TaxTMI 
TaxTMI 
2021 (7) TMI 216
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....of the Appellants-Trust are contained in the Indenture of Trust ("Trust Deed or "IOT; a Private Placement Memorandum (PPM), which is an Offer Document for inviting contributors or subscribers to be part of the Trust set up by the Settlor, is issued with the intent of allowing evaluation of possibility of investment in the units of the VCF; the Appellants' properties (i.e, money contributed by investors) are held in trust by the Trustee for the benefit of beneficiaries, who are contributors to the Funds ("Contributors/ Beneficiaries"); the Trust Deed executed for this purpose, lays down the objectives for which the Appellants' Trusts are set up, its establishment, management and other allied matters; the Trustee receives remuneration in the form of Trusteeship fees for services rendered by it to the Appellants. To ensure that the Appellants receives relevant professional and experienced advice, the Trustee appoints an Investment Manager or Asset Manager to manage the assets of the Appellants. The terms for appointment of the Investment Manager/ Asset Manager are contained in the "Investment Management Agreement" ("IMA"). The Investment Manager is responsible for managing the assets/....
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....ee; the person for whose benefit the confidence is accepted is called the beneficiary. In sum he argues that there is no Service being provided by the Appellant-Trusts to the Contributors /Beneficiaries; even assuming for the sake of an argument without conceding that there is a Service, Service tax not payable because there is no distinction between a Trust and Contributors/Beneficiaries; in any view of the matter, Service tax not payable because of the doctrine of mutuality; issue is covered by a direct judgement in the case of State of WB v. Calcutta Club; even assuming the doctrine of mutuality does not apply for any reason, there is no Service falling under the taxable entry "Banking and other financial services" (BFS) for the present tax demand to be sustained; expenses incurred by Trust do not constitute consideration for "services" by Trust to Contributors/ Beneficiaries. 2.2. Shri Vikram Nankani further submits that carrying Interest or Carried Interest is a return on investment and not performance fee; in any case it is not a fee received by the Appellant-Trusts for liability to arise in the hands of the Appellant-Trusts (it is the recipients of such income....
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....ustee. A Trust is a legal obligation that arises out of transfer of ownership of property (in which trust is reposed) to a Trustee and is a pooled vehicle of funds that is created in law for the benefit of the Contributors. "Trust" had been defined under Section 3 of the Indian Trust Act 1882 as "A 'Trust' is an obligation annexed to ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared by him, for the benefit of another, or of another and the owner". Simply put, a Trust is an arrangement whereby property is held by a person (the "Trustee") for the benefit of specific people (the "Beneficiaries") or for some object permitted in law. The property is held by a Trustee by virtue of confidence reposed/ declared in him and his abilities to achieve the objects of the Trust. The person who declares the confidence is called the "Author of the Trust" (or the "Settler"). 3.1. The senior Counsel submits that the Appellants are Venture Capital Funds that work on a high-risk model by investing in nascent companies professing pioneering and innovative technology and skills. Venture Capital investments are generally done in a pooled or c....
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....ts Act, 1881?" The Hon'ble Single Judge ruled that "For the offence under Section 138 of The Negotiable Instruments Act, committed by the Trust, every trustee, who was in-charge of the day-to-day affairs of the Trust, shall also be liable for punishment besides the Trust." 5.1. He submits that the aforesaid ruling is not applicable to the case on hand. The ruling is in the context of the Negotiable Instruments Act which confers liability on a juristic person. On the other hand, the present appeals are in the context of the service tax law, which, during the period under dispute did not confer any liability on juristic persons; the inclusion of trusts as a person/ juristic person under the service tax law/ goods and service tax law was incorporated in the legislation much after the periods under dispute; Pertinently, in the case above, the Trustee was proceeded against and not just the Trust as provided for under law; whereas, the present proceedings fail on grounds of the Trustee (who alone can sue and be sued for the actions of a Trust) has not been made a party to the proceedings rendering the entire proceedings invalid; further, the Respondent has completely disregarded....
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....ce tax operated on the basis of the the service category type and the service providers covered under the definition of the relevant service who alone were liable to pay service tax on provision of such defined taxable service. The Respondent has raised demand under the service category of "Banking and other financial services", whereas the Appellants were not covered under the meaning of any class of service providers, who were required to pay service tax under the category of "banking and other financial services". Moreover, the definition of the term "Person" has been included with effect from effective 1 July 2012 in the Act, and even at that stage, the said term did not include a "Trust". Accordingly, during the period under dispute, any demand of service tax on Trusts would fail simply on grounds that Trust is not recognized as a person, much less a person liable to tax under the Act. 6.1. Learned senior Counsel submits that under the Income tax Act, 1961 (the "IT Act") as well, the term, "person" does not include trusts. Notwithstanding this, provisions in the IT Act pertaining to taxation of Trusts have been formulated keeping in mind the representative capacity in....
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....s held that the fact that every club or association undertakes due diligence of the person before granting membership will not militate against the principle of mutuality of interest; hence, undertaking KYC does not challenge the legal position. 7.2. Shri Nankani submits that The Appellants obtained registration as mandated under various laws and regulations from a compliance standpoint; mere registration does not connote status of an "assessee" leading to tax liability as presumed by the Department; the entire understanding of the Respondent that all Appellants have obtained service tax registration and are therefore liable for service tax on the disputed demands is misguided and incorrect; the detail of service tax registration obtained by each of the Appellants including the rationale for the same have been explained in Para 9 of the Rejoinder submitted on 18 December 2020; many of the Funds obtained service tax registration under protest with a view to reserve their right to avail CENVAT credit in terms of Rule 3 of CENVAT Credit Rules, 2004 ("CCR"), having regard to the timeline brought in for availment of CENVAT vide Notification No. 21/2004-CE(NT) dated 11 July 2014....
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....ility. Relevant extracts (Para 32 and 63) of the same are reproduced as follows: "32. It is also submitted that petitioners obtained certificate of registration under the Rules of 1949 for their registration as Assessee; which is void from inception. The Hon'ble Supreme Court, therefore, has made it clear that the core issue in these matters is that who the assessee is. Therefore, we have to examine that whether the petitioners who have obtained the Certificate of Registration under the Rules of 1949 can be said to be assessee and because of their obtaining the Certificate, whether they are precluded and estopped from saying that they are not the assessee and whether they are liable to pay the electricity duty to the State Government directly or the State Authorities through its Commercial Tax Department who is the in-charge for recovery of electricity duty. 63. In view of the above, it is held that: (III) The petitioner Companies are neither licensees nor assessees but obtained the registration under the Chapter-II of the Bihar Electricity Duty Rules, 1949. Their registration is of no use. They may have obtained the registration under misconception o....
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....nce sheet, deduct TDS wherever applicable, obtain approvals and registration from SEBI, as the case may be. He submits that t the Appellants do not retain any amounts as income for providing services, and act as a pass through with respect to expenses incurred in relation to investment activities. This is evident from the Trust Deed as well as the profit and loss statement of the Appellants. This is also evidenced by the Trust Deed entered (clause 2.1.4) in case of India Advantage Fund II (Appeal No. ST/1651/2012). Submissions on Mutuality of Interest between Trust and Members 8. Submitting on the issue of Mutuality of Interest, Learned Senior Counsel says that there is no service provider - service recipient relationship between the Appellants and the Contributors; the fundamental requirement for levy of service tax is that service should be provided by a service provider and received by a service recipient; therefore, even assuming for the sake of an argument, without conceding, that the Appellants qualify to be an assessee or person liable to service tax, such levy shall stand negated on applying the principles of "mutuality of interest"; he submits that the doctrine....
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....eaffirmed the principle of mutuality of interest applicable to amounts received from members. Hence, this judgment does not support the case of the Respondent. 8.2. Learned Senior Counsel further submits that the Appellants satisfy the three conditions as laid down in Bangalore Club v. CIT (Supra); Respondent has stated that till the stage of generation of surplus funds, the setup of trust was in satisfaction of concept of mutuality i.e. the flow of money, to and fro, would have been maintained within the closed circuit formed by the trust and Contributors. Further, it has been stated that as soon as these funds were invested in portfolio companies as mentioned in the Trust Deed, the doctrine of mutuality has been violated by way of exposure to commercial investing and profit generating operations; in doing so, the Respondent has failed to consider the fact that the aforesaid ruling was in context of interest earned qua banks or third parties, whereas the present case is with respect to monies spent on behalf of and returned to contributors. Even as per the Supreme Court ruling above, qua contributors, there is complete mutuality of interest and consequent non taxability; ....
