ARC Trustee Services Not Taxable as Banking Services; ₹50 Cr Demand Set Aside on Mutuality Principle

Asset Reconstruction Company (India) Limited Vs Principal Commissioner (CESTAT Mumbai)

Asset reconstruction company trustee services not taxable under banking & financial services – Demand of over Rs. 50 crores set aside; mutuality principle applied: CESTAT Mumbai

The appellant is the largest Asset Reconstruction Company in India. It is registered as an NBFC. It floats a “trust” for liquidation of NPAs of banks. It issues security receipts (SR) in terms of Section 7 and 7A of the SARFAESI Act, 2002. It receives management fees for managing the trust as the trustee. It also earns a management incentive upside on liquidation of assets. The Service Tax Department sought to levy service tax on the above receipts under “banking or financial” service. A demand of over  Rs. 50 crores along with interest and equivalent penalty was confirmed. Hence, appeal.

The Hon’ble CESTAT, Mumbai set aside the order and allowed the appeal. It held: (i) for the period prior to 01.07.2012; the appellant is not providing any banking service or recovery agent service as it is undertaking a statutory function; (ii) applying the principle of “ejusdem generis” and Circular issued by CBIC holds that it is not a banking or financial institution; (iii) for the period post negative list; holds that there is consideration; however; service is not provided from one “person” to another as trust and trustee are not different persons; (iv) follows the “mutuality principle” enunciated by the Supreme Court in the case of State of West Bengal vs. Calcutta Club Limited; (v) holds that there is no suppression of facts as the issue is one of interpretation and audit had clarified that there is no service provided to any other person; (vi) remands matter back for decision on management incentive upside in light of the Supreme Court ruling.

Argued by Adv. Bharat Raichandani i/b UBR Legal.

FULL TEXT OF THE CESTAT MUMBAI ORDER

This appeal has been filed by M/s Asset Reconstruction Company (India) Limited (ARCIL), Mumbai (herein after referred to as ‘the appellants’ for short) assailing the Order-in-Original No. 45-47/STC-III/PP/16-17 dated 10.04.2017 (referred to, as ‘the second impugned order’) passed by the Principal Commissioner, Service Tax-III, Mumbai. This respondent Commissionerate, after the introduction of Goods and Services Tax regime, have been reorganized into Mumbai Central CGST & Central Excise Commissionerate.

2.1 Briefly stated, the facts of the case are that the appellants herein are engaged in the business of securitization and asset reconstruction. For this purpose, they are registered with the Reserve Bank of India (RBI) as a Non-Banking Financial Company (NBFC) and they had also obtained Certificate of Registration from RBI under Section 3 of the Securitization and Reconstruction of Financial Assets & Enforcement of Security Interest (SARFAESI) Act, 2002. The appellants are also registered with the jurisdictional Service Tax authorities and are holding the Service Tax Registration No. AAECA3878MST001.

2.2 In conducting the business of securitization and reconstruction, the appellants settle a revocable Trust which is a Special Purpose Vehicle (SPV) to hold the financial asset of the lender with a view to realize the best value for such financial asset. The said SPV is created in terms of Sections 7(2) and 7(2A) of the SARFAESI Act. As a Trustee of the trust, the appellants recover ‘Management Fees’ from the Trust at agreed rates as laid down in the Offer document. The rate varies from 0.5% to 2% of the average net value of the assets / Security Receipts (SRs). This fee is charged by the appellants for managing the affairs of the Trust. Further, the Trust would also realize the Financial Asset bought by it. In some cases, the trust is able to realize more from the value of the asset i.e., sum over and above acquisition cost, administration cost, interest cost attributable to the SR holders etc. Such surplus realization of the assets by the trust is commonly known as “Upside” or “deal profit”. A portion of the said upside income is paid to the appellants on a priority basis as provided for in the Trust Deed. The balance surplus is distributed to the SR holders in the ratio of risk profile of the underlying assets as provided for any offer documents. This is termed as ‘Management Incentive’ or ‘upside’ investment income.

2.3 During October, 2007 Central Receipts Audit (CERA) had conducted audit of the books of accounts maintained by the appellants for the financial years 2003-2004 to 2006-2007 and in the audit report submitted by them, it was observed that the ‘trustee fees’ collected by the appellants would not be liable to service tax under the taxable head of ‘Banking and Financial Services’; whereas the ‘advisory fees’ would be liable to service tax under the head of ‘Banking and Financial Services’. On such basis the appellants started paying service tax on management fees/advisory fees. However, since the said audit report stated that the trustee fees collected by the appellant would not be liable to service tax, they stopped paying service tax on ‘management fees’ w.e.f. 01.10.2007. But again, they started paying service tax on the same w.e.f. 01.04.2010, by way of abundant caution.

2.4 The Directorate General of Central Excise Intelligence, Mumbai Zonal Unit (DGCEI) conducted detailed investigation in 2012, and issued Show Cause Notice on 22.10.2013 by invoking extended period of limitation. Subsequently, two more SCNs were also issued for demand of service tax for the subsequent period. Details of these SCNs are as under:

S. No.	Details of SCN	Period of dispute	Service tax demand Confirmed in Rs.	Penalty
1	DGCEI/MZU/I&IS ‘C’ /12(2)50/2012 dated 22.10.2013	16.05.2008 to 31.03.2013	23,25,49,190/-	Sec.78 Equal to tax demand
		16.05.2008 to 31.03.2011	16,36,21,648/-
2	ST-3/DN-I/SCN- Commr/ARCL/15/2014 (Centralized   SCN  No. 19/COMMR/2014-15 dated 25.03.2015	01.04.2013 to 31.03.2014	2,23,06,774/-	Sec.76 10% of tax demand
3	ST-3/DN-I/SCN- Commr/ARCL/15/2014 (Centralized   SCN  No. 204/Pr .COMMR/2014-15 dated 22.03.2016	01.04.2014 to 31.03.2015	,00,27,286	Sec.76 10% of tax demand

The SCNs were adjudicated by the learned Principal Commissioner vide common impugned order dated 10.04.2017, in confirmation of the entire tax demand for the three periods as above, along with interest, under Section 73(2) of the Finance Act, 1994; further, the appellants were imposed with mandatory penalty equal to the service tax demand confirmed under Section 78 and 76 ibid. Feeling aggrieved with the impugned order, the appellants have filed this appeal before the Tribunal.

