2013 (5) TMI 393 - AT - Service Tax

Services received for issue of Foreign Currency Convertible Bond (FCCB) in foreign countries for raising of funds in foreign exchange needed by JLSL - service tax demanded from JLSL as a recipient of service in terms of provisions under Section 66A of Finance Act, 1994 since the service provider was located abroad - Held that - Not in agreement with the argument of Revenue that the service of Underwriting has to be necessarily provided by merchant bankers. Also disagree that providing Underwriting Service is incidental to the services rendered as a Lead Manager to the issue. This is basically because the latter involves basically organizing an event viz. issue of the FCCBs and the former involves financial risk to the underwriters and the two matters are totally different in nature. It is not acceptable that the contract has to be considered as a whole and classified considering it as a single service and subjected it to tax. This is because the services are distinct in nature and the contract lays down the services as distinct services with separate remuneration fixed for the two services. Further if at all it is to be considered as one single bundle it is not agreeable that the dominant nature of the service is that of Lead Manager s services, since JPMS is earning a higher commission by underwriting the issue taking the risk involved. As stated by JLSL, that the issue was wholly subscribed by JPMS, the Lead Manager service was a minimal part of the contract in this particular case. Further Underwriting Service is specified in a sub-clause of Section 65(105) which occurs earlier than the sub-clause in which Lead Manager s Service occurs. So going by the criterion laid down in Section 65A(c) of Finance Act, 1994, the service will get classified under Underwriting Services . Therefore holding the view that the Underwriting Service rendered by JPMS to JLSL is distinct from the Lead Manager service provided. Since the underwriter service is to be subjected to tax under Section 66A of Finance Act 1994 taking into consideration the place of performance as per Rule 3 of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006. In this case Underwriting was done outside India, thus no reason to tax the impugned service. JLSL also has a very strong case on the issue of time-bar because they had placed the entire matter before his jurisdictional officers who audited their record and they had initially opined that the tax is payable only on services relating to Lead Manager Service and the same was paid and such payment was reported in the relevant ST-3 returns. Against revenue.

Summary

Issues Involved:
1. Demand of service tax on services received by JLSL for the issue of Foreign Currency Convertible Bonds (FCCB) in foreign countries.
2. Classification of services provided by JPMS as either "Banking and Financial Services" or "Underwriting Services."
3. Applicability of service tax for services received prior to 18-4-2006.
4. Invocation of the extended period for demand due to alleged suppression of information by JLSL.
5. Distortion of the definition of "merchant banker" in the Show Cause Notice and Order-in-Original.
6. Time-bar issue regarding the demand for service tax.

Detailed Analysis:

1. Demand of Service Tax on FCCB Services:
The dispute centers on the service tax payable by JLSL as a recipient of services for the issuance of FCCBs in foreign countries. The service tax is demanded under Section 66A of the Finance Act, 1994, as the service provider, JPMS, was located abroad.

2. Classification of Services Provided by JPMS:
The core issue is whether the services provided by JPMS should be classified as "Banking and Financial Services" under Section 65(105)(zm) or "Underwriting Services" under Section 65(105)(z) of the Finance Act, 1994. The adjudicating authority classified the services as "Merchant Banking Services," considering the entire gamut of services provided by JPMS. However, JLSL contends that underwriting is distinct from lead manager services, involving financial risk and higher commission, and should be classified separately.

3. Applicability of Service Tax for Services Received Prior to 18-4-2006:
The adjudicating authority dropped the demand for services received prior to 18-4-2006, relying on the decision in Indian National Shipowners Association v. UOI, which was affirmed by the Apex Court. Consequently, the appeal filed by Revenue challenging this decision was dismissed.

4. Invocation of Extended Period for Demand:
The Director General of Anti-Evasion issued a Show Cause Notice claiming that the extended period for demand was invokable due to JLSL's suppression of information. However, JLSL had already paid service tax on lead manager services and reported it in their returns, arguing against the invocation of the extended period.

5. Distortion of Definition of "Merchant Banker":
JLSL argued that the Show Cause Notice and Order-in-Original distorted the definition of "merchant banker" by omitting crucial parts, leading to a misinterpretation that merchant bankers subscribe to securities themselves. The correct definition, as per SEBI (Merchant Bankers) Regulations, 1992, involves making arrangements for issue management, not subscribing to securities.

6. Time-Bar Issue:
JLSL had disclosed the entire matter to their jurisdictional officers during an audit, and the initial opinion was that tax was payable only on lead manager services, which was paid and reported. This transparency supports JLSL's argument against the extended period for demand due to alleged suppression.

Judgment:
The impugned order was set aside to the extent of allowing the appeal filed by JLSL, rejecting the classification of services as "Banking and Financial Services" and holding them as "Underwriting Services." Consequently, the appeal filed by Revenue was also dismissed. The judgment emphasized that underwriting services, performed outside India, should not be taxed under Section 66A of the Finance Act, 1994. The time-bar issue further supported JLSL's case, given their transparency during the audit process.

(Pronounced on 5-10-2012)