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....ted surplus fund to the Contributors after meeting out the expenses for day to day operations of the trust. Therefore, the benefit derived by the Appellants has been distributed among the beneficiaries clearly which satisfies the condition laid down in case of Bangalore Club v. CIT (Supra). This decision further debunks the entire line of argument of the Respondent that every investor needs to receive similar returns as the doctrine of mutuality is embedded in the doctrine of equality; the Appellants' case that, every participating member or Contributor is entitled to rights and returns as agreed at the stage of contribution; there is no mandate or requirement under law for equal treatment of unequal; even in the case of s club membership, rights are issued to different classes of members who pay differential fees in exchange of differential access to amenities and privileges. 8.4. Shri Nankani submits that the respondent has stated that the AMC has been given status of special contributors and accorded undue high returns and that as per Section 17 of the Trusts Act; trustee is bound to be impartial. He submits that impartiality is not "equality" of treatment but means tha....
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....the Contributors, wherein the contributions received have been returned to the Contributors along with capital appreciation received on the investments made out of the pooled money; it has been held in Hon'ble Madras High Court ruling in case of CIT v. Madras Race Club (Supra) that the application of the principle of mutuality is not destroyed by the presence of transactions with, or profits derived from non-members; Appellant Trusts have not profiteered, and the contributions made are returned to the Contributors along with capital appreciation; hence, the judgement relied by the Respondent will not be applicable in case of the Appellants. 8.6. Learned senior counsel submits that the case of M/s Yum Restaurants (Marketing) Private Limited v CIT 2020 SCC On Line SC 388 should not be relied in the instant case, In case of Yum! Restaurants (Supra), the appellant company was incorporated by YRIPL as its fully owned subsidiary for the purpose of economisation of the cost of advertising and promotion of the franchises as per their needs; essential requirement that of the contributors to the common fund are either to participate in the surplus or they are beneficiaries of the co....
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....s on the other; question of Appellants rendering a "service" to the Contributors, does not arise at all. there is no discretion vested with the Trust/ Trustee with respect to the manner of disbursement of the returns; the Contributors/ Beneficiaries subscribe to specific class of units and associated rights as set out in the underlying documentation; appellants/ Trusts being regulated entities, all of the arrangements as above are subject to the scrutiny of SEBI / other regulators; he places reliance on Hon'ble Supreme Court Ruling (Para 12, 13, 15, 16 and 17) in case of Bangalore Club (Supra); present case squarely falls within the above principles as all participating Contributors including the AMC (where relevant) contribute monies and receive a return as laid down in the various documents; as per above judgment, doctrine of mutuality does not mean equality in treatment; it merely means that there should be a complete identity between the participants and contributors and the contributors should have right of disposal over the surplus; accordingly, the entire presumption that certain class of unit holders enjoy specific privileges and incremental returns despite joining at the l....
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....areholders; it also can't be held that the Trust is providing any services to the Contributors. Quoting from paragraphs of different documents executed, like The Trust Deed; IMA executed between the Trustee and the Investment Manager; The Contribution Agreement and the Private Placement Memorandum, Senior Counsel affirms that they do not establish or recognize a service provider-service recipient relationship which is a sine qua non for any levy of service tax; Trust per se is incapable of entering into such transactions as a service. The Appellants is not a party to this basic document (ie, Contribution Agreement) through which the Contributors contribute money to the Appellants; the intention of the Contributors is only to invest/ contribute to the corpus and not to receive asset management services from the Trust. Submissions- whether expenses incurred- Carry Interest and performance fee amount to consideration for a service- whether tax liability arises 11. The senior counsel submits that no consideration under the alleged activities charged by the Appellants from the Contributors; as per Explanation (a) to section 67 of the Finance Act, consideration, for service t....
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....ated as consideration of taxable services has been struck down by Hon'ble Delhi High Court in the case of Intercontinental Consultants and Technocrats (P.) Ltd. vs. Union of India MANU/DE/ 6376/2012and affirmed by Hon'ble Supreme Court MANU/ SC/0229/2018. There was no provision for any service by the appellants; there was no consideration agreed upon for any service; even assuming that the expenses incurred with respect to services provided by various service providers to the Trust, the Appellants incur these expenses on behalf of the individual Contributors; incurring of expenses in the capacity of/ at the behest of the recipients of service cannot be considered or equated to consideration for provision of services.; there would be no levy in the hands of the Contributors in their capacity as recipient of services corresponding to the expenses. 11.2. Shri Vikram Nankani submits that for service tax to apply consideration should be received by a "taxable person" with respect to a "taxable service" ; gleaning through the provisions of service tax during the relevant period, he submits that levy of service tax on banking and other financial services is on a "banking company ....
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....on of "banking and other financial services" contains specific activities that are carried out by specific entities but does not cover any "facilitation services"; the Impugned Order admits that the Appellants does not manage any assets for the Contributors; hence, the demand of service tax is incorrect and needs to be set aside. 11.4. The learned Senior Counsel submits that the amounts considered in the Impugned Order includes notional expenses relating to accounting entries "loss on sale of investments", "accrued interest considered doubtful", "loss on revaluation of assets", etc; these amounts are not actual expenses but are only accounting adjustments which are required to be made to reflect the true and correct financial status of the Appellants as mandated under accounting principles; these cannot be treated as amounts "retained" by the Appellants from the Contributors for providing any "services" to the Contributors; out of the total amount of INR 28,51,49,62,689 treated as "consideration" received by the Appellants in the Impugned Orders, an amount of INR 12,37,36,99,793, is towards these accounting entries, which should clearly be excluded from the amounts under d....
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....el submits that wherever performance fee has been paid, service tax has been also paid by the recipient viz., AMC as borne out by the Statement dated 28 May 2009 of Mr. Jayatheeratha. Learned Counsel submits that there were some mistakes in showing the performance fee as follows. (i). in case of ICICI Emerging Sectors Fund, the amount of INR 6.80 Crores has been inadvertently shown as performance fee, whereas by nature, the same is distributions made to another Class B unit holder (and not AMC); since, the same is in nature of return on investments, service tax has been not been paid on the same. (ii). in case of ICICI Equity Fund, during the period under dispute, an amount INR 21.34 Crores has been paid as performance fee to the AMC, on which AMC discharged service tax; as can be seen from above, the AMC has already discharged applicable service tax on the performance fee received from the fund; hence, the said performance fee has already been subjected to service tax in the hands of AMC. (iii). the income from investments has been inadvertently shown as performance fee in the AMC's director's report for FY 2007-08 in respect of India A....
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....C unit holders cannot be treated as consideration and is liable to be set aside; this is not an income in the hands of the Funds for service tax liability to arise thereon. Submissions on limitation 12. Learned Senior Counsel Shri Vikram Nanakani, submitting on the extended period, submits that the impugned Orders have invoked the extended period of limitation alleging that the Appellants has suppressed the material facts from the department wilfully; failed to make payment of service tax and to file service tax return as well; Impugned Order has not however, made any reference as to how "suppression of facts with intention to evade" tax is established. He submits that the Appellants is under the firm belief that the intention of the Government has never been to tax VCFs set up as Trusts under the category of "banking and other financial services"; the appellants exercised bona fide belief that Trusts are not specifically included in the list of such institutions/ entities for "banking and other financial services"; it was clarified by CBEC vide Circular No 94/05/2007-ST dated May 15, 2007 that entry load and exit load charged by the mutual funds from invest....
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....des that in the event of any failure to collect service tax, the amount collected in lieu of having rendered the services would be taken to constitute amounts inclusive of service tax; since service tax is not payable for reasons stated above, interest is also inapplicable and places reliance on Pratibha Processors case 1996 (88) ELT 12 (SC). Submissions on penalty 14. On the issue of Penalties, Learned Senior Counsel Shri Vikram Nanakani avers that Section 76 of the Finance Act is applicable only when an assessee has failed to pay service tax; as the Appellant is not liable to service tax, there is no failure on the part of the Appellants to pay service tax; he submits that Section 77 of the Act provides for levy of penalty on an assessee where he fails to obtain registration and defaults in any provisions of the Act, where such default has no provision with regard to levy of penalty; as the Appellants believes that it does not provide taxable services, there is no requirement to file returns and hence no penalty can be levied. He submits that Section 78 of the Finance Act provides for penalty for suppressing the value of taxable service, where any person has not paid ....
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.... a non-obstante provision, having overriding effect over the other provisions that are in conflict with it; Section 80 of the Act; the Appellant has established its bona fides that it was under the belief that no service tax was payable and the master circular also states that similar expenses incurred by a mutual fund are not chargeable to service tax on amounts demanded; Appellant's case is well covered by the exception provided under section 80 of the Act, which primarily is meant to protect genuine and reasonable situations. He relies upon the following cases. (i). ETA Engineering Limited Vs CC - (2004) 174 ELT 19 (Tribunal)- Para 80 (ii). Oriental Insurance Co Ltd1998 (103) ELT 459 (Commr-Appeals)-Para 13 (iii). Addl. CIT Vs Mohammed and Sons 1985 (154) ITR 220 (Rajasthan High Court)-Para 12 and CWT V S.L. Khunna 1989 (180) ITR 340 (Allahabad High Court -Para 10 and 11 (iv). CCE Vs Milan Tent Palace -2001 (131) ELT 274 (CEGAT Delhi)-Para 2 (v). CCE Vs AB International- 2007-TIOL-1561-CESTAT-MUM (Mumbai CESTAT) Para 3 Submissions on Revenue Neutrality 17. Shri Vikram Nankani submits that the issue is Revenu....
