TaxTMI 
TaxTMI 
2017 (7) TMI 224
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....Tax Research Unit), Government of India (hereinafter referred to as the 'Revenue'). By the aforesaid Circular and Proceedings, the Revenue had called upon the assessees to pay the service tax on the running of chit funds as according to the Revenue, it was a service provided by the assessees which was covered under 'banking and other financial services', a taxable service under sub-section 12 of Section 65 of the Finance Act, 1994. Plea of the assessees was that the chit fund business does not amount to any service covered by the definition of 'banking and other financial services' as per the said term as defined in that provision, prevalent during the relevant period. The High Court has accepted the plea of the assessees and thereby quashed the Circular dated August 23, 2007 and consequently Proceedings dated December 18, 2007. It may be mentioned at this stage that we are concerned with the issue as to whether service tax is leviable on chit fund or not w.e.f. June 1, 2007, the date on which the Finance Act, 2007 came into effect. 2) In order to appreciate the controversy and resolution thereof, it would be apposite to first take note of the relevant statutory provisions of....
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....ices are included in the definition of banking and other financial services. In particular, it is to be examined as to whether such a service is covered by the term 'asset management'. As per the appellant, managing chit fund, which is a fund management service, is a specie of cash management, now stands included in the amended definition made effective from June 1, 2007. The assessees, on the other hand, maintain that even with the deletion of the words 'but does not include cash management' from sub-clause (v) of sub-section (12), chit fund does not get covered and for the purpose of coverage, it is to be shown that the chit fund services is 'asset management', while it is not so. 5) To understand the nature of chit fund business, we now refer to the relevant provisions of Chit Funds Act, 1982. Section 2(b) defines 'chit', in the following manner: "chit means a transaction whether called chit, chit fund, chitty, kuri or by any other name by or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical instalments over a defi....
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....nt of discount is distributed as dividend either among all the members or among the non-prized member only." 6) Since banking and other financial services can be carried out only with the permission of and after obtaining requisite licence from the RBI as per the provisions of Reserve Bank of India Act, 1954 (RBI Act), it would also become necessary to take note of some provisions of the RBI Act as well, which are relevant for the purposes of the present case. As per Section 45-I of the RBI Act, chit funds are categorised as financial institutions. Section 45-I (c) also defines the financial institution. Relevant extract whereof is as follows: "Financial institution" means any non-banking institution which carries on as its business or part of its business any of the following activities, namely:- (i) (ii) (iii) (iv) (v) managing, conducting or supervising, as foreman, agent or any other capacity, of chits or kuries as defined in law which is for the time being in force in any State, or any business, which is similar thereto; (vi)" Thus, the activity of managing, conducting or supervising chits or kuries is ....
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....the absence of specific statutory definition of the aforesaid expression, the question of its wider interpretation either by seeking to include or exclude any other transactions or business does not arise and is not permissible. The High Court went by the basic principle in the taxing statute, namely, no tax can be imposed on the subject without words in the Act clearly showing an intention to lay a burden upon the assessee; that the taxing statute are to be interpreted strictly; and that if two views are possible, benefit of doubt would have to be given to the assessee. In the opinion of the High Court, the deletion of the words 'but does not include cash management' while amending sub-section (12) of Section 65 of the Finance Act would not serve any purpose. 10) We may note here that the case set up by the Union of India before the High Court was that it was all along understood by the parties that business of chit fund was in the nature of cash management. Since, the definition of 'banking and financial services' prior to June 01, 2007 specifically excluded 'cash management', the benefit was extended to the chit fund companies by not levying any service tax as they were in th....
