By TIOL News Service

CHENNAI, AUG 02, 2018: BOTH, the assessee and the Revenue are in appeal against the order of the CCE, Madurai who confirmed the service tax demand of Rs. 98,57,126/- for the period from 01.05.2006 to 30.04.2007 but dropped the same for the period from 01.10.2004 to 30.04.2006 and 01.05.2007 to 30.11.2009 ; and also did not impose penalties by invoking Section 80 of the FA, 1994.

Brief facts are that, on intelligence by HQ Preventive officers, it was revealed that the appellants are primarily engaged in micro-financing (small scale lending) to poor women members of self-help groups, and were charging interest on such loans apart from collecting various other charges like processing charge, application charges Group Maintenance Charges, etc., from the borrowers.

Department was of the view that the activity would fall under 'Banking and Other Financial Services' and the appellants are liable to pay service tax.

The demand notice was adjudicated in the manner as mentioned at the outset.

The assessee, in appeal before the CESTAT, submits that they are a Public Charitable Trust formed vide Trust Deed dated 07.07.1999 and one of the important activities undertaken by the Trust is granting revenue generating (to set up appropriate revenue generating business for the members) as well as non-revenue generating (to meet expenses of festivals, emergency loans, housing loans, destitute loans, etc.) loans to its members; that the assessee obtains such loans from various banks and uses these funds to grant loans to their members.

That the loans are sanctioned in periodical meetings of the members and are not sanctioned by the Trust as such; that the obligation of repayment of the loan is also cast on the group and if any one member of the group defaults in repayment, the other members of the group are liable to repay the same and this ensures peer responsibility on the group to ensure repayment; thus, the loans are not disbursed as in normal banking activities; that the loans carry interest which are prescribed by the Trust.

That the appellant also collects small amounts of deposits from their members to inculcate the savings habit and even Rs.10/- are accepted as deposits but no facilities like withdrawal through cheque, etc. are offered against such deposits; that the savings can be withdrawn only upon cessation of membership and not before.

That in terms of the definition of "Banking And Financial Services" the taxable service is "any service provided to a customer by a banking company or a financial institution, including a non-banking financial company in relation to Banking and Other Financial Services".

And since the taxable service would attract levy of service tax only if it is rendered by a banking company or a financial institution or a non-banking financial company, the Commissioner has rightly set aside the demand during the period when the taxable service stood as stated above.

However, for the period 01.05.2006 to 30.05.2007, the said taxable service as given in Section 65(105)(zm) was amended to include the words "any other person" and accordingly the demand for the period 01.05.2006 to 30.04.2007 was confirmed.

Nonetheless, since in the Show Cause Notice the demand is made alleging that the assessee is a non-banking financial institution, the demand for the limited period from 01.05.2006 to 30.04.2007 alleging that assessee would fall into the category of "any other person" also cannot sustain.

The appellant also relied upon the decision of the Tribunal in the case of  Grama Vidiyal Trust Vs. C.C.E. & S.T. Tiruchirappalli vide Final Order No. 40925/2018 dt. 22.03.2018  [Stay order 2014-TIOL-1297-CESTAT-MAD wherein on the very same issue the Tribunal had set aside the demand.

The AR supported the order and also argued that that the appellants being a non-banking financial institution are liable to pay service tax for the remaining part of the demand for the period 01.10.2004 to 30.04.2006 and also 01.05.2007 to 30.11.2009. Accordingly, penalties are also imposable.

The Bench extracted and tabulated the definition of ‘taxable service' under BOFS during the disputed period as below -

The CESTAT further observed -

++ In para 8.3 of the Show Cause Notice, it is alleged that the assessee is a non-banking financial institution. Thus, the basic allegation is that the assessee being a non-banking financial institution is engaged in lending activity and, therefore, their services are classifiable under bank and other financial services with effect from 10.09.2004.

++ (As per the RBI Act) Only a company, corporation or cooperative society would fall within the definition of non-banking financial institution. There is no allegation in the Show Cause Notice that assessee is liable to pay service tax as they are rendering ‘Banking and Other Financial Services' as they are included in the category "any other person".

++ This being so, in our view, the Commissioner has traversed beyond the scope of Show Cause Notice to confirm the demand for the period 01.05.2006 to 30.04.2007.

++ From the provisions of law reproduced above, it can be seen that the Commissioner has rightly dropped the demand for the period from 01.10.2004 to 30.04.2006 and for 01.05.2007 to 30.11.2009 when the words "any other person" was not part of the definition under Section 65(105)(zm).

After extracting paragraphs 5 & 6 from the Tribunal decision in Grama Vidiyal Trust (supra) involving identical facts, the Bench held that the demand for the period 01.05.2006 to 30.04.2007 also cannot sustain and accordingly set aside the same.

The assessee's appeal was allowed and the Revenue appeal was dismissed.

(See 2018-TIOL-2383-CESTAT-MAD)