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TMI Blog2021 (7) TMI 216X X X X Extracts X X X X X X X X Extracts X X X X ..... T; a Private Placement Memorandum (PPM), which is an Offer Document for inviting contributors or subscribers to be part of the Trust set up by the Settlor, is issued with the intent of allowing evaluation of possibility of investment in the units of the VCF; the Appellants' properties (i.e, money contributed by investors) are held in trust by the Trustee for the benefit of beneficiaries, who are contributors to the Funds ("Contributors/ Beneficiaries"); the Trust Deed executed for this purpose, lays down the objectives for which the Appellants' Trusts are set up, its establishment, management and other allied matters; the Trustee receives remuneration in the form of Trusteeship fees for services rendered by it to the Appellants. To ensure that the Appellants receives relevant professional and experienced advice, the Trustee appoints an Investment Manager or Asset Manager to manage the assets of the Appellants. The terms for appointment of the Investment Manager/ Asset Manager are contained in the "Investment Management Agreement" ("IMA"). The Investment Manager is responsible for managing the assets/ investments of the Appellants and receives remuneration in the form of management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant-Trusts to the Contributors /Beneficiaries; even assuming for the sake of an argument without conceding that there is a Service, Service tax not payable because there is no distinction between a Trust and Contributors/Beneficiaries; in any view of the matter, Service tax not payable because of the doctrine of mutuality; issue is covered by a direct judgement in the case of State of WB v. Calcutta Club; even assuming the doctrine of mutuality does not apply for any reason, there is no Service falling under the taxable entry "Banking and other financial services" (BFS) for the present tax demand to be sustained; expenses incurred by Trust do not constitute consideration for "services" by Trust to Contributors/ Beneficiaries. 2.2. Shri Vikram Nankani further submits that carrying Interest or Carried Interest is a return on investment and not performance fee; in any case it is not a fee received by the Appellant-Trusts for liability to arise in the hands of the Appellant-Trusts (it is the recipients of such income who need to evaluate tax liability if any with respect to the same); notwithstanding the above, service tax (if any) needs to be calculated on the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds that is created in law for the benefit of the Contributors. "Trust" had been defined under Section 3 of the Indian Trust Act 1882 as "A 'Trust' is an obligation annexed to ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared by him, for the benefit of another, or of another and the owner". Simply put, a Trust is an arrangement whereby property is held by a person (the "Trustee") for the benefit of specific people (the "Beneficiaries") or for some object permitted in law. The property is held by a Trustee by virtue of confidence reposed/ declared in him and his abilities to achieve the objects of the Trust. The person who declares the confidence is called the "Author of the Trust" (or the "Settler"). 3.1. The senior Counsel submits that the Appellants are Venture Capital Funds that work on a high-risk model by investing in nascent companies professing pioneering and innovative technology and skills. Venture Capital investments are generally done in a pooled or collective format, such that several investors combine their investments into one large corpus that invests in many companies. The Appellants are therefore a pool ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... affairs of the Trust, shall also be liable for punishment besides the Trust." 5.1. He submits that the aforesaid ruling is not applicable to the case on hand. The ruling is in the context of the Negotiable Instruments Act which confers liability on a juristic person. On the other hand, the present appeals are in the context of the service tax law, which, during the period under dispute did not confer any liability on juristic persons; the inclusion of trusts as a person/ juristic person under the service tax law/ goods and service tax law was incorporated in the legislation much after the periods under dispute; Pertinently, in the case above, the Trustee was proceeded against and not just the Trust as provided for under law; whereas, the present proceedings fail on grounds of the Trustee (who alone can sue and be sued for the actions of a Trust) has not been made a party to the proceedings rendering the entire proceedings invalid; further, the Respondent has completely disregarded the fact that the dispute in the case of Abraham Memorial Education Trust was with respect to a transaction between the trust and a third party (and not the beneficiaries of the trust). Hence, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h defined taxable service. The Respondent has raised demand under the service category of "Banking and other financial services", whereas the Appellants were not covered under the meaning of any class of service providers, who were required to pay service tax under the category of "banking and other financial services". Moreover, the definition of the term "Person" has been included with effect from effective 1 July 2012 in the Act, and even at that stage, the said term did not include a "Trust". Accordingly, during the period under dispute, any demand of service tax on Trusts would fail simply on grounds that Trust is not recognized as a person, much less a person liable to tax under the Act. 6.1. Learned senior Counsel submits that under the Income tax Act, 1961 (the "IT Act") as well, the term, "person" does not include trusts. Notwithstanding this, provisions in the IT Act pertaining to taxation of Trusts have been formulated keeping in mind the representative capacity in which Trusts/ Trustees operate for and on behalf of the Beneficiaries. Trustees of a private trust are treated as the Representative Assesses for assessment of private trusts as per Section 160 (2) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not challenge the legal position. 7.2. Shri Nankani submits that The Appellants obtained registration as mandated under various laws and regulations from a compliance standpoint; mere registration does not connote status of an "assessee" leading to tax liability as presumed by the Department; the entire understanding of the Respondent that all Appellants have obtained service tax registration and are therefore liable for service tax on the disputed demands is misguided and incorrect; the detail of service tax registration obtained by each of the Appellants including the rationale for the same have been explained in Para 9 of the Rejoinder submitted on 18 December 2020; many of the Funds obtained service tax registration under protest with a view to reserve their right to avail CENVAT credit in terms of Rule 3 of CENVAT Credit Rules, 2004 ("CCR"), having regard to the timeline brought in for availment of CENVAT vide Notification No. 21/2004-CE(NT) dated 11 July 2014; the Appellants had availed/reserved their right to avail CENVAT credit under protest merely to ensure and protect the Funds' right to CENVAT credit in the event of confirmation of service tax liability pendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see; which is void from inception. The Hon'ble Supreme Court, therefore, has made it clear that the core issue in these matters is that who the assessee is. Therefore, we have to examine that whether the petitioners who have obtained the Certificate of Registration under the Rules of 1949 can be said to be assessee and because of their obtaining the Certificate, whether they are precluded and estopped from saying that they are not the assessee and whether they are liable to pay the electricity duty to the State Government directly or the State Authorities through its Commercial Tax Department who is the in-charge for recovery of electricity duty. 63. In view of the above, it is held that: (III) The petitioner Companies are neither licensees nor assessees but obtained the registration under the Chapter-II of the Bihar Electricity Duty Rules, 1949. Their registration is of no use. They may have obtained the registration under misconception of law or wrong advice but that will not make them the assessee registered under the Rules of 1949;" 7.4. He submits that therefore, the contention of the respondents that the Appellants is registered under the provisions of service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses incurred in relation to investment activities. This is evident from the Trust Deed as well as the profit and loss statement of the Appellants. This is also evidenced by the Trust Deed entered (clause 2.1.4) in case of India Advantage Fund II (Appeal No. ST/1651/2012). Submissions on Mutuality of Interest between Trust and Members 8. Submitting on the issue of Mutuality of Interest, Learned Senior Counsel says that there is no service provider - service recipient relationship between the Appellants and the Contributors; the fundamental requirement for levy of service tax is that service should be provided by a service provider and received by a service recipient; therefore, even assuming for the sake of an argument, without conceding, that the Appellants qualify to be an assessee or person liable to service tax, such levy shall stand negated on applying the principles of "mutuality of interest"; he submits that the doctrine of mutuality is a well-recognised and well accepted doctrine in the area of taxation; this doctrine essentially states that when persons contribute to a common fund in pursuance of a scheme for their mutual benefit, having no dealings or relations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supra); Respondent has stated that till the stage of generation of surplus funds, the setup of trust was in satisfaction of concept of mutuality i.e. the flow of money, to and fro, would have been maintained within the closed circuit formed by the trust and Contributors. Further, it has been stated that as soon as these funds were invested in portfolio companies as mentioned in the Trust Deed, the doctrine of mutuality has been violated by way of exposure to commercial investing and profit generating operations; in doing so, the Respondent has failed to consider the fact that the aforesaid ruling was in context of interest earned qua banks or third parties, whereas the present case is with respect to monies spent on behalf of and returned to contributors. Even as per the Supreme Court ruling above, qua contributors, there is complete mutuality of interest and consequent non taxability; the Respondent failed to note that the relied upon case was in respect of applicability of doctrine of mutuality on the interest income earned on fixed deposits made with banks; in that backdrop, the Hon'ble Supreme Court held that in such a case, the doctrine of mutuality would not be applicable, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on further debunks the entire line of argument of the Respondent that every investor needs to receive similar returns as the doctrine of mutuality is embedded in the doctrine of equality; the Appellants' case that, every participating member or Contributor is entitled to rights and returns as agreed at the stage of contribution; there is no mandate or requirement under law for equal treatment of unequal; even in the case of s club membership, rights are issued to different classes of members who pay differential fees in exchange of differential access to amenities and privileges. 