2021 (7) TMI 216 - AT - Service Tax

Taxability - Banking and other financial services - services rendered by ICICI Econet Internet and Technology Fund floated by the Settlor - trust is a legal entity or not - whether obtaining registration under any statute entails the trust to a Tax liability - Mutuality of Interest between Trust and Members - service provider-receiver relationship - tax liability on Carry Interest and performance fee - time limitation - computation errors - penalty - Revenue Neutrality - VCF established in the form of a trust - amorphous entity or not - doctrine of mutuality - VCFs equal to Clubs or not - Validity of the value taken for the purposes of working out service tax demand - Inclusion of Carry Interest. Mutuality of Interest - Does the doctrine of mutuality of interest exist between the trust and the contributors/beneficiaries - HELD THAT - The OIO contending the claim of the appellants that the Fund is neither a corporate entity nor does it have a personality distinct from Contributors/ Subscribers/ Investors, records that the arguments of the appellants is not acceptable as per the facts of the case which indicate that the main object of the assess is capital appreciation through the investment of contributors/ Subscribers/ Investors in the schemes devised by the appellants to gain profits/income; the motive of the fund is purely commercial; the Fund has independent identity and distinct personality of its own which is evident from the fact that the Fund is established as a Trust by ICICI Ltd. and is registered with SEBI; the Fund made investment in various companies; only a legal obligation with respect of ownership of property rests with the Fund is not true as the appellant is involved in the activity of capital invested by Contributors/ Subscribers/ Investors; the Fund also collects KYC Forms from the Contributors; therefore the Fund acts as a commercial concern. A Trust are essentially mutual funds engaged in Portfolio management etc. It could be seen that though these mutual funds are named Trusts, the essential function of the Trust was of commercial concerns that is maximizing the profit. Similarly, it is mentioned clearly in various places that the Trust Fund shall be managed by the Trust and the object of the Trust is to carry on the activity of a Venture Capital Fund. It is interesting to notice that to enable the funds, to distribute the dividends and other amounts payable on or in respect of Units, a mechanism in the form of Private Placement Memorandum and/or Scheme Document are created. Thus, the profit motive of the Trust is evident. All these Trusts have registered themselves under VCF Regulations, 1996 issued under SEBI Act, 1992 - Taxation Law being a specific legislation just as the SEBI Act, 1992 should prevail over the general Trust Act and the definition given thereof. The impugned trusts have violated the principles of mutuality by concerning themselves in commercial activities and by using the discretionary powers to benefit a certain class of investors or nominees or employees or subsidiaries. They can no longer be treated as trusts for the purposes of taxation statutes at least - the learned special counsel has rightly submitted that VCFs bear no comparison to members of club, which, by its very incorporation, is a grouping of individuals who have chosen to be members of a particular institution or club for fulfilment of certain human needs social, sporting, recreational etc that cannot be fulfilled except in such oragnised collectives. Whether the appellants Rendered Taxable Services? - HELD THAT - The argument that the banks need not pay service tax as the entities where they are further investing their monies are paying service tax. In a typical commercial activity various entity in the chain of activity needs to pay service tax and the subsequent entity may however, avail the credit of tax paid by the preceding entity. As long as the Trusts are performing the taxable services, they are liable to pay service tax. It has been demonstrated above by the learned Special Counsel for the Department and also found by us that the funds are managing the money invested by Subscribers/ Contributors/ Investors - the Trusts are not amorphous entities and the mutuality of interest is no longer applicable in the instant case; Funds are rendering the service of Portfolio Management or Asset Management under BOFS to the Subscribers/ Contributors/ Investors and the consideration is in the form of withholding the dividends/ profits distributable Subscribers/ Contributors/ Investors. The Appellants have relied on Circulars No. 94/5/2007- Service Tax dated 15.05.2007 and Circular No. 96/7/2007-ST dated 23.08.2007 which is claimed to have clarified that the entry load and exit load charged by mutual fund being for management of asset or not liable to service tax - These are huge amounts retained and distributed to the AMCs or their nominees subject to achieving certain levels of performance thus it is a variable expenditure and cannot be equated to entry or exit load. Moreover, it is found that the appellant s Trusts are managing Venture Capital Fund and not the mutual funds therefore the Circular is not applicable. Applicability of Board s Circular No. 86/04/06 - commercial concern or not - HELD THAT - In the case at hand, it is seen that the totality of the activities and objective of the assessee is to effect capital appreciation of the investments of the consumers/ subscribers/ investors who are mentioned as customers in terms of their policies. Further, schemes are devised to generate income/ profit/ gains to the benefit of the consumer/ subscribers/ investors. Therefore, the said Circular is not applicable in the instant case. Quantification of Demand - HELD THAT - The Trusts are floated for drawing Contributors/ Subscribers/ Investors and to facilitate such persons to earn profits or gains out of the acquisition, holding and subsequent disposal of assets by the Trust/ Fund. The principal liability and responsibility of managing the Trust/ Fund rests with the appellants. Any amount retained out of income distributable to subscribers is nothing but charge or fee for the services rendered - It is agreed that CI is paid subject to realizations generated by exiting portfolio investments and credited to the class B or C (special Units holders) only when the net realization recognized by selling and exiting portfolio investments exceeds the sum total of the capital committed and the appreciation gained as per the pre-agreed preferred rate of return. Levy of service tax - performance fee - carried interest and other expenses - HELD THAT - The fact that the AMC, Settlors and Trustees are all ICICI Group concerns would further give credence to the inference. It is also seen the roles of different companies are rotated. One company is AMC in one Trust and a settlor in other funds - service tax has been rightly demanded on the amounts shown as performance fee, carried interest and other expenses. Loss of sale of investment - Accrued interest considered doubtful - Loss on revaluation of assets - HELD THAT - The bench cannot decide over such calculations. It will be in the fitness of the things to remand the matter to the adjudicating authority to verify the veracity of the claims. Time Limitation - HELD THAT - This is a matter of interpretation and all the information being in public domain, suppression of any material fact with intent to evade payment of duty cannot be alleged - It is not the case of the appellants that the material information available in the form of various contracts/ agreements and balance sheets/ ledgers have been submitted to the Department suo moto by the appellants. It is only after investigation has been initiated, the necessary documents were submitted. Thus, the information available in the public domain is of no avail - the Department was in its right to invoke the extended period for the issue of SCN. Penalties - HELD THAT - The appellants have not obtained registration; have not paid applicable service tax and have not filed due returns. Therefore, the penalty under Section 77 is imposable. It is found that extended period is invokable; material facts have been deliberately suppressed by the appellants before the jurisdictional service tax authorities. Therefore, the imposition of penalty under Section 78 of the Finance Act, 1994 is justified. Revenue Neutrality - HELD THAT - All the SCNs and annexures mention carried Interest to be includible in the Gross Consideration for the demand of duty. Therefore, we find that the OIO has not traversed beyond the SCN. Learned Counsel for the appellants also raised an issue that this is a standalone Show Cause Notice issued to the appellants alone, though there are many similar funds floated my others during the relevant time. All the appeals are disposed of, by way of remand to the adjudicating authority, subject to the following conditions (i). Penalties imposed under Section 76 of Finance Act, 1994 are dropped. (ii). the adjudicating authority shall verify the following claims of the appellants, with documentary proof that may be submitted by the appellants, and give due allowance to the same, if found otherwise in order as per law, while computing the duty liability. (a). the claim that the amounts on account of Loss of sale of investment , Accrued interest considered doubtful , Loss on revaluation of assets , etc, are not actual expenses but are only accounting adjustments; and allow deduction if found in order. (b) claim of the appellants on the admissibility of the CENVAT (c)claims of the appellants on the cum duty benefit. (iii). The appellants shall submit necessary documentary proof with reference to the above claims within 4 weeks of the receipt of this order and the adjudicating authority shall complete the exercise within further 12 weeks of receipt of the documents from the appellants.