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....s, including break-up of tax demands, covering the period from 2005-2006 to 2011-2012, in respect 31 Appeals, for each of the 11 Funds i.e. Appellants. He gives brief introduction of the issue involved and states that various entities involved in the commercial transaction of investing funds by ICICI Econet Internet and Technology Fund (hereinafter called 'the Fund) for achieving long- term capital appreciation by generating profits on investments made are (a) India Econet Fund (IEF)-A trust settled by ICICI Ltd, through Indenture of Trust (IOT) dated 16.10.2000 (b).ICICI Econet Internet and Technology Fund, a scheme floated by the IEF in terms of Article 1.1 of IOT; (c) ICICI Trusteeship Services Ltd- A company registered under the Companies Act, 1956, appointed as 'Trustee' of the Fund and (d) Asset Management Company (AMC) - ICICI Venture Funds Management Company [IVEN] with whom the Trustee entered into an Investment Management Agreement for the purpose of managing the Scheme. He submits that AMC has a delegation of Asset management duties from the Trustee representing the Fund for the benefit of the Contributor /Subscriber /Investor (collectively referred to as 'Investor....
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..... 20.1. Learned Special Counsel submits also that Preamble of IOT read with Article 6, makes it clear that the objective of the Fund is that of achieving long term capital appreciation by investment of the monies raised from Contributors/Subscribers/Investors and subsequent management of the same; the definition of 'Scheme' explains the process adopted by the Fund; from these provisions, it is seen that the Fund floats schemes under which Units are issued/sold to Investors with a view to providing facilities to such investors to participate in the income, profits and gains arising out of the acquisition, holding or disposal of portfolio investments, property or rights or any other benefits under such schemes; the Fund represented by the trustee is thus engaged in providing services of long-term management of the investments; the activities reflect a systematic process and an organized and regular business of accepting monies from investors, using the same for making profits /gains by re-investing in portfolios or extending loans and distributing the proceeds received by way of dividends or interest on loans. The impugned funds- legal implications as Venture Capital Fund....
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....that a company or trust or a body corporate proposing to carry on any activity as a VCF shall apply to the Board for grant of a certificate; the certificate is issued in the name of the VCF; sub- regulation (4) also provides that if no such application is made an existing VCF shall cease to carry on any activity as VCF; Regulation 20 relating to ' Maintenance of Books of account and records' and Regulation 21 relating to ' Power to call for information' are responsibilities enjoined on the Fund; according to these provisions, a VCF is regarded as a legal entity. 21.1. Learned Special Counsel submits also that as per Regulation 30, 'Liability for action in case of default' is fastened on the VCF; Default, if established, may result in suspension or cancellation of certificate of registration to carry on as VCF; under sections 15A to 15HB of the SEBI Act, penalties, up to Rs. 1 Cr, are imposable for defaults on the part of any person or entity, including an intermediary; clause (iii) of Ex.1 clearly states that the powers of the trustee shall not be deemed to be curtailed, restricted or otherwise limited by, u....
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.... liability company, body of individuals, association, trust, institutional investor or other entity or organization whether incorporated or not, including a Government( Central or State) or an agency or instrumentality thereof."; in the case of ICICI Equity Fund and ICICI Emerging Sector Fund, the definition of 'person' means any natural or juridical person or any body of persons corporate or incorporate" ; in the case of Econet Fund, the definition of 'person' is again wide enough to cover trusts. In any case, no exclusion is provided for trusts from the definition of 'person' in respect of any of these 11 Funds; the very fact that in their own key documents, the subject VCFs have regarded a 'trust' as a 'person' goes to show that, in the reckoning of the ICICI VCFs themselves, a trust is without doubt a legal entity or a person. 22.2. Learned Special Counsel submits further that following further facts support the view that the Funds herein are legal entities/persons: • The Fund has obtained a Service Tax registration on 28.05.2008 for banking and financial services of its own volition and continued to hold; it also availed CENVAT credit of Rs. 17.04 Cr. to ....
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....powers and responsibilities for the purpose of management and administration of the Trust Fund. The following factors establish this fact: • Article 1-Page 4 (Ex.1) ''scheme'' is said to be 'providing facilities' to persons, i.e. investors, to participate in the income, profits and gains arising out of the acquisition, holding or disposal of portfolio investments, property or rights or any other benefits under such schemes; • Articles 3.1, 5 and 10 (Page 8 & 9 of Ex.1) indicate that the Trust Fund shall be held in trust by the trustee and managed in accordance with the IOT; this means that the primary responsibility to manage the Trust Funds lies on the Fund and its trustee. • As per Article 34.1 (EX.1 -Page 20), the Fund represented by the trustee can terminate or dissolve the Fund if AMC resigns or the services of AMC are discharged; in such an event, the trustees have the liberty to appoint a new AMC within a period not exceeding six months (180 days); this would mean that the Fund represented by the trustee would manage the Fund in the interregnum. This is indicative of the fact that the Fund is the fall back entity for managing the trust ....
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....erest flowing from their investment in the Trust Fund; Fund uses for gain, the assets of the investors during the lifetime of the Scheme and makes good the beneficial interest due to the investor. 23.3. Learned Special counsel submits moreover that Learned Special Counsel submits that Black's Law Dictionary defines beneficial interest as "profit, benefit or advantage resulting from a contract, or the ownership of an estate as distinct from the legal ownership or control."; a beneficial interest is also "distinguished from the rights of someone like a trustee or official who has responsibility to perform and/or title to the assets but does not share in the benefits; Section 3 of the Indian Trust, Act 1882, defines both a beneficiary and beneficial interest to be "the person for whose benefit the confidence is accepted is called the "beneficiary": the subject-matter of the trust is called "trust-property" or "trust-money": the "beneficial interest" or "interest" of the beneficiary; therefore, two conclusions emerge: (i) Beneficial interest is nothing but a right; Property does not only include what is tangible, but rights too; this would imply that beneficial interest does f....
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....Units pursuant to a Contribution Agreement; similar definitions are to be found in the Contribution Agreement with reference to the Fund in the IOT and CA of ICICI Equity Fund and ICICI Emerging Sectors Fund; these definitions clearly indicate that the relationship between the Subscribers or Investors and the various Funds is actually a relationship between a vendor and a customer as the terms used are 'purchase of Units' and 'amount paid to the Trust towards the purchase price of Units'. 24.1. Learned Special Counsel submits that the powers of the Trustee listed in the schedule of the IOT, and clauses 10, 20 and 32, of thereof are totally contrary to the principle of mutuality in the service flow between the Fund and the contributors /subscribers/investors; if, the contributors and the Trustee representing the Fund are same and if the relationship is based on mutuality, Clause 32.1 has no meaning; such non-existence of mutuality between the Trustee representing the Fund and the investor is well known and accepted by the Trustee represented by the Fund; as it comes out even at the time of incorporation of the IOT itself, the rights of the contributor or investor are highly....
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....lauses (b) and (c) 9 which provide for winding up say b) If it is the opinion of the Trustee that the scheme should be wound up in the interest of the contribution; or c) If holders of more than seventy-five percent of the outstanding units under the scheme determine that the scheme should be wound up," from a reading sub-clauses (b) and (c) of Clause 35.1 together, it emerges that the Trustee can wind up the scheme even when all the contributors want to continue the Scheme; even when 74% of the total Unit holders desire winding up of the Scheme, unless the Trustee also agrees, the Scheme cannot be wound up; this implies that the Trustee representing the Fund is not equal with the contributors; further, the CA is a tripartite agreement, wherein the Fund is differentiated from a contributor or investor. 24.4. Learned Special Counsel submits that Hon'ble Supreme Court, in a Landmark Judgment passed on 14-January-2013 in CIVIL APPEAL NO. 124,125 OF 2007, 272-278 of 2013 arising out of S.L.P.(Civil) No. 16880 - 16884 of 2010 and16879 of 2010 of M/s Bangalore Club Vs. Commissioner of Income Tax gives greater clarity on "Principles of Mutuality", under which....
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....e the investors make a capital contribution, collectively called 'Unit Funds' which goes into the Trust Fund, the investees use the monies in the Trust Fund made available to them by the VCF, to generate profits for themselves, a part of which is passed on to the VCF as dividends or interest; the mandate of a VCF is such that it can never satisfy the second condition; on the other hand, in the case of a club, as far as supplies of food and other items to permanent members are concerned, the second condition gets satisfied and the mutuality principle becomes applicable; in the case of Calcutta Club, the facts met this criterion as the Hon'ble SC found; significantly, the facts involved only the Club and its permanent members and the subject matter was supplies of food and other items to permanent members; thus, the relationship between an investor and the VCF is not at all comparable to the relationship between a member and his Club, which is founded primarily on the principle of mutuality. 24.6. Learned Special Counsel submits that the actions of the Fund and the investor must be in furtherance of the mandate of the Venture fund; the Venture Funds mandate of generating lon....