3.1 Learned Advocate appearing for the appellants submitted that the entire transactions of the appellants are properly accounted for in their books of accounts and the financial records for the year 2003-2004 to 2006-2007 were audited by CERA at the premises of the appellants in the month of September, 2007. In the Audit report issued vide F. No. ST/HO/ Spl-Audit/Gr.F/87/07/2379, the appellants had been informed that the ‘trustee fees’ collected by the appellants would not be liable to service tax under taxable head of ‘Banking and Financial’ service as defined under the Finance Act, 1994. However, the audit report further observed that ‘advisory fees’ would be subject to service tax under taxable head of ‘Banking and Financial’ services as defined under Section 65 (105)(zm) of the Act of 1994. On the basis of aforementioned audit report, the appellants stopped paying Service Tax on management fees with effect from 01.10.2007.

3.2 Learned Advocate in explaining the nature of activities undertaken by the appellants submitted the following. The appellants approach the lenders for purchase of Non-Performing Assets (NPA); the lenders provide the appellants with the list of the NPAs to be sold. The Appellants, at its own cost, undertake valuation, legal due diligence etc. to arrive at the value at which the NPA asset has to be offered to the lenders for purchase of NPAs. After due negotiations with the lenders, the appellants finalise the value under the terms and conditions at which the lender would like to assign to the appellants its financial asset which have become a NPA. In the event of such negotiation not resulting into purchase of NPA, the appellants debit the pre-acquisition expenses to their Profit and Loss Account. The said business model of the appellants is prescribed under the SARFAESI Act and RBI guidelines issued in this regard. In explaining such business model, it is also submitted as a Trustee of the trust, the appellants recovers ‘Management Fees’ from the Trust at agreed rates as laid down in the Offer document. The rate varies from 0.5% to 2% of the average net value of the assets / SR’s. This fee is charged by the Trustee for managing the affairs of the Trust. Further, the trust would also realize the Financial Asset bought by it. In some cases, the trust is able to realize more from the value of the asset i.e., sum over and above acquisition cost, administration cost, interest cost attributable to the SR holders etc. Such surplus realization of the assets by the trust is commonly known as “Upside” or “deal profit”. A portion of the said upside income is paid to the appellants on a priority basis as provided for in the Trust Deed. The balance surplus is distributed to the SR holders in the ratio of risk profile of the underlying assets as provided for any offer documents. This is termed as ‘Management Incentive’ or ‘upside investment income’.

3.3 Learned Advocate further stated that it is trite law that for a service transaction, whether prior to July, 2012 or after the introduction of the negative list regime, there has to be an agreement of service to be provided between service provider and service receiver; and there has to be a contract of service defining the service so provided. However, in the instant case, all these ingredients are missing. The show cause notices and the impugned order has failed to identify the contract for provision of taxable service. There is no mention in the impugned order about the “service recipient”. ‘Trustee’ and ‘ the trust’ cannot be service provider and service recipient, respectively, as they are one and the same entity.

3.4 On the taxability of ‘management fees’, learned Advocate stated that the appellants are ‘the trustee’ of the ‘trust’; they are not managing the assets of the trust, but performing a statutory function in terms of the SARFESAI Act read with the RBI guidelines, by arranging and supervising the affairs of the trust. The obligation to perform an act cannot be said to be provision of service. Hence, he stated that the appellants have not provided any service, and no service tax can be demanded from the appellants on the management fees. The appellants are one of the trustees of the trust and thus, the trust is a mutual concern. There is no service provider-service receiver relationship between the appellants and the trust. There is no service being provided by one person to another in the transactions between them. There is a complete identity between the person contributing to the trust and the persons participating in the activities of the trust. For a service to be regarded as taxable service there should be two distinct persons, i.e. service provider and service receiver. In light of the above factual and legal position, the appellants submit that they are not liable to pay service tax on management fees.

3.5 In respect of ‘management incentives’ received by the appellants, learned Advocate stated that in the process of realization of the financial asset, at times, the trust is in a position to recover more than the acquisition price, administration costs and the interest attributable to SR holders. Such surplus/excess in the hands of the trust is commonly referred to as “deal profit” or “upside income”. Some part of the surplus is received by the appellants on priority basis and it is called as “Management Incentive Fees” in the trust deed. This amount is earned by the appellants as a result of surplus profit earned in the transaction. The said profit is additional profit earned by the appellants in the capacity as a trustee. The said amount is a share of profit made by the appellants. The said profit is premium profit earned by the appellants. Hence, by no stretch of imagination, can it be said that the same is consideration for providing any service. He further stated that such profit is earned on account of their assuming risks by investing in the trust property. Hence, the share of profit earned by the appellants, by whatever name called, would be a return on investment undertaken by the appellants. The upside income received by the appellants on priority basis is in the nature of profit share on the investment made by ARCIL. The said income is also reflected as “Upside Income” in the profit and loss account. Thus, profit, if any, earned by ARCIL would be profit on investment and not a consideration for rendering any service. Hence, ARCIL is not rendering any service lest banking and other financial services.

3.6 On the principle of mutuality of interest, in the case of trusts, learned Advocate stated that the Full Bench of the Hon’ble Supreme Court had in the context of the case of State of West Bengal Vs. Calcutta Club 2019 (29) G.S.T.L. 545 (S.C.) analyzed the 61st Law Commission report and observed that the Statement of Objects and Reasons for introduction of the 46th amendment has not properly understood the decision Young Men’s Indian Association. It assumed that sale of goods by members’ clubs in the corporate form were taxable. Proceeding on this incorrect basis, the 46th Amendment used expression “any unincorporated association or body of persons”. The Court further held that even read disjunctively, body of persons cannot be equated with “person”. Body of persons would not include corporate persons. The Court observed the difference in definition of the term “person” under the Income Tax Act and Article 366(29A)(e) held that body of persons would not include corporate persons, unless accompanied by “whether incorporated or not”. Dehors this, the Court held that “consideration” as defined under section 2(d) of the Indian Contract Act, 1872 necessarily posits consideration flowing from one person to another, which does not exist in the case of a members club. Therefore, he claimed that there would be no element of services for subjecting the transaction to tax. They had also relied upon the following case laws:

(i) ICICI Econet Internet & Technology Fund Vs. Commissioner of Central Tax, Bangalore North – 2021 (51) G.S.T.L 36 (Tri. – Bang.)

