By TIOL News Service

MUMBAI, JUNE 22, 2015: THE facts are that the appellant, borrowed, by way of 'syndicated loans', for their international acquisition and capital expansion, from various overseas banks. In order to find lenders / lender syndicate, the appellant appointed various banks/institutions abroad as Mandated Lead Arrangers (MLAs). The MLAs were paid "arrangement fees" which is essentially a fee paid for arranging lenders/lender syndicate for the appellant borrower.

A SCN was issued demanding ST on reverse charge basis under the head 'Banking and Financial Services'.

In his Order the adjudicating authority mentioned that because, out of the total amount demanded, Rs.9,73,86,016/- was paid during investigation within due dates or with a short delay of six days and 29 days and for the delay, the appellants paid the interest, no further action including penalties was necessary in respect of this amount of tax already paid. Therefore, in the Order only the balance demand of Rs.8.05 crores is discussed. This amount of Service Tax of Rs.8.05 crores arises from payments made by appellant on two accounts namely, Arrangement fees (including road show expenses) and Agency fees paid to Mandated Lead Arrangers (MLA) and Agent Banks respectively. Apart from upholding the extended period of demand & confirming the demand, the adjudicating authority also imposed penalties u/s 76 & 78 of FA, 1994. The Commissioner also held that the demand for the period prior to 18.04.2006 is also sustainable in view of CBEC Circular No. 275/7/2010 CX-8A dated 30.06.2010 and Notification No. 36/04-ST dated 31.12.2004 issued under Section 68 (2) read with Rule 2(10(d)(iv) of the Service Tax Rules.

After hearing the elaborate submissions made by both sides, the Member (Technical) held -

Merits:

+ From the Commitment letter and Facility Agreement, it is clear that there are two services involved - one is the service provided by the MLAs, who charged the Arrangement fee and the second was the actual lending services provided by the institutions who actually lend the money. It is clear that the role of the Arranger is only to arrange for financial institutions or a group of institutions, who can provide finance to the appellant. The Arrangement fee is truly a fee paid to the Arranger in his capacity as Arranger notwithstanding the fact that the Arranger may ultimately also become the lender.

+ We find that the service under Section 65(105)(zm) is a service provided to any person in relation to "Banking and other Financial services". In the present case, it is clear that the service rendered by the MLAs to the appellant is of arranging loan from the financial institutions for the appellant.

+ The service in question i.e. "Banking or other Financial Services" falls under Section 65(105)(zm) which is covered by Rule 3(iii) [Taxation of Services (Provided from Outside India and received in India) Rules, 2006] above. Therefore clearly, the service of Banking is considered to be received in India when the recipient is located in India which is an unquestioned fact in the present case.

+ It is contended that since the money has been lent abroad and the MLAs are abroad, therefore, the Service Tax is not payable. On a close reading of the above provisions of law, it becomes clear that what is important is whether the recipient of service is located in India. We have no hesitation in stating that the service recipient is located in India. The Commitment letter and the Facility Agreement are addressed to M/s Tata Steel Ltd., whose business office is in India and they have signed the Facility Agreement as Tata Steel India. One should not be confused by the activity of actual lending of finance. The MLAs have clearly provided the services to the appellant M/s Tata Steel in India and informed them of the terms and conditions of their Commitment including the fees/expenses that will be charged by them. Therefore, this activity of MLAs is clearly a taxable service provided from outside India and received in India. It is significant to note that the MLAs fees are paid by the appellant from India and the interest on the finance given by lenders is also paid from India. We hold that the service provided by the MLAs to the appellant is a service provided from outside India and received in India.

+ It is now a settled matter that Service Tax on import of service on reverse charge mechanism (on receiver) is not leviable prior to this date. Both sides agreed that only demand for the period on or post 18.4.2006 sustains.

