TaxTMI 
TaxTMI 
2015 (6) TMI 695
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....enders / lender syndicate, the appellant [ a borrower] appointed various banks/institutions abroad as Mandated Lead Arrangers (MLAs). The MLAs were paid "arrangement fees" which is essentially a fee paid for arranging lenders/lender syndicate for the appellant borrower. 3. A show-cause notice was issued to the appellant stating that they are paying various service charges to different foreign financial institutions/banks namely Arrangement fees (MLA fees) for arranging loan, agency fees, front end fees, syndicate fees, out of pocket fees, structuring fees, upfront fees, issuing fee, underwriting fees, trustee fees, road show expenses, etc. Further, the MLA's and lending Banks, in consultation with appellant, appointed non-resident banks as agents in connection with financial documentation relating to the loans. The appellant pay agency fees to the Agents. As the said foreign financial institutions do not have any office or establishment in India, it was alleged that the Service Tax on the above service charges (arrangement fees and agent fees) paid by Tata Steel Ltd. becomes payable by Tata Steel Ltd., on reverse charge basis, being the recipient of services in terms of Sectio....
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....nterest and repayments of principal and any other payments required under the loan agreement to the Agent bank. The agent bank passes these monies to the banks to whom they are due. Similarly the banks advance funds to the borrower through the Agent. 4.2 The Commissioner held that the demand for the period prior to 18.04.2006 is also sustainable in view of CBEC Circular No. 275/7/2010 CX-8A dated 30.06.2010 and Notification No. 36/04-ST dated 31.12.2004 issued under Section 68 (2) read with Rule 2(10(d)(iv) of the Service Tax Rules. On the issue of time bar, Commissioner held that the payment of said Arrangement fee and Agency fee was never declared to the department and therefore extended period of 5 years is applicable. He also imposed penalties under Sections 76 & 78 of the Finance Act, 1994. 5. Heard both sides. 6. The learned C.A. Mr. A.R. Krishnan Counsel for the appellant shows us the Arrangement by which the appellant were facilitated in obtaining finance from the international market. He referred to the Commitment letter dated august 4, 2006 addressed to the appellant by a syndicate of banks namely ABN AMRO Bank, City Bank and Standard Chartered Bank, all committing to ....
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....al services' viz., clause (ix) - 'lending'. The MLAs services are to the borrower and not to the lender and hence it is 'in relation to' borrowing not in relation to 'lending'. Only the services qua service recipient are relevant. E.g. Stock Brokers service - whereunder services in connection with both sale and purchase are liable. The Agreement clearly provides for payment of arrangement fees to the arrangers only and not to the lenders. The scope of work of the arranger was to arrange funds for the borrower. This is clear from the mandate letter of 4.8.2006. The subsequent act of arranger becoming a lender will not obliterate the fact that the arrangement fees is paid for arranging a loan for the borrower and not for lending. If Arrangement fees is considered as "in relation to lending" since it is paid to the lenders then it will have the character of 'interest' and interest is excluded from value of taxable service - hence not liable for service tax - Rule 6(2)(iv) of Valuation Rules. (ii) The service is provided beyond the Indian territory - hence not liable to tax. The MLA's are abroad, lenders are abroad, and monies are received abroa....
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....umbai - Appeal No. ST/694/12 ii. Intas Pharmaceuticals Ltd. Vs. Commissioner of Service Tax, Ahmedabad 2009 (16) STR 748 (Tri. - Ahmd.) iii. KPIT Cummins Infosystems Ltd. Vs. Commissioner of Central Excise, Pune-I - 2014 (33) STR 105 (Tri. - Mumbai) to justify that Service Tax is not payable when the services are received abroad. 7. The learned Special Counsel Shri K.M. Mondal, appearing on behalf of Revenue, reiterated the findings of the Commissioner. He drew our attention to the show-cause notice where it has been stated that since the foreign financial institutions, which made arrangement for loan, do not have any office or establishment in India, the Service Tax becomes leviable on service charges paid by the appellant to the foreign institution, appellant being the recipient of service in terms of Taxation of Services (Provided from outside India and received in India) Rules, 2006 framed under Section 66A of the Finance Act, 1994 and read with Rule 2(1)(d)(iv) of Service Tax Rules, 1994. 7.1 He also drew our attention to the statement of Shri Pravin Sood, Head of Tax Administration and Planning, M/s Tata Steel stating that they did not pay Service Tax as they were under ....