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....en primarily influenced by the fact that with the amendment of sub-clause (v) of sub-section (12) by Amendment Act, 2007 resulting into deletion of the words 'but does not include cash management', the business of chit fund would be covered by the term 'all forms of fund management' which can be seen from the following discussion therein: "31.The nature of contentions raised, argued and dealt with before the High Court of Andhra Pradesh in A.P. Federation Chit Funds v. Union of India (2009 (13) STR 350 (A.P.)) is more discernible from Paragraphs 5,6,7 and 8 of the said verdict, which are extracted below: "5. Shri.N. Venkataramana, learned Senior Counsel appearing on behalf of the petitioner mainly contended that merely because of deletion of certain expressions under the aforesaid sub-clause (12) of S. 65 of the Finance Act, 2007, the nature of business done by the petitioner cannot be roped in, as long as the levy is not made specifically in respect of such transactions in clear words. Therefore, even otherwise it has been contended that in view of the nature of chit transaction as already been explained to by the Apex Court, it cannot come within the parameters ....
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....provision was extracted in paragraph 11. The verdict passed by the Apex Court in AIR 1993 SC 2063 (cited supra) was also referred to, extracting the relevant portion in paragraph 10, wherein it was held that: "the foreman does not lend his money to constitute any money lending business and that the dominant purpose of the Act (Chit Funds Act 1982) was to regulate the chit and control the activity for the foreman and protect the interest of the subscribers which essentially in the realm of fund management." 33. True, the provisions in a 'taxation statute' have to be interpreted strictly, as made clear by the Apex Court. But when "all sorts of fund management" were sought to be taxed, giving exception only to 'cash management' under the unamended provision and when it came to be excluded after the amendment to S.65(12)(a)(v) in the year 2007, this Court finds that, each and every instance of 'fund management' need not be separately mentioned in the provision, to attract the tax liability. Even as per the unamended statute, when the exception was only to a limited extent i.e., in respect of 'cash management', the deletion of the exception has revived "all forms of fu....
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....une 1, 2007 specifically excluded cash management. At that time, a doubt had arisen in the Department of Revenue, Ministry of Finance as to whether it would include the services rendered by a chit fund. Letter dated December 7, 2001 was written by the Ministry of Finance to the RBI seeking its clarification. RBI, after examining the issue, responded vide its communication dated February 5, 2002 explaining the meaning of the term 'cash management' and also opining that chit fund may not be regarded as providing any taxable service in view of detailed note dated January 29, 2001 which was appended along with said letter dated February 05, 2002. After receiving this clarification, Ministry of Finance, Government of India issued Circular No. 41/4/2002 dated March 15, 2002 addressed to the officials of Central Excise and Customs as well as service tax clarifying that banking and other financial services will not include the service rendered by the chit fund and, therefore, no service tax was payable. 14) Amendment was carried w.e.f. June 1, 2007 whereby the words 'but does not include cash management' were deleted. This provision remained on statute book upto June 30, 2012. By Financ....
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....gether new system of taxation of services by making a paradigm shift. Now, the scheme of taxation of services is based on negative list of services. Therefore, earlier list of taxable services is no longer applicable. Instead two things have happened. First, the term 'service' is defined whereas there was no definition of 'service' in the Finance Act, 1994 which position remained till 2012. Earlier, each individual service on which tax was levied (known as taxable service) was defined. Secondly, the definition of service given now contains a negative list which is contained in Section 66D of the Act. In other words, it specifically excludes certain transactions from the ambit of service. Thus, those transactions which are specifically excluded are not liable for service tax. Any other kind of service which qualifies the definition of 'service' contained in the Act would be exigible to service tax. 16) The term service is defined in Clause 44 of Section 65B of the Act which reads as under: "44. "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include - (a) an activity which constit....
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....rdinary notions of a service be considered as a service, neither can it be considered as falling within the first part of the definition because it lacks the four constituent elements which are required by the definition. In a mere transaction in money or actionable claim, no service is involved; there is just the payment and receipt of the money. The word "money" is defined in section 65B(33) in the following manner:- "(33) "money" means legal tender, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveler cheque, money order, postal or electronic remittance or any similar instrument but shall not include any currency that is held for its numismatic value; 11. A mere transaction in money represents the gross value of the transaction. But what is chargeable to service tax is not the transaction in money itself since it can by no means be considered as a service. The exclusionary part of the definition of the word "service" however refers to "an activity which constitutes merely a transaction in money or actionable claim". Since a mere transaction in money or actionable claim cannot under the common notions of a service be considered....