+ Relatively smaller issue remains, that of Agency fees paid by the appellant to the agents abroad, who are appointed for administering the loan and their functions are laid down in the Agreement. The findings above in respect of Arrangement fees would hold in respect of Agent fees. Therefore, service tax is held to be payable on Arrangement fees and Agent fees for the period on or after 18.4.2006.

Limitation:

+ It is true that the department, on the basis of some information, started investigating the case and entered into correspondence with the appellant. This does not mean that the extended period of time cannot be invoked. It is quite natural that the department will take some time to assess the case after examining all documents and recording the statements of the appellant's officials. The fact remains that the appellant never disclosed the activity of receiving services from MLAs abroad.

+ The acquisition of knowledge by the Department during the process of investigations does not obliterate the suppression of fact on the part of the appellant as held by the Hon'ble Gujarat High Court in the case of CCE, Surant-I Vs. Neminath Fabrics Pvt. Ltd. - 2011-TIOL-10-HC-AHM-CX. Therefore, we hold that the extended period of 5 years is applicable in the present case for demanding duty under Section 73 of the Finance Act, 1994.

Penalties:

+ The claim for bona fide belief is not acceptable,therefore, the benefit of Section 80 of the Finance Act, 1994 has no application to the facts of the present case. Accordingly, we hold that penalties under Sections 76 and 78 ordered by the Commissioner as well as interest under Section 75 of the Act are sustainable.

The Member (Judicial) did not fully agree with the order of Member (Technical) and hence penned a separate order as below -

Merits:

+ So far the question of taxability of 'Arrangement fee' is concerned, I find that the same is paid vide the agreement between the Tata Steel Ltd. (borrower) and the Loan Arranger Bank. The remuneration for the arrangement was paid by the borrower-assessee to the Arranger Bank. I further hold that the word 'lending' appearing in clause (ix) of Section 65(12) will not include borrowing. As borrowing is not included under the Section 65(12), I hold that no Service Tax is exigible on the 'arrangement fee' paid by the appellant company to the Arranger Banks. The role of the Arranger was to procure the lenders for the appellant (borrower) and this role of the arranger concluded upon signing of the agreement. This finding also corroborates the facts that all the Lender Banks are not Arrangers, which is an admitted fact on record.

+ That it is by way of facilitation in which the Agent Bank interacts with all other lending Bank and on behalf of the lending Bank together, correspond and/or interacts with the appellant borrower. For this, the Agent Bank is entitled to some remuneration which is paid by the appellant borrower company, but in fact no service is received by the appellant borrower.

+ I further find that the agent is appointed by the lenders (Banks) and the appellant borrower has no role in selecting the Agent Bank. I further find that there is no such ostensible service, which can be demanded by the appellant herein from the Agent Bank. Accordingly, I hold that no Service Tax is payable on the Agent Bank fees paid by the appellant-borrower to the nominated Agent Bank of the lenders. As I have decided the issue of taxability in favour of the appellant company and against the Revenue, I refrain from entering the question whether the service is received in India. Thus, the appeal is allowed and the impugned order is set aside.

Limitation:

+ It is an admitted fact that the whole transaction have been admittedly recorded in the Books of Account maintained in the normal course of business. It is also matter of record that the transaction relates to the period 31.3.2006 to 5.1.2007. Revenue sought details of the overseas payment made towards external borrowing commission for the period of three years i.e. from 10.9.2004 to 13.6.2006 vide its letter dated 12.7.2007. This letter was replied giving the details of overseas payment in respect of external commercial borrowing including arrangement and agency fees in question. The Revenue has taken a period of little more than 19 months in making up of its mind as to the taxability of the two payments made by the appellant herein, in the subject matter of the appeal. I find that there is no suppression of facts and/or contumacious conduct on part of the appellant company. Accordingly, I hold that the extended period of limitation is not invocable by the Revenue. Thus, the appeal succeeds on this ground also.

In view of the difference in opinion, the matter is placed before the President for reference to the third Member.

(See 2015-TIOL-1202-CESTAT-MUM)