(ii) India Advantage Fund III Vs. Commissioner of Central Tax, Bangalore– 2024 (388) E.L.T. 276 (Kar.)

(iii) Infosys Technologies Limited Employees Welfare Trust Vs. Commissioner of Service Tax, Bangalore – Final Order No. 20567 of 2025 dated 09.04.2025.

3.7 Learned Advocate further stated that extended period of limitation cannot be invoked in their case, as there was no suppression of facts with intent to evade payment of tax. The appellants were under bonafide belief that service tax was not leviable, particularly when the CERA audit wing of the department had given its report about non taxability of the management fees. Further, the issue under dispute is one of classification; and is purely legal in nature. The respondent has maintained regular books of accounts. The appellants have shown the entire transactions in their books of accounts and statutory returns. The demand in the present case is based on the books of accounts maintained and provided during the course of audit, investigation only. Moreover, there being no positive act on part of the respondents to suppress any fact from the department and there being no evidence for such allegation, the proposal to invoke extended period is not legally sustainable. In this regard, they relied upon the case laws in Continental Foundation Vs. CCE – 2007 9216) E.L.T. 177 (S.C) and CCE Vs. Chemphar Drugs 1989 (40) E.L.T. 276 (S.C).

4. On the other hand, learned Authorised Representative for Revenue reiterated the findings of Commissioner in the impugned order. He further stated that since the disputed issues were examined in detail, the impugned order is sustainable, and the appeal filed by the appellants is liable to be dismissed.

5. Heard both sides and perused the records of the case. I have also perused the additional written submissions presented in the form of paper books for this case.

6. The period of dispute in the present case is from 16.05.2008 to 31.03.2015, covered in three SCNs. In the impugned order, the learned Commissioner had listed out the disputed issues and dealt with the same as follows:

“24. The issue to be decided in the present case is as under:-

(i) Whether the activity carried out by M/s ARCIL for the securitization trust is a service and whether it is Banking and Financial Service prior to 01.07.2012;

(ii) Accordingly whether the assessee was liable to pay service tax on Management Fee during the period 16.05.2008 to 31.03.2010?

(iii) Accordingly whether the assessee was liable to pay service tax on Management Incentive Fee from 16.05.2008?

(iv) Whether extended period of limitation is applicable in the instant case and consequent penalties thereof?

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26….Asset Reconstruction Companies (ARCs) are acting as bad bank by isolating NPAs from the balance sheet of bank/financial institutions i.e., FII and facilitate the latter to focus on normal banking business. Banks and financial institutions with a large proportion of their bad loans or NPAs can sell these to this separate entities i.e., ARC. Then ARCs recover a sum through attachment, liquidation etc., The objective is to help banks in making clean books by reducing NPAs. Asset Reconstruction Companies are also making profit by buying NPAs at a lower price.

26.1 The Business model of M/s ARCIL/ARCIL is as under: …

(i) M/s. ARCIL itself is also a Security Receipts (SR) holders in the trust. A minimum of 5% of Security Receipts is acquired by M/s. ARCIL in terms of the regulatory provisions. Thus QIBs are investors in the trust. M/s ARCIL is also an investor in the trust having minimum of 5% of SRs;

(j) M/s. ARCIL settles the trusts and acts as a trustee and asset manager of the financial assets acquired in the trusts…..

(k) All the terms and conditions relating to functioning of the trust, its obligations, obligations of the ARCs (ARCIL), SR holders, remuneration to ARCIL etc are embodied in the trust deed, by which the trust is settled by ARCIL. Thus, M/s ARCIL acts as an asset manager and also a SR holder;

(l) M/s. ARCIL as trustee undertakes the asset reconstruction by, amongst others, reschedulement of debt, settlement, enforcement of security interest under SARFAESI Act, realization of dues through legal means such as DRT (Debt Recovery Tribunal) etc. and realizes monies from the financial assets held in trusts;

(m) ….

RBI Guidelines define ‘Securitisation Trust’ as-

• • • a process by which
    • a single performing asset or a pool of performing assets are sold to a bankruptcy remote SPV and transferred from the balance-sheet of the originator to the SPV
    • in return for an immediate cash payment

xxx                           xxx                         xxx                         xxx

27. From the above Business Model, it is noticed that:-

(i) M/s ARCIL while undertaking asset reconstruction of Non-performing Assets acquired by them, for and on behalf of the Trusts created by them, provides the services of Asset Management to the Trusts. For the said services of Asset Management provided to the Trusts, M/s. ARCIL is eligible for and receives remuneration in the form of:-

(a) An annual fee known as the management fee. The said income is shown as Management Fees in its books of account and is the Trusteeship fees charged by M/s. ARCIL to the Trusts;

(b) A management incentive fee, It is shown as upside income in the Books of Accounts. It is based on the conditions in the Trust Deed.

xxx                           xxx                         xxx                         xxx

28.3.5… Therefore, the Services provided by M/s ARCIL are covered under Banking and Other Financial services and is a taxable service.

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28.3.8 Thus, prior to 1.7.2012 and after that period there is no doubt that ARCIL provides a service to the trust and thus is liable to pay Service Tax.

29. M/s ARCIL has contended that the service receiver has to be a person distinct and separate from the service provider and in the instant case, there is no service provider-service receiver; the relationship between them and the trust is that of the relationship between the trustee and the trust. Hence, the trust cannot be treated as a separate person. As a trustee they are not providing service to the trust, but it is providing service to self. In this regard the contention of the assessee is the following:

Quote

The Indian Trust Act indicates that the Trustee is the assignee of the property. A Trust is not a legal person and has no legal existence apart from its Trustee. In this regard, they referred to the case of Duli Chand vs. Mahavir Pershad Trilok Chand AIR 1984 Delhi 144. Applying, the said case to the present case, it can be inferred that they are a Trustee of the Trust and Trust cannot be regarded as their customer. The property vests in him for the benefit of the beneficiary. As a Trustee, they are not providing services to Trust but it is providing service to-self.