8.4. Shri Nankani submits that the respondent has stated that the AMC has been given status of special contributors and accorded undue high returns and that as per Section 17 of the Trusts Act; trustee is bound to be impartial. He submits that impartiality is not "equality" of treatment but means that a trustee's treatment of beneficiaries or conduct in administering a trust is not to be influenced by the trustee's personal favoritism or animosity toward individual beneficiaries, even if the latter results from antagonism that sometimes arises in the course of administration; Nor is it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rinciple of mutuality is not destroyed by the presence of transactions with, or profits derived from non-members; Appellant Trusts have not profiteered, and the contributions made are returned to the Contributors along with capital appreciation; hence, the judgement relied by the Respondent will not be applicable in case of the Appellants. 8.6. Learned senior counsel submits that the case of M/s Yum Restaurants (Marketing) Private Limited v CIT 2020 SCC On Line SC 388 should not be relied in the instant case, In case of Yum! Restaurants (Supra), the appellant company was incorporated by YRIPL as its fully owned subsidiary for the purpose of economisation of the cost of advertising and promotion of the franchises as per their needs; essential requirement that of the contributors to the common fund are either to participate in the surplus or they are beneficiaries of the contribution is missing; through the common AMP activities no benefit accrues to Pepsi Food Ltd. or YRIPL; accordingly the principles of mutuality cannot be applied. Apex Court clearly stated (Para 16) that Whereas the legal position on what amounts to a mutual concern stands fairly settled, the factual determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set out in the underlying documentation; appellants/ Trusts being regulated entities, all of the arrangements as above are subject to the scrutiny of SEBI / other regulators; he places reliance on Hon'ble Supreme Court Ruling (Para 12, 13, 15, 16 and 17) in case of Bangalore Club (Supra); present case squarely falls within the above principles as all participating Contributors including the AMC (where relevant) contribute monies and receive a return as laid down in the various documents; as per above judgment, doctrine of mutuality does not mean equality in treatment; it merely means that there should be a complete identity between the participants and contributors and the contributors should have right of disposal over the surplus; accordingly, the entire presumption that certain class of unit holders enjoy specific privileges and incremental returns despite joining at the last minute is unfounded and called for. 8.8. Shri Nankani further avers that the relationship between the Appellants and the Contributors is akin to the relationship between a Company and its shareholders; understanding in the impugned orders that the Contributors are only subscribers to schemes floated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms that they do not establish or recognize a service provider-service recipient relationship which is a sine qua non for any levy of service tax; Trust per se is incapable of entering into such transactions as a service. The Appellants is not a party to this basic document (ie, Contribution Agreement) through which the Contributors contribute money to the Appellants; the intention of the Contributors is only to invest/ contribute to the corpus and not to receive asset management services from the Trust. Submissions- whether expenses incurred- Carry Interest and performance fee amount to consideration for a service- whether tax liability arises 11. The senior counsel submits that no consideration under the alleged activities charged by the Appellants from the Contributors; as per Explanation (a) to section 67 of the Finance Act, consideration, for service tax purposes, should be an amount payable for provision of services. As per Section 2(d) of the Indian Contract Act, 1872, "When at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing, something, such act or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d upon for any service; even assuming that the expenses incurred with respect to services provided by various service providers to the Trust, the Appellants incur these expenses on behalf of the individual Contributors; incurring of expenses in the capacity of/ at the behest of the recipients of service cannot be considered or equated to consideration for provision of services.; there would be no levy in the hands of the Contributors in their capacity as recipient of services corresponding to the expenses. 11.2. Shri Vikram Nankani submits that for service tax to apply consideration should be received by a "taxable person" with respect to a "taxable service" ; gleaning through the provisions of service tax during the relevant period, he submits that levy of service tax on banking and other financial services is on a "banking company or a financial institution including a non-banking financial company or any other body corporate or commercial concern"; A Trust does not have any such general legal identity. In fact even the Department has conceded that the Trust shall not qualify as a banking company or a financial institution, non-banking financial company or any other body c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submits that the amounts considered in the Impugned Order includes notional expenses relating to accounting entries "loss on sale of investments", "accrued interest considered doubtful", "loss on revaluation of assets", etc; these amounts are not actual expenses but are only accounting adjustments which are required to be made to reflect the true and correct financial status of the Appellants as mandated under accounting principles; these cannot be treated as amounts "retained" by the Appellants from the Contributors for providing any "services" to the Contributors; out of the total amount of INR 28,51,49,62,689 treated as "consideration" received by the Appellants in the Impugned Orders, an amount of INR 12,37,36,99,793, is towards these accounting entries, which should clearly be excluded from the amounts under dispute, as these cannot be treated as amounts "retained" by the Appellants for providing "services" to the Contributors; unless there is an actual flow of consideration for an agreed service, no service tax liability can arise. 11.5. The learned Senior Counsel submits that Revenue entirely alleges that the Appellants retain amounts distributable to class B/ C unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vertently shown as performance fee, whereas by nature, the same is distributions made to another Class B unit holder (and not AMC); since, the same is in nature of return on investments, service tax has been not been paid on the same. (ii). in case of ICICI Equity Fund, during the period under dispute, an amount INR 21.34 Crores has been paid as performance fee to the AMC, on which AMC discharged service tax; as can be seen from above, the AMC has already discharged applicable service tax on the performance fee received from the fund; hence, the said performance fee has already been subjected to service tax in the hands of AMC. (iii). the income from investments has been inadvertently shown as performance fee in the AMC's director's report for FY 2007-08 in respect of India Advantage Fund - Series 1 (IAF Series 1);it was shown that they earned Rs. 578.6 million as performance fee; subsequently it was rectified in the AMC's director's report for financial year 2008-09. He submits that as can be seen from above, the amount alleged by the Respondent to be in nature of performance fee, is in fact, in the nature of income from investment in venture capital fund, which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has suppressed the material facts from the department wilfully; failed to make payment of service tax and to file service tax return as well; Impugned Order has not however, made any reference as to how "suppression of facts with intention to evade" tax is established. He submits that the Appellants is under the firm belief that the intention of the Government has never been to tax VCFs set up as Trusts under the category of "banking and other financial services"; the appellants exercised bona fide belief that Trusts are not specifically included in the list of such institutions/ entities for "banking and other financial services"; it was clarified by CBEC vide Circular No 94/05/2007-ST dated May 15, 2007 that entry load and exit load charged by the mutual funds from investors shall not be liable for payment of service tax under fund management services (banking and financial services).; as evident from the circular, expenses retained by a Fund are not liable to tax; the artificial distinction sought to be made by the Respondent on entry/ exit load covered in the above Circular and expenses incurred by the Funds is neither supported by law or fact; therefore, no suppres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned Senior Counsel Shri Vikram Nanakani avers that Section 76 of the Finance Act is applicable only when an assessee has failed to pay service tax; as the Appellant is not liable to service tax, there is no failure on the part of the Appellants to pay service tax; he submits that Section 77 of the Act provides for levy of penalty on an assessee where he fails to obtain registration and defaults in any provisions of the Act, where such default has no provision with regard to levy of penalty; as the Appellants believes that it does not provide taxable services, there is no requirement to file returns and hence no penalty can be levied. He submits that Section 78 of the Finance Act provides for penalty for suppressing the value of taxable service, where any person has not paid service tax due to suppression of value of taxable service with intent to evade service tax; in the instant case the appellants had no intent to evade service tax as due to the definition of "banking and other financial services" and circulars issued by the CBEC clearly state that the intention of the government is not to levy service tax on such amounts retained by the Appellants; the Appellant does not func ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 80 of the Act, which primarily is meant to protect genuine and reasonable situations. He relies upon the following cases. (i). ETA Engineering Limited Vs CC - (2004) 174 ELT 19 (Tribunal)- Para 80 (ii). Oriental Insurance Co Ltd1998 (103) ELT 459 (Commr-Appeals)-Para 13 (iii). Addl. CIT Vs Mohammed and Sons 1985 (154) ITR 220 (Rajasthan High Court)-Para 12 and CWT V S.L. Khunna 1989 (180) ITR 