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....investing in equities of the portfolio company; this loaning out of funds and equity investments on outsiders for commercial reasons, and snaps the link of mutuality and thus, breaches the third condition. VCFs not equal to Clubs 25. Shri PRV Ramanan submits that as per of the Judgment of the Hon'ble SC in the case of Yum Restaurants! (Para 35), clubs operate for the common benefit of the members wishing to enter into a social exchange with no commercial content; in the present case, however, the Funds are formed only for undertaking a commercial activity with a view to realizing profits /gains; the funds of the Club have to be necessarily expended on the members by providing services and facilities or returned to them if any unused surplus remains; only then the mutuality principle is satisfied; Per contra, in the case of a VCF, the contributed funds have to be necessarily expended on third parties first to generate gains/profits, so that the capital appreciation envisaged in the IOT and PPM, in respect of contributions received from investors, is achieved; 25.1. Learned Special Counsel submits that firstly, the flow of money, to and fro, was not maintained wi....
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....her the activities of the Fund fall under "asset management including portfolio management, all forms of fund management, pension fund management, custodial, depository and trust services. He submits that the expression 'commercial concern' has not been defined in the Finance Act, 1994; hence, resort has to be had to the common understanding of the expression; the term 'commercial concern' would, in general, denote an entity, like a firm or company or organization engaged in commercial activities like sale, purchase or providing services for consideration and having profit motive; however, decisions of several Courts and the Tribunal have provided different perspectives on this issue; in general, charitable institutions, entities which are not engaged in commercial activities in a regular manner, training entities that charge a fee have been regarded as other than a 'commercial concern'; some Courts have held that profit motive is not a necessary condition for an entity to be called a 'commercial concern'; on examination, one finds that after the establishment of a VCF in the form of a Trust, the Fund appoints an AMC to formulate and devise schemes and invest the Trust ....
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....haustive; accordingly, an entity in the form of a trust, like the subject Funds, would be covered within the scope of the expression 'any other person'; as seen above, definition of a 'person' in IOT and CA of all 7 India Advantage Funds- I to VII and in ICICI Strategic Investment Fund, the definition of 'person' is again wide enough to cover trusts; in any case, no exclusion is provided for trusts from the definition of 'person' in respect of any of these 11 Funds; the very fact that in their own key documents, the subject Funds have regarded a 'trust' as a 'person' goes to show that a trust is without doubt a legal entity and gets covered within the expression 'any other person'; moreover, with effect from 1/7/2012, the term "person" has been defined vide section 65B (37), which is very wide in its coverage and specifically includes every artificial juridical person; as per Wikipedia 'A juridical person is a non-human legal entity, in other words any organization that is not a single natural person but is authorized by law with duties and rights and is recognized as a legal person and as having a distinct identity'; According to 'Legal te....
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....y the Appellants (Appendix 2); the following shows the status for the period from 2005-2006 to 2011-2012: Note: Class C unit holders were the AMC and its nominees] 27.1. Learned Special Counsel submits that the value adopted for arriving at the quantum of tax demand comprises two elements, namely, Fund expenses incurred by the 11 VCFs as enumerated (Ex-3C) and Carried interest (referred to as 'Performance Fee' in Ex-3C) paid to the AMC and its nominees; as may be seen from Appendix 5; this is a unique case where the service provider himself holds the entire proceeds- i.e. profits and gains from investments/ loans etc. made by the Fund- which are due to the investors who are the recipients of the service as per the definition of the term 'Scheme' ' in Article 1-Page 4 of Ex.1- wherein the expression used is 'providing facilities' to persons, i.e. investors, to participate in the income, profits and gains arising out of the acquisition, holding or disposal of portfolio investments, property or rights or any other benefits under such schemes; the Fund incurs several costs and expenses, such as, Management fee, Performance fee and Fund expenses and meets them by....
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....ial) have been exempt from being included in the value of the service, the recurring expenses being integral to the nature of primary service have not been exempted; the Trust / Fund has an experienced auditor who has raised an invoice INL0200012303 dated 30.1.2008; their auditor deemed it correct to charge service tax on Rs. 27.50, as recovery of expenses and the Trust/fund pays with service tax; the Appellant cannot claim that the amount represents expenses and cannot be held liable to tax. Inclusion of Carry Interest 28. Replying to the contention that 'Carried Interest' is interest or return on investment, it does not amount to service and hence, it is not taxable, Shri PRV Ramanan submits that 'Carried Interest' (CI) is neither an interest nor a return on investment but a compensation/performance fee paid to the AMC or any person /entity designated by the it, the latter, as a special class of investors/ Unit holders; CI is contingent to payouts (realizations Generated by exiting portfolio investments) by the fund; such Carried interest is credited to the class B (special Units holders) only when the net re....
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....ddition, surplus made over to such unit holders amounted to Rs. 588.13 Cr; total amount of capital raised from 'B' Class unit holders was Rs. 353.63 Cr; the capital was returned in full and in addition, surplus made over to such unit holders amounted to Rs. 439.34 Cr; total amount of capital raised from 'C' Class unit holders was Rs. 10 Lakhs but surplus made over to such unit holders was Rs. 135.61 Cr without redemption. 28.2. Learned Special Counsel submits also that holders of 'A' and 'B' Class units were regular investors such as LIC, ICICI Bank, PNB, Andhra Bank and Dynamic India fund and also some Employees; 'C' Class unit holders were namely, India Advantage Fund I and II and ICICI Venture i.e. the AMC as well as the Settlor for the India Advantage Fund I; India Advantage Fund I and II and ICICI Venture together had only invested Rs. 10 Lakhs that too on 30 & 31/3/ 2006; they were given from the profits and gains a sum of Rs. 109.11 Cr. on 31/3/2008 (i.e. in 2 years' time) and an amount of Rs. 26.49 Cr. on 22/3/2010 without redemption of units; thus as against an investment of Rs. 10 Lakhs, these two 'C' class unit holders received purportedly as 'income from invest....
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....nit holders (special class of unit holders), which is actually a taxable service, is masked as income from Investments and not shown as a performance fee in all the ICICI VCFs; this is the crux of the evasion; it is also seen from the exhibit 14 that while the capital committed and subscribed by Class A units was in 2002 , the Class B (special class ) unit holders subscribe to the units only in 2006, when the Fund was ready to pay carried interest after returning capital and realization of Preferred rate of return to the Class A investors. 28.4. Learned Special Counsel submits that a perusal of the Annual report of IVEN (fund manager of all the 11VCFs) for 2007- 2008, shows that it earned a performance fee of Rs. 530.7 million (page 1 Ex.-19) and then reports the same amount as income from investments in page 2 of the Exhibit; it clearly points to the intent of tax evasion by describing in a misleading manner, the performance fees as income from investments; it also proves the fact that the " income from investments" otherwise called "carried interest" earned by the AMC is nothing but a performance related payment. He submits that perusal of Ex.-20, shows provisions of the....
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....inary income garnered by the Class B unit holders in comparison with Class A unit holders, who having invested in the ICICI Econet Fund in the year 2000 get Rs. 970.13 for every Rs. 100 invested, the Class B units holders get Rs. 38371 for every Rs. 100 invested in the year 2006 even without redemption of the units, purely through CI; statements (Exhibits 4, 4A, 6,7A and 7B) of Shri Jayatheertha Senior Vice-President, Finance, IVEN and Shri Anselm Pinto, Legal and Company Secretary clearly show the acceptance of the fact that CI is of the nature of Performance fee. 28.6. Learned Special Counsel submits that articles 6.4 and 6.5 of the IOT relating to India Advantage Fund-I (Ex-26 269 and 270) set out the provisions relating to proceeds distributable to contributors/ investors w.r.t the Fund investments; the amounts distributed to Class C unit holders pursuant to clauses 6.4.3 and 6.4.4 are referred to as 'Carried Interest"; in clause 6.5 (page 270), it is envisaged that out of CI, 'C' class unit holders may allocate up to a max. of 30% of such CI for any person nominated by the Investment Manager; all the balance CI will be deemed to accrue to ICICI Bank, one of the Contri....
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....Funds were available in public domain;(c) The Annual reports and Accounts were also available in public domain and (d) The basic activity of the Appellant is similar to that of Mutual funds wherein also, there are expenses pooled. He submits that reasons adduced at (a), (b) and (c ) above bank on the availability of information about the subject ICICI VCFs such as, registration with SEBI and offer documents and annual reports being in public domain; these do not amount to disclosure to the Department as clearly brought out in OIO (Para 49.1 and 49.2-OIO No.36/2012 dated 31/7/2012 in the case of ICICI Econet Fund -Pages 200 to 202 in the Appeal file relating to appeal no.ST/2900/2012); as rightly observed, 'the theory of universal knowledge cannot be attributed to the department in the absence of any declaration'; ICICI Venture as the AMC was fully in the know of the requirements under the S Tax law; reading together section 70(1) and section73 of the Finance Act, 1994, make it clear that under the S Tax law, self-assessment and remittance of tax are the statutory responsibility of an assessee; non- compliance with this basic requirement cannot be wished away by stating that there w....