Unquote

29.1 Here however, I find one important point that ARCIL agrees that a service is provided, but since it is a self-service, there is no tax liability. The above contention of M/s ARCIL however is, incorrect. To decide that I have to decide the following points :-

i. Whether the securitization trust is a taxable person having a distinct individuality under service tax law?

ii. Whether the trustee M/S ARCIL is a separate entity; different than the securitization trust?

iii. Whether as a Trustee, M/S ARCIL are not providing services to Trust but is providing service to-self?

xxx                           xxx                         xxx                         xxx

29.2.7 Thus from the above, it is clear, a person would include all persons – natural and juristic, i.e., artificial persons created by an act of law. It will also includes a company or association or body of individuals whether incorporated or not

xxx                           xxx                         xxx                         xxx

29.4.2 As per the regulation above the securitization trust is set up by the trustee and managed by the trustee. Thus M/s ARCIL acts in dual capacities i.e trustee as well as Asset Manager since M/s. ARCIL manages the assets of the trust. As an asset manager it provides service to the trust and to the investors who have invested in the trust for acquiring the asset. Therefore, the Trust and M/s ARCIL are two different persons. Had it been the same person he would not have got the remuneration for rendering such services M/s ARCIL gets the Management Fees and Management Incentive Fee from the trust. As per the trust deed it is paid for the services rendered by ARCIL to the trust.

29.4.3 Accordingly, in the instant case there is a service provider viz M/s ARCIL as an Asset Manager and there is a service receiver viz. the Trust whose assets are managed by M/s ARCIL. The fact that ARCIL as a Trustee was charging the Trust, created for the benefit of the Security Receipt Holders, for the management of assets acquired by the Trust. Thus it is evident that the two are two different legal persons; and ARCIL is proving taxable services to the Trust.

xxx                           xxx                         xxx                         xxx

29.8 Thus from above in-depth analysis it is clear that the securitisation trust is juristic person and is clearly a separate entity created for a specific purpose(securitisation) under Law (SARFAESI Act). It is a special purpose vehicle created by the Law. Its activities are independent from the security receipt holders who have invested in the trust. Trustee M/s. ARCIL is also a separate entity, and a SR holder in the trust. It cannot be equated to the trust as the trust, is a special purpose. vehicle created under the SARFAESI Act, though M/s. ARCIL has created/settled it. Merely by settling it, ARCIL cannot be the trust itself, as the trust assumes its individuality with distinct function and constituents with independent financial transactions. The financial transactions of ARCIL and trust are completely independent. Therefore, trust and ARCIL are two separate entities and the service rendered by ARCIL to the trust has to be construed as a service provided to a separate person, the securitisation trust and be taxable.

xxx                           xxx                         xxx                         xxx

29.10 Thus the service rendered by ARCIL as a Trustee to the Trust is a service rendered not to itself rather it is a service rendered to another legal person, the securitisation trust. The service is covered under Banking and Financial Service prior to 01.07.2012 and is distinct service after 01.07.2102 and it taxable.

xxx                           xxx                         xxx                         xxx

29.12.1 From the above discussion, it is now clear that, the tax is liveable w.e.f. 16.05.2008 on the asset management service covered under Banking and Financial Services rendered by ARCIL to the Securitisation trusts and since they started paying tax w.e.f. 1/4/2010, they should pay differential tax on Management Fee for the intervening period (i.e., w.e.f. 10.05.2008 to 31.03.2010).

xxx                           xxx                         xxx                         xxx

34.2 On the issue of principle of mutuality, the relationship between the Trust and M/s ARCIL is not like club or Association and their members. Here the securitization trust is not formed as a club. It is a SPV created for a distinct purpose as mandated by the SARFAESI Act. The security receipt holders are investors in the trust and are regulated in accordance with SARFAESI Act and RBI guidelines and distinct trust deed. The trustee himself is a security receipt holder and is a distinct person. He provides the service as per the requirement of the Law. Thus, a club cannot be equated to a securitization trust. Club is a simple association of persons and the service of the club is generally provided in the form of relaxation or welfare measures. The averment in Ranchi Club case is completely different than the securitization process. Therefore, drawing a parallel is not relevant. Moreover, in the present case, M/s ARCIL is acting as a business organization and charging management fees as well as management incentive fee from the trust on the basis of the service provided to the trust. The trust are paying towards the services received by them from M/s ARCIL. In view of this fact, it is clear that the transaction between the Trust and M/s ARCIL is purely a business transaction; therefore, the principle of mutuality does not exist in such transaction. The judgments cited by M/s ARCIL stand distinguished in the above facts of the case.

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35…

(f)…..

• • • Thus his income includes the amount he gets as share from the standard yield as set out in the offer document as a SR holder and the share of the 80% of the Additional yield over and above the standard yield. The management fee and the 20% of the addl realization/ yield which is given as management incentive are his income for the provision of asset management service Thus the total income of the trustee is:

Service income

I. Management fee.

II. Management incentive fee

And

IV. Share from the standard yield.

Share from the profit (profit here is the additional realization minus the management incentive fee)

xxx                         xxx                         xxx                         xxx

(i) In the instant case all investments in the Non-Performing Asset held in Trust and managed by M/s. ARCIL, as a Trustee, are made by the Security Receipt Holders. Hence any profit or loss of the investment is of the Trust alone and consequently to the Security Receipt Holders. M/s ARCIL as per RBI Guidelines holds a minimum of 5% Security Receipts in each Trust for which the profit earned by them is shown as income under the head of account Yield on SRs’/Income from Investments’ in their Profit &Loss Account. The income earned by M/s. ARCIL as ‘Upside Income Management incentive’ since not profit from investments, in the Annual Accounts of M/s. ARCIL, it is shown under the Accounting Head Operating Income’ whereas income from investment as a Security Receipt Holder is shown under Accounting Head ‘Income on Trade Investment’;

(j) ARCIL holds minimum 5% of the SRs in each trust as per Reserve Bank of India Guidelines which is the only investment made by them. If the Management Incentive were a share of profit, it would have been shared with all the Security Receipt Holders, which in this instance was not the case.

(k) In view of the above, I am of the opinion that, management incentive fee is a fee / consideration paid to ARCIL for his provision of service to the Trust. It should form a part of the total consideration for provision of service and since the service is taxable as banking and Financial service w.e.f 16.05.2008, it should be paid w.e.f 16.05.2008.

