By TIOL News Service

MUMBAI, MAY 20, 2013: J.M. Financial Services P. Ltd. is the appellant. Against them, the Commissioner of Service Tax, Mumbai has confirmed a Service Tax demand of more than rupees Five crores and the accompanying penalties and interest. Inasmuch as it is held that the services rendered by the applicant are leviable to Service Tax under the category of "Business Auxiliary Services" and "Business Support Services".

The alleged activities undertaken by them are -

"3.1 IPO Financing Fees - The demand has been confirmed against the applicants for IPO finance under the head "Business Auxiliary Services" … This demand has been confirmed on the activity undertaken by the applicants where they are financing to their clients through Non Banking Finance Company (NBFC, in short) which are sister concerns of the applicants and share the income of interest earned by these NBFC on revenue sharing basis. There was a MOU between the applicants and the NBFC in terms of which NBFC were to arrange finance for the applicant's clients. As per the above said MOU, the applicants and the NBFC company were to share the income earned from this activity after deducting the expenses. The department is of the view that the said activity is covered under the "Business Auxiliary Services" as the applicants are promoting the business of these NBFC's by way of performing the activity of introducing its corporate clients to their NBFC's.

3.2 Processing fee - This activity is that where the applicants are collecting money on behalf of the company (who issues IPOs). The money collected by the applicants is to be deposited in a designated bank assigned by the IPO issuing company. The applicants deposited the money in the designated bank and as the bank earns the interest on the deposit made by the applicants, therefore, the Banks shares interest earned by them with the applicants. The Revenue is of the view that it is an activity of promotion of the business of the Banks, therefore, they are liable to pay service tax under the category of "Business Auxiliary Services".

3.3 Recovery of Common expenses - These expenses recovered by the applicants from the co-user of the premises on actual basis. As the applicants are doing these expenses on behalf of the co-user and recovering the same from the co-user as per their usage. The department is of the view that the recovery of the expenses are covered under the category of infrastructural support service as the applicants are providing infrastructure support service to the co-user.

The Bench, while deciding the Stay application, had taken a prima facie view that no Service Tax is payable, either under BAS or BSS and had granted a complete waiver of pre-deposit and stayed the recovery of the adjudged dues. See (2012-TIOL-325-CESTAT-MUM).

The following was the prima facie view taken in respect of the three activities undertaken -

IPO Financing Fees: We find that as per the MOU, the applicants have agreed to compensate these NBFC's, if any demand arises. In that situation the applicants have not acted as a commission agent, therefore, they are doing business with these NBFC's on principal to principal basis and sharing their profits. Therefore, we are of the view that the applicants are not rendering any service under the category of "Business Auxiliary Services". Accordingly, they have made a strong prima facie case for waiver of pre-deposit of demands adjudged by the impugned order for this activity.

Processing fee: Prima facie, we find that the activity undertaken by the applicants for the investments in the bank assigned by the IPO issuing company. The amount of interest income which the bank shares with the applicant is not because applicant is promoting or marketing of any of the services provided by the bank. Therefore, the applicants are not liable to pay service tax in this category also and made out a case for 100% waiver of pre-deposit.

Recovery of Common expenses: On going through the records, we find that these activities is also not covered under the "Business Support Services" as the applicants are paying the expenses incurred by them on all the premises and thereafter recovered from the co-user on actual usage basis. Prima facie, we are of the view that the applicants are not rendering any service at all, therefore, the applicants have made out a case of 100% as waiver."

The matter was heard finally and the Bench has taken the following view in respect of the three categories of the demand raised -

IPO financing Fees:

6.3 Having considered the rival contentions, we are of the view that no service has been rendered by the appellant to the finance company and the activity has been done on the principal-to-principal basis. Accordingly, no Service Tax is leviable on the amount received by the appellant by way of share of income from NBFC in the activity of financing.

Processing Fee:

5.2 The contention of the appellant is that the receipt from the bank is not linked to any services nor it is linked to the interest earned by the bank. Thus, there is no element of promotion of business or marketing of business for the bank. The investor whose money is deposited is not even aware so as to with which bank his share application money is deposited. Further, the situation is revenue neutral as the credit of Service Tax, if any, discharged by the appellant would be available to the concerned bank and accordingly there is no intention for the appellant to evade Service Tax on this account.

5.3 Having considered the rival submissions, we find that there is no element of promoting or marketing of any services of the bank nor any service has been provided to the bank by the appellant on behalf of any client. This being the position, the tax liability on the incentive or processing fees received from the Bank is held to be not table to Service Tax under the heading ‘Business Auxiliary Services'.

Recovery of common expenses:

7.2 Having considered the rival submissions and contentions, we are of the view that in respect of reimbursement of common expenses in the nature of electricity and other expenses incurred commonly by the appellant, no service can be stated to have been rendered and accordingly, the same not liable to Service Tax.

The final order -

"9. To sum up,

(i) we set aside the levy of Service Tax on the share income as the result of IOP financing received from the NBFC company.

(ii) We set aside the leviability of Service Tax in respect of Processing Fee received from the Bank,

(iii) We set aside the levy of Service Tax on the reimbursement of common expenses such as electricity charges, common office expenses etc., and

(iv) We set aside the penalties imposed on the appellant."

In the result, the appeal was allowed.

Ears of experience!

(See 2013-TIOL-757-CESTAT-MUM )