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.... submits that distributions to Class B Unit holders is not even reflected as an expense on the Fund balance sheet, as it is shown as income distributed to Unit holders (to be read as distributions to special class of Unit holders) for the only reason that the beneficiaries are affiliates of AMC; it is noteworthy to keep in mind that in the case of Econet Fund, the Trustee and the AMC are subsidiaries of ICICI Bank, who is the Settlor.; a similar distribution has happened in all other Venture funds of the ICICI group; in the remaining 10 VCFs, in fact, the Settlor i.e. ICICI Venture Fund Management Company Ltd (IVEN) being the AMC the proceeds have flown back to him; only in respect of Econet Fund, the settlor is ICICI Bank Ltd and the AMC is IVEN; such an arrangement has enabled the ICICI group to conveniently suppress material facts from the department. 29.3. Learned Special Counsel submits that the Annual report of ICICI Venture Fund Management Company Ltd [Ex-15] while managing India Advantage Fund-I allotted 5,000 units under the same modus operandi with the full knowledge of Trustee of IAF- I (A Trust); while page 1of this Exhibit shows that these 5,000 units have gen....
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....nit holders and Rs. 80,000 divided among one crore unit holders; extending the above mathematically every Rs. 10 Crore distributed over and above Rs. 25 Crores up to Rs. 50 Crores, will have Rs. 1 Cr distributed to the 10,000 unit holders (who have invested Rs. 10 Lakhs) and Rs. 9 Crores among the 1 Crore unit holders (who have invested Rs. 100 Crores); the above undisputable facts learly show that there was a deliberate default on the part of the aforesaid 11 Venture Capital Funds established by the ICICI group, with ICICI Venture Management Co. Ltd. as the Settlor and the AMC; therefore, invoking of the extended period of limitation is fully justified; since S Tax liability stands established, demand of interest under section 75 of FA, 1994 becomes payable. As regards the reliance of appellant on the Supreme Court's decision in the Alcobex Metals, he relies upon decision in Shree Ranee Gums and Chemicals Pvt. Ltd. vs. CCE ,Jaipur [2017 (4) GSTL 340 (Tri-Del], which clearly settles the issue in favour of Revenue, wherever the SCN has covered extended period as well as normal period. Imposition of penalties 30. Shri PRV Ramanan submits that the penalties were imposed on....
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....as to be examined with supporting documents, before it can be accepted; amounts representing 'Carried Interest' would however stand on a different footing as the same is, in real terms, a performance based payment which has not suffered any S Tax; However, for quantification purposes, the matter may have to go back to the adjudicating authority. On the plea that amounts representing Write-offs and provisions should be excluded from the value taken for calculating the tax demand, he submits that this claim of the appellant was not raised before the adjudicating authority; the appeal memorandum also does not make a mention of this aspect; the present argument being on facts ought not to be entertained; if, however, the Hon'ble Bench is inclined to allow the plea, still it has to be substantiated before it can be accepted; for quantification purposes, however, the matter may have to go back to the adjudicating authority. 32. Summing up, Shri PRV Ramanan submits that the 11 Venture Capital Funds formed by the ICICI group, who are the Appellants herein are legal entities and are juridical persons; they come within the definition of 'commercial concern'; the said Funds , through....
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....obligation annexed to ownership of property and arising out of confidence reposed in and accepted by the owner or declared and by him, for the benefit of another, or of another and the owner; simply put, a Trust is an arrangement whereby property is held by a person (the "trustee") for the benefit of specific people (the "beneficiaries") or for some object permitted in law. He submits that various judgments of the Hon'ble Supreme Court and High Court established that the Trust and the beneficiaries thereof are not different from one another. On the other hand, the learned Special Counsel for the appellants submits a reading of the Indenture of Trust (IoT) shows that the Trust is distinct from the contributors/beneficiaries; this is supplemented by the fact that the Trust undertakes KYC or due diligence of the contributors/beneficiaries; the Trust is registered under SEBI (Venture Capital Fund Regulations, 1996) as well as under the Income Tax and Service Tax Laws. 34.1. Learned Senior Counsel referred to some cases in the appellant's favour. We turn our attention to the various judgements. We find that Hon'ble Bombay High Court in the case of Homi Nariman Bhiwandiwala Vs Z....
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.... 18. From the deed of trust dated 31 January, 1990 it appears that the Canara Bank as a settlor, constituted a trust under the aforenoted name "Can Bank Mutual Fund", with itself as the principal trustee of the fund for doing mutual fund business. The Trust Deed declares that the settlor has decided that the Can Bank Mutual Fund shall be vested in the Canara Bank as trustees for the benefit of the persons participating in the scheme to be framed by the Canara Bank as trustee of the Can Bank Mutual Fund (Preamble (iii) ; the Canara Bank declared to hold as trustees in trust for the subscribers to such schemes, the moneys, contributed by the settlor and the persons participating in such schemes for the Can Bank Mutual Fund [preamble (iv)]; for managing and administering the trust, the deed provides that the settlor shall constitute a Board of trustee [Article 7(1)] : the Canara Bank as trustee of the existing mutual fund and acting thereunder as the principal trustee shall be the legal owner in whom all the assets of the existing funds and all the funds which may be set up in future shall vest and the management and administration of all such funds shall vast in the Board [....
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.... enabling him to take prompt necessary steps in the matter. It was, however, the inaction on the part of the plaintiff himself who failed to take necessary steps. 78. Thus, in view of the foregoing discussion, I hold that not joining the Trustees of the Bombay Hospital Trust and also Tata Memorial Hospital is a serious lacuna and the suit certainly is bad for non-joinder of necessary parties. Issue No. 2 is, therefore, answered in the affirmative. 34.4. Hon'ble Supreme Court in the case of Bangalore Club Vs Commissioner of Income Tax, 2013-5-SCC-509 and Others, held that 11. One of the first Indian cases that dealt with the principle was Commissioner of Income-Tax, Bombay City Vs. Royal Western India Turf Club Ltd.[6]. It quoted with approval three conditions stipulated in The English & Scottish Joint Co-operative Wholesale Society Ltd. (supra), which were propounded after referring to various passages from the speeches of the different Law Lords in Styles case (supra). Lord Normand, who delivered the judgment of the Board summarized the grounds of the decision in Styles case (supra) as follows: "From these quotations it appears that the ex....
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....that this exempting element of mutuality should exist it is essential that the profits should be capable of coming back at some time and in some form to the persons to whom the goods were sold or the services rendered.... * * * It has been held that a company conducting a members' (and not a proprietary) club, the members of the company and of the club being identical, was not carrying on a trade or business or undertaking of a similar character for purposes of the former corporation profits tax. * * * A members' club is assessable, however, in respect of profits derived from affording its facilities to non-members. Thus, in Carlisle and Silloth Golf Club v. Smith, (1913) 3 K.B. 75, where a members' golf club admitted non-members to play on payment of green fees it was held that it was carrying on a business which could be isolated and defined, and the profit of which was assessable to income tax. But there is no liability in respect of profits made from members who avail themselves of the facilities provided for members." (Emphasis supplied) 15. In short, there has to be a comp....
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....ered in the course of the same business, the exemption of mutuality could not be granted. This Court held thus: "As already stated, in the instant case there is no mutual dealing between the members inter se and no putting up of a common fund for discharging the common obligations to each other undertaken by the contributors for their mutual benefit. On the contrary, we have here an incorporated company authorised to carry on an ordinary business of a race course company and that of licensed victuallers and refreshment purveyors and in fact carrying on such a business. There is no dispute that the dealings of the company with non- members take place in the ordinary course of business carried on with a view to earning profits as in any other commercial concern." (Emphasis supplied) 19. The second feature demands that the actions of the participators and contributors must be in furtherance of the mandate of the association. In the case of a club, it would be necessary to show that steps are taken in furtherance of activities that benefit the club, and in turn its members. Therefore, in Chelmsford Club (supra), since the appellant provided recreational faciliti....
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....ople - it does not matter whether they are called members of the company, or participating policy holders - and apply it for the benefit of those same people, not as shareholders in the company, but as the people who subscribed it, then, as I understand the New York case, there is no profit. If the people were to do the thing for themselves, there would be no profit, and the fact that they incorporate a legal entity to do it for them makes no difference, there is still no profit. This is not because the entity of the company is to be disregarded, it is because there is no profit, the money being simply collected from those people and handed back to them, not in the character of shareholders, but in the character of those who have paid it. That, as I understand it, is the effect of the decision in the New York case." 34.5. Hon'ble Supreme Court in the case of State of West Bengal and Others Vs Calcutta Club Ltd, 2008 (2) TMI 837 held that: 17. We have thus to discover for ourselves whether the doctrine of mutuality has been done away with by Article 366(29-A)(e), and whether the ratio of Young Men's Indian Association (supra) would continue to operate even af....
