whether the private placement of shares taxable under category of ‘management consultancy of service’ or of ‘merchant banking’

PJ/CASE LAW/2015-16/2601

Case:-TRIUMPH INTERNATIONAL FINANCE INDIA LTD. Versus C.S.T., MUMBAI-I

Citation :-2014 (35) S.T.R. 338 (Tri. – Mumbai)

Brief facts:-The appellant M/s. Triumph International Finance India Ltd., Colaba, Mumbai, is registered with Securities and Exchange Board of India Ltd. under the Merchant Bankers Regulations, 1992 as a merchant banker. They had rendered merchant banking services to M/s. Himachal Futuristic Communications Ltd. for the private placement of equity shares against which 25 lakhs shares were allotted. For this service, they received consideration from M/s. Himachal Futuristic Communications Ltd. (HFCL). The department was of the view that the activity undertaken by the appellant is management consultancy service and therefore a notice was issued demanding Service Tax of Rs. 13,12,500/- along with interest thereon and also proposing to impose penalties under the provisions of Finance Act, 1994. Notice was adjudicated and order dated 3-2-2009 was passed classifying the service undertaken by the appellant under ‘Management Consultancy Service’ and confirming the Service Tax demand of Rs. 13,12,500/- along with interest thereon. Penalties were imposed on the appellant under Sections 75A, 76, 77 and 78 of the Finance Act, 1994.

Appellant’s contention:-The learned consultant for the appellant submitted that the period of dispute involved in this case is January, 2000. As per the definition of ‘Management Consultancy Service’ under Clause (65) of Section 65 of the Finance Act, 1994 means:
“Management consultant means any person who is engaged in providing any service, either directly or indirectly, in connection with the management of any organisation in any manner and includes any person who renders any advice, consultancy or technical assistance, in relating to conceptualizing, devising, development, modification, rectification or upgradation of any working system of any organisation.”
By rendering the service of private placement of equity shares, they had not undertaken any of the activities which come within the scope of ‘management consultant’ as defined in the Finance Act, 1994. On the other hand, the services undertaken by them came within the ‘Merchant Banking and other Financial Services’ under Clause (12) of Section 65 of the Finance Act. Initially, the levy was restricted on banking companies and NBFCs. However, w.e.f. 16-8-2002 the scope of the levy was extended to cover other ‘body corporates’ also. Therefore, the service rendered by them as a merchant banker came under the tax net only w.e.f. 16-8-2002 and prior to that date, there was no liability to pay any Service Tax on the said activity. Therefore, the impugned demand was not sustainable in law. The learned consultant also drew their attention to Ministry’s letter F. No. BII/I/2000-TRU, dated 9-7-2001 wherein in Para 2.3, the Ministry had clarified as follows :
“Merchant banking services
2.3 Banks and Financial institutions including NBFCs providing merchant banking services are governed by the SEBI (Merchant Banker) Rules, 1992 and SEBI (Merchant Bankers) Regulations, 1992. As per these rules and regulations, merchant banking service is any service provided in relation to issue management either by making arrangements regarding selling, buying or subscribing securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management. This, inter alia, consists of preparation of prospectus and other information relating to the issue, determining financial structure, tie up of financiers and final allotment and refund of the subscription for debt/equity issue management and acting as advisor, consultant, co-manager, underwriter and portfolio manager. In addition, merchant banking services also include advisory services on corporate restructuring, debt or equity restructuring, loan restructuring, etc. The fee charged by the merchant banker for rendering these services will be the taxable value in respect of this service.”
From the above clarification given by the Ministry, it could be seen that the activity undertaken by them would come under the category of ‘Merchant Banking’.

Respondent’s contention:-The learned Dy. Commissioner (AR) appearing for the Revenue strongly refuted the contentions of the learned consultant and submitted that the impugned order was based on Board’s Circular No. 1/1/2001-S.T., dated 27-6-2001 wherein in para 7 thereof the Board clarified as follows :
“7. In this regard, the Board had consulted the Indian Institute of Management Ahmedabad for obtaining an expert opinion on the subject matter. They have opined that the term “Management” is generally understood to mean running the affair of an organisation in an organised and systematic manner. To be able to do this efficiently and effectively, management typically involves carrying out a host of activities, functions and tasks and at different levels. Thus management encompasses both strategic and operational level functioning and would include tasks such as planning, organising, staffing, directing, controlling and coordinating. Management also invariably involves designing organisational structure around functions such as marketing, manufacturing, research and development and finance and/or business area such as product groups or geographical markets. Thus management of any organization involves carrying out a wide variety of clearly defined activities across a number of organisational sub-units in a coherent and coordinated manner. Since the expression “Management” is an inclusive term, ‘management consultant’ would also be equally encompassing expression and would include any adviser who renders services on any aspect of management. They have further opined that financial advisory services rendered in merger and acquisition transactions are clearly in the nature of services in connection with the management of an organisation as merger and acquisition themselves are important dimension of modern management.”
Therefore, he submitted that the activity undertaken by the appellant would merit classification under ‘Management Consultancy services’.
The learned consultant, in his rejoinder submitted that this clarification had been issued by the Board in June, 2001 and from the beginning of the paragraph it was evident that there were a number of doubts regarding scope of the services of management consultancy and therefore, even if it was held that the activity undertaken by them would come under ‘management consultancy services’, the demand would be hit by time bar as no mala fide can be alleged against the appellant.

Reasoning of judgment:-After carefully considering the rival submissions they held that the issue lied in a narrow compass. They were of the view that the appeal itself could be finally disposed of. With the consent of both the sides, after dispensing with the pre-deposit of the dues adjudged against the appellant, they took up the appeal itself for consideration and disposal.
From the records of the case, it was seen that the activity undertaken by the appellant was private placement of shares of the client M/s. HFCL; for the said activity they had received a consideration @ 1% of the value of the shares so placed. From the circular dated 9-7-2001 of the Board, the scope of the term ‘merchant banking services’ had been explained in detail. From the said circular it could be seen that merchant banking services was any service provided in relation to issue management, either by making arrangement regarding selling, buying or subscribing securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management. The activity undertaken by the appellant squarely fell within this definition. The appellant was also registered as a merchant banker under the SEBI regulations. Therefore, the confirmation of demand under the category of ‘Management Consultancy Service’ was not sustainable under law. Since the transaction was undertaken in January, 2000 and the merchant banking activities rendered by ‘body corporate’ came under the tax net w.e.f. August, 2002, prior to that period no service tax would be leviable on merchant banking activity rendered by a ‘body corporate’.
In view of the above, the impugned order was not sustainable in law. Accordingly, the appeal was allowed and the stay application also disposed of.

Decision :- Appealallowed

Comment:- The gist of this case is that the service category merchant banking service is service provided in relation to issue management, either by making arrangement regarding selling, buying or subscribing securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management. The activity undertaken by the appellant fell within this definition instead of category of ‘Management Consultancy Service’ Since the transaction was undertaken in January, 2000 and the merchant banking activities rendered by ‘body corporate’ came under the tax net w.e.f. August, 2002, no tax was chargeable on the said transaction.

Prepared by:- Prayushi jain

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PJ/CASE LAW/2015-16/2601

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