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36.4 In respect of demanded amounts on management incentive fee in SCN dated 2.10.2013 and the demand of tax in other two SCNs (dated 25.3.15 and 22.3.16), I agree to the demanded amount.

xxx                           xxx                         xxx                        xxx

Invocation of Extended Period of Limitation:

I find that the observations of the Audit are as under:-

“On perusal of the definition given of BFN under Section 65 (105) (zm), in the case of B&F service a relationship between Bank and Customer must exist but in the given event, it does not exist, as revealed above. Prima facie, the audit is of the opinion that Arcil is not providing Banking and Financial service to anyone. It is clear from the transaction that service provider and service recipient is one and same because, in the instant case, the transaction’ between trust and trustee and relating legal documents, clearly shows that the “trust” and “Trustee” are the same legal person”.

xxx                           xxx                         xxx                        xxx

The CERA observation hence is not relevant since was given in a period when the service was not taxable. Further the context, in which the observation was given, was when the service was taxable when provided to a customer and ARCIL was not a customer. CERA did not have the opportunity to review after the Law was changed. Further the CERA objection is not also accepted as observation in para 32 supra

From the above, I find that Asset Management is a Banking and financial service, only taxable if provided to a customer prior to 16/5/2008. No doubt the services provided prior to 16/5/2008 is to a trust and as per audit observation cannot be taxable. But after 16/5/2008, the service is taxable if provided to any person and Trust being a legal person, the service provided is taxable. Despite the amendment M/s ARCL did not pay Service Tax after 16/5/2008 relying upon observation of Audit which is not applicable after 16/5/2008 since not given in the context of the amended provision. Such an action of the assessee can be treated as commission with intent to avoid tax..”

Therefore, on the above basis, learned Commissioner had confirmed the differential duty and imposed penalty on the appellants.

7. The issue involved in this appeal is to determine whether the amount described as ‘management fee/trusteeship fee’ and ‘management incentives fees’ which was received by the appellants as an ‘asset reconstruction company’, in the course of ‘asset reconstruction’ activities undertaken by them in terms of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act of 2002), would involve payment of service tax under Sections 66A, 66B and 67 of the Finance Act, 1994. The services which are in dispute are Banking and Other Financial Services (BOFS), which were earlier covered under the specific category of taxable service under Section 65(105)(zzzzl) of the Act of 1994 prior to the negative list regime and generally as ‘service’ for which the levy of service tax has been imposed under Section 66B ibid. The relevant legal provisions are extracted and given below:

Finance Act, 1994
Chapter V

“Section 65. Definitions.– In this Chapter, unless the context otherwise requires,—…..

(12) “banking and other financial services” means—

(a) the following services provided by a banking company or a financial institution including a non-banking financial company or any other body corporate or commercial concern namely:—

(i) financial leasing services including equipment leasing and hire-purchase.

Explanation.– For the purposes of this item, “financial leasing” means a lease transaction where—

(i) contract for lease is entered into between two parties for leasing of a specific asset;

(ii) such contract is for use and occupation of the asset by the lessee;

(iii) the lease payment is calculated so as to cover the full cost of the asset together with the interest charges; and

(iv) the lessee is entitled to own, or has the option to own, the asset at the end of the lease period after making the lease payment;

(ii) Omitted

(iii) merchant banking services;

(iv) securities and foreign exchange (forex) broking, and purchase or sale of foreign currency, including money changing;

(v) asset management including portfolio management, all forms of fund management, pension fund management, custodial, depository and trust services;

(vi) advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisitions and advice on corporate restructuring and strategy;

(vii) provision and transfer of information and data processing;

(viii) banker to an issue services; and

(ix) other financial services, namely, lending; issue of pay order, demand draft, cheque, letter of credit and bill of exchange; transfer of money including telegraphic transfer, mail transfer and electronic transfer; providing bank guarantee, overdraft facility, bill discounting facility, safe deposit locker, safe vaults; operation of bank accounts;

(b) foreign exchange broking and purchase or sale of foreign currency, including money changing provided by a foreign exchange broker or an authorised dealer in foreign exchange or an authorised money changer, other than those covered under sub-clause (a).

Explanation.—For the purposes of this clause, it is hereby declared that “purchase or sale of foreign currency, including money changing” includes purchase or sale of foreign currency, whether or not the consideration for such purchase or sale, as the case may be, is specified separately;

(105). “taxable service” means any service provided or to be provided,—….. (zm) ¹to any person, by a banking company or a financial institution including a non-banking financial company, or any other body corporate or commercial concern, in relation to banking and other financial services; (zzzl) to a banking company or a financial institution including a non-banking financial company or any other body corporate or a firm, by any person, in relation to recovery of any sums due to such banking company or financial institution, including a non-banking financial company, or any other body corporate or a firm, in any manner;”

Post Negative List regime (after 01.07.2012)

“Section 658. Interpretations.– In this Chapter, unless the context otherwise requires,—…..

(37) “person” include,–

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

(iv) a society,

(v) a limited liability partnership,

(vi) a firm,

(vii) an association of persons or body of individuals, whether incorporated or not,

(viii) Government,

(ix) a local authority, or

(x) every artificial juridical person, not falling within any of the preceding sub-clauses;

(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 constitutes merely,–

(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

(ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or

(iii) a transaction in money or actionable claim;

(b) a provision of service by an employee to the employer in the course of or in relation to his employment;

(c) fees taken in any Court or tribunal established under any law for the time being in force.

(51) “taxable service” means any service on which service tax is leviable under section 66B;

Section 668. Charge of service tax on and after Finance Act, 2012. There shall be levied a tax (hereinafter referred to as the service tax) at the rate of ²fourteen per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.”