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....ing upon his rights as a member of the club, not by reason of any new contract, but under his old contract of association by which he subscribed a sum to the funds of the club, and became entitled to have ale and whisky supplied to him as a member at a certain price. I cannot conceive it possible that Graff could have sued him for the price as the price of goods sold and delivered. There was no contract between two persons, because Foster was vendor as well as buyer. Taking the transaction to be a purchase by Foster of all the other members' shares in the goods, Foster was as much a co-owner as the vendor." 34.6. Hon'ble Supreme Court in the case of the Joint Commercial Tax Officer, Harbour Division, II-Madras Vs the Young Men's Indian Association, MANU/SC/0472/1970 (Regd.), Madras and Others, held that 11. The essential question, in the present case, is whether the supply of the various preparations by each club to its members involved a transaction of sale within the meaning of the Sale of Goods Act, 1930. The State legislature being competent to legislate only under Entry 54, List II, of the 7th Schedule to th....
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....le consideration has no application to members' clubs; the Hon'ble Apex Court upheld the decisions of Hon'ble Jharkhand High Court and the Hon'ble Gujarat High Court (which followed the Hon'ble Jharkhand High Court decision) to the effect that service rendered by a club founded on the principle of mutuality would not attract Service Tax levy. Further, it was held that the exclusion clause in the definition of a club or association namely, "anybody established or constituted by or under any law for the time being in force" would cover even a Club registered as a Company under the Companies Act and registered co-operative societies under various State Acts as a body constituted by or under any law for the time being in force. the second part of the judgment however, relates to levy of service tax relating to such supplies and the Apex Court held, after taking note of the definition of 'club or association' under the S tax law- particularly, the exclusion thereunder- viz. "anybody established or constituted by or under any law for the time being in force"- that from 2005 onwards, the Finance Act, 1994 does not purport to levy service tax on members' clubs in the incorporated form. Lea....
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.... (ii). during the course of their investment management business, the Funds used such contributions to advance loans to their portfolio companies/buy equity/quasi equity etc. as per Trust Deed; hence, in the present case, the Funds being engaged in commercial operations with third parties (investee portfolio companies/body corporate), ruptures the 'privity of mutuality', consequently, violating the one-to-one identity between the investor and Fund. 35.3. Learned special Counsel submits that in this case, Bangalore Club, an unincorporated Association of Persons (AOP), sought exemption from income tax on the interest earned on fixed deposits with certain banks which were corporate members of that club on the basis of doctrine of mutuality; however, tax was paid on the interest earned on fixed deposits kept with non-member banks; the Apex Court identified three grounds for grant of tax exemption, on the principle of mutuality, namely (i). There must be a complete identity between the contributors and participators. (ii). The actions of the participators and contributors must be in furtherance of the mandate of the association. (iii) There must be no scope of profiteeri....
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....L 77 Allahabad wherein it was ruled that: "71. As regards the allegation that the impugned Regulations are contradictory to the Companies Act or other Acts, in our opinion the SEBI Act and the impugned regulations are special laws and will prevail over the provisions of the Companies Act and other Acts which lay down the general law. It is well settled that the special law prevails over the general law." He submits that the Trusts dealing with Venture capital funds have to follow the Regulations in respect of maintenance of books of accounts etc. He submits that the VCF is a Trust only in form and not in content; a VCF is not mere obligation but a legal entity with its own rights and duties; it can be penalized and registration given can be suspended or cancelled. 35.5. Relying on the case of Hon'ble Madras High Court in the case of M/s Abraham Memorial Education Trust Vs Shri C. Suresh Babu, he submits that the Trust falls within the definition of the term "Person" as defined in Section 11 of IPC and Section 3(42) of General Clauses Act; applying the ratio Trust is a person as per Finance Act, 1994 as it existed between May 2006 and 31.05.2007. He submits that in the IoT ....
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....akin to the lifting of the veil in order to discern the real nature thereof; this is exactly what the Revenue has sought to do in highlighting the lack of completeness of identity in the wake of the non-equal metrics of contribution and profit sharing by the Contributors of Class A and Class B units and has also lifted the veil on completely different profit sharing formulae between the contributors with the Class B units receiving exponential returns. He submits that the Hon'ble Court underlines (Para 17) the need for class of members (Investors, in this appeal) to stay intact as the transaction progresses from the stage of contributions to that or returns/surplus; in the instant case Revenue has clearly established the deviations from equality in profit sharing among the Class A and Class C Unit holders in this case as the transaction progresses from investment stage to achieving different benchmarks of returns, thus establishing the non-existence of mutuality between the Investors themselves and then between the Investors and the Fund at large. He submits that further the Apex Court (in Para 24) states that "The mutuality and non-profiteering character of a concern are to ....
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....impaired when the third-party investee companies derived benefits without being contributors at the first instance. (iii) Though the investors received capital appreciation on their investment, and also received a surplus, the special class of investors with a very small contribution got disproportionately large benefits purportedly as 'income from investment' though the payment was in the nature of performance fee. (iv) The entire activity of the ICICI VCFs was aimed at generating profits and gains which flowed back to the Company which sponsored the trusts. The activity was undoubtedly a commercial activity, which is, as observed by the Hon'ble SC in the Bangalore Club decision "fatal to the principle of mutuality". 36. In reply, learned Senior Counsel for the appellants submits that obtaining Service Tax Registration cannot lead to fastening of service tax liability on the contributions received as there is no service provider-service recipient relationship; obtaining registration in compliance to other laws should not be interpreted to mean that the appellants are a legal entity; compliance to other laws does not change the fact that appellants are am....
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....d shall be held by the Trustee upon Trust and for the purposes herein specified or declared by the instrument and managed in accordance with the instrument. • As per Article 6, the object of the Trust shall be to carry on the activity of a Venture Capital Fund • As per Article 10, the Trust Fund shall be under the control of the Trustee and the Trustee shall, in its absolute discretion inter alia determine: (i) to what extent the Trust Fund is to be applied to all or any of the objects of the Trust; (ii) to what extent any part of the income of the Trust Fund is to be accumulated for any specific object; and (iii) to what extent the Income of the Trust Fund is to be distributed to the Contributors. • As per Article 12.1, distribution to contributors or subscribers of any scheme shall be either in the form of dividend or by way of redemption of units or otherwise as provided in the private placement memorandum and/or scheme document. The Trustee shall decide the appropriate percentage of profits earned to be distributed in any given year to the contributors. • Article 16 lays down the duties of the Trustee which inter alia include ....
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.... 37.1. A typical Investment Management Agreement has, inter alia provides as follows: • In terms of Article 3.1, the AMC shall exercise the powers and privileges subject to the superintendence, control and direction of the Trustees. • In terms of Article 11, the AMC shall be entitled to remuneration as stated in the relevant private placement memorandum and/or scheme document; AMC shall be entitled to reimbursement of all costs and expenses incurred by it on way of the Trust. 37.2. We turn our attention now as to how the issue was treated in the SCN as well as the Order-in-Original (the appeal No. ST/2900/2012). We are given to understand that barring minor variations all the SCNs and OIOs are similar in lines. The SCN alleges that going by the facts of the case, the appellant floats schemes and collects funds from contributors/ Subscribers/ Investors and facilitates them to earn profits/gains/income out of acquisition/ holding/ disposal of portfolio investments of the Trust which are controlled by the Trustees for contributors/ Subscribers/ Investors; the mere title given as expenses to the amount withheld from contributors/ Subscribers/ In....
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....below) will be to achieve long term capital appreciation by providing financial and other assistance to such persons as is permitted under the applicable regulations (including SEBI Regulations)" 37.4. Similarly, it is mentioned clearly in various places that the Trust Fund shall be managed by the Trust and the object of the Trust is to carry on the activity of a Venture Capital Fund. It is interesting to notice that to enable the funds, to distribute the dividends and other amounts payable on or in respect of Units, a mechanism in the form of Private Placement Memorandum and/or Scheme Document are created. Thus, the profit motive of the Trust is evident. All these Trusts have registered themselves under VCF Regulations, 1996 issued under SEBI Act, 1992. We find that in terms of Regulation 2(m), VCF means a fund established in the form of a Trust or a Company including a body corporate registered under VCF Regulations. As the Trusts are treated as juridical persons for the purposes of SEBI Regulations, we do not find any reason as to why they should not be treated so for the purpose of taxation. Taxation Law being a specific legislation just as the SEBI Act, 1992 should pr....
