2014 (1) TMI 1611 - AT - Service Tax

Sale of Reserve Bank of India (RBI) Bonds issued by the RBI - Receipt of brokerage - Held that - As per notification dated 13/03/2003 issued by the Government, the tax savings bonds have been issued as part of the borrowing programme of the Government from the public. As per the clarification issued by the RBI vide letter dated 28/10/2004, copy of which is available on record, the said bonds issued under Section 2 (2) of Public Debt Act, 1944, constitute a Government security and the bonds were issued by the Government for raising a public loan. Therefore, there is no doubt that the tax savings bonds issued by the RBI and sold by the appellant bank is a Government Security. For this transaction in Government securities, the appellant bank has received a brokerage for sale of the security. From the Circular dated 10/08/2010 issued by the CBE&C, it is clear that there is no service tax liability on underwriting fee or underwriting commission received by the primary dealers for dealing in Government securities; the same logic would apply in respect of brokerage also - sale of RBI bonds would amount to statutory/sovereign function and cannot be subjected to any tax liability - Following decision of Canara Bank Vs. CST, Bangalore 2012 (6) TMI 274 - CESTAT, AHMEDABAD - Decided in favour of assessee.

Summary

Issues:
Service tax demand on sale of RBI Bonds by HDFC Bank Ltd.

Analysis:
The appeal challenged a service tax demand of Rs.1,53,07,091/- confirmed against HDFC Bank Ltd. for selling RBI Bonds exempted from income tax and wealth tax. The appellant received brokerage from RBI for selling these bonds. The issue was whether this service rendered by the bank to RBI falls under Banking and Finance Services category. The appellant argued citing precedents and circulars that the demand was not sustainable as Government securities have zero default risk, and service tax liability does not arise on underwriting fee for dealing in Government securities.

The Additional Commissioner for Revenue contended that the circular on Government securities did not apply as the case involved tax savings bonds, not securities. The Tribunal analyzed the situation, noting that tax savings bonds issued by RBI under Public Debt Act, 1944, were indeed Government securities. Referring to the circular on underwriting fee and precedents, the Tribunal held that the sale of RBI bonds constituted a statutory/sovereign function exempt from tax liability. Therefore, the impugned demands were deemed unsustainable, and the appeal was allowed with consequential relief as per the law.

This judgment clarifies the tax treatment of transactions involving Government securities like RBI Bonds and sets a precedent for exempting such transactions from service tax liability based on the nature of the securities and relevant circulars.