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....ully considered the rival contentions. The background in brief is that the appellant borrowed finance by way of syndicated loans for their international acquisition as well as international capital expansion, from Financial Institutions/Banks abroad. To facilitate their desire to locate lending institutions, they appointed Mandated Lead Arrangers (MLAs), which can be a single entity or a group of institutions. In their case, they obtained a Commitment letter from the syndicate comprising of ABN Amro Bank, Citibank and Standard Chartered Bank, who committed, vide their letter dated 4.8.2006 to the appellant to act as Mandated Lead Managers of the 'Facility'. The 'Facility' was to arrange US$ 750 million syndicate loan facility. The MLAs committed to manage all aspects of the syndication in consultation with the appellant including the timing of offers to potential lenders, acceptance of commitments and determination of the amounts offered and the compensation provided. In the commitment letter, the essential features of which are related in para 6 above, it is stated that the agreement with the MLAs will automatically terminate on the earlier of date of signing of fa....
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....wn account." Section 5 clause (11) provided for the Arrangement fee to be paid by the Borrower to each Arranger party and Agency fee to be paid by the borrower to the Agent. 8.2 From the Commitment letter and Facility Agreement, it is clear to us that there are two services involved - one is the service provided by the MLAs, who charged the Arrangement fee and the second was the actual lending services provided by the institutions who actually lend the money. There is no confusion that the Arrangers and the lenders are different entities. Simply because some Arrangers are also lenders, does not detract from the fact that the activity of arranging finance is a distinct activity, separate from the activity of lending. It is clear that the role of the Arranger is only to arrange for financial institutions or a group of institutions, who can provide finance to the appellant. The Arrangement fee is truly a fee paid to the Arranger in his capacity as Arranger notwithstanding the fact that the Arranger may ultimately also become the lender. The issue whether the two activities are distinctly separate needs to be addressed first because the Commissioner in his order appears to have confus....
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...., the word 'lending' does not automatically mean 'borrowing' also. He also argued that if the Arrangement is considered as "in relation to lending" then it will take the character of interest which is excluded from the value of taxable service under Rule 6(2)(iv) of Valuation Rules. The learned Special Counsel, on the other hand, contended that the activity of lending is involved in the present situation. 9.2 We note that the definition at clause (ix) uses the word 'lending'. This leads to the question whether service provided by the MLAs to the borrower (appellant) is not that of lending. We find that the service under Section 65(105)(zm) is a service provided to any person in relation to "Banking and other Financial services". In the present case, it is clear that the service rendered by the MLAs to the appellant is of arranging loan from the financial institutions for the appellant. In other words, it is a service of arranging lending or arranging lenders for the appellant and is clearly covered under the provisions of law stated above. Therefore, we reject the contention of the learned C.A. The other contention that if the service is considered as in re....
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....hose specified in clause (ii) of this rule, Be such services as are received by a recipient located in India for use in relation to business or commerce. The service in question i.e. "Banking or other Financial Services" falls under Section 65(105)(zm) which is covered by Rule 3(iii) above. Therefore clearly, the service of Banking is considered to be received in India when the recipient is located in India which is an unquestioned fact in the present case. (c) Thirdly, in relation to import of services, Rule 2(i)(d)(iv) of Service Tax Rules, 1994, defines a person liable to pay Service Tax as:- "(iv) in relation to any taxable service provided or to be provided by any person from a country other than India and received by any person in India under Section 66A of the Act, the recipient of such service." 10.1 The learned C.A. contended that since the money has been lent abroad and the MLAs are abroad, therefore, the Service Tax is not payable. On a close reading of the above provisions of law, it becomes clear that what is important is whether the recipient of service is located in India. We have no hesitation in stating that the service recipient is located in India. The Commi....
