By TIOL News Service

MUMBAI, APR 11, 2016: AGAINST a service tax demand of Rs.76,02,092/- (after extending cum-tax benefit & holding that a portion of demand is hit by limitation) confirmed along with interest thereon, as provider of 'Banking and other financial services' for the period from August 2002 to March 2006, the appellant is before the CESTAT.

Revenue is aggrieved with this order for the benefits extended by the adjudicating authority and so they too are in appeal.

The issue is -

+ M/s JM Financial Services Pvt Ltd., a broker, had filed some applications on behalf of intending purchasers of bonds, designated as 6.5% Savings Bond, issued by the Reserve Bank of India and are stated to have received a brokerage for the bonds that were issued against these applications.

+ In the adjudication order, it was held that these bonds are 'government securities' within the meaning of section 2(h)(ii) of the Securities Contract (Regulation) Act, 1956 read with The Public Debt Act, 1944 and that brought it within the meaning of the expression 'securities' as found in section 65(12) of the Finance Act, 1994 that defined 'banking and other financial services' by body corporate other than banks in section 65(105)(zp) for the period prior to 10 th September 2004 and in section 65(105)(zm) thereafter.

The appellant submitted that 'savings bonds' are not government securities because these are issued and held in dematerialized form with the Public Debt Office of the Reserve Bank of India. It is also contended that the linkage between the savings bond and a public loan has not been established and hence it would not be 'government security' within the meaning of The Public Debit Act; that it is not a 'security' because it is not freely transferable. It is also submitted that brokers, in relation to Savings Bonds, deal only with the application forms which cannot, by any stretch of imagination, be considered as a 'security' before issue of bond.

The following case laws were relied upon - Morgan Stanley Mutual Fund v. Kartick Das [(1994) 4 SCC 225] and R D Goyal v. Reliance Industries Ltd [(2003) 1 SCC 81] to show that shares do not have existence prior to their allotment; HDFC Bank Ltd - 2014-TIOL-2285-CESTAT-MUM & Enam Securities Pvt Ltd - 2014-TIOL-2205-CESTAT-MUM to contend that any transaction in connection with sale of bonds, being a statutory function that devolved on the Reserve Bank of India, was not taxable; ICICI Bank Ltd - 2015-TIOL-1983-CESTAT-MUM that the bonds issued by the Reserve Bank of India do not fall within the ambit of 'banking and other financial services'.

The AR cited the decisions in State Bank of Patiala - 2014-TIOL-1835-CESTAT-DEL & Canara Bank - 2012-TIOL-790-CESTAT-AHM in support of the Revenue stand.

The Bench, at the outset, observed that the original authority had paid heed to the denomination of the payment received by M/s JM Financial Services Pvt. Ltd as 'brokerage' in the bond issue documents and was influenced by its status as a 'body corporate' to confirm liability to tax as provider of 'banking and other financial services.'

It was further observed -

++ Brokerage is earned by a broker in the course of sale and purchase. That M/s JM Financial Services Pvt. Ltd is registered as a broker with the Securities and Exchange Board of India does not render all its activities to be that of brokering. Brokering of securities requires the existence of 'securities' as well as a 'buyer' and 'seller' of 'securities'. Purchase& sale of securities is predicated upon stock being available for trading. It is clear from the scheme of the savings bond issue that these are not tradeable. The bonds are subscribed to by individuals and the Reserve Bank of India manages the issue on behalf of the Central Government.

++ The Reserve Bank of India is not the seller of the savings bond as the bonds do not belong to it. The subscriber to the bond issue is, quite possibly, a regular customer of M/s JM Financial Services Pvt. Ltd as a broker of securities. Such a relationship or equation does not, for that reason alone, attract tax burden on other transactional activities of the two. We notice that there is no allegation of receipt of any consideration from the subscriber of the bond issue. It is from the Reserve Bank of India that designated intermediaries receive payment. However, as Reserve Bank of India is not the seller of the said bonds, it cannot be a customer of a broker and the payment it makes cannot be considered to be brokerage. Reserve Bank of India undertakes the management of the issue as an agency function for the Central Government in exercise of a statutory responsibility. Clearly, there is no brokering of securities in the disputed transaction. The fee paid to 'receiving offices' and 'brokers' for their role in the bond issue is not 'brokerage' but commission. The foundation for confirmation of the demand in the impugned order is seen to totter.

++ Handling of application forms for an intending subscriber cannot constitute brokering in securities because the securities do not exist at that stage. The foundation for the demand in the impugned order no longer totters but collapses. [Morgan Stanley Mutual Fund v Kartick Das [(1994) 4 SCC 225] refers]

++ We find that taxing of a transaction merely because the remuneration is designated as 'brokerage' and because the recipient of that 'brokerage' is a 'body corporate' is not sustainable in the light of intent to tax the activity of 'banking and other financial services' without a clear finding that the bond is a tradeable security and that the recompense flows to M/s JM Financial Services Pvt. Ltd from a buyer or seller under a 'brokering' contract. The impugned order fails that test of coverage under section 65(105) of Finance Act as a 'taxable service.'

The order was set aside & the appeal was allowed with consequential relief. The Revenue appeal was dismissed.