whether the share premium charged by the Indian Company while allotment of shares to their parent Company (based outside India) is liable for service tax under the Finance Ac, Service Tax

[hanmant kadam]

1. One Indian Company has allotted their shares to their parent Company situated in Germany, having face value of ₹ 10/-each. While such allotment they had charged premium @ ₹ 100/-/ 90/-or 50/- per share for such allotment of shares. Thus it appears that there are two different activities involved while allotment of shares on premium:-

1. Allotment of shares at face value of ₹ 10/-
2. For such allotment charging of Premium @ ₹ 100/-/ 90/-or 50/-

1.1 Though the first activity is covered as the ‘sale of goods’ in view of explanation given under para 2.6.6 of the CBEC’s Education Guide, the second activity of charging premium for such allotment appears to be taxable activity. In other words ‘share allotment’ is an act for which the Indian Company had charged and received amount under the head of ‘premium’ which is nothing but a consideration for service of ‘allotment of shares’.

1.2 After issue of the share at premium , face value of the share is considered as investment and ‘premium’ is nothing but value over and above the face value of the share charged by a company for allotment of Shares , which is nothing but a taxable service after introduction of the Negative List base taxation w.e.f. 1-07-2012.

2. In the Negative List era effective from 01-07-2012 the term ‘Service’ has been defined in clause (44) of the new section 65B and means ‘ any activity carried out by a person for another for consideration and includes a declared service’

In the present case it appears that :-

• any activity- Activity of allotment of Share
• for consideration:-In the form of Premium
• carried out by a person for another:- Carried by the Indian Company for German Company.
• and includes a declared service.:- ‘Agreeing to the obligation to do an act’ as mentioned under sub clause (e) of section 66E of the Act

2.2 Thus activity of allotment of shares which is carried out for the consideration received as ‘premium’ by Indian Comapany for German Company., is rightly treated as ‘Agreeing to the obligation to do an act’, which is a declared service under sub clause (e) of section 66E of the Act

3. Further , As per para 2.6.7 of the CBEC’s Education Guide:-

2.6.7 What are the implications of inclusion of ‘securities’ as ‘goods’?

The definition of ‘goods’ has essentially been borrowed from the Sale of Goods Act, 1930 with the only variation that in the inclusion clause of the said definition the phrase ‘stocks and shares’ been replaced with ‘securities’. In effect, therefore, activities that are in the nature of only transfer of title by way of sale, redemption, purchase or acquisition of securities on principal-to-principal basis, excluding services of dealers, brokers or agents in relation to such transactions, are outside the ambit of ‘services’. However activities which are not in the nature of transfer of title in securities (for example a person agreeing not to exercise his right in a security for a given period of time for a consideration) would not be included in this exclusion clause to the definition of ‘service’.

3.1 Thus, it appears that the face value of share is covered under the definition of Securities and hence not chargeable to tax. However, charging of ‘premium’ for allotment of shares is out side the purview ofdefinition of ‘Securities’, as it is charged for allotment of a share over and above the face value of a share. Hence, Premium is excluded from the definition of ‘Securities’ .

4. IF, PREMIUM IS NOT TAXABLE , WHETHER REVERSAL OF CENVAT CREDIT UNDER RULE 6(3) IS REQUIRED OR OTHERWISE?

While calculating the premium value of total assets of the company is considered , which is inclusive of Input Credit/ Input Service Credit . Thus if, for any reason the said services are considered as non taxable / exempted services , as there is use of common input/ input services , it appears that in that case provisions of CCR Rule 6(3) are invokable for demanding reversal of CENVAT Credit on amount of ‘Premium’ received by the Indian Company.

Posts / Replies

[bhart b sharma]

the case requires detailed deliberations on several points. as a preliminary, can go through following case law though facts may differ from your case supposedly as all details are not forthcoming from the synopsis above. the case law is of BOMBAY High Court:

Major Metals Limited vs. Union of India = 2012 (4) TMI 227 - BOMBAY HIGH COURT =  [2014 (303) E.L.T. 380 (Bom.)]

[Yash Goyal]

Dear Hanmant,

I am unable to understand the provisions of law based on which you have arrived at the above conclusion. With due respect to your view, My view on the subject matter are as under.

The relevant extract of the CBEC education guide is as under

'In effect, therefore, activities that are in the nature of only transfer of title by way of sale, redemption, purchase or acquisition of securities on principal-to-principal basis are outside the ambit of services'

According to the above guide, sale of securities on a principal to principal basis are outside the ambit of services. It nowhere refers to the price at which the transactions are carried out. The case as discussed by you, is for allotment of securities. The transaction is carried out on a principal to principal basis. Hence the transaction of allotment of shares is clearly out of the service tax net.

Since the activity of allotment of shares, itself is out of the service tax net, it would be irrelevant to discuss the aspect of consideration. However, even if the consideration aspect is analysed, in my view there is no logical ground for resorting to bifurcation of the issue price. The entire issue price, irrespective of the face value and premium components, is for the allotment of shares and it is the issue price that represents the value of shares and not merely the face value. Share holders do not pay a premium because the company is allotting shares. The premium is paid as a part of the value of shares.

Regarding the aspect of reversal of cenvat credit u/r 6, please note that the Rule 6 applies in a case where the service provider is engaged in providing 'exempted services'. If a particular activity is not service, then the said activity can never qualify to be an exempted service. And hence rule 6 will not be applicable in the instant case at all.

Trust the above clarifies the issue. Alternate / counter views are welcome and appreciated.

Regards

Yash Goyal

[Yatin Bhopi]

Dear exeprts

We are manufacturer. recently we have gone through excise audit.

We have securities premium account where premium received on issue of equity share is credited. i.e. for eg. if the face value of shares is ₹ 10 and if we issue to shareholder at ₹ 15, ₹ 5 is the premium received and credited to securities premium account.

Now auditors view is that, this is exempted service and they are asking us to reverse the CENVAT credit according to CCR 6 (3).

Please let me know the legal position and your view in this matter.