2020 (11) TMI 435 - AT - Service Tax

Demand of service tax - SEBI - negative list regime - demand of tax on the fees collected, under the authority of the various Rules and Regulations notified for administration of the financial market in India, and retained in the General Fund of the appellant - Extended period of limitation - HELD THAT - The legislation, enforcement of laws and administration of justice are sovereign functions. We also deduce that the discharge of these functions may be subject to such laws as the competent legislative authority intends it to be so; consequently, statutes, not especially dealing with these specifically, do not immunize the discharge of sovereign functions if the legislative intent, stated or implied, does not exclude such subordination. The requirement of goods in the operating establishments of government cannot be equated with the discharge of sovereign obligations. The consequent ease with which the distinguishability of goods from functioning as a sovereign affords the latitude of transaction - of manufacture, of import and of sale and purchase in goods to be carved out for assigning to designated subordinates or entities, with attendant accountability to authorities under normal tax laws, is not discerned in the tax relating to services. The generalized definition of services in the negative list regime appears to have been the clarion call for tax intrusion into activities of government. Much of these, not being individual-specific deliveries and, moreover, without perceptible consideration could not have held the attention of tax authorities for long but others, in which government bodies were empowered to receive fees, did. Thus, it, probably, was that the focus of the adjudicating authority rested upon the autonomy of Securities and Exchange Board of India (SEBI), the participants in the financial markets and the fees charged from them as provider , recipient and consideration respectively. Clearly, the concept of service and, particularly, the legislative reliance on the expression for in section 65B (44) of Finance Act, 1994, to substitute to in section 65 (105), did not make any impression on the adjudicating authority. The premise that there is no pale of service outside Finance Act, 1994, and the fitment thereon within the definition, admittedly, without finding a place in the exclusions or exemptions, though eminently convenient, is, nevertheless in error for this reason. This Tribunal has been established to adjudge appeals arising from adjudication orders of Commissioners and appellate orders of Commissioners (Appeals). In appropriate circumstances, we may be called upon to construe circulars and instructions as beyond the scope of enforceability; however, statutory instruments issued by the Central Government in exercise of power to exempt tax conferred by Parliament are beyond the scope of such negation by us. Neither is the continued existence of such statutory instrument dependent on our approval; to do so would be frittering away of judicial resources - With that notification, the Central Government, a custodian of the sovereignty assigned to the Republic by the people of India, has distanced the authority wielded over the financial markets by the appellant, notwithstanding duly acknowledged succession, through creation under an executive order, from a department exercising that authority, from sovereign power. This abnegation, coupled as it is, with the renunciation of future tax liability arising therefrom, is cleansed of the stain of vested interest. We cannot but withhold our ascertainment of the legality of the claim made by the appellant before us. Extended period of limitation - Suppression of facts or not - HELD THAT - The composition of the Board is determined by the Government of India and the organization is staffed in accordance with rules framed under the governing statute. The receipts accruing to the appellant, in accordance with procedures laid down by law, are retained in a designated fund and scrutinized by the constitutionally established auditor. The retention of such fee in the assigned fund has been prompted by the principle of separation of powers much in the same way that the three organs of State are compartmentalised. Therefore, it is difficult to conceive of any motive in not complying with tax liabilities. There is also no allegation of suppression or misrepresentation by the appellant. Imposition of Fiscal Penalties - HELD THAT - The appellant is statutorily empowered to impose fiscal penalties for breaches enumerated in the statute and the proceeds of such imposition are credited to the Consolidated Fund of India - no different from the deposit of fines imposed by adjudicating authorities under Finance Act, 1994. As the successor, in due course, of the Government of India in Department of Economic Affairs substituting for the abolished Controller of Capital Issues, its role in the scheme of governance for the larger public interest is not a matter of mere conjecture. Service tax authorities had raised the issue of taxability of the fees charged by the appellant within a few months of the transition to the negative list regime and the appellant had been in correspondence with appropriate levels in the tax administration seeking acceptance of their interpretation. It, therefore, does not behoove the tax administration to claim that there has been suppression or misrepresentation on the part of the appellant. The delay on the part of tax authorities in issuing show cause notice cannot be justified by the argument that the bar of limitation extends to five years past from the date of issue of show cause notice; the jurisdictional tax authority was cognizant of the non-payment, and the reasons thereof, well before the normal period of limitation had lapsed. The mantle of sovereign power was not easily deniable and we cannot but conclude that the impugned order erred in concluding that the ingredients for invoking the extended period, and for imposition of penalty under section 78 of Finance Act, 1994 were, directly and indirectly, evidenced - The demand for the period beyond normal limitation, therefore, does not sustain - Consequently, the penalty under section 78 of Finance Act, 1994 is set aside. Appeal disposed off.

Summary

Issues Involved:
1. Taxability of fees collected by SEBI.
2. Sovereign functions and immunity from service tax.
3. Applicability of the 'negative list' regime and exemptions.
4. Invocation of the extended period of limitation and imposition of penalties under Finance Act, 1994.

Issue-wise Detailed Analysis:

1. Taxability of Fees Collected by SEBI:
The appeal by SEBI sought to set aside the order-in-original dated 2nd May 2018, which confirmed demands for service tax on fees collected by SEBI. The adjudicating authority concluded that SEBI's activities conformed to the statutory definition of "service" under section 65B of Finance Act, 1994. The fees collected were deemed quid pro quo for services rendered, thus falling within the taxable activity. The adjudicating authority rejected SEBI's claim for exemption under section 66D(a) of the Finance Act, 1994, and the 'mega exemption' notification no. 25/2012-ST.

2. Sovereign Functions and Immunity from Service Tax:
The adjudicating authority acknowledged that discharge of sovereign functions is beyond the scope of service tax but limited this to government activities. SEBI argued that its regulatory functions, including registration and monitoring, were sovereign functions carried out under the control of the Central Government. SEBI's establishment as a statutory regulator and its role in protecting investor interests were highlighted. The tribunal noted that the adjudicating authority failed to consider the broader scheme of sovereign immunity and the statutory basis of sovereignty.

3. Applicability of the 'Negative List' Regime and Exemptions:
The tribunal analyzed the evolution of service tax, noting that the 'negative list' regime replaced enumerated taxable services with a generalized definition. SEBI's claim for exemption was tested against the four tiers of escapement: exogenic to the definition of 'service,' exceptions within the definition, exclusions listed in section 66D, and exemptions notified under section 93 of Finance Act, 1994. The tribunal found that the adjudicating authority had not fully evaluated SEBI's claim of sovereignty and its exclusion from tax liability.

4. Invocation of the Extended Period of Limitation and Imposition of Penalties:
SEBI contended that the demand was barred by limitation and that penalties under section 78 of Finance Act, 1994 should not have been imposed. The tribunal noted that SEBI had been in correspondence with tax authorities and there was no suppression or misrepresentation. The adjudicating authority's rescheduling of hearings and the Central Government's subsequent exemption of SEBI from tax liability indicated a lack of intent to evade tax. Consequently, the tribunal concluded that the extended period of limitation and penalties were not justified.

Conclusion:
The tribunal set aside the demand arising from the second show cause notice due to procedural lapses and remanded it for fresh adjudication. The demand for the period beyond normal limitation was also set aside, along with the penalty under section 78 of Finance Act, 1994. The appeal was disposed of on these terms.