By TIOL News Service

MUMBAI, JAN 06, 2014: THE appellant under took sale of 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 13/03/2003.

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 paid a brokerage @ 0.50 paisa per Rs.100/- in terms of Notification dated 13/03/2003 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 is on this amount the Service Tax demand of Rs.1.53 crores has been confirmed with penalties and interest by CCE, Belapur holding that the said services rendered comes under the category of Banking and Financial Services.

Before the CESTAT, the appellant submitted that the issue is covered by the decision of the Tribunal in the case of Canara Bank Vs. CST, Bangalore - (2012-TIOL-790-CESTAT-AHM) and Union of Bank of India Vs. CCE & ST, - (2013-TIOL-343-CESTAT-MUM). It is also submitted that the CBE&C vide Circular No. 126/08/2010-ST dated 10/08/2010 had clarified 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 Revenue representative strongly refuted the arguments and submitted that the Circular referred is in respect of Government securities whereas in the present case the issue is of tax savings bonds and, therefore, tax savings bonds cannot be construed as a security and hence, the ratio of the cited decisions and the circular are not applicable to the facts of the present case.

The Bench observed -

"4.1 As per notification dated 13/03/2003 issued by the Government, the tax savings bonds have 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 is 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 is 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 has received a brokerage for sale of the security. From the Circular dated 10/08/2010 issued by the CBE&C, it is clear that there is 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) has held that the sale of RBI bonds would amount to statutory/sovereign function and cannot be subjected to any tax liability."

In fine, the CESTAT held that the demand is unsustainable and accordingly after setting aside the same, the appeal was allowed.

(See 2014-TIOL-27-CESTAT-MUM)