340 (Allahabad High Court -Para 10 and 11 (iv). CCE Vs Milan Tent Palace -2001 (131) ELT 274 (CEGAT Delhi)-Para 2 (v). CCE Vs AB International- 2007-TIOL-1561-CESTAT-MUM (Mumbai CESTAT) Para 3 Submissions on Revenue Neutrality 17. Shri Vikram Nankani submits that the issue is Revenue neutral as the Appellant is also eligible to claim CENVAT Credit of the Service tax paid on input services in terms of Rule 3 of the CENVAT Credit Rules, 2004 read with Rule 2(1) thereof; the expenditure incurred by the Appellants as shown in the Revenue Account discloses actual expenses incurred by the Appellants and the accounting provisions created by the Appellants. He submits a chart showing duty demanded, allowance for write off on the loss of sale of invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by ICICI Ltd, through Indenture of Trust (IOT) dated 16.10.2000 (b).ICICI Econet Internet and Technology Fund, a scheme floated by the IEF in terms of Article 1.1 of IOT; (c) ICICI Trusteeship Services Ltd- A company registered under the Companies Act, 1956, appointed as 'Trustee' of the Fund and (d) Asset Management Company (AMC) - ICICI Venture Funds Management Company [IVEN] with whom the Trustee entered into an Investment Management Agreement for the purpose of managing the Scheme. He submits that AMC has a delegation of Asset management duties from the Trustee representing the Fund for the benefit of the Contributor /Subscriber /Investor (collectively referred to as 'Investors') through the IMA executed on 2nd April 2001; any/all duties responsibilities/ powers of the AMC are primarily that of the IEF; a Contribution Agreement (CA) is also entered into with each investor and The Private Placement Memorandum (PPM) prepared by the Fund, as required under the relevant SEBI Regulations, apprising the intending Investors of the details of the Fund. Submissions by Shri P.R. V. Ramanan, Special Counsel for Revenue 20. Shri PRV Ramanan, Special Counsel, appearing for the respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities to such investors to participate in the income, profits and gains arising out of the acquisition, holding or disposal of portfolio investments, property or rights or any other benefits under such schemes; the Fund represented by the trustee is thus engaged in providing services of long-term management of the investments; the activities reflect a systematic process and an organized and regular business of accepting monies from investors, using the same for making profits /gains by re-investing in portfolios or extending loans and distributing the proceeds received by way of dividends or interest on loans. The impugned funds- legal implications as Venture Capital Fund 21. 21. Shri PRV Ramanan submits that these Funds are registered under VCF Regulations, 1996 issued under the SEBI Act, 1992; Section 11(2) (c); Section 12 (1-B) of the said Act provides for mandatory registering of and regulation of VCFs.; Regulation (2) (k) defines that 'trust' means a trust established under the Indian Trusts Act, 1882 (2 of 1882) or under an Act of Parliament or State Legislature; since all the 11 funds are registered under VCF Regulations and are bound by the provisions of the same, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n' are responsibilities enjoined on the Fund; according to these provisions, a VCF is regarded as a legal entity. 21.1. Learned Special Counsel submits also that as per Regulation 30, 'Liability for action in case of default' is fastened on the VCF; Default, if established, may result in suspension or cancellation of certificate of registration to carry on as VCF; under sections 15A to 15HB of the SEBI Act, penalties, up to Rs. 1 Cr, are imposable for defaults on the part of any person or entity, including an intermediary; clause (iii) of Ex.1 clearly states that the powers of the trustee shall not be deemed to be curtailed, restricted or otherwise limited by, under or in pursuance of the provisions of section 20 or any other provision of the Indian Trusts Act, 1882, in regard to investment of trust monies; thus, a VCF is a trust only in form not in content; a VCF is not a mere obligation but a legal entity, with its own rights and duties; the exclusion sought from the Indian Trusts Act and the resultant deviation is not limited to section 20 alone. By setting up a special class of investors and providing them with privileges adverse to the regular Class A investors; provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is provided for trusts from the definition of 'person' in respect of any of these 11 Funds; the very fact that in their own key documents, the subject VCFs have regarded a 'trust' as a 'person' goes to show that, in the reckoning of the ICICI VCFs themselves, a trust is without doubt a legal entity or a person. 22.2. Learned Special Counsel submits further that following further facts support the view that the Funds herein are legal entities/persons: * The Fund has obtained a Service Tax registration on 28.05.2008 for banking and financial services of its own volition and continued to hold; it also availed CENVAT credit of Rs. 17.04 Cr. to be used on taxable services provided by Trust/Fund, during the period from 4/2015 to 9/2015 IEIT; * The Fund/Trust has a bank account, prepares profit and loss accounts, files balance sheet, deduct TDS wherever applicable, obtain approvals and registration from SEBI. * The Fund has, even before the date of its formation /inception allowed invoices to be raised on it by various service providers (including service tax value) and has duly paid the same; Fund, which qualifies as a legal entity or person" for having received such servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OT; this means that the primary responsibility to manage the Trust Funds lies on the Fund and its trustee. * As per Article 34.1 (EX.1 -Page 20), the Fund represented by the trustee can terminate or dissolve the Fund if AMC resigns or the services of AMC are discharged; in such an event, the trustees have the liberty to appoint a new AMC within a period not exceeding six months (180 days); this would mean that the Fund represented by the trustee would manage the Fund in the interregnum. This is indicative of the fact that the Fund is the fall back entity for managing the trust funds; Ex. 3A (Page-1 India Advantage Fund -V) and Ex.3 B (India Emerging Sectors Fund -pages 1 & 2) also have similar provisions. * Statements (Exhibit- 4, 5, 6, and7) of IVEN's Senior Vice-President, Finance, Shri Jayatheertha, also show that the Fund represented by the trustee is the primary fund manager and the primary service provider of taxable services, with the Asset management company being only a sub- delegate of the Fund. 23.1. Learned Special Counsel also submits that the Econet Fund is fully responsible for holding, and using for gain, the assets of the investors during the lifetime of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the assets but does not share in the benefits; Section 3 of the Indian Trust, Act 1882, defines both a beneficiary and beneficial interest to be "the person for whose benefit the confidence is accepted is called the "beneficiary": the subject-matter of the trust is called "trust-property" or "trust-money": the "beneficial interest" or "interest" of the beneficiary; therefore, two conclusions emerge: (i) Beneficial interest is nothing but a right; Property does not only include what is tangible, but rights too; this would imply that beneficial interest does fall within the ambit of the term "property", as defined and contemplated by Indian laws, judicial interpretations; in the instant case, the investor has the right to get beneficial interest from the Units purchased from or issued to him by the Fund; this calls for performance of activities from the Fund; the Fund is, therefore, bound by the IOT to perform to the benefit of the investors; this is done by them by appropriate asset management services; thus, the service of 'asset/ fund management' to the investors' contributions is primarily rendered by the Fund; in the course of such management they engage the services of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereof are totally contrary to the principle of mutuality in the service flow between the Fund and the contributors /subscribers/investors; if, the contributors and the Trustee representing the Fund are same and if the relationship is based on mutuality, Clause 32.1 has no meaning; such non-existence of mutuality between the Trustee representing the Fund and the investor is well known and accepted by the Trustee represented by the Fund; as it comes out even at the time of incorporation of the IOT itself, the rights of the contributor or investor are highly restricted; contributors have no say when it comes to investment policies and decisions of the Fund; the Trustee and the AMC's decisions are final in all key matters. Given this position, it would be a misnomer to say that the Fund and the investors are one and the same. 24.2. Learned Special Counsel submits also that articles 6.4 and 6.5 of the IOT relating to India Advantage Fund-I (Ex.- 26 - page 269 and 270) sets out the provisions relating to proceeds distributable to contributors/investors w.r.t the Fund investments; it is envisaged that out of CI, 'C' class unit holders may allocate up to a max of 30% of such CI fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es that the Trustee representing the Fund is not equal with the contributors; further, the CA is a tripartite agreement, wherein the Fund is differentiated from a contributor or investor. 24.4. Learned Special Counsel submits that Hon'ble Supreme Court, in a Landmark Judgment passed on 14-January-2013 in CIVIL APPEAL NO. 124,125 OF 2007, 272-278 of 2013 arising out of S.L.P.(Civil) No. 16880 - 16884 of 2010 and16879 of 2010 of M/s Bangalore Club Vs. Commissioner of Income Tax gives greater clarity on "Principles of Mutuality", under which the Tax Exemption of Societies /Trusts is also justified; Supreme Court has laid down three conditions (i) there must be a complete identity between the contributors and participators (ii). the actions of the participators and contributors must be in furtherance of the mandate of the association and (iii). there must be no scope of profiteering by the contributors from a fund made by them which could only be expended or returned to themselves. He submits that in the case of the Funds which have filed the present appeals none of the three conditions are met for the Fund to claim the consideration received by it as exempt from income due to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C found; significantly, the facts involved only the Club and its permanent members and the subject matter was supplies of food and other items to permanent members; thus, the relationship between an investor and the VCF is not at all comparable to the relationship between a member and his Club, which is founded primarily on the principle of mutuality. 