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....doubt or ambiguity in it. Ultimately, however, it is the intention of the legislature which is paramount and a mere use of a label cannot control or deflect such a function. This is the principle laid down by a Constitution Bench of the Supreme Court in Dattatraya Govind Mahajan v. State of Maharashtra : (1977) 2 SCC 548. In S. Sundaram Pillai, etc. v. P. Lakshminarayana Charya : (1985) 1 SCC 591 : AIR 1985 SC 582, a three-Judge Bench of the Supreme Court considered the object of an Explanation and observed as follows:- "52. Thus, from a conspectus of the authorities referred to above, it is manifest that the object of an Explanation to a statutory provision is- (a) to explain the meaning and intendment of the Act itself, (b) where there is any obscurity or vagueness in the main enactment, to clarify the same so as to make it consistent with the dominant object which it seems to subserve, (c) to provide an additional support to the dominant object of the Act in order to make it meaningful and purposeful, (d) an Explanation cannot in any way interfere with or change the enactment or any part thereof but where some gap is left which is rel....
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....e find that the said clause refers to duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or State Governments or local authority and who is not deemed as an employee before the commencement of this section. It is obvious that the Explanation can have no relevance to this clause also. In these circumstances we are constrained to hold that Explanation 2, when it says for the purpose of this clause., the reference can only be to clause (a) and more precisely to sub-clause (iii) which refers to a transaction in money or actionable claim. Be that as it may, if the exclusionary part of the definition [i.e., clause (a)(iii)] is construed on its own terms there would be an anamoly in as much as what was not a "service" in the first place within the opening words of Section 65B (44) would fall to be excluded - a construction that would be aimless or futile; but if that part is construed in the light of or with the aid of Explanation 2 and what it signifies or implies, then the anamoly gets ironed out or removed, as we have explained earlier. Obviously, we have to prefer the latter interpretation and not the former. ....
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....y manner is to be covered by the expression 'transaction in money or actionable claim'. Thus, it has been brought specifically within the definition of service by the aforesaid amendment which takes effect from June 15, 2015. Therefore, there is no dispute that w.e.f. June 15, 2015, service tax is payable on chit fund. 21) The aforesaid historical background would demonstrate that admittedly upto June 14, 2007, chit fund business was not exigible to service tax. Likewise, from July 01, 2012 to June 14, 2015, no service tax was payable. Present dispute concerns the intervening period from June 15, 2007 to June 30, 2012, the outcome whereof depends upon the definition of banking and financial service contained in sub-section (12) of Section 65 of the Act and particularly sub-clause (v) thereof as amended in 2007. 22) Having noted the aforesaid historical background, we now proceed to discuss the two questions that arise for consideration as the answer thereto will determine the issue involved in these appeals. Question No.1 - Whether chit fund activity can be treated as business of cash management? 23) We have already reproduced definition of' chit' as contained in ....
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....y Dr. Bhabatosh Dutta constituted by the Banking Commission in 1970. The said description was given imprimatur by this Court in Reserve Bank of India v. Pearless General Finance and Investment Company Limited (AIR 1987 SC 1203) The said description along with the definition of the term 'chit' contained in Section 2(b) of the Chit Funds Act gives a fair idea of the nature of fund business. A person (known as foreman) enters into agreement with specified number of persons where under all those persons agree to subscribe a certain sum of money by way of periodical instalment over a definite period. Say, for example, this kind of agreement is entered into with 20 persons. These 20 persons i.e. subscribers agree to subscribe Rs. 5,000/- per month for 20 months. In this manner, every month Rs. 1,00,000/- are contributed by these 20 persons. Out of this amount, foreman deducts his commission, say, Rs. 10,000/- (which is regulated by the provisions of Chit Funds Act). Remaining amount of Rs. 90,000/- would be the prize amount. This amount would be given to one of the subscribers as determined by lot or by auction or by tender or in such other manner as may be specified in chit agreement....