Summary

Issues Involved:
1. Doctrine of mutuality of interest between the trust and the contributors/beneficiaries.
2. Classification of services under "banking and other financial services" (BOFS) as per Section 65(105)(zm) of the Finance Act, 1994.
3. Whether expenses incurred by the Trust, performance fee, carry interest, and provisions for losses constitute consideration for services to the contributors/beneficiaries.
4. Justification for invoking the extended period for issuing the Show Cause Notice (SCN).
5. Imposition of penalties under Sections 76, 77, and 78 of the Finance Act, 1994.

Detailed Analysis:

1. Doctrine of Mutuality of Interest:
The appellants argued that the Trust and the beneficiaries are not distinct entities and that there is mutuality of interest between them. They cited several judgments to support their claim that a Trust is not a separate legal entity. However, the Revenue contended that the Trusts are distinct from the contributors/beneficiaries and that they undertake KYC or due diligence, are registered under SEBI (Venture Capital Fund Regulations, 1996), and are governed by the Indian Trusts Act, 1882. The Tribunal found that the Trusts are essentially mutual funds engaged in portfolio management with a profit motive, thus violating the principle of mutuality. The Tribunal concluded that the Trusts have failed the test laid down by the Hon'ble Supreme Court in the Bangalore Club case and are not comparable to clubs, which have minimal commercial interest.

2. Classification of Services under BOFS:
The Tribunal examined whether the services rendered by the Trusts to the contributors fall under "banking and other financial services" (BOFS). The Trusts were found to be managing the funds of the contributors and retaining amounts from the distributable income as consideration for their services. The Tribunal concluded that the Trusts are rendering asset management services under BOFS and are liable to pay service tax on the amounts retained as consideration.

3. Consideration for Services:
The appellants argued that there was no consideration for the alleged services, and even if there was, it was in the nature of reimbursement of expenses. The Tribunal found that the Trusts retained amounts from the distributable income as consideration for the services rendered. The Tribunal also found that "carried interest" is not a return on investment but a performance fee paid to the Asset Management Company (AMC) and its nominees. The Tribunal concluded that the amounts retained, including carried interest, constitute consideration for the services rendered and are liable to service tax.

4. Invocation of Extended Period:
The appellants argued that the extended period for issuing the SCN was not justified as there was no suppression of facts with intent to evade tax. The Tribunal found that the appellants did not obtain registration, did not pay service tax, and did not file returns. The Tribunal concluded that the extended period was rightly invoked as there was deliberate suppression of material facts by the appellants.

5. Imposition of Penalties:
The Tribunal examined the imposition of penalties under Sections 76, 77, and 78 of the Finance Act, 1994. The Tribunal found that penalties under Section 77 were justified as the appellants did not obtain registration, pay service tax, or file returns. The Tribunal also found that penalties under Section 78 were justified due to deliberate suppression of facts. However, the Tribunal held that penalties under Section 76 and Section 78 cannot be imposed simultaneously, and therefore, dropped the penalties under Section 76.

Conclusion:
The Tribunal remanded the matter to the adjudicating authority for re-calculation of the gross value of taxable services, availability of CENVAT credit, and cum duty benefit. The appellants were directed to submit necessary documentary proof within four weeks, and the adjudicating authority was directed to complete the exercise within twelve weeks of receipt of the documents. Penalties under Section 76 were dropped, while penalties under Sections 77 and 78 were upheld.