24.6. Learned Special Counsel submits that the actions of the Fund and the investor must be in furtherance of the mandate of the Venture fund; the Venture Funds mandate of generating long term capital appreciation on investments by profit generations on such investments for the investor is to be considered along with the fact that the Fund is a trust under Indian Trusts Act; the mandate is incomplete by just generating profits without distribution of generated profits/surplus; the Fund being a Trust under Indian Trusts Act, such distribution has to be impartial, in line with the Act, for the completion of mandate; however in this case, the AMC and its employees/consultants have been given the status of a special contributor and have been accorded unduly high returns categorized as investment returns at the cost of other contrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expended on the members by providing services and facilities or returned to them if any unused surplus remains; only then the mutuality principle is satisfied; Per contra, in the case of a VCF, the contributed funds have to be necessarily expended on third parties first to generate gains/profits, so that the capital appreciation envisaged in the IOT and PPM, in respect of contributions received from investors, is achieved; 25.1. Learned Special Counsel submits that firstly, the flow of money, to and fro, was not maintained within the closed circuit formed by the Fund and the Investor; as soon as the contributions were placed in various investments as also loans, the closed flow of funds between the Fund and the investor suffered from deflections due to exposure to commercial investing and profit generating operations and secondly the contributions were expended on third parties, who benefited from the VCF activity of the Funds without any contribution to the Trust funds. The commonality of identity between contributors and participators got impaired when the third- party investee companies derived benefits without being contributors at the first instance. 25.2. Learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different perspectives on this issue; in general, charitable institutions, entities which are not engaged in commercial activities in a regular manner, training entities that charge a fee have been regarded as other than a 'commercial concern'; some Courts have held that profit motive is not a necessary condition for an entity to be called a 'commercial concern'; on examination, one finds that after the establishment of a VCF in the form of a Trust, the Fund appoints an AMC to formulate and devise schemes and invest the Trust fund in accordance with the objects and provisions of the IOT and SEBI regulations; an IMA is entered into between the Trustee and the AMC for this purpose; a PPM is prepared outlining the features of the Scheme; based on the PPM, contributions are sought from intending Investors; due diligence checks are exercised before acceptance of contributions; the monies so collected are invested in companies and like entities in terms of the IOT and the IMA; on conclusion of the Scheme, by redeeming the Units, income generated through investments is distributed to the investors based on a formula after setting off certain expenses; VCFs may be close or open ended. 26 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'any other person'; moreover, with effect from 1/7/2012, the term "person" has been defined vide section 65B (37), which is very wide in its coverage and specifically includes every artificial juridical person; as per Wikipedia 'A juridical person is a non-human legal entity, in other words any organization that is not a single natural person but is authorized by law with duties and rights and is recognized as a legal person and as having a distinct identity'; According to 'Legal terms dictionary', a juridical person means any legal entity duly constituted or otherwise organized under applicable law, whether for profit or otherwise, and whether privately-owned or governmentally-owned, including any corporation, trust, partnership, joint venture, sole proprietorship or association; the subject Funds, which are VCFs, are given a distinct legal identity under SEBI (Venture Capital Fund) Regulations, 1996 and is authorized by law with duties and rights; hence, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of the service as per the definition of the term 'Scheme' ' in Article 1-Page 4 of Ex.1- wherein the expression used is 'providing facilities' to persons, i.e. investors, to participate in the income, profits and gains arising out of the acquisition, holding or disposal of portfolio investments, property or rights or any other benefits under such schemes; the Fund incurs several costs and expenses, such as, Management fee, Performance fee and Fund expenses and meets them by retaining a portion of the proceeds before making over the balance of proceeds to the investors; such retention of the proceeds is the consideration for the services rendered by the Fund to the investors. 27.2. Learned Special Counsel submits also that the he Appellants claim that the funds distributable to the investors held back by the Fund do not constitute the value of the taxable service is not in conformity with the Service Tax (Determination of Value) Rules, 2006; explanation to Section 67, includes 'any amount payable' for deriving the valuation of taxable services; explanation states that "consideration" includes any amount that is payable for the taxable services provided or to be provided an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, it is not taxable, Shri PRV Ramanan submits that 'Carried Interest' (CI) is neither an interest nor a return on investment but a compensation/performance fee paid to the AMC or any person /entity designated by the it, the latter, as a special class of investors/ Unit holders; CI is contingent to payouts (realizations Generated by exiting portfolio investments) by the fund; such Carried interest is credited to the class B (special Units holders) only when the net realization recognized by selling and exiting portfolio investments exceeds the sum total of the capital committed and the appreciation gained as per the pre-agreed preferred rate of return; CI is a function of the profitable exits during a given year; which means it is a profit sharing mechanism , which defines carried interest; it clearly indicates that the profit sharing is 20% of the net realizations (sale value of portfolio investments ); perusal of Exhibit 14 pages 1 & 2, reveals that the 20 percent sharing to the special class unit holders (Class B unit holders ) happens even when the capital contribution from these unit holders are only 0.0003 percent to the total capital committed for investment; this is only b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well as the Settlor for the India Advantage Fund I; India Advantage Fund I and II and ICICI Venture together had only invested Rs. 10 Lakhs that too on 30 & 31/3/ 2006; they were given from the profits and gains a sum of Rs. 109.11 Cr. on 31/3/2008 (i.e. in 2 years' time) and an amount of Rs. 26.49 Cr. on 22/3/2010 without redemption of units; thus as against an investment of Rs. 10 Lakhs, these two 'C' class unit holders received purportedly as 'income from investment' Rs. 135.61 Cr., i.e. 1356 times the investment. He gives a contra example (page 416) stating LIC, an 'A 'class unit holder had an opening balance of Rs. 67.50 Cr. by 2005-2006 and had added a further investment of Rs. 37.50 Cr by August 2006; total amount invested by LIC was, thus Rs. 105 Cr; a sum of Rs. 58.81 Cr was redeemed and retuned against on 28/3/2008; LIC was paid from profits and gains a sum of Rs. 152.33 Cr up to 31/3/2008 and Rs. 15.76 Cr. by 22/3/2010; thus LIC received on redemption of units valued at amount of Rs. 58.81 Cr and a surplus of Rs. 168.09 Cr. i.e. 2.86 times the investment. He submits that thus, in the case of India Advantage Fund -I, two C class investors, namely, India Advantage Fund -I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .7 million (page 1 Ex.-19) and then reports the same amount as income from investments in page 2 of the Exhibit; it clearly points to the intent of tax evasion by describing in a misleading manner, the performance fees as income from investments; it also proves the fact that the " income from investments" otherwise called "carried interest" earned by the AMC is nothing but a performance related payment. He submits that perusal of Ex.-20, shows provisions of the IOT talk about withdrawal and mandatory redemption for the Class B unit holders (investment managers and affiliates/ associates) in case of their termination; it also mentions either transfer or re-allotment of the same units to the new asset managers and their designated partners on appointment. This is a common feature in all Funds and clearly highlights the performance related and incentive nature of the Class B units (special units). No Class A (regular class of units) will be subjected to this treatment (forced redemption) after the initial investment. This highlights the fact that the special class of units called Class "B" units are for the service providing AMC and in specific terms for the current AMC providing mana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to proceeds distributable to contributors/ investors w.r.t the Fund investments; the amounts distributed to Class C unit holders pursuant to clauses 6.4.3 and 6.4.4 are referred to as 'Carried Interest"; in clause 6.5 (page 270), it is envisaged that out of CI, 'C' class unit holders may allocate up to a max. of 30% of such CI for any person nominated by the Investment Manager; all the balance CI will be deemed to accrue to ICICI Bank, one of the Contributors who may agree to share a portion of the balance CI accruing to itself with the holders of Class A unit holders; the provisions reflected in Ex.-22, is very important in understanding the concept of CI, its performance related incentivization nature and how the AMC distributes the carried interest among its employees; it states that "The Board of directors of ICICI Venture Funds Management Company Ltd. at its meeting held on October 30, 2002 approved a carry plan for its employees; the carry plan envisages that the said Company will arrange to directly pay 'carry' from the performance fee earned by it from its Funds to its employees through a special trust created for the purpose in the following manner"; it is crystal clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edge cannot be attributed to the department in the absence of any declaration'; ICICI Venture as the AMC was fully in the know of the requirements under the S Tax law; reading together section 70(1) and section73 of the Finance Act, 1994, make it clear that under the S Tax law, self-assessment and remittance of tax are the statutory responsibility of an assessee; non- compliance with this basic requirement cannot be wished away by stating that there was no intention to evade tax; prior to following the above procedure, all the 11 Funds ought to have registered with the concerned/proper officer of the S Tax department and made a true declaration of the material particulars; further, no evidence of diligent conduct has been adduced to substantiate bona fide belief on the part of the said Funds or its Trustees. He relies upon the case of Kala Sagar Vs CST Tax, Mumbai [2015(138) STR 1015 (T-Mum]. 