NEW DELHI, APRIL 10, 2013: THE appellant are manufacturers of chemicals and pharmaceuticals products chargeable to central excise duty. During 2004-2005, 2005-2006 and 2006-2007, they issued Foreign Currency Convertible Bond (FCCB) to the extent of USD 35 Million, USD 75 Million and USD 200 Million through ABN AMRO Rothschild (hereinafter referred to as ABN) and JP Morgan Securities Ltd., USA (hereinafter referred to as JP Morgan), who had acted as the lead manager to the issue and to whom payments of Rs.5,23,62,658/-, Rs.7,93,42,445/- and Rs.12,34,37,000/- respectively had been made during those years.

The department was of the view that the services of lead managers to the issue and underwritings and other banking & financial services had been received by the Appellant from offshore services provider - ABN and JP Morgan and, therefore, the appellants being service recipients are liable to pay service tax in respect of the same.

A demand notice was issued to the appellant demanding service tax for the aforementioned period and the CCE, Noida vide order-in-original dated 29.11.2010 adjudicated the case thus -

(a) while service tax demand amounting to Rs.1,62,78,751 /- pertaining to the period prior to 18.04.2006 was dropped, the service tax demand of Rs.1,52,56,813/- pertaining to the period w.e.f 18.04.2006 was confirmed along with interest and

(b) penalty of equal amount i.e. Rs.1,52,56,813/- was imposed on the appellant under Section 78 of the Finance Act, 194. No penalty was imposed under Section 76 and 77 ibid.

Before the CESTAT while seeking a Stay in the matter, the appellant had submitted –

+ the appellant's agreement with the offshore service provider was for underwriting the entire issue and acting as Lead Manager to coordinate activities of other service providers; that in terms of the Board Circular No.96/7/2007-ST dated 23.08.2007 when the underwriting service were provided by the Lead Managers they would be taxable as underwriting services; that the appellants have already paid service tax amounting to Rs.22,91,734/- along with interest amounting to Rs.4,62,805/- on the charges for underwritings, that no service tax is payable on the remaining amount, that the appellant have strong prima facie case and hence the requirement of pre-deposit of adjudged dues may be waived and recovery stayed.

The Revenue representative justified the order of the lower authority and the Bench after considering the submissions observed that the services received by the appellant from J.P. Morgan and ABN were of ‘underwriting the issue as well as managing the issue'. Inasmuch as the services provided by the underwriters is taxable under ‘Underwriter's Services', the services of managing the issue is prima facie covered by the definition of Banking and other Financial Services (Merchant Banking Services) and, therefore, it was not a case of total waiver and the appellant was directed to make a pre-deposit of Rs.50 lakhs in addition to the amount already agreed and paid by them in respect of ‘underwriting services'.

We reported this case as 2012-TIOL-199-CESTAT-DEL.

The matter was heard finally when the departmental appeal against the dropped portion of the Order-in-Original was also taken up.

As for the Department appeal, the Bench noted that it had to be dismissed straight away in view of the decision in Indian National Ship-owners Association Vs. UOI - (2008-TIOL-633-HC-MUM-ST) where it is held that no liability would arise in such situation for period prior to 18.4.2006 and which decision has been affirmed by the Apex Court and the CBEC had also has issued instructions accepting the decisions.

Observing that the dispute about taxability of services relating to the Foreign Currency Convertible Bond (FCCB) which happened prior to 18/04/2006 needs no further examination, the Bench m oved to the core issue involved and which pertained to the following –

+ In the third series of FCCB issued, M/s J.P. Morgan Securities Ltd. ("JPMS"), U.K. was acting as the Lead Manager. They were also the underwriters to guarantee full subscription for the issue.

+ Initially the appellant did not pay any service tax on payments made to JPMS in this matter. When this matter was noticed during the audit conducted by the officers of Revenue there was discussion between the officials of JLSL and the audit team and both came to the conclusion that service tax is payable only on charges paid for services rendered by JPMS as a Lead Manager and not in respect of services rendered by JPMS as an Underwriter . Based on such understanding JLSL paid an amount of Rs.22,91,734/- towards service tax and an amount of Rs.4,62,805/- as interest on 24.12.2007 and included such payments in the six monthly return for the period ending 31.3.2008.

+ Later, investigations were conducted by Director General of Anti-Evasion, New Delhi who were of the view that service tax should have been paid on the entire amounts paid to the JPMS and since appellant had not paid such tax, a Show Cause Notice was issued demanding service tax for a full amount paid to JPMS taking a stand that extended period to time is invokable for making such demand because there was suppression of information on the part of appellant in providing information to the department.

The Bench further observed –

+ The difference in liability arises because as per the provisions of Taxation of Service (Provided from Outside India and Received in India) Rules, 2006 which is relevant for demanding service tax under Section 66A of Finance Act, 1994, the service of "Banking and Financial Services" is classified in one category and "Underwriting Service" is classified under another category and different criteria are laid down under the two categories.

+ In the case of "Banking and Financial Services", service tax becomes payable based on the location of the recipient of the service that is JLSL which is in India. In the case of Underwriting, Service tax becomes payable only if the service is performed in India. In this case the issue of FCCB and underwriting of the issue was an activity undertaken outside India. Thus the crucial issue to be decided in this case is the classification of the service.