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....erruled by events all these show that self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability." (p. 690) 37.6. In the case of Yum! Restaurants (Marketing) Private Ltd. Vs. Commissioner of Income Tax, Delhi, [Civil Appeal No. 2847 of 2010], Hon'ble apex Court observes that 18. Coterminous with the requirement of common identity, as discussed above, the law also contemplates a completeness of identity between the contributors and participators. The theory of completeness of identity presupposes the contributors and participators to be two separate classes, but there is oneness or equality in the matter of sharing of surplus/profits. This is to ensure that there is no interference of any alien commercial entity in the transaction. With the interference of any alien entity, the idea of conducting business with oneself is defeated and any profits or gains accruing therefrom become subject to tax liability. This proposition of law is succinctly predicated in British Tax Encyclopaedia7, which reads thus: "For this doctrine to apply it is essential that all the contributors to the common fund are entitled to....
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....nancial Institution. The clubs on the other hand have no or minimal commercial interest and basically are formed to share facilities, which would normally be inaccessible or unaffordable at an individual level. We find that the learned special counsel has rightly submitted that VCFs bear no comparison to members of club, which, by its very incorporation, is a grouping of individuals who have chosen to be members of a particular institution or club for fulfilment of certain human needs social, sporting, recreational etc that cannot be fulfilled except in such oragnised collectives. Moreover, if we consider the understanding these VCFs in common parlance, it would be clear that no common man considers these VCFs to be like clubs as such not to talk of Trusts as o common. Such common understanding cannot be wished away. Learned Senior Counsel for the appellants relied upon various case law to argue that the trusts are amorphous and are governed by the principle of mutuality of interest. As per our discussion above and the case records we find that these trusts are VCFs and are not Trusts as such to draw the analogy of different cases cited. We find that each case rests on its own fact....
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....-B/C unit holders was made in respect of India Advantage Fund- I & II, ICICI Econet Internet and Technology Fund and ICICI Emerging Sectors Fund; such carried interest has been charged to income tax in the hands of Class-B/C holders; it cannot be assumed to be an expense incurred by the Funds and cannot construe as value of taxable services. He submits that in case of ICICI Strategic Investment Fund, there are no Class-B/C unit holders; however, the Department has treated Class-A distributions and raised service tax of Rs. 17,33,13,728/-. Learned Special Counsel further submits that carry interest cannot be confused with performance fee; wherever performance fee has been paid, the recipient AMC has discharged service tax liability. He further submits that an amount of Rs. 6.80 crores has been inadvertently shown as performance fee under Expenditure Head in Revenue account for the financial year 2006-07; it is in the nature of return on investments. He further submits that in case of ICICI Equity Funds during the period under dispute, a sum of Rs. 21.34 crores was paid as performance fee to the AMC who discharged service tax on the same; similarly amounts alleged to be performance f....
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....y way of dividends or interest on loans among investors and retaining some portion of the same in consideration of the facility of asset management services provided to the investors. The Fund is fully responsible for holding, and using for gain, the assets of the investors during the lifetime of the Scheme, for financing which the funds have been contributed by the latter. He submits that similarly, Fund can be regarded as a "Person" (for the period 01.05.2006 to 31.05.2007) though the same is not defined in the Finance Act, 1994. The adjudicating authority has rightly adopted the definition as per Section 3(42) of General Clauses Act, 1897; according to the said Act, person shall include any company or association or body of individual whether incorporated or not; being an inclusive definition, the subject funds would be covered within the scope of the expression "any other person". He further submits that w.e.f. 01.07.2012 in terms of Section 65B (37) of Finance Act, 1994 "Person" includes ----(x) every artificial juridical person, not falling within any of the proceedings clauses; the activities of the Funds clearly get covered under the description Asset Management, including ....
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.... the AMCs and their nominees (Class-C Investors) at their discretion. We find that learned Senior Counsel for the appellants has vehemently argued that it is the AMCs who were managing the portfolios/ funds on behalf of the Trusts and the said AMCs are paying service tax as applicable. Notwithstanding this argument, we find that in a chain of commercial activity different entities perform their functions. As an example, general public may invest their money in the banks, which in turn may invest certain amounts in other entities or concerns for further managing the funds. The argument that the banks need not pay service tax as the entities where they are further investing their monies are paying service tax. In a typical commercial activity various entity in the chain of activity needs to pay service tax and the subsequent entity may however, avail the credit of tax paid by the preceding entity. As long as the Trusts are performing the taxable services, they are liable to pay service tax. It has been demonstrated above by the learned Special Counsel for the Department and also found by us that the funds are managing the money invested by Subscribers/ Contributors/ Investors. 40.....
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.... rendering taxable services to the Subscribers/ Contributors/ Investors. In view of our discussion above, the answer is in affirmative. 40.4. In view of the above discussion, it is evident that the appellant trusts have performed commercial operations/functions i.e. an economic activity. The concept of trust is only a façade. Even otherwise, Hon'ble High Court of Judicature at Madras in Crl. OP Nos.12630 & 12661 of 2012 and M.P.Nos.1, 1, 2 & 2 of 2012 observes that trust is juridical person. It held that 27. From the foregoing discussions, it is manifestly clear that the moment a Trust (organisation) is formed with an obligation attached to the same, an artificial person is born and because such artificial person is recognised by law, conferring upon such artificial person right to own property, to enjoy certain other rights and also to discharge certain obligations, it attains the status of a juristic person. Thus, a Trust whether private or public, is a juristic person who can sue/be sued or prosecute/be prosecuted. 40.5. We find that learned special counsel for the Revenue submits that terms like commercial concern etc are not defined in Service....
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....roker, etc and recurring expenses are incurred on fund management, fee to Asset Management Company, brokerage, trustees fee, expenses on account of stationery, postages, advertisements, listing on exchanges, publishing of Net Asset Value (NAV), distribution charges, custodian charges, audit fee ,etc. We find merit in Revenue contention that while the initial issue expenses are exempt, recurring expenses were not. We find that in the instant case, the payments made by the appellant are not in the nature of entry and exit expenses. These are huge amounts retained and distributed to the AMCs or their nominees subject to achieving certain levels of performance thus it is a variable expenditure and cannot be equated to entry or exit load. Moreover, we find that the appellant's Trusts are managing Venture Capital Fund and not the mutual funds therefore the Circular is not applicable. 40.7. We find that the appellants have also relied upon Board's Circular No. 86/04/06 stating that they are not a commercial concern. It can be seen from the said circular that the CBEC has clarified that it is not a single activity but the totality of activities and the objectives of its existence ....
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....s B/C unit holders; assuming but not admitting that such return on Class B/C units is an expense incurred by the Fund(s), such expense incurred by the Appellants cannot be construe as value of taxable services as these are neither received nor retained by the Funds; out of the total demand of INR 321 Crores, an amount of INR 54.76 Crores relates to the service tax demanded on Carry Interest paid to Class B/C unit holders; in case of one of the fund (by the name of ICICI Strategic Investment Fund), there are no Class B/C unit holders and the fund is having only one class of units, i.e. Class A; however, the Respondent has treated Class A distributions as Class B/ C distributions and raised service tax demand thereon; an amount of INR 1,40,22,14,630 paid to Class A unit holders has been erroneously treated as an amount distributed to Class B/ C unit holders service tax of INR 17,33,13,728 should anyway be excluded from total service tax demand in the instant appeals; Carry Interest cannot be confused with performance fee. 41.2. He submits that the amounts considered in the Impugned Order includes notional expenses relating to accounting entries "loss on sale of investments",....
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....lass B/C unit holders; in case of one of the fund (by the name of ICICI Strategic Investment Fund), there are no Class B/C unit holders and the fund is having only one class of units, i.e. Class A; however, the Respondent has treated Class A distributions as Class B/ C distributions and raised service tax demand thereon; an amount of INR 1,40,22,14,630 paid to Class A unit holders has been erroneously treated as an amount distributed to Class B/ C unit holders service tax of INR 17,33,13,728 should anyway be excluded from total service tax demand in the instant appeals; Carry Interest cannot be confused with performance fee. 41.4. The learned Senior Counsel submits that wherever performance fee has been paid, service tax has been also paid by the recipient viz., AMC; in case of ICICI Emerging Sectors Fund, the amount of INR 6.80 Crores has been inadvertently shown as performance fee, whereas by nature, the same is distributions made to another Class B unit holder (and not AMC); since, the same is in nature of return on investments, service tax has been not been paid on the same; in case of ICICI Equity Fund, during the period under dispute, an amount INR 21.34 Crores has b....
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....ot contingent upon an investment by the AMC and not related to units held by AMC; it is therefore, erroneous to equate performance fee with Carry Interest; amount retained for payment of carried interest to Class B/ C unit holders cannot be treated as consideration and is liable to be set aside; this is not an income in the hands of the Funds for service tax liability to arise thereon. 42. On the other hand, Learned Special Counsel for the Revenue submits that the appellant's claim that the funds distributable to Contributors/Subscribers/ Investors held back by the Fund/Trust do not constitute value of taxable service; this argument is not in line with Service Tax (Determination of Values) Rules, 2006; Explanation to Section 67 of the Finance Act 1994 sets out that "Gross Amount Charged" and "Consideration" as follows: (i) Consideration includes any amount that is payable for the taxable services provided or to be provided. (ii) Gross amount charged includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment, and any amount credited or debited, as the case ....