29.1. Learned Special Counsel submits that the Econet Fund began in year 2000 with a Trust fund of Rs. 100 crores contributed by two investors (Ex-23 and Ex- 25A); a new class of investment was allowed to become a part of the fund with 10,000 units of Rs. 100 each, thus investing Rs. 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is IVEN; such an arrangement has enabled the ICICI group to conveniently suppress material facts from the department. 29.3. Learned Special Counsel submits that the Annual report of ICICI Venture Fund Management Company Ltd [Ex-15] while managing India Advantage Fund-I allotted 5,000 units under the same modus operandi with the full knowledge of Trustee of IAF- I (A Trust); while page 1of this Exhibit shows that these 5,000 units have generated an income of Rs. 53.70 Cr as an income from investment in venture capital units, in page 2 of the same annual report the same amount of Rs. 53.70 Crores is shown as performance fees earned by the ICICI Venture Fund Management Company; this astronomical return is earned by the AMC for these 5,000 units, while the normal unit holders in the same fund earn Rs. 1611 Crores for 1090 crore units; IVEN, in its filing to Security Exchange Commission (SEC) USA [Ex.-22] has highlighted the performance nature of the fees earned through a special trust formed to itself and its employees; such special trusts are the privileged class of unit holders earning astronomical returns over that of norm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comes payable. As regards the reliance of appellant on the Supreme Court's decision in the Alcobex Metals, he relies upon decision in Shree Ranee Gums and Chemicals Pvt. Ltd. vs. CCE ,Jaipur [2017 (4) GSTL 340 (Tri-Del], which clearly settles the issue in favour of Revenue, wherever the SCN has covered extended period as well as normal period. Imposition of penalties 30. Shri PRV Ramanan submits that the penalties were imposed on under section 77 and 78 of the Finance Act, 1994, wherever deliberate default has been established; under section 76 penalty is imposable for default in payment of service tax and mens rea is not required to be proved and mere contravention of statutory provisions would suffice; as per discussion above, there are sufficient grounds to hold that the conduct of the subject 11 ICICI Funds and the Trustees representing the said Funds was clearly not above board; there was suppression of the material facts and non-declaration of the same to the Department with intention to evade due S Tax; he relis upon Gujarat Travancore Agency Vs Commissioner of Income -tax: [1989] 177 ITR 455 (SC) AIR 1989 SC 1767 and Chairman, SEBI Vs Sriram Mutual Fund : [2006] 131 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he plea, still it has to be substantiated before it can be accepted; for quantification purposes, however, the matter may have to go back to the adjudicating authority. 32. Summing up, Shri PRV Ramanan submits that the 11 Venture Capital Funds formed by the ICICI group, who are the Appellants herein are legal entities and are juridical persons; they come within the definition of 'commercial concern'; the said Funds , through their Schemes, provide facilities of asset management to investors to realize profits and gains by efficiently managing the monies/funds invested by the latter and in this process engage the services of the AMC, Custodians, Legal and other consultants etc; they are, thus, the principal service providers to investors in the Schemes floated by them; these 11 Funds did not disclose the fact of providing the said services to the department and had suppressed the fact of making performance based payments called 'Carried Interest' to privileged special Class of unit holders and showed the same to be 'return on investment' to evade tax; hence, the invoking of extended period of limitation for arriving at the tax demand for certain periods stands justified and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ligence of the contributors/beneficiaries; the Trust is registered under SEBI (Venture Capital Fund Regulations, 1996) as well as under the Income Tax and Service Tax Laws. 34.1. Learned Senior Counsel referred to some cases in the appellant's favour. We turn our attention to the various judgements. We find that Hon'ble Bombay High Court in the case of Homi Nariman Bhiwandiwala Vs Zoroastrian Co-operative, AIR-2007-BOM-267, 2001 (3) BOMCR 352 held that 16. Issue Nos. 13, 15 & 21: Defendant No. 2 is a trust and in case of a trust which is not a legal entity, all the trustees should be joined if a legal action is initiated against a trust. This view is taken by a Full Bench of the Gujarat High Court, reported in AIR 1978 Guj. 113, Atmaram Ranchhodbhai v. Gulamhussain Gulam Mohiyaddin. Same view is also taken by this Court in a decision reported in AIR 1998 Bom 373, Venkatesh Iyer v. Bombay Hospital Trust. The suit is also not maintainable for want of notice under Section 164 of the Maharashtra Co- operative Societies Act. The notice is mandatory which is clear from the provisions of Section 164 of the M. C. S. Act. This is laid down by the Division of this Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll constitute a Board of trustee [Article 7(1)] : the Canara Bank as trustee of the existing mutual fund and acting thereunder as the principal trustee shall be the legal owner in whom all the assets of the existing funds and all the funds which may be set up in future shall vest and the management and administration of all such funds shall vast in the Board [Article 7(2)]; the Board is to consist of the Chairman and the Managing Director for the time being of the Canara Bank, the Executive Director of Canara Bank, an officer of the settlor shall be the Executive trustee and two more other individuals are to be appointed by the settlor in its discretion [Article 7(3)]. 19. It is true that a trust registered under the Trusts Act not being a separate legal entity, has to act through its trustees and to that extent the Canara Bank may be justified in contending that it is acting on behalf of the mutual fund in that capacity, and, strictly speaking the Trust by itself may not be a public sector enterprise but in the present case, having perused some of the Articles of the Deed of trust, in particular the one noticed above, I feel that Canara Bank has a pervasive control on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociety Ltd. (supra), which were propounded after referring to various passages from the speeches of the different Law Lords in Styles case (supra). Lord Normand, who delivered the judgment of the Board summarized the grounds of the decision in Styles case (supra) as follows: "From these quotations it appears that the exemption was based on (1) the identity of the contributors to the fund and the recipients from the fund; (2) the treatment of the company, though incorporated, as a mere entity for the convenience of the members and policy holders, in other words, as an instrument obedient to their mandate; and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves." 12. We will consider each of these conditions in detail before proceeding to the facts of the case. The first condition requires that there must be a complete identity between the contributors and participators. This was first laid down by Lord Macmillan in Municipal Mutual Insurance Ltd. Vs Hills [7] wherein he observed: "The cardinal requirement is that all the contributors to the common fund must be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of which was assessable to income tax. But there is no liability in respect of profits made from members who avail themselves of the facilities provided for members." (Emphasis supplied) 15. In short, there has to be a complete identity between the class of participators and class of contributors; the particular label or form by which the mutual association is known is of no consequence. Kanga & Palkhivala explain this concept in "The Law and Practice of Income Tax" (8th Edn. Vol. I, 1990) at p. 113 as follows: "...The contributors to the common fund and the participators in the surplus must be an identical body. That does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he has paid." The Madras, Andhra Pradesh and Kerala High Courts have held that the test of mutuality does not require that the contributors to the common fund should willy-nilly distribute the surplus amongst themselves: it is enough if they have a right of disposal over the surplus, and in exercise of that right they may agree that on winding up the surplus will be transferred to a similar a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are taken in furtherance of activities that benefit the club, and in turn its members. Therefore, in Chelmsford Club (supra), since the appellant provided recreational facilities exclusively to its members and their guests on "no-profit-no-loss" basis and surplus, if any, was used solely for maintenance and development of the club, the Court allowed the exception of mutuality. 20. The mandate of the club is a question of fact and can be determined from the memorandum or articles of association, rules of membership, rules of the organization, etc. However, the mandate must not be construed myopically. While in some situations, the benefits may be evident directly in the short-run, in others, they may be accruable to an organization indirectly, in the long-run. Space must be made for both such forms of interactions between the organization and its members. Therefore, as Finlay J. observed in National Association of Local Government Officers Vs Watkins [9], where member of a club orders dinner and consumes it, there is no sale to him. At the same time, as in case of Commissioner of Income Tax, Bihar Vs. Bankipur Club Ltd.[10], where a club makes 'surplus receipts' from the sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been done away with by Article 366(29-A)(e), and whether the ratio of Young Men's Indian Association (supra) would continue to operate even after the 46th Amendment. 18. At this juncture, it is important to set out the two pillars, so to speak, on which the Young Men's Indian Association (supra) is largely based. In Graff v. Evans (1882) 8 Q.B. 373, the Grosvenor Club was incorporated in the form of a trust, the Appellant Graff acting as Manager of the club, for and on behalf of a Managing Committee, which conducted the general business of the club. Food and refreshments such as wine, beer and spirits were served to members on payment for the same. The question was whether a license was required under the Licence Act, 1872, to sell liquor by retail. In this context, the Queen's Bench Division held: "I think the true construction of the rules is that the members were the joint owners of the general property in all the goods of the club, and that the trustees were their agents with respect to the general property in the goods, although they had other agents with respect to special properties in some of the goods. I am unable to follow the reasoning of the learned magist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1930. The State legislature being competent to legislate only under Entry 54, List II, of the 7th Schedule to the Constitution the expression "sale of goods" bears the same meaning which it has in the aforesaid Act. Thus in spite of the definition contained in Section 2(n) read with Explanation I of the Act if there is no transfer of property from one to another there is no sale which would be exigible to tax. If the club even though a distinct legal entity is only acting as an agent for its members in matter of supply of various preparations to them no sale would be involved as the element of transfer would be completely absent. This position has been rightly accepted even in the previous decision of this Court. 