After extracting the contents of the contract entered into by the appellant with M/s J.P. Morgan Securities Ltd., the Bench observed that in the very lengthy order issued by the adjudicating authority the finding on the issue was given in para 5.3.10 of the adjudication order and which is the only paragraph which is relevant for deciding the classification and taxability of the services under dispute .

This para is re-produced below:

"5.3.10 A study of the agreement in question indicates that the service provider J.P. Morgan were appointed to perform a whole gamut of functions/activities normally performed by Merchant Bankers. In my view, merely carrying out the activity of underwriting, within the act of providing the service of a merchant banker, will not qualify as rendering only "underwriter's service" as contended by the party as the entire gamut of service rendered is to be considered in a comprehensive manner while classifying such service. Underwriting is just one of the jobs of a merchant banker and therefore any person who provides services as a merchant banker/lead manager has to provide underwriting service as well while the reverse may not hold true for an underwriter. Accordingly, I hold that the services in respect of the FCCB-III were also similar as those in respect of other two FCCBs and were in the nature of 'Merchant banking'. "

The appellant contested the above findings that Underwriting is a part of the job of a lead manager by submitting thus –

+ The Lead Manager's job involves only complying with the legal requirements for issue of the bonds giving publicity for the issue, soliciting clients, receiving and accounting money received from subscribers, listing of the bonds in stock exchanges etc. On the other hand underwriting involves giving guarantee that the issue will be fully subscribed and in the event of the issue not being subscribed fully by the public, the underwriter has to himself subscribe to the issue taking the entire risk on himself and for this guarantee, a higher commission has to be paid.

+ Service of Underwriting was made taxable from 16.10.98 itself whereas the services of Lead Manager Service covered by the entry for banking and financial services were taxed only from 19.5.2006.

+ CBEC had issued a circular during the period when Underwriting was taxable and Lead Manger Service was not taxable by stating that Underwriting Services, if provided by Lead Manager is liable to be taxed under Section 65(105)(z).

+ that the services done by JPMS under these two headings were specified in separate clauses of the agreement and charges for the two services were separately specified and there is no reason to bundle both the services together and classify it as Banking and Financial Services.

+ the Show Cause Notice and the Order-in-Original had distorted the definition of "merchant banker" as per Section 2(cb) of SEBI (Merchant Bankers) Regulations, 1992 while deciding the matter.

+ Inasmuch as where as the correct definition of merchant banker is as below,

"Merchant banker" means any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management."

In the SCN and the o-in-o, it is shown thus –

"Merchant banker" means any person who is engaged in the business of 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".

+ that by omitting the words existing in the actual definition, a different meaning has been given that merchant banker subscribes to bonds themselves in the ordinary course of rendering such services; the distorted definition also gives the impression that subscribing to securities as a manager also is the business of a merchant banker; that a merchant banker only makes arrangements for an issue and gives advisory services in relation to issue but does not subscribe to the issue in the ordinary course of business as a merchant banker.

The Revenue representative submitted that the entire service under the contract has to be considered as one bundle of service and the nature of that bundle of services has to be decided with reference to the dominant character of the services rendered and if this criteria is adopted the services are correctly classifiable under banking and financial services which is covered by Section 65(105)(zm). It is further submitted that once the service is held to be classifiable under Section 65(105)(zm) the service will fall under category 3 of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 and hence it would become taxable.

The Bench held -

“13. We have considered arguments on both the sides. We are not in agreement with the argument of Revenue that the service of Underwriting has to be necessarily provided by merchant bankers. We also do not agree with the argument that providing Underwriting Service is incidental to the services rendered as a Lead Manager to the issue. This is basically because the latter involves basically organizing an event viz. issue of the FCCBs and the former involves financial risk to the underwriters and the two matters are totally different in nature. We are also not in agreement with the argument that the contract has to be considered as a whole and classified considering it as a single service and subjected it to tax. This is because the services are distinct in nature and the contract lays down the services as distinct services with separate remuneration fixed for the two services. Further if at all it is to be considered as one single bundle we do not agree with the contention of Revenue that the dominant nature of the service is that of Lead Manager's services, since JPMS is earning a higher commission by underwriting the issue taking the risk involved. Further from the facts of the case as stated by JLSL, that the issue was wholly subscribed by JPMS, the Lead Manager service was a minimal part of the contract in this particular case. Further "Underwriting Service" is specified in a sub-clause of section 65 (105) which occurs earlier than the sub-clause in which Lead Manager's Service occurs. So going by the criterion laid down in Section 65A (c) of Finance Act, 1994, the service will get classified under "Underwriting Services". Therefore we hold the view that the "Underwriting Service" rendered by JPMS to JLSL is distinct from the Lead Manager service provided. Since the underwriter service is to be subjected to tax under Section 66A of Finance Act 1994 taking into consideration the place of performance as per Rule 3 of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006. In this case Underwriting was done outside India. So we do not see any reason to tax the impugned service.”

On the issue of time bar, the Bench held -

“14. JLSL also has a very strong case on the issue of time bar because they had placed the entire matter before his jurisdictional officers who audited their record and they had initially opined that the tax is payable only on services relating to Lead Manager Service and the same was paid and such payment was reported in the relevant ST-3 returns.”

In fine, the order was set aside, the appeal filed by assessee-appellant was allowed and the appeal filed by Revenue was rejected.

Jubilant but…hope the amounts paid are returned…

(See 2013-TIOL-580-CESTAT-DEL)