submits that the show-cause notices have been issued only on 17/10/2006 invoking the extended period of time and therefore, the demands are clearly time barred inasmuch as they have started discharging the service tax liability under BAS since 10/09/2004. The department has not disputed the classification adopted by the appellant. Since BAS is not carved out of “Banking and other Financial Services” (BOFS), the question of payment of service tax under “BOFS” would not arise at all for the period prior to 10/09/2004. Therefore, he submits that both on merits as well as on the ground of time bar, the demands would not sustain.

Respondent’s contention:-The learned Additional Commissioner (AR) appearing for the Revenue reiterates the findings of the adjudicating authority. It is his contention that RBI Bond is a Government Security and therefore, broking in “Government Security” would come within the category of “Banking and other Financial Services” and liable to tax and hence, the demands confirmed for the period prior to September 2004 are sustainable and therefore, he pleads for upholding the impugned order.

Reasoning of judgment:-Unlike other banks, RBI does not undertake borrowing or lending on its own. Whenever the RBI undertakes borrowing activities, it is on behalf of the Government of India to manage the Indian economy which its constitutional responsibility. Therefore, the lending or borrowing of money by the Government is a sovereign function and on such functions there cannot be any tax liability whether by way of direct tax or by way of indirect tax. This is the principle followed by this Tribunal in the case of HDFC Bank and Canara Bank case (supra).

In view of the above, the impugned demands are clearly unsustainable in law. Accordingly, they set aside the same and allow the appeals with consequential relief, if any, in accordance with the law.

Decision:-Appeals allowed.

Comment:- The analogy of the case is that when RBI undertakes borrowing activities, it is on behalf of the Government of India to manage the Indian economy which is its constitutional responsibility. Therefore, the lending or borrowing of money by the Government is a sovereign function and on such functions there cannot be any tax liability whether by way of direct tax or by way of indirect tax. Accordingly, the appeal was allowed.

Prepared by:- Monika Tak

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PJ/CASE LAW/2014-15/2440

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