2018 (7) TMI 622 - HC - Service Tax

Validity of SCN - Case of Revenue is that Since a prima facie case is made out for initiating proceedings against the appellant, there is no question of interdicting the proceedings during the show cause stage - Levy of Service Tax on charges/fees received out of the profit on sale of securitization of future receivables. Whether the appellant has made out a case for quashing the show cause notice issued by the first respondent? Held that - The proceedings under challenge in W.P.No.35241 of 2016 was only a show cause notice. The appellant has no case that the first respondent has no jurisdiction to initiate proceedings by issuing the show cause notice. The appellant has taken up a contention that the proceedings are barred by limitation. The issue regarding limitation is a mixed question of fact and law. In fact, the learned Senior Standing Counsel for the Revenue has produced materials in support of his contention that the show cause notice was issued within the period of limitation. It is for the adjudicating authority to decide this issue. The first respondent is the adjudicating authority. The appellant cannot be heard to say that the explanation would not be considered by the first respondent and an order on merits would not be passed. None of the ground taken by the appellant in the writ petition would constitute 'sufficient grounds' to set aside the show cause notice. Petition rightly dismissed.

Summary

Issues:
Challenge to order dismissing writ petition to quash show cause notice for non-payment of service tax on charges/fees received from sale of securitization of future receivables.

Analysis:

1. Jurisdiction and Tax Liability: The appellant, a Non-Banking Financial Company, challenged a show cause notice demanding service tax on profits from the sale of future receivables. The appellant argued that the transaction was a sale and not a service, thus beyond the jurisdiction of the tax authority. The appellant contended that the Finance Act excludes "transaction in money and actionable claims" from the definition of service, questioning the legality of the notice.

2. Nature of Transactions: The appellant's primary business involved providing financial services like loans, hire-purchase, and leasing. The appellant securitized future receivables by pooling and selling them to banks, complying with RBI guidelines on Priority Sector Lending. The notice alleged that the main consideration for securitization was an 'Upfront Fee' and profit was derived from the interest rate differential between what the appellant collected from customers and paid to the assignee.

3. Contentions and Proceedings: The appellant argued that the show cause notice exceeded jurisdiction and was time-barred. The Revenue contended that vital issues needed adjudication and a prima facie case existed. The court considered whether the notice should be quashed, emphasizing that the issue of limitation was a mixed question of fact and law to be decided by the adjudicating authority.

4. Decision and Conclusion: The court held that the show cause notice was validly issued within the limitation period and that the adjudicating authority should decide the matter on merits. The court dismissed the intra court appeal, finding no grounds to set aside the notice. The judgment upheld the dismissal of the writ petition, concluding that the issues were factual and did not warrant interference.

In summary, the High Court of Madras upheld the dismissal of the writ petition challenging a show cause notice for service tax on profits from securitization of future receivables. The court emphasized the need for the adjudicating authority to decide the matter on merits, ruling that the notice was validly issued within the limitation period. The judgment highlighted the distinction between sale and service transactions, ultimately dismissing the appeal and closing the connected miscellaneous petitions.