2024 (7) TMI 1460 - AT - Service Tax

Levy of service tax - income in the form of Call Option Fee - support service of business or commerce or not - period 2007-08 to 2013-14 - extended period of limitation - penalty - HELD THAT - The Call Option is a derivative or a right in securities. Both of which are specifically included in the definition of securities in section 2 (h) 2 (d)of the Securities Contracts (Regulation) Act, 1956 (SCRA). Securities are otherwise regarded as goods under normal parlance. Therefore, it is held that a grant of Call Option is a transaction in goods hence cannot be subject to levy of service tax. The imposition of service tax on goods is beyond the scope of Finance Act, 1994. In Vodafone 2012 (1) TMI 52 - SUPREME COURT case Hon ble Supreme Court has considered involving almost same companies as are involved herein. Though the department has taken plea that it is only in 2013 that SEBI granted validity to contracts providing for pre-emptive rights, right of first offer, tag along right, drag-along right and call put options by revoking notification of year 2000. Hence for the period in question the Call Options were not legalized. However, it is observed that in Vodafone case, Hon ble Supreme Court has discussed and analyzed Call Options at length and there seems not even a whiff that the Call Option was illegal or not a valid contract. The judgment is prior amendment of 2013 in SCRA, 1956. The Framework Agreement contemplated the transfer of SBP Shares upon exercise of the Call Option granted to GSPL, the requirement/ obligation on the Appellant to hold the underlying shares which were the subject of the Call Option was ancillary and necessary for the Call Option to be enforceable. Accordingly, the consideration could not be attributed, and was not paid, for such an ancillary requirement as it had no separable commercial value. Therefore, the consideration was not for the restriction contemplated under clause 4.1 but for the grant of the Call Option. The SCRA further defines securities to include both rights in securities and derivatives , The grant of call option by the Appellant to GSPL results in the transfer of Appellants right in securities, and the creation of a derivative contract which derives its value from underlying securities. Rights in securities and derivatives are specifically included in the definition of securities in the SCRA. Therefore, call options clearly fall within the activities excluded from the scope of the definition of 'service' in Section 65B (44). Extended period of limitation - HELD THAT - There is no discussion regarding any specific act on part of appellant which may establish the intent to evade tax. There is no discussion regarding which of the situation listed in clause (a) to (e) of the proviso to section 73 (1) of Finance Act is attracted - it is clear that granting call option is not an activity of rendering service. The appellant was of this bonafide belief only, which is why the service tax on call option fee was not paid by the appellant. In view of these apparent facts on record and absence of any evidence about the positive act of the appellant to evade duty, the department has wrongly invoked the extended period of limitation. Penalty - HELD THAT - The penalty has wrongly been imposed. Reliance placed upon the decision of Hon ble Supreme Court in the case of UOI vs. Rajasthan Spinning and Weaving Mills 2009 (5) TMI 15 - SUPREME COURT wherein it has been held that the evidence of deliberate deception by the assessee with an intent to evade duty is necessary for imposing penalty, same has been the observation of Supreme Court in the subsequent decision in the case of CCE, Chandigarh vs. Pepsi Food Ltd. 2010 (12) TMI 15 - SUPREME COURT . The appellant has wrongly been held to have been a service provider while receiving call option fee . The demand of service tax has wrongly been confirmed. The Finance Act has wrongly been invoked and the penalty has also wrongly been imposed. For these reasons the order under challenge is hereby set aside - appeal allowed.

Summary

Issues Involved:
1. Whether Service Tax is leviable on the amounts received by the appellant for granting "call options" under the framework agreement.
2. Whether the extended period of limitation for the demand of duty is applicable.
3. Whether the imposition of penalty is justified.

Issue-wise Detailed Analysis:

1. Service Tax Liability on Call Options:
The primary issue was whether the amounts received by the appellant for granting "call options" to GSPL or Vodafone India and their associate companies under the framework agreement were subject to Service Tax. The appellant argued that the "call option" is a financial instrument and not a taxable service. The Department contended that the transaction was a "support service of business or commerce" under Section 65(104c) of the Finance Act, 1994.

The Tribunal noted that "call options" are derivatives and fall under the definition of "securities" as per Section 2(h) and 2(d) of the Securities Contracts (Regulation) Act, 1956 (SCRA). The Tribunal relied on the Supreme Court's decision in the Vodafone International Holdings B.V. vs. Union of India case, which held that "call options" are contractual rights and are considered "goods." Therefore, the transaction was deemed a dealing in goods, not a service, and thus beyond the scope of the Finance Act, 1994. The Tribunal concluded that the imposition of Service Tax on such transactions was without jurisdiction.

2. Extended Period of Limitation:
The Department invoked the extended period of limitation under Section 73(1) of the Finance Act, alleging suppression of facts by the appellant. The Tribunal observed that there was no evidence of any specific act by the appellant to evade tax. The appellant's belief that "call options" were not taxable services was deemed bona fide. The Tribunal cited the decision in Grindwell Norton, which held that extended periods should not be invoked in cases involving bona fide interpretation of law. Consequently, the Tribunal held that the extended period of limitation was wrongly invoked, and the Show Cause Notice was barred by time.

3. Imposition of Penalty:
The Tribunal addressed the imposition of penalties under Section 78 of the Finance Act. It held that penalties are justified only when there is evidence of deliberate deception with an intent to evade duty. The Tribunal cited the Supreme Court's decisions in UOI vs. Rajasthan Spinning and Weaving Mills and CCE, Chandigarh vs. Pepsi Food Ltd., which emphasized the necessity of evidence of intent to evade duty for imposing penalties. The Tribunal found no such evidence in this case and concluded that the penalty was wrongly imposed.

Conclusion:
The Tribunal set aside the order under challenge, holding that the appellant was not a service provider while receiving "call option fees." The demand for Service Tax was wrongly confirmed, the Finance Act was wrongly invoked, and the penalty was wrongly imposed. Consequently, the appeal was allowed, and the order was set aside.