34.7. Hon'ble Delhi High Court in the case of Duli Chand Vs Mahabir Parshad Trilok Chand Charitable Trust, AIR 1984 Delhi 144 held that "16. It is well-known that a Trust is not a legal entity as such. In fact, a Trust may be defined as an obligation imposed on the ostensible owner of property to use the same for a particular object for the benefit of a named beneficiary or a charity. Thus all Trustees in law are owners of the property but they are obliged to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce Act, 1994 does not purport to levy service tax on members' clubs in the incorporated form. Learned Special Counsel submits that in the case of Venkatesh Premises Co-op Society, the issue was about certain charges collected by a society resulting in surplus, which were subsequently utilized for mutual benefit towards maintenance of the premises, repairs, infrastructure and provision of common amenities and such surplus was held to be increase in the common fund and not as business income. 35.1. Learned Special Counsel strongly urges that the decisions rendered in the context of Members' clubs ought not to be applied to the case of an ICICI VCF, whose prime purpose is one of generation of profits from monies raised from several investors, which included PSUs, PSBs, LIC and other high net-worth organizations/individuals and employees of AMC, by providing facilities to achieve capital appreciation of the investors' monetary assets; activities of a VCF are very much akin to the activities of a Bank or a Financial Institution and bears no comparison to a Members' club, which, by its very composition, is a grouping of individuals who have chosen to be members of a particular in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urtherance of the mandate of the association. (iii) There must be no scope of profiteering by the contributors from a fund made by them which could only be expended or returned to themselves. He submits that applying the aforesaid criteria, the Court held that when the Club placed the surplus funds in the hands of corporate member banks, who used such deposits to advance loans to their clients, the funds of the mutuality were put into commercial operations with third parties outside of the mutuality; this meant that the first condition was not satisfied; secondly, while the mandate of the club was to provide facilities/service to its members, the surplus funds of the club came to be used for a totally different purpose as the said funds were placed at the disposal of third parties; this, the Court held, cannot be categorized as an activity of the club; hence, the Court ruled that the second condition was violated; though surplus funds come back to the club along with interest thereon, it does not satisfy the third requirement, because, before that happens the surplus funds gets used by third parties and the member banks also derive profits by lending the funds to their clients. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1994 as it existed between May 2006 and 31.05.2007. He submits that in the IoT and CA of all Seven India Advantage Funds- I to VII and ICICI Strategic Investment Fund, "Person" means any natural or juridical person or any body of persons corporate or incorporate and in the case of ICICI Equity Fund and ICICI Emerging Sector Fund, "Person" means any natural or juridical person or any body of persons corporate or incorporate and in the case of Econet Fund, the definition is wide enough to cover Trusts. Learned Counsel submits that in documents of the appellants VCFs have regarded Trust as person. He also submits that the appellants themselves have obtained Service Tax Registration for banking and financial services; they availed CENVAT credit of Rs. 17.04 crores during the period 04/2015 to 09/2015; the Fund has a bank account and prepares profit and loss accounts and registers themselves with SEBI etc; providers of service tax, CAs and legal consultants to the Fund, have raised invoices on them including service tax; Ministry of Corporate Affairs vide Circular No.37/2014 dated 14th October, 2014 clarified that Trusts are not barred to hold a partnership in an LLP in its name. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24) states that "The mutuality and non-profiteering character of a concern are to be determined in light of its actual working structure and the factum of corporation or incorporation or the form in which it is clothed is immaterial. It is therefore imperative to examine the actual functional framework of the assessee company". This is imperative to this appeal; Revenue's contention that the assessed entity, by whatever name it calls itself (i.e. a Trust or a Company) or seeks refuge in, is a commercial "juristic/ juridical person" carrying on asset management activities for the Investors for profiteering, delivering taxable services either by itself or through its delegates, retaining a portion of the surplus money, otherwise distributable to investors, is not different from the view of the Hon'ble Supreme Court in this judgment. 35.7. Replying to the reliance on the Judgment rendered by the Hon'ble SC in the case of GSFC vs. CCE, Special Counsel submits that Court Ruled that the setting up of the common facility at the GSFC premises with contribution from GACL and GSFC and the sharing of expenses of handling did not amount to providing the service of' Storage and Warehousi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liance to other laws does not change the fact that appellants are amorphous entity not qualifying to be a taxable person under Service Tax Law; the observation that as per the Circular issued by Ministry of Corporate Affairs, Trust can become a partner in an LLP and therefore is a legal entity is incorrect as the Trustee (not the Trust) can become a partner in LLP; therefore it furthers the appellant's stand that a Trust is incapable of carrying out any activity on its own. He submits that the conclusion drawn by the Department on the basis of the definition in IoT are incorrect as the services provided by the appellant to the contributors are covered under the principle of mutuality; the Trust satisfies the conditions laid down by the Hon'ble Supreme Court in the case of Bangalore Club; the formulation of KYC policy and mandated by PMLA cannot be used against the appellants to establish a deemed service provider-recipient relationship; the amounts retained by the Trust are towards the expenses incurred on behalf of the contributors and not towards any service fee; Service Tax Circular No.94/5/2007-ST dated 15th May 2007 clarifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the AMC and custodian duly fulfills the functions assign to them from time to time; to take reasonable care, to ensure the funds are managed by the AMC in accordance with the instrument; to supervise the investments of the Trust Fund. * In terms of 18.1, Immediately after executing this Instrument, the Trustee shall enter into the Investment Management Agreement. Thereafter, the Trust Fund shall be managed by the AMC pursuant to the Investment Management Agreement. The Trustee may, subject to Article 16, delegate to the AMC such duties of the Trustee, and also grant to the AMC such powers of the Trustee, under this instrument as per specified in the Investment Management Agreement. * In terms of Article 20, the Trustee shall have the power to make such results out of income or capital as the Trustee deems proper for expenses, taxes and other liabilities. * In terms of Article 32, The contributors of the Trust shall have no right to make decisions with regard to the Trust, save and except to the extent provided in the Contribution Agreement; the contributors shall not participate or take part in the control of the Trust's affairs and shall have no right or authority to act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harged by the appellant on annual basis from the gains out of the portfolio investments; the payment of service tax by the entities like AMC, Custodian, R&T Agent, Brokers, selling agents employed by the assessee through their Trustee (Power of Attorney Holders of the Trust) does not absolve the assessee from being a principal Service provider to the contributors/ Subscribers/ Investors and also does not waive off of its statutory liability to pay Service Tax on the Assets Management Services it has provided to the contributors/ Subscribers/ Investors. The SCN alleges that Venture Capital Fund is a pooled investment vehicle where various persons pool their money for the purpose of taking investments in companies or assets. The OIO contending the claim of the appellants that the Fund is neither a corporate entity nor does it have a personality distinct from Contributors/ Subscribers/ Investors, records that the arguments of the appellants is not acceptable as per the facts of the case which indicate that the main object of the assess is capital appreciation through the investment of contributors/ Subscribers/ Investors in the schemes devised by the appellants to gain profits/income; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecial Counsel for the Respondents, we find that Hon'ble High Court of Allahabad in the case of Paramount Biotech Industries (supra) has held that: "71. As regards the allegation that the impugned Regulations are contradictory to the Companies Act or other Acts, in our opinion the SEBI Act and the impugned regulations are special laws and will prevail over the provisions of the Companies Act and other Acts which lay down the general law. It is well settled that the special law prevails over the general law." 37.5. We find that in Paramount Bio-Tech Industries Vs UOI, Allahabad High Court {2004 120 Comp Cas 18 All, (2004) 2 Comp LJ 446 All, 2004 49 SCL 77 All) observes that 91. In R.K. Garg v. Union of India [1998] 4 SCC 675 (690) a Constitution Bench of the Supreme Court observed: "8. Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion, etc. It has been said by no less a person than Holmes, J. that the Legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs and participators. This means identity as a class, so that at any given moment of time the persons who are contributing are identical with the persons entitled to participate; it does not matter that the class may be diminished by persons going out of the scheme or increased by others coming in" It is pertinent to note that in order to determine the breach in mutuality, the court is well within its powers to go beyond the periphery of the concern and undertake an examination akin to the lifting of the veil in order to discern the real nature thereof. 