2015 (6) TMI 695 - AT - Service Tax

Demand of service tax - Banking and other Financial services - taxability of Arrangement fees - Service Tax on Agent s Bank fee - Invocation of extended period of limitation - Difference of opinion - matter to be placed before the Hon ble President for reference to the Third Member on the following points - (i) Whether in the facts and circumstances of the case, the Arrangement fee and Agent s Bank fee are taxable in the hands of the appellant company in view of the findings recorded by the learned Member (Technical) Or Whether the same was not taxable in view of the findings recorded by Member (Judicial). (ii) Whether in the facts and circumstances of the case, the extended period of limitation is invocable and penalties under Section 76 & 78 are payable as held by the learned Member (Technical) Or Whether the extended period of limitation is not invocable in the facts and circumstances of the case as held by the learned Member (Judicial).

Issues Involved:
1. Taxability of Arrangement Fees.
2. Taxability of Agent's Bank Fees.
3. Applicability of Extended Period of Limitation.
4. Imposition of Penalties under Sections 76 and 78 of the Finance Act, 1994.

Issue-Wise Detailed Analysis:

1. Taxability of Arrangement Fees:
The Commissioner held that the Arrangement fees paid by the appellant to Mandated Lead Arrangers (MLAs) are taxable under 'Banking and other Financial Services' as defined under Section 65(105)(zm) read with Section 65(12) of the Finance Act, 1994. The argument was that these services are in relation to lending, making them taxable. The appellant contended that the services provided by MLAs are for borrowing, not lending, and thus should not be taxed. However, the Tribunal concluded that arranging finance is a distinct activity from lending and falls under the taxable service category. Therefore, the Arrangement fees are subject to Service Tax.

2. Taxability of Agent's Bank Fees:
The Commissioner also held that the Agent's Bank fees paid by the appellant are taxable under the same service category. The Tribunal agreed, noting that the Agent Bank's role included maintaining contact with the borrower, monitoring compliance, and facilitating payments, which are integral to the loan administration and thus taxable. The appellant argued that these services were provided abroad and should not be taxed in India. However, the Tribunal upheld the taxability, stating that the services were received in India by a recipient located in India.

3. Applicability of Extended Period of Limitation:
The Commissioner invoked the extended period of limitation, stating that the appellant did not declare the payment of Arrangement fees and Agent's fees to the department, justifying the extended period under Section 73 of the Finance Act, 1994. The Tribunal supported this view, noting that the appellant had not made any disclosures to the department and had not sought clarification on the taxability of these services. The Tribunal found that the extended period of five years was applicable due to suppression of facts.

4. Imposition of Penalties under Sections 76 and 78 of the Finance Act, 1994:
The Commissioner imposed penalties under Sections 76 and 78, which the Tribunal upheld. The Tribunal found no merit in the appellant's claim of bona fide belief and noted that the appellant, being a large company with adequate resources, should have sought clarification from the department. The penalties were deemed appropriate given the circumstances.

Separate Judgment by Member (Judicial):
The Member (Judicial) disagreed with the taxability of both Arrangement fees and Agent's Bank fees, arguing that the word 'lending' does not include 'borrowing' under Section 65(12). The Member (Judicial) also found that the Agent Bank's role was merely facilitative and not a service received by the appellant. Additionally, the Member (Judicial) held that the extended period of limitation was not invocable as there was no suppression of facts, and the transactions were recorded in the appellant's books of accounts. Thus, the appeal was allowed, and the impugned order was set aside.

Difference of Opinion:
Due to the difference of opinion between the Members, the matter was placed before the Hon'ble President for reference to a Third Member on the following points:
1. Taxability of Arrangement fees and Agent's Bank fees.
2. Applicability of the extended period of limitation and penalties under Sections 76 and 78.

Final Order:
The appeal was disposed of with the direction to pay Rs. 5,22,35,092/- as Service Tax, uphold penalties under Sections 76 and 78, and pay appropriate interest under Section 75 of the Finance Act, 1994. The demand for the period prior to 18.04.2006 was held unsustainable.

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