8.1 On careful reading of the definition of taxable service, as it existed prior to 01.07.2012, under Section 65(105)(zm) ibid in respect of taxable service provided by ‘banking and financial institution’ with effect from 16.07.2001, read with Section 65(105)(zzzl) ibid in respect of ‘recovery agent service’ with effect from 18.04.2006, it transpires that the taxable services were enumerated under specific category in order to levy service tax on such activities. Further, the scope of services covered under the tax net in terms of the legal provisions of the Finance Act, 1994 have been explained in the Budget Instructions issued by the Tax Research Unit (TRU) in the Ministry of Finance in the respective years at the time of introduction of such levy. These have been extracted and given below:

“F.No.B.11/1/2001-TRU
Government of India
Ministry of Finance
Department of Revenue

New Delhi, dated the 9th July, 2001

Dear Commissioner,

Subject: Tax on 15 New Services to be effective from 16.7.2001-Instructions regarding.

Kindly refer to section 137 of the Finance Act, 2001 (14 of 2001) which, inter-alia, provides for the levy of service tax on 15 new services.

2. It has been decided that the levy and collection of service tax on the newly introduced shall be effective from the 16.7.2001. (Vide notification No. 4/2001-ST, dated 9.7.2001)

3. As you are aware, certain legislative amendments were made in sections 67, 69 to 74, 75, 77, 79, 82, 84 to 86 of the Finance Act, 1994 vide section 137 of the Finance Act, 2001. All these changes will be effective from 16.7.2001. The Service Tax Rules, 1994 have also been amended. Notification No. 5/2001-ST dated the 9th July, 2001 has been issued in this regard. These amendments are also effective from the 16.7.2001

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7. Extension of service tax to fifteen more services: In regard to the new services, which will be subject to service tax from 16th July, 2001, certain issues have been brought to notice during the course of discussion with the concerned Association. These have been discussed and clarified in the Annexures appended as per details below.

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Annexure VII

Banking and other financial services;

1. As per section 65(10) of the Finance Act, 1994, “banking and financial services” means the following services provided by a banking company or a financial institution including a non banking financial company, namely:

(i) financial leasing services including equipment leasing and hire-purchase by a body corporate;

(ii) credit card services;

(iii) merchant banking services;

(iv) securities and foreign exchange (forex) broking;

(v) asset management including portfolio management, all forms of fund management, pension fund management, custodial depository and trust services, but does not include cash management;

(vi) advisory and other auxiliary financial services including investment and portfolio research and advice, advice on mergers and acquisition and advice on corporate restructuring and strategy; and

(vii) provision and transfer of information and data processing.

1.1 The taxable service, as per section 65(72)(zm) means any service provided, to a customer, by a banking company or a financial institution including a non banking financial company, in relation to banking and other financial services.

1.2 The definitions of ‘banking’, ‘banking company’, ‘financial institution’ and ‘nob-banking financial company’ as per the Banking Regulation Act, 1949 and Reserve Bank of India Act, 1934 are given below:

“ banking” means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.

“banking company” means any company which transacts the business of banking in India.

“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) the financing, whether by way of making loans or advances or otherwise, of any activity other than its own:

(ii) the acquisition of shares, stock, bonds, debentures or securities issued by a government or local authority or other marketable securities of like nature:

(iii) letting or delivering of any goods to a hirer under a hire-purchase agreement as defined in clause (c) of section 2 of the Hire Purchase Act. 1972 (26 of 1972):

(iv) the carrying of any class of insurance business:

(v) managing, conducting or supervising, as foreman, agent or in any other capacity, of chits or kuries as defined in any law which is for the time being in force in any State, or any business, which is similar thereto;

(vi) collecting, for any purpose or under any scheme or arrangement by whatever name called, monies in lumpsum or otherwise, by way of subscription or by sale of units, or other instruments or in any other manner and awarding prizes or gifts whether in cash or kind, or disbursing monies in any other way, to persons from whom monies are collected or to any other person, but does not include any institution, which carries on as its principal business (a) agricultural operations; or (a) industrial activity; or (b) purchase or sale of any goods (other than securities) or providing of any service, or (c) the purchase, construction or sale of immovable property, so, however, that no portion of the income of the institution is derived from the financing of purchases, construction or sales of immovable property by other persons.

“non-banking financial company“ means (i) a financial institution which is a company; (ii) a non banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner; (iii) such other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify

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2.3 Merchant banking services Banks and Financial institutions including NBFCs providing merchant banking services are governed by the SEBI (Merchant Bankers) Rules, 1992 and SEBI (Merchant Bankers) Regulations, 1992. As per these rules and regulations, merchant banking service is any service provided in relation to issue management either by making arrangements regarding selling, buying or subscribing securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management. This, inter-alia, consists of preparation of prospectus and other information relating to the issue, determining financial structure, tie up of financiers and final allotment and refund of the subscription for debt/ equity issue management and acting as advisor, consultant, co-manager, underwriter and portfolio manager. In addition, merchant banking services also include advisory services on corporate restructuring, debt or equity restructuring, loan restructuring, etc. The fee charged by the merchant banker for rendering these services will be the taxable value in respect of this service.

2.4 Asset management including portfolio management and all forms of fund management, pension fund management, custodial depository and trust services.

2.4.1 Asset management and portfolio managers are also governed by the SEBI (Portfolio Managers) Rules, 1993 and SEBI (Portfolio Managers) Regulations, 1993. As per these rules and regulations, the “portfolio manager” means any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as discretionary manager or otherwise) the management or the administration of portfolio of securities or the funds of the client, as the case may be. They enter in agreement with the client and charge an agreed fee for providing the service. The tax will be leviable on the fee charged for providing these services. Similarly in the case of other types of fund management such as pension fund management, service tax will be leviable on the fee charged for providing the service.

2.5 Other auxiliary financial services 2.5.1 Some examples of other auxiliary financial services are investment and portfolio research and advice, advice given on mergers and acquisition, advice on corporate restructuring and strategy, market analysis and intelligence.”

8.2 Vide Budget instructions in F. No. B1/4/2006-TRU dated 19.04.2016 in explaining the legal provisions of Finance Act, 2006 (No.21 of 2006), the scope of new taxable services under Section 65(105)(zzzl) was explained as follows:

“3.4 Following services are specifically included in the list of taxable services:

….

(4) Service provided by a recovery agent; sub-clause (zzzl) of section 65(105) refers

3.8 RECOVERY AGENT: Services provided for recovery of any sums due to a commercial or business entity are covered under this category. Under Securities and Reconstruction of Financial Assets and Enforcement of Security Act, 2002 and the relevant rules made there under, banks and other financial institutions appoint recovery agents.”

