By TIOL News Service

MUMBAI, NOV 20, 2015: 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 & 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(1)(d)(iv) of the Service Tax Rules.

Holding that balance of convenience lay in favour of Revenue and the appellant had not made out a prima facie case for waiver, the Tribunal had directed the appellant to make a pre-deposit of Rs.1 crore and report compliance. See 2012-TIOL-1651-CESTAT-MUM.

The appeal was heard on 17.12.2014. After hearing the appeal, both the Division Bench Members differed in their views and, so, the matter came to be referred to the third Member.

The following was the difference of opinion referred –

i) Whether in the facts and circumstances of the case, the Arrangement fee and Agent's Bank fee are taxable in the hands of the appellant company in view of the findings recorded by the learned Member (Technical)

Or

Whether the same was not taxable in view of the findings recorded by Member (Judicial).

(ii) Whether in the facts and circumstances of the case, the extended period of limitation is invocable and penalties under Section 76 & 78 are payable as held by the learned Member (Technical)

Or

Whether the extended period of limitation is not invocable in the facts and circumstances of the case as held by the learned Member (Judicial).

We reported this order dated 05.06.2015 as  2015-TIOL-1202-CESTAT-MUM.

Incidentally, the appellant had filed a modification application seeking rectification of mistake in the aforesaid Order dated 05/06/2015 and consequently, supplementary questions were framed and referred to the third Member.

These were –

(i) In the facts and circumstances, whether the services have been received by the appellant-assessee beyond the Indian Territory and hence, not liable to Service Tax as held by Member (Judicial)

OR

Whether the services have been received within Indian Territory and hence liable to Service Tax as held by Member (Technical)

(ii) Whether in the facts and circumstances and in law, the benefit of section 80 is available to the appellant-assessee and no penalties are imposable as held by Member (Judicial)

OR

Such benefit is not available and penalties are imposable under Section 76 and 78 of the Finance Act, 1994 as held by Member (Technical).

This order dated 10.09.2015 was reported as 2015-TIOL-2036-CESTAT-MUM.

The Third Member (Technical) has passed an order recently.

These are his observations -

++ It is seen that out of the service tax demand of Rs.8,05,24,006/- confirmed by the Commissioner, a sum of Rs.2,82,88,914/- relates to the period prior to 18/04/2006 when Section 66A was inserted in Chapter V of the Finance Act, 1994 by the Finance Act, 2006 providing for levy of service tax on services received from outside India. It has, therefore, been held that the demand of service tax of Rs.2,82,88,914/- is not sustainable. On this point, both the Members are in agreement. Hence no further discussion is necessary.

++ Undisputedly the recipient of services is the appellant located in India. The expression "received by a recipient located in India" in Rule 3(iii) of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 matches the expression "received by a person who has his place of business, fixed establishment, permanent address or usual place of residence, in India" in clause (b) of Section 66A of the Finance Act, 1994. Harmonious reading of the provisions of clause (b) of Section 66A of the Finance Act, 1994 and the provisions of Rule 3(iii) of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 makes it clear that the recipient located in India is liable to pay tax on the taxable services received for use in relation to business or commerce. In this case, money was received by the appellant. The fact that this money was used abroad to acquire certain assets will not make any difference. Location of assets, procured as a result of receiving the money which in turn was consequent to the receipt of the said service, is immaterial.

++ There is no dispute that the appellant is located in India. There is also no dispute that the services of the Mandated Lead Arrangers (MLAs) and the agent bank were received and consumed by the appellant. There is also no dispute that the appellant has remitted fees to the MLAs and the Agent Bank for their services. It is, however, contended that the services provided by them were in relation to 'borrowing' and not in relation to 'lending', therefore, their services are not covered by the definition of 'Banking & other financial services' which includes 'lending' only. It is a common knowledge that lending and borrowing go together. There cannot be a lender without a borrower. The appellant has borrowed loans from the non-resident banks and these loans were arranged by the MLAs. Clearly therefore, the services provided by the MLAs were in relation to loans (i.e. lending of money) given by the non-resident banks to the appellant.

++ In the present case, the so called MLAs are none other than the banking and financial institutions and 10 of them put together has extended 90% of the loan and the remaining six banks have extended only remaining 10% of the loan. Thus, keeping in view the trade practices as also the holistic view of the operations, in my view, no distinction can be made for the services in connection with the loan vis-à-vis borrowing.

++ The appellant paid fees to the Agent bank in terms of the Facility Agreement dated 10/10/2006. It is inconceivable that the appellant would pay fees to the Agent bank without any service to it. The Agent bank acted mainly as a coordinator between the appellant and the lender banks for various follow-up action in connection with the loans and repayments thereof.

++ It cannot be said that the services has been consumed abroad because money raised from the banking and financial institutions was used in procuring the assets abroad. I am, therefore, of the considered view that the services have been consumed in India only and has not been consumed abroad.

Limitation:

++ During the relevant period the appellant had not taken registration under the Banking and Financial Services and hence they did not file the ST-3 returns. In the absence of registration and non-filing of the return, the material fact about the receipt of the above mentioned services was completely suppressed from the department. In view of the above factual matrix it is not possible to accept the contention that the appellant had a bonafide doubt.

++ Even if they had a bona fide doubt, they should have provided the precise information in July 2007 itself so that the show cause notice could have been issued within the normal period of limitation. Under the circumstances, the relevant information was suppressed from the department and extended period of limitation has been correctly invoked.

Penalties: The penalties under Sections 76 & 78 were imposable simultaneously on the appellant during the material period (i.e. prior to the amendment of Section 78 with effect from 16/05/2008). No reasonable cause for waiver of penalties under Section 80 of the Act has been made out by the appellant.

Inasmuch as the third Member on reference concurred with the views of the Member (Technical) on all the points referred.

And so, the Majority decision is -

(i) Arrangements fees and Agency fees paid to the foreign banks are taxable under Banking and Financial Services in the hands of the appellant-company in India.

(ii) The services provided by the MLAs and the Agent bank have been received in India in terms of Section 66A(b) read with Rule 3(iii) of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006.

(iii) Demand of Rs.5,22,35,092/- for the period 18.4.2006 onwards is upheld. Appropriate interest as applicable under Section 75 of the Finance Act, 1994 is payable. The extended period of limitation is invocable in the facts and circumstances of this case.

(iv) Penalties are imposable on the appellant under Section 76 and equivalent penalty of Rs. 5,22,35,092/- under Section 78 of the Act. There is no reasonable cause for waiver of penalty under Section 80 of the said Act.

(See 2015-TIOL-2464-CESTAT-MUM)