2016 (2) TMI 221 - AT - Service Tax

Tribunal rules in favor of appellant, service tax not applicable on Merchant Banking & M&A services

DSP Merrill Lynch Limited Versus Commissioner of Service Tax, Mumbai And Vice-Versa

The tribunal ruled in favor of the appellant, dismissing the revenue's appeal. It held that the demand for service tax on Merchant Banking Services and ... Management consultancy services - Merchant Banking Services - Underwriting services - Stock broker services. - Receipt of Advisory fees, Retainership fees, Advisory fees for Mergers and Acquisitions ( hereinafter referred as M&A), fees for Merchant Banking services ( hereinafter referred as MBS), Management fees earned by appellant's subsidiary, fees for underwriting Government securities and some other minor fees. Held that:- what is to be seen is the obvious legislative intent to tax merchant banking services under the category of banking service w.e.f. 16.7.2001 and not to see any intended meaning of legislation in the definition of 'Management Consultant Service'. We hold that the MBS cannot be classified under Management Consultancy Service and therefore no service tax is payable. The fees are towards activities of financial ties/private placement, financial valuation services etc. We find these activities to be squarely covered under the definition of Banking and other Financial Services and therefore our views given above in the case of Merchant Banking Services would hold in this case also. The third category of service which have been classified under the Management Consultancy Service is the fees earned by the subsidiary of the appellant. We find that it has not been controverted by the department with any evidence that the payment is received in respect of activities undertaken by their subsidiary. The subsidiary is a separate legal entity under the Companies Act. The fees earned is not the income of the appellant company. Merely because the income is shown in the consolidated financial statement of the company and its subsidiary, the same cannot be a ground for demanding service tax from the company. Services in relation to software development projects - The service that is Information Technology Service was specifically excluded from the scope of 'Business Auxiliary Service(BAS). Both these facts indicate Government’s intention to classify the service under Gonsulting Engineer Service' or under BAS. Therefore we are inclined to give the benefit to the appellant and hold that service tax is not payable on the service in question under Management Consultant Service. The concept of Management Consultancy is clearly consultancy and technical assistance in the running of the affairs of an organization. The definition itself refers to various aspects of the working system of any organization. Whereas Mergers and Acquisitions is a highly technical and restrictive term. Mergers refer to the mergers of organizations. Similarly, the word 'acquisition' refers to acquisition of another entity by a company. Mergers and acquisitions cannot be related to the running of the affairs of an organization. If such a wide view is taken then, as stated by the learned Counsel, specific service entries in the Finance Act, 1994 such as practicing Chartered Accountants [Section 65 (83)], Cost Accountants [Section 65(84)], and Secretaries [Section65(85)] would all get covered under the definition of 'Management Consultancy Service'. It would render many entries otiose. The legal position is that an interpretation of the scope of an entry should not be such which will lead to an illogical situation and lead to unnecessary complexity. The legislative intent should not be negated as held by the Apex Court in the case of Balaji Enterprises [1997 (5) TMI 108 - SUPREME COURT OF INDIA]. We respectfully follow the High Court judgment in the case Indian National Shipowners Association [2009 (12) TMI 850 - SUPREME COURT OF INDIA]. The new entry of Mergers and Acquisitions extends the coverage of service tax and is not the result of carving out a new entry from the Management Consultancy Service. Consequently we hold that service tax is not payable on M&A Services prior to 16.7.2001 under the category of “Management Consultancy Service”. Demand set aside - Decided in favor of assessee. Issues Involved:1. Time-barred demand for service tax on Merchant Banking Services (MBS) and Mergers and Acquisitions (M&A) services.2. Classification of various financial services under Management Consultancy Services or Banking and Financial Services.3. Service tax liability on advisory and retainership fees, management fees by subsidiary, software development project fees, and underwriting government securities.4. Penalties under Sections 76 and 78 of the Finance Act, 1994.Detailed Analysis:1. Time-barred Demand for Service Tax on MBS and M&A Services:The appellant argued that the demand for service tax on MBS and M&A services is time-barred as all relevant information was already disclosed to the department in earlier communications and audits. The appellant referenced a series of events showing that they had consistently informed the department about their activities, and thus, the extended period for demand under Section 73(1) proviso of the Finance Act was not applicable. The department contended that the appellant did not disclose the value of services in the ST-3 returns for the period April-June 2000, constituting suppression of facts.The tribunal found that despite the appellant's disclosures, the department could not have known the exact value of services rendered without the ST-3 returns. Therefore, the extended period of limitation was applicable, and the demand was not time-barred.2. Classification of Various Financial Services:The tribunal examined whether the services provided by the appellant should be classified under Management Consultancy Services or Banking and Financial Services.- Merchant Banking Services (MBS): The tribunal held that MBS should be classified under the specific entry of Banking and Financial Services introduced on 16.07.2001, rather than Management Consultancy Services. This conclusion was supported by the unchanged definition of Management Consultancy Services post-16.07.2001 and the legislative intent to tax MBS under the new entry.- Advisory and Retainership Fees: These fees were found to be related to financial advisory services, which fall under Banking and Financial Services rather than Management Consultancy Services.- Management Fees by Subsidiary: The tribunal held that the fees earned by the subsidiary could not be taxed in the hands of the appellant, as the subsidiary is a separate legal entity.- Software Development Project Fees: The tribunal concluded that these services are covered under Consulting Engineer Services or Business Auxiliary Services, not Management Consultancy Services. The services were exempt from service tax under Notification No. 4/99 dated 28.02.1999.3. Service Tax Liability on Specific Services:- Underwriting Government Securities: The tribunal referred to the judgment in Kotak Mahindra Capital Co. Ltd. and CBEC Circular No. 126/8/2010-ST, concluding that underwriting fees for government securities are not liable for service tax.- Miscellaneous Income: The tribunal found that activities such as write-back of credit balances, recovery of expenses, and bad debts do not involve any service and thus are not subject to service tax.4. Penalties Under Sections 76 and 78:Since the tribunal held that the services in question were not taxable under the categories assessed by the department, the imposition of penalties under Sections 76 and 78 of the Finance Act did not arise.Conclusion:The tribunal allowed the appeal of the appellant on merits, dismissing the revenue's appeal. The tribunal held that the services provided by the appellant were not taxable under Management Consultancy Services and were correctly classified under Banking and Financial Services from 16.07.2001. Consequently, no service tax was payable on these services prior to this date, and the penalties were not applicable.