2014 (1) TMI 1003 - AT - Service Tax

Underwriting Fee or Underwriting Commission - Whether dealing in government securities amounts to dealing in securities of a body corporate, particularly since government securities are issued by the Reserve bank of India, which is a body corporate in terms of section 3 (2) of the RBI Act, 1934 - Held that - Government securities are sovereign securities having zero default risk. Reserve Bank of India only manages the issue and also auction of Government Securities on behalf of the Government of India. In effect, Primary Dealers registered with the RBI (as opposed to registration with the Securities Exchange Board of India) deal in Government Securities, issued by the RBI on behalf of the Government of India, as a part of the central Government s market borrowing program. The general practice is that the RBI invites bids from the Primary Dealers, who in their bids indicate the amount to be underwritten and the underwriting fee expected by them. RBI examines these bids and decides the amount to be underwritten and underwriting fee to be paid to a Primary Dealer. Underwriting Fee is also known as Underwriting Commission in common parlance. Thus the conclusion drawn is that government securities are not securities of a body corporate - service tax liability does not arise on Underwriting Fee or Underwriting Commission received by the Primary Dealers during the course of the dealing in Government Securities - Decided against Revenue.

Summary

Issues:
1. Whether the Reserve Bank of India is considered a body corporate for the purpose of underwriting securities under the Finance Act, 1994.

Analysis:
The Revenue filed an appeal challenging the Commissioner of Central Excise's decision that the Reserve Bank of India is not a body corporate, thus the respondent cannot be considered to have subscribed to securities of a body corporate for underwriting under Section 65 (105) (z) of the Finance Act, 1994. The Revenue argued that the Reserve Bank of India is a body corporate and subscription to securities of a body corporate falls within the definition of underwriting under the Finance Act. They referred to the definition of underwriting in Rule 2 (f) of the Securities and Exchange Board of India (Underwriters) Rules, 1993, which states that an underwriter is a person who engages in the business of underwriting securities of a body corporate. However, a circular issued by the Board clarified that government securities are not considered securities of a body corporate. The circular explained that government securities are sovereign securities with zero default risk, managed by the Reserve Bank of India on behalf of the Government of India. Therefore, the dealing in government securities by Primary Dealers, as part of the central Government's market borrowing program, does not amount to dealing in securities of a body corporate. Consequently, the service tax liability does not arise on underwriting fees or commissions received by Primary Dealers for dealing in government securities. The Tribunal found no error in the Commissioner's order based on the clarification provided in the circular and dismissed the appeal.

This judgment clarifies the distinction between government securities and securities of a body corporate, emphasizing that government securities managed by the Reserve Bank of India are not considered securities of a body corporate for the purpose of underwriting under the Finance Act. The circular issued by the Board played a crucial role in determining the tax liability on underwriting fees for dealing in government securities.