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.... as he does not lend money beonging to him. 26) Having kept in mind the aforesaid nature of the chit fund business, it becomes difficult to hold that such business amounts to 'cash management'. We have already noted that there is no definition of cash management in the Act. In the absence of such a definition, Mr. Radhakrishnan, learned senior counsel appearing for Union of India relied upon the dictionary meaning which is assigned to the term cash management. This Court in Union of India & Ors. v. Martin Lottery Agencies Limited (2009) 12 SCC 209) has observed that dictionary or etymological meaning to the term 'service' may or may not be appropriate. Following observations from that judgment may be noted: "20. The word "service" has not been defined in the Act. Its dictionary or etymological meaning may or may not be appropriate. We would, however, notice its dictionary meaning: "Work done or duty performed for another or others; a serving; as, professional services, repair service, a life devoted to public service. An activity carried on to provide people with the use of something, as electric power, water, transportation, mail delivery, telephones,....
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....ent Central Office) on the meaning of cash management and of legal Division on the implication of covering chit business under service tax may be obtained. 21.01.2002 - DBOD provided an opinion on the meaning of 'cash management' wherein it was clearly stated that: "Cash management" as a service activity would involve extending certain special facilities to the customer by virtue of which the customer is able to streamline his resources in an efficient manner resulting in reduction of the extent of idle cash/unrealized dues (by way of cheque/bills deposited for collection/clearing). It may not be correct to conclude that a chit fund company is extending service of the above nature to its member." 30) Thus, whenever a person is having idle cash or unrealised dues and wants the same to be utilised in a proper and fruitful manner, managing the said idle cash would amount to cash management. These are the services generally offered by the banking institutions to their clients. Aswath Damodaran in his book Corporate Finance has spelled out the management of cash in the following manner: "Every business has to maintain a cash balance to meet needs t....
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....cash flows (both inflows and outflows) arising out of the operations of the business. In this sense, while undertaking the task of cash management, the financial manager may also be required to identify the sources from where cash may be procured on a short term basis or the outlets where excess cash may be invested for a short term so that whenever the cash is needed in the business, short term investment is liquidated and the cash utilised. A judicious management of cash, near cash assets and marketable securities allows the firm to hold the minimum amount of cash necessary to meet the firm's obligations as and when they arise. As a result, the firm is not only able to meet its obligations, but is also in a position to take advantage of the opportunity of earning a return and thereby increasing the profitability of the firm. Thus, the challenge before any business is to assess how much holding of cash is needed for day to day business, that is, for the purpose of business transactions as a precautionary measure, and even keeping in mind speculative motive in order to take advantage of potential profit making situations etc. Further, after setting apart cash for the aforesaid purp....
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....e". To attain a welfare State is our constitutional goal as well, enshrined as one of its basic feature, which runs through our Constitution. It is for this reason, specific provisions are made in the Constitution, empowering the legislature to make laws for levy of taxes, including the income tax. The rationale behind collection of taxes is that revenue generated therefrom shall be spent by the Governments on various developmental and welfare schemes, among others. 41.2. At the same time, it is also mandated that there cannot be imposition of any tax without the authority of law. Such a law has to be unambiguous and should prescribe the liability to pay taxes in clear terms. If the provision concerned of the taxing statute is ambiguous and vague and is susceptible to two interpretations, the interpretation which favours the subjects, as against the Revenue, has to be preferred. This is a well-established principle of statutory interpretation, to help finding out as to whether particular category of assessee is to pay a particular tax or not. No doubt, with the application of this principle, the courts make endeavour to find out the intention of the legislature. At the sam....
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....122) "... as I understand the principle of all fiscal legislation it is this: if the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be." 34) Likewise, we would also like to reproduce discussion to the same effect contained in Commissioner of Income Tax, Patiala & Ors. v. Shahzada Nand & Sons & Ors. (1966) 3 SCR 379): "10. Before we advert to the said arguments, it will be convenient to notice the relevant rules of construction. The classic statement of Rowlatt, J., in Cape Brandy Syndicate v. IRC [(1921) 1 KB 64, 71] still holds the field. It reads: "In a Taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used." To this may be a....