2014 (7) TMI 621 - AT - Service Tax

Scope of the Banking and Financial services - activity of managing funds on its own account or on behalf of state government - nature of amount reimbursed by the state government - whether taxable - Held that - The appellant is raising funds by way of loans on issue of Bonds in its own name, which cannot be considered as managing the funds of the State Government. The fact that the State Government guarantees repayment of loans by the appellant (under Bonds issued by it) would not amount to issue of the Bonds by the State Government. The discipline of Article 266 mandates that all loans raised by a State Government shall form one consolidated fund to be called the Consolidated Fund of that State. If that be the reality of the transaction, the expenditure incurred by the appellant would be expenditure incurred for servicing its own activity, of raising funds for its purposes though reimbursed by the State Government, to the extent of the incurred administrative expenses. Such reimbursement, in our view would not amount to payment of consideration for rendition of the tanable service, by the appellant to that Government. - Decided in favor of assessee. However, demand of ₹ 36370/- on Technical Testing and Analysis/ Technical Inspection and Certification Services confirmed with interest - penalty waived u/s 80 - Decided partly in favor of assessee.

Summary

Issues:
1. Service tax demand on 'Technical Testing and Analysis/ Technical Inspection and Certification' services.
2. Service tax demand on 'Banking and other Financial Services'.

Issue 1: Service tax demand on 'Technical Testing and Analysis/ Technical Inspection and Certification' services:

The appellant was alleged to have provided these services, with a confirmed demand of Rs. 36,370. The appellant admitted this liability but contended that its local offices were instructed to remit the service tax due, which was not done. The demand of Rs. 36,370 was confirmed as there was no remittance by the appellant or its local units. The appellant's counsel did not object to this position. Hence, this demand was deemed impeccable and confirmed.

Issue 2: Service tax demand on 'Banking and other Financial Services':

A demand of Rs. 2,74,078 was confirmed under this head. The authority concluded that the appellant provided auxiliary financial services and fund management services to the State Government, receiving remuneration as 'administrative expenses'. However, upon careful consideration, it was found that the appellant, as an instrumentality of the State, raised loans from the public by issuing Bonds, with funds kept in its own account. As the activities were deemed a service to itself and not to any other entity, the demand for 'Banking and other Financial Services' could not be sustained and was quashed.

In conclusion, the appeal was partly allowed, confirming the demand of service tax to the extent of Rs. 36,370 along with interest. The penalties under various sections were set aside, considering the appellant's status as an instrumentality of the State and the reversal of the substantive tax demand. The penalties were deleted, and the appeal was allowed without costs.