Government securities treatment excludes service tax on brokerage for sale of RBI tax savings bonds

Brokerage received by a bank for selling RBI tax savings bonds was treated as outside service tax because the bonds formed part of the Government borrowing programme and qualified as Government securities under the Public Debt Act, 1944. Applying the CBE&C clarification that no service tax is leviable on underwriting fee or commission for dealing in Government securities, the same treatment was extended to brokerage on their sale. The activity was also regarded as a statutory or sovereign function, so the service tax demand and penalties could not survive and were set aside with consequential relief.

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Issues: Whether brokerage received by a bank for sale of RBI tax savings bonds constitutes taxable service under banking and finance services, or is exempt as consideration for dealing in Government securities.

Analysis: The bonds were issued as part of the Government borrowing programme and, on the RBI clarification, constituted Government securities within the meaning of section 2(2) of the Public Debt Act, 1944. The circular of the CBE&C clarified that no service tax is leviable on underwriting fee or underwriting commission received for dealing in Government securities, and the same principle applies to brokerage for sale of such securities. The activity was also treated as a statutory or sovereign function, and the demand could not survive on the premise that the bonds were outside the category of Government securities.

Conclusion: The service tax demand and penalties were unsustainable and were set aside, with consequential relief to the assessee.

Ratio Decidendi: Brokerage earned for sale of RBI bonds that constitute Government securities is not liable to service tax when the transaction is part of the Government borrowing programme and is treated as a sovereign or statutory function.

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