37.7. A conjoint perusal of the records, facts of the case with above judicial pronouncements, would lead us to the conclusion that the impugned trusts have violated the principles of mutuality by concerning themselves in commercial activities and by using the discretionary powers to benefit a certain class of investors or nominees or employees or subsidiaries. They can no longer be treated as trusts for the purposes of taxation statutes at least. We find that the funds have been paying huge amounts to the AMCs in the form of Performance Fee and carry interest to the AMCs or their nominees. Thus, as far as the distribution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Al Noori Tobacco Products (supra) observed that 13. Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases. Disposal of cases by blindly placing reliance on a decision is not proper. Whether the appellants Rendered Taxable Services 38. Coming to the question as to whether the services rendered by the funds to investors within the definition of banking and other financial services, learned Senior Counsel for the appellants submits that in terms of Section 67A of Finance Act, 1994 consideration for the service tax purposes should be an amount payable for the services and in the instant case, the same is absent; even if the amounts retained by the Trustee and paid to Management Investment Company is understood to be a reimbursement, there was no provision or scope for levy of service tax on the expenses reimbursed during the period in view of the Hon'ble Delhi High Court's decision in the case of Intercontinental Consultants also affirmed by Hon'ble Supreme Court. He also submits that Trust does not have a legal entity and therefore cannot be treated as a "Person" or "commercial concern" or "body co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Counsel for the appellants further submits that carry interest is paid to Class-B/C unit holders in return of the investment made by them; the return on the investment is called carry interest and the same cannot be equated to performance fee. Regarding the allegation that the return is disproportionate to investment, learned Special Counsel submits that it is based on prior disclosure made in the PPF and IoT; it is paid after first return of capital to Class-A unit holders and after payment of preferred rate of interest to Class-A unit holders (15%); thereafter 20% of the balance remaining is distributed to Class-B/C holders and finally remained is again distributed in the ratio of 80:20 to Class-A and Class-B/C holders. He submits that since carry interest is part of the profit received by Class-B/C holders, service tax is not leviable. 39. On the other hand, learned Special Counsel for the Department submits that the questions that would arise are as to whether the Funds can be regarded as "commercial concern" for the period 04/2005 to 04/2006 and 06/2007 to 03/2012; be regarded as "Person" during the period 05/2006 to 05/2007 and whether the activities of the Fund fall u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of Service Tax Law. The definition of Banking and other financial services during the period of dispute were as follows: Section 65(12) of the Finance Act, 1994 ("the Act") defined "banking and other financial services as follows: * Definition from April 1,2005 to April 30.2006 "Banking and other financial services" means (a) the following services provided by a banking company or a financial institution including a non-banking financial company or any other body corporate or commercial concern, namely:- ..... (v) asset management including portfolio management, all forms of fund management, pension fund management, custodial, depository and trust services, but does not include cash management" * Definition from May 1,2006 to May 31,2007 "banking and other financial services" means (a) the following services provided by a banking company or a financial institution including a non-banking financial company or any other body corporate or any other person, namely:- ..... (v) asset management including portfolio management, all forms of fund management, pension fund management, custodial, depository and trust services, but does not include ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefit of contributors; the responsibilities/ duties of fund management towards contributors primarily relies with the Trustees on behalf of the Trust in line with the indenture of Trust instrument until subsequently delegated to the Asset Management Company by virtue of Investment Management Agreement and that the fund is engaged in Asset Management. Therefore, there is no doubt in our minds that the Trust is managing the funds of the contributors and thereby are rendering a service to the contributors and the said service squarely falls under Asset Management as applicable under Banking and Other Financial Service. Regarding the remuneration for the service, we find that the remuneration is not charged to the contributors but is retained from the amounts that are duly distributable to Subscribers/ Contributors/ Investors. It was argued by the learned Senior Counsel for the appellants that three distinct elements i.e. Service Provider, Service Recipient and Consideration are absent in the instant case. As found above, the Trusts are not amorphous entities and the mutuality of interest is no longer applicable in the instant case; Funds are rendering the service of Portfolio Manageme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lance wisdom has been stressed upon by various courts from time to time. In Mukesh Kumar Aggarwal & Co Vs State of Madhya Pradesh 2004 (178) E.L.T. 3 (S.C) Hon'ble Supreme Court held that 4. In a taxing statute words which are not technical expressions or words of art, but are words of everyday use, must be understood and given a meaning, not in their technical or scientific sense, but in a sense as understood in common parlance i.e. "that sense which people conversant with the subject- matter with which the statute is dealing, would attribute to it". Such words must be understood in their 'popular sense'. The particular terms used by the legislature in the denomination of articles are to be understood according to the common, commercial understanding of those terms used and not in their scientific and technical sense "for the legislature does not suppose our merchants to be naturalists or geologists or botanists". We find that as per various cases cited above, have been held to be juridical persons as far as taxation is concerned. For this reason, there is nothing illegal or illogical in holding that trusts do exist and function as juridical persons as far as they are rendering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f their policies. Further, schemes are devised to generate income/ profit/ gains to the benefit of the consumer/ subscribers/ investors. Therefore, the said Circular is not applicable in the instant case. Quantification of Demand 41. Coming to the issue of quantum of consideration and quantification of tax, the senior counsel submits that no consideration under the alleged activities charged by the Appellants from the Contributors; as per Explanation (a) to section 67 of the Finance Act, consideration, for service tax purposes, should be an amount payable for provision of services. As per Section 2(d) of the Indian Contract Act, 1872, "When at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing, something, such act or abstinence or promise is called a consideration for the promise". As per Black's Law Dictionary "Consideration is not to be confounded with motive, consideration means something which is of value in the eye of the law, moving from the plaintiff, either of benefit to the plaintiff or of detriment to the defendant." 41.1. He submits that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etained" by the Appellants from the Contributors for providing any "services" to the Contributors; out of the total amount of INR 28,51,49,62,689 treated as "consideration" received by the Appellants in the Impugned Orders, an amount of INR 12,37,36,99,793, is towards these accounting entries, which should clearly be excluded from the amounts under dispute, as these cannot be treated as amounts "retained" by the Appellants for providing "services" to the Contributors; unless there is an actual flow of consideration for an agreed service, no service tax liability can arise. 41.3. The learned Senior Counsel submits that Revenue alleges that the Appellants retain amounts distributable to class B/ C unit holders; it was submitted in their written arguments and rejoinders that the carried interest paid as return on investments (Class B/C units) to the AMC or its affiliates is a performance fee paid to the AMC ; it was alleged that in the case the returns on Class B/C units had been paid in form of performance fee, the same would have been reflected as part of expense in the hands of the Fund(s). Learned senior counsel submits that this contention is not applicable in case of all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntly it was rectified in the AMC's director's report for financial year 2008-09. He submits that as can be seen from above, the amount alleged by the Respondent to be in nature of performance fee, is in fact, in the nature of income from investment in venture capital fund, which is not liable to service tax. 41.5. The learned Senior Counsel submits that Carry Interest is paid to Class B/C unit holders in return of the investment made by them; it is only in case of those Funds where the AMC also makes an investment in the Fund as a contributor, that the AMC also receives a return on investment which is colloquially called the Carry Interest; the mere fact that AMC is also a Contributor cannot be confused to equate Carry Interest to performance fee; AMC wears two hats; as a Contributor the AMC gets a return based on a pre- agreed formula, which in absolute terms is less than the amount distributed to Class A unit holders; revenue alleges that Carry Interest is like a performance fee; Carry Interest is disproportionate to the investment made by Class B/C unit holders and that it is reflective of the performance of the AMC. He submits that any return, on investment to Class B/C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Fund during the course of providing taxable service to the contributor is to be treated as value of taxable service where value shall not be less than the cost of provision of taxable service. He submits that the only exemption for treating expenses as value of the service is provided only to pure agents; the Trust/Fund does not qualify to be a pure agent; the Circular dated 15.05.2007 exempts only initial expenses and reimbursement and not the recurring expenses being integral to the nature of service of BOFS to the Contributors/ Subscribers/ Investors; it is pertinent to note that auditor has deemed it correct to charge service tax from the Fund. 42.2. Learned Special Counsel submits with reference to the carried interest (CI) that it is neither interest nor return on investment; it is a compensation/ performance fee paid to the AMC or any person/ entity designated by them, as a special class investor/ unit holders. CI is contingent to pay outs (realizations generated by exiting portfolio investments) by the Fund; such carried interest is credited to