2014 (8) TMI 380 - AT - Service Tax

Banking and financial services - providing micro finance to self-employed women by organizing them into Self-Help Groups - They take finance from other financial institutions @ 12% and while providing finance to SHGs they charge 15% from such persons. Revenue was of the view that this 3% was towards loan processing fee and service charges and would be taxable under banking and other financial services as defined under Section 65(12) and made taxable under Section 65(105)(zm) of Finance Act, 1994 - Held that - prima facie, appellant is not a financial institution considering the definitions at Sections 45I(c) and 45I(e) in RBI Act, 1934 - Since Only for a brief period under dispute, Section 65(12) provided for taxing service rendered by any other person for the rest of the period the service was taxable only if it was provided by a Financial Institution, NBFC or a commercial concern. Therefore, the demand for service tax is not maintainable - stay granted.

Summary

Issues:
1. Taxability of loan processing fee and service charges under banking and financial services.
2. Taxability of miscellaneous incomes in relation to loans provided.
3. Classification of the applicant as a financial institution.
4. Granting of waiver of pre-deposit and stay on collection of dues during the appeal.

Analysis:
1. The case involved the taxability of a Trust providing microfinance to self-employed women through Self-Help Groups. The Revenue contended that the 3% margin charged by the Trust from the loan amount was taxable under banking and financial services. Additionally, other miscellaneous incomes like insurance, training fees, and administrative fees were also deemed taxable. A show-cause notice was issued for non-payment of service tax for the period 2004-05 to 2008-09, resulting in a substantial demand against the Trust.

2. The Trust argued that it was not a financial institution but a Trust registered under Section 12AA of the Income Tax Act. The consultant highlighted that the service tax demand was not sustainable as the Trust was not a financial institution, NBFC, or commercial concern. They also emphasized that the miscellaneous incomes were not solely related to banking services but included activities like training and insurance. The Trust had already deposited a significant amount during the investigation, which they believed should suffice for admission of the appeal.

3. On the question of whether the Trust could be classified as a financial institution, the Revenue asserted that the Trust fell under the definition of a "Financial Institution" as per the RBI Act, 1934. They argued that the 3% margin charged by the Trust was taxable, and the miscellaneous incomes were all connected to providing loans, making them taxable under banking and financial services. The Revenue requested a reasonable pre-deposit to be ordered.

4. The Tribunal, after considering the submissions from both sides, found that the Trust did not fit the definition of a financial institution as per the RBI Act, 1934. Citing a previous case where a similar petition was allowed, the Tribunal granted a waiver of pre-deposit for the admission of the appeal. Additionally, a stay was ordered on the collection of dues during the pendency of the appeal, providing relief to the Trust.

This judgment clarifies the taxability of specific charges and miscellaneous incomes in the context of microfinance activities undertaken by a Trust, emphasizing the importance of correctly classifying entities for the application of service tax laws.