2016 (4) TMI 599 - AT - Service Tax

Demand of Service tax - Banking and other financial services - Revenue stated respondent to be a broker who had filed some applications on behalf of intending purchasers of bonds, designated as 6.5% Savings Bond, issued by the Reserve Bank of India and have received a brokerage for the bonds that were issued against these applications. Held that - the subscriber to the bond issue is, quite possibly, a regular customer of M/s JM Financial Services Pvt Ltd as a broker of securities. Such a relationship or equation does not, for that reason alone, attract tax burden on other transactional activities of the two. It is noticed that there is no allegation of receipt of any consideration from the subscriber of the bond issue. It is from the Reserve Bank of India that designated intermediaries receive payment. However, as Reserve Bank of India is not the seller of the said bonds, it cannot be a customer of a broker and the payment it makes cannot be considered to be brokerage. Reserve Bank of India undertakes the management of the issue as an agency function for the Central Government in exercise of a statutory responsibility. Clearly, there is no brokering of securities in the disputed transaction. The fee paid to receiving offices and brokers for their role in the bond issue is not brokerage but commission. The foundation for confirmation of the demand in the impugned order is seen to totter. As per decision of Hon ble Supreme Court in the case of Morgan Stanley Mutual Fund v Kartick Das 1994 (5) TMI 168 - SUPREME COURT OF INDIA , prior to allotment, shares do not exist . Accordingly, handling of application forms for an intending subscriber cannot constitute brokering in securities because the securities do not exist at that stage. The foundation for the demand in the impugned order no longer totters but collapses. So the taxing of a transaction merely because the remuneration is designated as brokerage and because the recipient of that brokerage is a body corporate is not sustainable in the light of intent to tax the activity of banking and other financial services without a clear finding that the bond is a tradeable security and that the recompense flows to M/s JM Financial Services Pvt. Ltd from a buyer or seller under a brokering contract. The impugned order fails that test of coverage under section 65(105) of Finance Act as a taxable service. - Decided against the revenue

Issues:
1. Tax liability determination for banking and financial services.
2. Extension of benefit of 'cum-tax' valuation.
3. Classification of savings bonds as government securities.
4. Taxability of brokerage received by a corporate entity.
5. Applicability of service tax on brokering activities.
6. Interpretation of relevant sections of the Finance Act, 1994.

Analysis:

1. The case involves an appeal against an order determining tax liability for providing banking and financial services. The appellant contested the tax demand, arguing that certain portions were barred by limitation. The original authority extended the benefit of 'cum-tax' valuation but did not impose penalties under specific sections of the Finance Act, 1994.

2. The Revenue also appealed against the order, challenging the extension of the 'cum-tax' benefit. The dispute centered around whether brokerage received by the appellant for facilitating bond transactions constituted consideration for providing banking and financial services.

3. The core issue was the classification of savings bonds as government securities and whether the brokerage received was taxable under the relevant provisions of the Finance Act, 1994. The appellant argued that savings bonds were not government securities and that the brokering activities did not fall under the definition of taxable services.

4. The Tribunal analyzed the nature of brokerage received by the appellant and the criteria for taxing such services. It was established that the mere designation of payment as 'brokerage' in documents did not automatically render the activity taxable. The Tribunal emphasized the need for Revenue to establish that the services provided fell within the scope of taxable services under the Finance Act.

5. The judgment delved into the definition of taxable services under the Act, highlighting the distinction between brokering activities involving tradable securities and the specific nature of the bond transactions in question. The Tribunal concluded that the activities of the appellant did not meet the criteria for taxation as 'banking and other financial services.'

6. Citing relevant legal precedents and interpretations of the Finance Act, the Tribunal ruled in favor of the appellant, allowing the appeal and setting aside the impugned order. The decision emphasized the importance of clear findings regarding the taxability of services under the Act and the necessity to establish a direct link between the services provided and the taxable transactions.

This detailed analysis of the judgment highlights the key legal issues, arguments presented, and the Tribunal's decision regarding the tax liability for banking and financial services in the case.

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