2015 (9) TMI 1036 - AT - Service Tax

Classification - sale of savings bonds issued by RBI - assessee bank rendered custodial service by maintaining the Bond Ledger Account and services incidental thereto - Banking and other financial services - Business Auxiliary service - cum-tax value has been adopted for determining the value of the taxable service - Held that - It is clear that custodial services in relation to securities is primarily the safekeeping of the securities of a client; the secondary function is that of providing services incidental thereto - a few of such services are included in the definition. Sans client- custodian relationship and sans entrusting of securities for safekeeping, the incidental services are not relevant. Once a client has entrusted the safekeeping of securities to a custodian, the custodian may maintain accounts relating to the security and collect the benefits accruing to the client as incidental activities. Without such entrustment the relationship is not one of custodianship. There is no client-beneficiary relationship with the bond-subscriber. Without rendering of custodian services, it would not be correct to hold that the appellant is liable to service tax for the consideration received from the Reserve Bank of India as handling commission, turnover commission and service charge in the category of banking or other financial service . - The claim of the assessee to be taxed as provider of business auxiliary service is upheld. There being no differential tax to be collected, the departmental appeal on valuation and penalty is dismissed - Decided against Revenue.

Summary

Issues:
1. Classification of services provided by M/s ICICI Bank as "banking and other financial services" or "business auxiliary services"
2. Valuation of taxable service based on "cum-tax" basis
3. Applicability of penalty and extended period for demand

Issue 1: Classification of services provided by M/s ICICI Bank

The appeal contested the confirmation of service tax for rendering "banking and other financial services" by M/s ICICI Bank as an "agency bank" for sale of relief and savings bonds. The original authority held that the activities performed by M/s ICICI Bank, such as issuing certificates, maintaining Bond Ledger Accounts, and paying interest, constitute custodial services liable to tax. The contention of M/s ICICI Bank that they are taxable as providers of "business auxiliary service" was based on their role as a "receiving office" and not as a provider of "banking and other financial services."

Issue 2: Valuation of taxable service

The departmental appeal raised concerns regarding the valuation of the taxable service on a "cum-tax" basis. It was argued that excluding the tax component in the remuneration contravened established legal principles. The learned Chartered Accountant for M/s ICICI Bank highlighted that the demand for tax prior to a specific date was barred by limitation of time. The Tribunal noted previous decisions indicating that brokerage earned on the sale of government securities may not be taxable.

Issue 3: Penalty and extended period for demand

The Tribunal observed that M/s ICICI Bank had paid service tax on remuneration earned from the Reserve Bank of India post the introduction of tax on "business auxiliary service." The demand for tax on brokerage earned before a specific date was deemed unsustainable based on previous Tribunal decisions. The Tribunal emphasized that the activities of M/s ICICI Bank did not amount to custodial services, thus upholding their classification as providers of "business auxiliary service." Consequently, the departmental appeal on valuation and penalty was dismissed.

In conclusion, the Tribunal allowed M/s ICICI Bank's appeal by setting aside the demand for tax prior to a certain date and upheld their classification as providers of "business auxiliary service." The judgment clarified the distinction between custodial services and the activities performed by M/s ICICI Bank in relation to the sale of bonds, ultimately dismissing the departmental appeal on valuation and penalty.