2013 (9) TMI 222 - AT - Service Tax

Nature of Service Collecting funds from investors - Demand of service tax was made by the department on the ground that amounts spent by various trusts which were known as Funds and which were engaged in the activity of collecting funds from investors and investing them were liable to tax Held that - Assesse had not been able to make out a prima facie case - provision for investment losses cannot be considered as part of expenses for providing service - the claim of the assesse that he was eligible for CENVAT credit in respect of various services received by the venture capital fund and once these were taken into account and also the expenses relating to provision for investment losses cannot be taken into account as credit. Stay granted subject to deposit of Rs. 2 crores.

Issues involved: Challenge to demand of service tax on amounts spent by trusts engaged in fund collection and investment activities; interpretation of whether trust and investors can be considered the same entity; applicability of service tax on expenses incurred by the trust; eligibility for CENVAT credit on service tax paid by service providers.

Analysis:
1. Challenge to demand of service tax: The appellants contested the demand of service tax on amounts spent by trusts involved in fund collection and investment activities. The total amount involved in these cases was approximately Rs. 272 crores, with penalties imposed. The primary argument was that the expenses incurred by the trust, apart from service tax paid on specific services, should not attract service tax liability. The Revenue contended that the trust and investors are distinct entities, and the expenses incurred by the trust should be subject to service tax.

2. Interpretation of trust and investors relationship: The appellants argued that the trust and investors should not be segregated, as the trust essentially acts on behalf of the investors in managing funds. They highlighted that the trust is not a separate legal entity under the Indian Trusts Act, 1882. Reference was made to a Circular stating no service tax liability on certain charges by mutual funds, emphasizing that if expenses are recovered from investors, no service tax should be levied. The Revenue, however, maintained that the trust and investors are distinct entities, supported by the identification of trustees, investors, and Asset Management Company separately.

3. Applicability of service tax on trust expenses: The Tribunal considered whether the expenses incurred by the trust, including audit fees, bank charges, and pre-incorporation expenditure, should attract service tax. After evaluating arguments from both sides, the Tribunal found that the appellants did not establish a prima facie case that the trust and investors are the same entity, leading to the conclusion that the expenses incurred by the trust could be subject to service tax. The reliance on the Circular was deemed unsustainable in this context.

4. Eligibility for CENVAT credit: The appellants claimed eligibility for CENVAT credit on service tax paid by service providers, reducing their liability significantly. The Tribunal agreed that the appellants could avail CENVAT credit for services received by the venture capital fund, leading to a substantial decrease in the total liability. It was clarified that provision for investment losses should not be considered as part of expenses for providing service.

5. Decision and direction: The Tribunal directed the appellants to pre-deposit an amount of Rs. 2 crores within a specified timeline, considering the overall liability and the need for further hearings. Compliance with the pre-deposit requirement would result in a stay against the recovery of the remaining dues during the appeal process, providing a temporary relief to the appellants.

In conclusion, the judgment addressed various aspects related to the demand of service tax on trust expenses, the interpretation of the relationship between trusts and investors, and the eligibility for CENVAT credit, providing a detailed analysis and direction for further proceedings.

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