8.3 On further reading of these instructions issued in bringing into effect the legal provisions with respect to the taxable services, it also transpires that the ‘banking and other financial services’ included in specific terms the financing activities such as lending or advancing money, acquisition of securities, hire-purchase agreement, insurance business, managing chit funds and other similar activities. Further, non-banking financial institution was also covered under the scope of service tax levy to the extent they provided the above banking services more particularly lending and receiving of deposits etc. On the scope of levy of service tax on ‘banking and other financial services’ as per the definition provided under Section 65(12) of the Finance Act, 1994 in the context of services provided by the Department of Posts, it was explained by the TRU in the Ministry of Finance that on the principle of ‘ejusdem generis’, the other financial services provided under the taxable category of Section 65(105)(zm) ibid would include only services provided similar to a bank or financial institution would alone be taxable; and thus it was clarified that Department of Posts providing services of operation of savings accounts etc. are not liable to service tax in this entry. Furthermore, in respect of Section 105(zm) ibid, the taxable services provided by banking company or other financial institution was initially restricted to ‘its customers’, which was later w.e.f. 16.05.2008 was amended for such service being provided ‘to any person’.

8.4 Based on the above analysis of legal provisions as well as the instructions/ clarification issued, it transpires that any services provided by a Non-Banking Financial Company (NBFC) in the course of ‘asset reconstruction’ activities undertaken by them as a statutory function in terms of SARFAESI Act of 2002, would not get covered under the scope of Banking and Other Financial Services (BOFS), inasmuch as these are not in the nature of banking services such as lending and receiving of deposits, management of funds, assets etc. It also transpires that since the scope of taxable services under Section 65(105)(zzzl) ibid is limited to ‘recovery agent’ appointed by the Banks, and as the appellants have not been engaged for performing the function of a recovery agent under other functions of asset reconstruction company, it is not feasible to cover the activities carried out by the appellants under the scope of taxable service by invoking Section 65(105)(zzzl) of the Act of 1994. Therefore, in our considered opinion, when the disputed services provided by the appellants not having been covered under the scope of taxable category specifically, either under Section 65(105)(zm) or under 65(105)(zzzl) of the Act of 1994 for ‘banking and other financial services’ or ‘recovery agent’ service, respectively, we find that there is no scope for charging service tax thereon and further making the appellants responsible for payment of service tax thereon for the period from 16.05.2008 to 30.06.2012.

8.5 In respect of the period post negative list regime w.e.f. 01.07.2012, we need to further examine the issue in the context of prevailing legal provisions relating to the scope of ‘taxable service’ as defined under Section 65B (51) of the Act of 1994. On careful reading of the interpretations given for the phrase ‘service’ and ‘taxable service’, it transpires that any activity performed by one person for another, which involves a consideration would amount to ‘service’. Further, the general scope of service also includes certain ‘declared services’ provided under Section 66E ibid and would exclude the ‘negative list of services’ provided under Section 66D ibid. The ‘asset reconstruction’ activities undertaken by the appellants neither find mention in the declared services nor in the negative list of services, and therefore these provisions alone do not provide for any guidance in arriving at a conclusion about the nature of service. On harmonious reading of the definition given for the phrase ‘service’ and ‘taxable service’ along with the charging section 66B ibid, it also transpires that any activity amounting to a service shall be provided by one person to another, and there shall be a consideration for such service provided in the transaction between one person to another person.

8.6 In this context, learned Commissioner found in the impugned order, that the appellants are the ‘service provider’ and the trust whose assets are managed by the appellants are the ‘service receiver’; and both are two different legal persons. The various activities undertaken by an ‘asset reconstruction company’ besides the main activity of “securitisation” which involves acquisition of financial assets by them from any originator, by raising of funds by issue of security receipts representing undivided interest in such financial assets, are provided under Section 10 of the SARFAESI Act of 2002 as follows:

“10. Other functions of asset reconstruction company.—(1) Any asset reconstruction company registered under section 3 may—

(a) act as an agent for any bank or financial institution for the purpose of recovering their dues from the borrower on payment of such fee or charges as may be mutually agreed upon between the parties;

(b) act as a manager referred to in clause (c) of sub-section (4) of section 13 on such fee as may be mutually agreed upon between the parties;

(c) act as receiver if appointed by any court or tribunal:

Provided that no asset reconstruction company shall act as a manager if acting as such gives rise to any pecuniary liability.

8.7 It is a fact on record that in the present case, the appellants are performing the activities of ‘asset reconstruction company’ to the banks or other secured creditors, in managing the secured assets, the possession of which has been taken over by the banks, when these became a Non-Performing Asset. The ‘management fee’ agreed upon between the appellants and the banks, therefore would qualify as ‘fees’ received as consideration for performing the activity of securitisation and management of secured assets. Therefore, to the extent there is an involvement of consideration between the banks/secured creditors and the appellants. Since, with the introduction of negative list regime in service tax, there is no category of specific taxable service, the services provided by the appellants to the banks/secured creditors for whom they are undertaking the activities of ‘securitisation’ etc., are in our considered opinion are liable to service tax with effect from 01.07.2012 in terms of Section 66B of the Finance Act, 1994.

9.1 On the arguments advanced by the appellants that there is no mutuality of interest between the appellants acting as a ‘trustee’ and the ‘trust’ created for the purpose of securitisation, learned Commissioner has held in the impugned order that these two are two distinct legal persons, i.e., the appellants being a NBFC and the trust organized in the form of body of persons, are two distinct legal persons as per definition of the phrase ‘person’ provided under Section 65B(37) ibid. Further, learned Commissioner also held that ‘management incentive fee’ is a consideration received by the appellants from provision of service to the trust, since it is fee paid on additional realization over the probable yield, and not sharing of profits, since it is not shared among all security receipt holders.

9.2 On the issue of mutuality of interest arising in the context of levy of service tax on activities undertaken between members of the club and the club per se, the Hon’ble Supreme Court in the case of State of West Bengal Vs. Calcutta Cub Limited – 2019 (29) G.S.T.L. 545 (S.C.), have held that members of the club cannot be taxed as they are not distinct from the club being body of persons, irrespective of incorporated or not, and held the case in favour of the appellants, by dismissing the appeal of Revenue.