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....s clear that Performance Fee/ Carried Interest are contingent to pay out and are a function of profitable exit. He further submits that from the Annual Report of ICICI Emerging Sectors Fund, it is seen that a Performance Fee of 6.8 crore is reported; it also reports that amount paid to the AMC in the related party transaction to be Rs. 205,521,347/- being management fee without performance component; the 6.8 crore is not shown as payment to AMC thereby indicating that the Performance Fee was paid another entity which could only be holders of special Class Units i.e. Investment Manager, their employees or any Trust for the benefit of the employees or any such person designated by the Investment Manager. He submits that this income to the Class-B Units is masked as income from investments and not shown as Investment Fee; similarly Annual Report of IVEN for the year 2007-08 shows a Performance Fee of 530.7 million at one place and as income from investments in some other place. Learned Special Counsel further submits that IoT of India Advantage Fund V, highlights the fact that the amount ear- marked as CI to the Class-B Units is held under Escrow account and credited to Class-B Units ....
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....which is a function of the returns generated by the funds, number and nature of funds being managed and the profitable exits during the year. In the Schedule-XIV at 3 Income Recognition, it is stated that as Fund Manager, the Company is entitled to an annual management fee and a performance fee, which is contingent on the payouts to the Fund investors, in respect of the Private Equity Funds advised by the Company, the Company is entitled to any advisory fee. The annual management fee, performance fee and the advisory fee are recognized as revenue when they contractually accrue except where the management believes that the collectability is in doubt. We find from the IoT of India Advantage Fund-V that the distribution would be as follows: 6.4.1. First, 100% to all holders of Class-A Units and Class-B Units in proportion to their Capital Contributions until the cumulative amount distributed pursuant to this Clause 6.4.1 to each Contributor is equal to its respective Capital Contribution. 6.4.2. Second, 100% to all holders of Class-A Units and Class-B Units in proportion to their Capital Contributions until the cumulative amount distributed pursuant to th....
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....ility of managing the Trust/ Fund rests with the appellants. Any amount retained out of income distributable to subscribers is nothing but charge or fee for the services rendered. We find that it is nothing but gross consideration in service tax parlance. We find that 'Carried Interest' (CI) is neither interest nor return on investment as claimed by the Appellants; revenue successfully demonstrated that it is a portion of the consideration retained by the Funds for the services rendered by them to the investors and passed on, in the disguise of return on investments, to the so called 'special class of investors' called as 'C' class Unit holders, who are none other than the AMC and or its nominees and that in respect of 10 out of the 11Funds, the amounts as 'CI' have flown back to the Settlor and his nominees. We are in agreement that CI is paid subject to realizations generated by exiting portfolio investments and credited to the class B or C (special Units holders) only when the net realization recognized by selling and exiting portfolio investments exceeds the sum total of the capital committed and the appreciation gained as per the pre-agreed preferred rate of return. 43.3.&n....
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....ax and to file service tax return as well; Impugned Order has not however, made any reference as to how "suppression of facts with intention to evade" tax is established. He submits that the Appellants is under the firm belief that the intention of the Government has never been to tax VCFs set up as Trusts under the category of "banking and other financial services"; the appellants exercised bona fide belief that Trusts are not specifically included in the list of such institutions/ entities for "banking and other financial services"; it was clarified by CBEC vide Circular No 94/05/2007-ST dated May 15, 2007 that entry load and exit load charged by the mutual funds from investors shall not be liable for payment of service tax under fund management services (banking and financial services).; therefore, no suppression much less any wilful suppression can be alleged. 44.1. He submits that there is no dispute that the issue is interpretative in nature; no similar demands have been raised by the Revenue on any other Fund; extended period of limitation has been invoked mechanically, It is a settled principle that extended period cannot be invoked in case of interpret....
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....roper officer of the S Tax department and made a true declaration of the material particulars; further, no evidence of diligent conduct has been adduced to substantiate bona fide belief on the part of the said Funds or its Trustees. He relies upon the case of Kala Sagar Vs CST Tax, Mumbai [2015(138) STR 1015 (T-Mum]. 45.1. He further submits, countering the appellants reliance on the case of Alcobex Metals, that the issue involved and decided by the Apex Court related to jurisdiction; the ratio flowing from it is that once a SCN is held to be invalid due to lack of jurisdiction, it cannot held to be valid for a shorter period; in the present case, the SCN having been issued by the Commissioner, there is no dispute about jurisdiction; Grounds for invoking the proviso were never ever discussed by the Hon'ble Tribunal or the Apex Court in the context of Alcobex. The ratio of the aforesaid decision of the Apex Court does not apply to the present case. Revenue would rely on the decision of Hon'ble Tribunal in the case of Shree Ranee Gums and Chemicals Pvt. Ltd. vs. CCE ,Jaipur [2017 (4) GSTL 340 (Tri-Del]. 46. We find that the appellants have argued that this is a matt....
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.... for Revenue, the issue of jurisdiction of the issuing authority was under consideration. We find that Hon'ble Supreme Court held that: "13. ...... one of the plea agitated before the Supreme Court was whether the show cause notices can still be treated as invalid for the period which is within the normal period of limitation. The Apex Court did not lay down the law on the above subject but proceeded to declare the show cause notice as invalid on the ground that the same was issued by an authority not competent under the relevant statute. The aforesaid judgment, in my view, is not pointer to an issue whether the show cause notice can still be validated for a period which is within the normal period enshrined under the statute" Therefore, we find that the facts of the case cannot be compared to the case before us and hence the reliance would not be of any help to the appellants. In view of the discussions, we find that the Department was in its right to invoke the extended period for the issue of SCN. Penalties 47. Coming to the issue of imposition of penalty under different sections, Learned Senior Counsel Shri Vikram Nankani avers that the Appellant is not ....
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....ply. 48. We find that in the instant case, the appellants have not obtained registration; have not paid applicable service tax and have not filed due returns. Therefore, we find that penalty under Section 77 is imposable. We also find that extended period is invokable; material facts have been deliberately suppressed by the appellants before the jurisdictional service tax authorities. Therefore, we find that imposition of penalty under Section 78 of the Finance Act, 1994 is justified. Coming to the imposition of penalty under both Sections 76 & 78, we find that Hon'ble Karnataka High Court in the case of Motor World, 2012 (27) STR 225 (Kar.) have held that simultaneous penalty cannot be imposed under Section 76 and Section 78 of Finance Act, 1994. Revenue relies upon Hon'ble Kerala High Court judgment in the case of Krishna Poduval (supra). However, with due regards to Hon'ble Kerala High Court, we find that Hon'ble Karnataka High Court in the judgment cited above, have distinguished the judgment of Hon'ble Kerala High Court. We further find that Hon'ble Kerala High Court's judgement was in a writ appeal whereas, Karnataka High Court's order was in a Central Excise Appeal.....
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.... by the Appellants and provisions should be excluded from the demand; the adjudicating authority has not provided any opportunity to the Appellants seeking submission documents for the purpose of claiming CENVAT credit; the Appellants had filed detailed year wise listing of expenses at the time of investigation itself. He relies upon the following cases: (i) Formica India Division Vs CCE, 2002-TIOL-599-SC-CX. (ii) Dineshchandra R Agarwal Infracon Pvt. Ltd. Vs CCE, Ahmedabad, 2010 (18) STR 39 (Tri. Ahm.) (iii) Shah Yarn Tex P Ltd. Vs CST, 2008-TIOL-1975-CESTAT- MAD. (iv) Shah Yarn Tex P Ltd. Vs CST, 2016-TIOL-351-HC-MAD- CX (v) OK Play India Ltd. Vs CCE, 2017-TIOL-4054-CESTAT- CHD. Relying on CCE & C, Patna Vs Advantage Media Consultants, 2008 (3) TMI 59 (CESTAT Kolkatta), he submits that cum duty benefit needs to be allowed and CENVAT available needs to be permitted to be set off. 49.2. In reply, learned Special Counsel for the Department submits that no evidences were produced regarding payment of service tax against which the appellant intents to avail CENVAT credit; no evidence was produced to....
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....alue of taxable service plus service tax payable. We find that this principle has been legislated in the following terms with effect from 18.04.2006 in Section 67 (2) of the Finance Act, 1994 as amended: "67(2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as with the addition of tax payable, is equal to the gross amount charged." 50.1. Therefore, we are inclined to allow the request of the appellants for re-calculation of the gross value of the taxable services (taking into account the appellant's submissions on amounts under different Heads of accounts were wrongfully considered as expenses); availability of CENVAT credit and cum duty benefit. We find that for achieving the above object, the issue needs to go back the adjudicating authority for computation of the same. During the course of arguments, Shri Nankani learned counsel for the appellants raised the issue that the Adjudicating authority has traversed beyond the SCN as far as the demand on Carry Interest is concerned. On- going through the concerned records we fin....