Whether service tax is leviable on brokerage received for dealing in tax saving bonds issued by RBI?

PJ/CASE LAW/2015-16/2653

Case:-HDFC BANK LTD. VERSUSCOMMISSIONER OF SERVICE TAX, MUMBAI

Citation:- 2015 (37) S.T.R. 779 (Tri. - Mumbai)

Brief facts:- The appeal was directed against Order-in-Original No. 14/COMMR(AK)/08, dated 26-2-2008 passed by Commissioner of Central Excise (Adj.), Belapur.
Vide the impugned order, a Service Tax demand of Rs. 1, 53, 07,091/- had been confirmed against HDFC Bank Ltd. along with interest thereon and also by imposing penalties under Sections 76 & 78 of the Finance Act, 1994. The appellant, M/s. HDFC Bank Ltd. undertook sale of Reserve Bank of India (RBI) Bonds issued by the RBI, notified as Issuance of 6.5% Savings Bond, 2003 (Non-taxable) vide Notification No. F.4/(9)-W&M/2003, dated 13-3-2003. These bonds were to be purchased by individuals and HUF and the bonds were exempted from income tax and wealth tax issued at par. The RBI authorised the appellant bank to sell these bonds and pay a brokerage @ 0.50 paisa per Rs. 100/- in terms of Notification dated 13-3-2003 issued by the Government of India, Ministry of Finance and Company Affairs (Department of Economic Affairs). For the service rendered, the appellant bank received brokerage from the RBI and it was on this amount the Service Tax demand had been confirmed holding that the said services rendered by the appellant bank to the RBI came under the category of Banking and Financial Services. Aggrieved of the same, the appellant filed appeal.

Appellant’s contention:- The ld. Consultant for the appellant submitted that the issue was covered by the decision of this Tribunal in the case of Canara Bank v. CST, Bangalore reported in 2012 (28)S.T.R.369 (Tri.-Ahmd.)and Union Bank of India v. CCE & ST reported in 2013-TIOL-343-CESTAT-MUM. He also submitted that the C.B.E. & C. vide Circular No. 126/8/2010-S.T., dated 10-8-2010 had clarified that Government securities are sovereign securities having zero default risk. RBI only manages the issue and the primary dealers registered with the RBI deals in Government Securities as part of the Government market borrowing program. The said circular also clarifies that Service Tax liability does not arise on underwriting fee/underwriting commission received by primary dealers during the course of dealing in Government securities. The ld. Counsel further submitted that these decisions and circular fairly applied to the facts of the present case and therefore, demand confirmed in the impugned order was not sustainable in law.

Respondent’s contention:- The ld. Additional Commissioner (AR) appearing for the Revenue strongly refuted the arguments advanced by the ld. Consultant. They contended that the Circular issued in 2010 was in respect of Government securities whereas in the present case, the issue was of tax savings bonds and therefore, tax savings bonds cannot be construed as a security and hence, the ratio of the above decisions of this Tribunal and circular were not applicable to the facts of the present case.

Reasoning of judgment:- After considering submissions of both sides it was held that as per Notification dated 13-3-2003 issued by the Government, the tax savings bonds had been issued as part of the borrowing programme of the Government from the public. As per the clarification issued by the RBI vide letter dated 28-10-2004, copy of which was available on record, the said bonds issued under Section 2(2) of Public Debt Act, 1944, constitute a Government security and the bonds were issued by the Government for raising a public loan. Therefore, there was no doubt that the tax savings bonds issued by the RBI and sold by the appellant bank is a Government Security. For this transaction in Government securities, the appellant bank had received a brokerage for sale of the security. From the Circular dated 10-8-2010 issued by the C.B.E. & C., it is clear that there was no Service Tax liability on underwriting fee or underwriting commission received by the primary dealers for dealing in Government securities; the same logic would apply in respect of brokerage also. Further, this Tribunal in the case of Canara Bank and Union Bank of India cases (cited supra) had held that the sale of RBI bonds would amount to statutory/sovereign function and cannot be subject to any tax liability.
Following the ratio of these decisions and the clarification issued by the C.B.E. & C. as well as by the RBI, we hold that the impugned demands were not sustainable. Accordingly, the same was set aside. The appellant was also entitled to consequential relief, if any, in accordance with the law. Appeal was disposed of in the above terms.

Decision:- Appeal allowed.

Comment:- The essence of this case is that as the tax saving bonds issued by RBI constituted a government security therefore the brokerage received for trading in these securities was not taxable. As per the Government circular dated 10-8-2010 issued by the C.B.E. & C., it is ample clear that the underwriting fee or commission, received while trading of government securities by primary dealers is exempt therefore the same principal shall apply to brokerage also and it would not be taxable. Reliance was also placed in the cases of Canara Bank v. CST, Bangalore [2012 (28)S.T.R.369 (Tri.-Ahmd.)]and Union Bank of India v. CCE & ST [2013-TIOL-343-CESTAT-MUM].

Prepared by:- Prayushi Jain

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PJ/CASE LAW/2015-16/2653

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