2019 (4) TMI 31 - AT - Service Tax

Classification of services - Subscription Agreement - import of services - place of providing of services / supply of services - services provided by M/s Goldman (Sachs) Asia LLC M/s Morgan Stanley Co. International PLC, situated outside India - respondent agreed to pay as Management underwriting commission and selling commission for the service provided by them - whether classifiable as Banking and other Financial Services or as underwriting services? Held that - The role of an underwriter as defined under the relevant SEBI Rules adopted in the Finance Act,1994 on the issue of securities to shareholders or public is to bear the risk of non-subscription of securities/bonds offered and to subscribe that portion of the securities/bonds issued against the underwriting commission agreed to be paid to them. In the present case, it is clear that the Respondent issuer issued bonds of value of US 500,000,000 which are convertible into equity shares on maturity and the lead managers viz. M/s Goldman (Sachs) Asia LLC M/s Morgan Stanley Co. International PLC assumed the responsibilities to facilitate subscription of the bond by general investors outside India and in the event they fail to achieve 100% subscription of the general investors, the said lead mangers undertook to subscribe the unsubscribed bonds. This fact has not been disputed by the Revenue. The services provided by the foreign service provider are akin to the definition of the underwriting services and not Banking or other Financial service , particularly merchant banking service. No doubt, under scope of merchant banking, the underwriting is also as an activity, but considering the overall stipulation and conditions in the subscription agreement dt.24.00.2009 between the Appellant and M/s Goldman (Sachs) Asia LLC M/s Morgan Stanley Co. International PLC, it could be safely inferred that even though the amount paid for the services by the Respondent has been described as Management underwriting commission and selling commission , but the core service provided by the Lead Managers is that of underwriter service and not managerial service for the issue of Bonds as is evident particularly clause 4.1.33 where under it is mentioned that none of the managers has to provide any legal, accounting, regulatory and tax advisors; clause 9 mentions the expenses that are to be borne by the issuer and the Lead Managers. Once, it is concluded that the service provided by the Respondent fall under the category of underwriter service , the amount paid by the Respondent to the Lead Managers for the services performed outside India would come under the scope of Rule 3(iii) of Taxation of Services (provided from outside India and received in India) Rules, 2006 and accordingly not chargeable to service Tax. Appeal dismissed - decided against Revenue.

Summary

Issues Involved:
1. Classification of services provided by foreign entities under "Banking and other Financial Services" or "Underwriter Services".
2. Applicability of service tax under reverse charge mechanism.
3. Invocation of the extended period of limitation.

Detailed Analysis:

Issue 1: Classification of Services:
The primary issue is whether the services provided by M/s Goldman (Sachs) Asia LLC and M/s Morgan Stanley & Co. International PLC to the Respondent fall under "Banking and other Financial Services" as defined under Section 65(105)(zm) or "Underwriter Services" as defined under Section 65(105)(z) of the Finance Act, 1994.

The Respondent entered into a Subscription Agreement dated 24.09.2009 with the aforementioned entities for the issue of US $500,000,000 5% Convertible Bonds due 2014. The Revenue argued that the services rendered were classifiable under "Banking and other Financial Services", particularly "merchant banking services", and thus liable for service tax under reverse charge basis under Section 66A. The Respondent contended that the services were "underwriting services" as the Lead Managers agreed to subscribe to any unsubscribed portion of the bonds, thus bearing the financial risk.

The Tribunal referred to the definitions and principles of classification under the Finance Act, 1994, and relevant SEBI Rules. The Subscription Agreement's clauses indicated that the Lead Managers were to ensure full subscription of the bonds, and if not, they would subscribe to the remaining bonds themselves. This arrangement was deemed to fall under "underwriting services" rather than "merchant banking services."

Issue 2: Applicability of Service Tax:
Since the services were classified as "underwriting services," they fell under Rule 3(iii) of the Taxation of Services (provided from outside India and received in India) Rules, 2006. This rule implies that services performed outside India are not chargeable to service tax. The Tribunal upheld this view, stating that the core service provided was underwriting, and thus, the amount paid was not subject to service tax under the reverse charge mechanism.

Issue 3: Invocation of Extended Period of Limitation:
The Respondent argued that the extended period of limitation could not be invoked as there was no suppression of facts. The Tribunal noted that the proceedings and audits related to the case had commenced much earlier, and all relevant facts were within the department's knowledge. Therefore, invoking the extended period of limitation was unsustainable. The Tribunal referenced several judgments supporting the view that when the issue involves interpretation of law or conflicting decisions, the extended period of limitation should not be applied.

Conclusion:
The Tribunal concluded that the services provided by M/s Goldman (Sachs) Asia LLC and M/s Morgan Stanley & Co. International PLC were "underwriting services" and not "Banking and other Financial Services." Consequently, the amount paid by the Respondent was not liable to service tax under the reverse charge mechanism. The invocation of the extended period of limitation was also deemed unsustainable. The appeal filed by the Revenue was dismissed, and the impugned order was upheld.