Agency-based tax exemption extends to an appointed bank performing government banking functions for the principal

Service tax exemption available to a principal can extend to a lawfully appointed agent when the agent performs the principal's statutory functions and the exemption provision does not exclude such extension. Applying that principle, a bank acting as the Reserve Bank's agent for government banking transactions was treated as stepping into the principal's shoes for the relevant activity. The service tax demand on those services was therefore not sustainable on merits, and the related interest and penalties were set aside.

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Issues: Whether the service tax exemption available to the Reserve Bank of India extended to Canara Bank when it acted as the RBI's agent in performing government banking functions.

Analysis: The RBI Act, 1934 empowers the Reserve Bank to transact Government business and to appoint banks as its agents for specified purposes. On the facts, Canara Bank was functioning as an appointed agent of RBI for government transactions. The exemption notification was issued in respect of services provided to or by RBI, and the Court applied the principle that an agent stepping into the shoes of the principal is entitled to the same exemption as the principal, unless the statute provides otherwise. The reasoning was reinforced by the Supreme Court's approach that an agent is entitled to the exemptions available to the principal where the agency relationship is the basis of the activity.

Conclusion: The exemption available to RBI was held applicable to Canara Bank as RBI's agent, and the service tax demand could not be sustained on merits.

Final Conclusion: The demand, interest, and penalties were set aside, and the appeal succeeded with consequential relief.

Ratio Decidendi: Where a statutory exemption is available to a principal, an agent lawfully appointed to perform the principal's functions is entitled to the same exemption if the agency relationship is the basis of the activity and the statute does not exclude such extension.

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