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....pparently taxable services are susceptible and ought to be, vivisected, to ascertain which of the services or components thereof fall within the ambit of the Act and which services fall outside such ambit. As services provided for outbound tours are provided and consumed outside the Indian territory; are beyond the province and purview of the provisions of the Act, the consideration received which corresponds and is reiatable to services provided outside the Indian territory require to be excised by applying the doctrine of apportionment. On such vivisection, the consideration attributable to services provided outside the Indian territory must be excluded, as this is not subject to levy and collection of service tax, under provisions of the Act. This conclusion is also the logical corollary of the non-derogable premise that service tax is not a tax on the pursuit of the profession of providing a taxable service but is a tax on the provision of a taxable service, a destination based consumption tax. (k) The fundamental fallacy in the substantive premise of the adjudicating authority, in our considered view, is applying the provisions of the Act (which authorises the levy and collec....
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....". To our mind, there is a discernible difference between this underlined clause and "receipt of service in India by a person who has.....". We have, of course, also noted that Rule 3 of the Taxation of Services (Provided from Outside India) Rules, 2006 is captioned in such a way that (for purposes of Section 66A) taxable services provided from outside India should be received in India. However, it is pertinent to note that Rule 3, in its body, refers to "such services as are received by a recipient located in India for use in relation to business or commerce". The phrase "received by a recipient located in India" found in the text of Rule 3 matches the phrase "received by a person who has his place of business, fixed establishment, permanent address or usual place of residence in India", found in the text of Section 66A of the Act. It is, indeed, a debatable question as to whether any requirement of "receipt of taxable service in India" should be read into Section 66A and Rule 3 or whether, for a demand of service tax in the reverse charge mechanism, receipt of taxable service, whether in or outside India, by a person resident or located in India is enough. The question can be rep....
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....od on or post 18.4.2006 sustains. We have already held that the Arrangement fee is leviable to Service Tax, being the fee provided by the appellant to MLAs for receiving the MLAs Arrangement service in India. The fees paid for road shows etc is included in the demand raised on account of Arrangement fees. Relatively smaller issue remains, that of Agency fees paid by the appellant to the agents abroad, who are appointed for administering the loan and their functions are laid down in the Agreement. The findings above in respect of Arrangement fees would hold in respect of Agent fees. Therefore, service tax is held to be payable on Arrangement fees and Agent fees for the period on or after 18.4.2006. 13. The contention of learned C.A. that show-cause notice does not categorically specify clause (ix) of Section 65(12) does not vitiate the proceedings. We find that the show-cause notice does mention Section 65(12) which defines 'Banking and other Financial Services' The show-cause categorically refers to the classification of service under Section 65(105)(zm); that is the service under which service tax is leviable. Therefore, the appellants were clearly put to notice on the se....
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....Central Excise authorities or some reputed legal firm regarding dutiability of the item manufactured by it.....". We note that the appellant is not new to Indirect Tax law. They are a very large company with adequate resources at their command for taking advice. The least they should have done was to make enquiries from the department, which they did not do. They also made some payment of Service Tax on services towards Letter of Credit/Lead Manager fees for issue of securities. The acquisition of knowledge by the Department during the process of investigations does not obliterate the suppression of fact on the part of the appellant as held by the Hon'ble Gujarat High Court in the case of CCE, Surant-I Vs. Neminath Fabrics Pvt. Ltd. - 2010 (256) ELT 369 (Guj.). Therefore, we hold that the extended period of 5 years is applicable in the present case for demanding duty under Section 73 of the Finance Act, 1994. 15. As regards penalties, we note that the claim for bona fide belief is not acceptable as held by us above. Therefore, the benefit of Section 80 of the Finance Act, 1994 has no application to the facts of the present case. The Commissioner has rightly imposed equal amoun....
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.... all the Lender Banks are not Arrangers, which is an admitted fact on record. 20. The second issue relates to Service Tax on Agent's Bank fee. I hold that the Agent's Bank is a representative of all other lending bank, who have jointly or severally lent to the appellant company, is not taxable in the hands of the appellant, as the appellant has not received any such services. It is only by way of facilitation that the appellant-borrower will face difficulty, as it has entered into an agreement with the several Bank which had lent to the appellant, to correspond with each in respect of policy matters and/or giving or accepting notice and/or in case of any dispute, will of them together. That it is by way of facilitation in which the Agent Bank interacts with all other lending Bank and on behalf of the lending Bank together, correspond and/or interacts with the appellant borrower. For this, the Agent Bank is entitled to some remuneration which is paid by the appellant borrower company, but in fact no service is received by the appellant borrower. 21. I further find that the agent is appointed by the lenders (Banks) and the appellant borrower has no role in selecting the Age....