Class-B (Special Unit Holders) only when the net realization recognized by selling and exiting portfolio investment the sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the unit holders upon achieving the performance only; therefore, this CI is nothing but Performance Fee. 42.3. He further submits that Shri Jayathertha, Senior Vice President, Finance, IVEN accepted that CI was in the nature of Performance Fee. Learned Special Counsel submits that from the distribution made by ICICI Econet Internet Technology Fund as on 29th July, 2007, it is clear that Class- B Unit holders garnered extraordinary income in comparison to Class-A Unit holders whereas Class-A Unit holders got Rs. 970.13 for every 100 rupees invested; Class-B Unit holders got Rs. 38,371/- in 2006 even without redemption. He submits that from the Minutes of the Meeting, held on 30th October, 2002, of the Board of Directors of ICICI Venture Funds Management Company Ltd. approved a carry plan for the employees; the carry plan envisages that the said company will arrange to directly pay carrying from the Performance Fee earned by it from its funds to the employees through a special Trust created for the purpose in the manner mentioned therein. Learned Special Counsel submits that the above documentary proof makes its crystal clear that the entire scheme was devised to allow AMC t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holders of Class-B Units is equal to 20% of the sum of distributions made pursuant to Clause 6.4.2 and the Clause 6.4.3 and 6.6. The Trustee may in consultation with the Investment Manager and in accordance with the terms of the Contribution Agreement executed by a Contributor make any additional distributions to the Class-A Units held by a Contributor in respect of any sharing of any Carried Interest and such portion of Carried Interest shall be distributed to the Class-A Contributor along with distribution under Clause 6.4.4 above. 43.1. From the above, it appears that Carried Interest is an additional income to Class-B Unit holders other than pro rata income. From the Revenue account for the year ending March 31, 2007 of ICICI Emerging Sectors Fund, it is clear that capital was committed by Class-A Units in 2002 whereas Class-B Units subscribed in 2006 when the Fund was ready to pay Carried Interest after returning capital and realization of preferred rate of return to the Class-A investors. We find that in the Director's Report Annual Report of IVEN for the year 2007-08 states under analysis of financial performance that Rs. 530.7 million was a Performance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ICI Group concerns would further give credence to the inference. It is also seen the roles of different companies are rotated. One company is AMC in one Trust and a settlor in other funds. Thus we find that service tax has been rightly demanded on the amounts shown as performance fee, carried interest and other expenses. The appellants have taken a plea that some of these are expenses which are reimbursed. However, it is alleged in the Show Cause Notice dated 22-10- 2010 that such expenses are not reflected in the Revenue expense for the year 2006-2007. 43.4. Learned senior counsel for the appellants has argued that some amounts on account of 'Loss of sale of investment', "Accrued interest considered doubtful", "Loss on revaluation of assets", etc, are not actual expenses but are only accounting adjustments which are required to be made to reflect the true and correct financial status of the Appellants as mandated under accounting principles; these cannot be treated as amounts "retained" by the Appellants from the Contributors for providing any "services" to the Contributors; out of the total amount of INR 28,51,49,62,689 treated as "consideration" received by the Appellants ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecific provision was incorporated under section 73 of the Act to sustain the demand pertaining to normal period of limitation when the extended period invocation failed; being an amendment that occurred post the periods under dispute; in the instant case, the entire demand fails on account of extended period of limitation not being liable to be invoked in the instant case. 45. On the other hand, Learned Special Counsel for the Revenue, submits that in the present case involving 11 ICICI VCFs, sufficient grounds have been placed before the Hon'ble Bench for sustaining the demand invoking the extended period of limitation; the appellants claim that there was no intention on their part to suppress any facts as (a) All the Funds were registered with SEBI from the beginning;(b) All the Offer documents issued by the Funds were available in public domain;(c) The Annual reports and Accounts were also available in public domain and (d) The basic activity of the Appellant is similar to that of Mutual funds wherein also, there are expenses pooled. He submits that reasons adduced at (a), (b) and (c ) above bank on the availability of information about the subject ICICI VCFs such as, re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correct position of law during the relevant time. The facts of the case are different. It cannot be argued that suppression cannot be alleged as the information is in the public domain. Information being in the public domain is not of any consequence. The information should be in the knowledge or made available to the authorities concerned who need to take a certain decision depending on such information. It is not the case of the appellants that they have been paying applicable service tax on getting registered and have been submitting regular returns to service tax authorities. It is not the case of the appellants that the material information available in the form of various contracts/ agreements and balance sheets/ ledgers have been submitted to the Department suo moto by the appellants. It is only after investigation has been initiated, the necessary documents were submitted. Thus, the information available in the public domain is of no avail. We find that learned adjudicating authority has rightly relied upon in the case of CCE, Calicut Vs Steel Industries Kerala Ltd, 2005 (188) ELT 33 (Tri. Bang.) wherein it is held at Para 3 as under: 3. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel submits that assuming without admitting that the Appellants is liable to service tax on the services, the Appellants has not suppressed the value of taxable service; Appellants has co-operated at every stage of the investigation and provided necessary information/ documents as and when requested. Learned Counsel submits that it is a well settled legal proposition that penalties under section 76 and 78 cannot be imposed simultaneously i.e, where penalty under section 76 has been levied, penalty under section 78 cannot be imposed as held in CCE v First Flight Courier Ltd 2011-VIL-06-Punjab & Haryana High Court - ST) and Opus Media and Entertainment v CCE [2007] 10 STJ 259 (CESTAT-New Delhi). He submits that applying the provisions of Section 80, if it is proved that there was reasonable cause for such failure no penalty can be imposed; this provision being a non-obstante provision, has overriding effect over the other provisions that are in conflict with it; the Appellant has established its bona fides that it was under the belief that no service tax was payable and the master circular also states that similar expenses incurred by a mutual fund are not charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, provisions of Section 80 are not attracted. Therefore, we are not inclined to accept the submissions of the appellant in this regard. Revenue Neutrality 49. Shri Vikram Nankani submits that the issue is Revenue neutral as the Appellant is also eligible to claim CENVAT Credit of the Service tax paid on input services in terms of Rule 3 of the CENVAT Credit Rules, 2004 read with Rule 2(1) thereof; the expenditure incurred by the Appellants as shown in the Revenue Account discloses actual expenses incurred by the Appellants and the accounting provisions created by the Appellants. He submits a chart showing duty demanded, allowance for write off on the loss of sale of investments and class B/C, actual demand, service tax available etc and submits that Total demand is Rs. 3,21,24,64,061, actual demand after allowing the wrong figures taken by department/losses would be Rs. 1,31,74,18,678 and CENVAT availability would be Rs. 1,29,57,64,253 which is 98 percent of the demand; principle of allowing the demand to be paid net of CENVAT credit that is otherwise eligible has been expressly recognized in the interim order passed by this Hon'ble Bench; he also relies upon. (i). Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... availment of CENVAT credit by another entity on the basis of such payment is not a criteria to determine the exigibility of a particular service rendered. The argument goes against the general scheme of service tax and CENVAT credit. If one entity has to pay service tax, it has to pay the same notwithstanding the fact that credit will be availed by a subsequent user. The scheme of CENVAT credit is to lessen the cascading effect of taxation and cannot be a reason for not paying taxes. We find that the appellant's submissions on revenue neutrality are not convincing. We find that both, the appellant and Revenue are in agreement in principle about the admissibility of the CENVAT credit and cum duty benefit. The only difference of opinion is with reference to submission of documents and verification thereof. We find that learned Senior Counsel for the appellants submits that in respect of certain accounting Heads which were considered as expenses were submitted to the adjudicating authority and no finding has been given in the OIO. We find that the cases relied upon by the appellants support their claim both for CENVAT credit and cum duty benefit. We find that Kolkata Bench of CESTAT i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eover, we are not sitting in judgement to decide such an averment. The issue before us is as to whether the impugned order and Show Cause notice are maintainable under Law. The same has ben answered by us in view of the discussion above. 51. In view of the above, all the appeals are disposed of, by way of remand to the adjudicating authority, subject to the following conditions: (i). Penalties imposed under Section 76 of Finance Act, 1994 are dropped. (ii). the adjudicating authority shall verify the following claims of the appellants, with documentary proof that may be submitted by the appellants, and give due allowance to the same, if found otherwise in order as per law, while computing the duty liability. (a). the claim that the amounts on account of 'Loss of sale of investment', "Accrued interest considered doubtful", "Loss on revaluation of assets", etc, are not actual expenses but are only accounting adjustments; and allow deduction if found in order. (b) claim of the appellants on the admissibility of the CENVAT (c)claims of the appellants on the cum duty benefit. (iii). The appellants shall submit necessary documentary proof with reference to the above c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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