“24. It can be seen that Young Men’s Indian Association (supra) expressly distinguished Enfield India Ltd. (supra), in paragraph 9 therein. The judgment in Enfield India Ltd. (supra), held on the facts of that case that there was nothing to show that the society in that case was acting as an agent of its members in providing facilities for making food available to them. A distinction was then made between a society which is a body corporate and its members, stating that the body corporate is a separate person in law. It then referred to various English judgments including Trebanog (supra), and refused to apply them on the ground that they were cases which dealt with criminal proceedings. The judgment then ended by stating that the Court was not called upon to decide whether an unincorporated club, supplying goods for a price to its members, may be regarded as selling goods to its members.

25. It can be seen from the above, that the ratio of the Three Judge Bench in Enfield India Ltd. (supra) does not square with the ratio of the Six Judge Bench in Young Men’s Indian Association (supra). Young Men’s Indian Association (supra) is expressly based upon the English judgments which disregarded the corporate form and stated that there could not be a sale, on the facts of those cases, between two persons because Foster, i.e. a member of the club, could be regarded as vendor as well as purchaser in Graff (supra). Likewise, in Trebanog (supra), the form in which the club was clothed was of no moment, it being stated that there is no magic in the expression “trustee or agent”. What is essential is that the holding of the property by the trustee or agent must be a holding for and on behalf of, and not a holding antagonistic to, the members of the club.

26. It is thus clear that Enfield India Ltd. (supra) does not take the matter any further. Young Men’s Indian Association (supra) made no distinction between a club in the corporate form and a club by way of a registered society or incorporated by a deed of trust. What is the essence of the judgment is that the holding of property must be a holding for and on behalf of the members of the club, there being no transfer of property from one person to another. Proprietary clubs were distinguished, as there the owner of the club would not be the members themselves, but somebody else.

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67. A new Section 66B was then introduced, which states as follows :

“66B. Charge of Service Tax on and after Finance Act, 2012. – There shall be levied a tax (hereinafter referred to as the Service Tax) at the rate of fourteen per cent. on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.”

68. As was stated hereinabove, Service Tax was thus leviable on all services as defined, short of a negative list of services which was then set out in Section 66D of the Act.

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73. It is, thus, clear that companies and cooperative societies which are registered under the respective Acts, can certainly be said to be constituted under those Acts. This being the case, we accept the argument on behalf of the respondents that incorporated clubs or associations or prior to 1st July, 2012 were not included in the Service Tax net.

74. The next question that arises is – was any difference made to this position post-1st July, 2012?

75. It can be seen that the definition of “service” contained in Section 65B(44) is very wide, as meaning any activity carried out by a person for another for consideration. “Person” is defined in Section 65B(37) as including, inter alia, a company, a society and every artificial juridical person not falling in any of the preceding sub-clauses, as also any association of persons or body of individuals whether incorporated or not.

76. What has been stated in the present judgment so far as Sales Tax is concerned applies on all fours to Service Tax; as, if the doctrine of agency, trust and mutuality is to be applied qua members’ clubs, there has to be an activity carried out by one person for another for consideration. We have seen how in the judgment relating to Sales Tax, the fact is that in members’ clubs there is no sale by one person to another for consideration, as one cannot sell something to oneself. This would apply on all fours when we are to construe the definition of “service” under Section 65B(44) as well.

77. However, Explanation 3 has now been incorporated, under sub-clause (a) of which unincorporated associations or body of persons and their members are statutorily to be treated as distinct persons.

78. The Explanation to Section 65, which was inserted by the Finance Act of 2006, reads as follows :

“Explanation. – For the purposes of this section, taxable service includes any taxable service provided or to be provided by any unincorporated association or body of persons to a member thereof, for cash, deferred payment or any other valuable consideration.”

79. It will be noticed that the aforesaid explanation is in substantially the same terms as Article 366(29A)(e) of the Constitution of India. Earlier in this judgment qua Sales Tax, we have already held that the expression “body of persons” will not include an incorporated company, nor will it include any other form of incorporation including an incorporated cooperative society.

80. It will be noticed that “club or association” was earlier defined under Sections 65(25a) and 65(25aa) to mean “any person” or “body of persons” providing service. In these definitions, the expression “body of persons” cannot possibly include persons who are incorporated entities, as such entities have been expressly excluded under Sections 65(25a)(i) and 65(25aa)(i) as “anybody established or constituted by or under any law for the time being in force”. “Body of persons”, therefore, would not, within these definitions, include a body constituted under any law for the time being in force.

81. When the scheme of Service Tax changed so as to introduce a negative list for the first time post-2012, services were now taxable if they were carried out by “one person” for “another person” for consideration. “Person” is very widely defined by Section 65B(37) as including individuals as well as all associations of persons or bodies of individuals, whether incorporated or not. Explanation 3 to Section 65B(44), instead of using the expression “person” or the expression “an association of persons or bodies of individuals, whether incorporated or not”, uses the expression “a body of persons” when juxtaposed with “an unincorporated association”.

82. We have already seen how the expression “body of persons” occurring in the explanation to Section 65 and occurring in Sections 65(25a) and (25aa) does not refer to an incorporated company or an incorporated cooperative society. As the same expression has been used in Explanation 3 post-2012 [as opposed to the wide definition of “person” contained in Section 65B(37)], it may be assumed that the Legislature has continued with the pre-2012 scheme of not taxing members’ clubs when they are in the incorporated form. The expression “body of persons” may subsume within it persons who come together for a common purpose, but cannot possibly include a company or a registered cooperative society. Thus, Explanation 3(a) to Section 65B(44) does not apply to members’ clubs which are incorporated.

83. The expression “unincorporated associations” would include persons who join together in some common purpose or common action – see CIT, Bombay North, Kutch and Saurashtra, Ahmedabad v. Indira Balkrishna, (1960) 3 SCR 513 at pages 519-520. The expression “as the case may be” would refer to different groups of individuals either bunched together in the form of an association also, or otherwise as a group of persons who come together with some common object in mind. Whichever way it is looked at, what is important is that the expression “body of persons” cannot possibly include within it bodies corporate.

84. We are therefore of the view that the Jharkhand High Court and the Gujarat High Court are correct in their view of the law in following Young Men’s Indian Association (supra). We are also of the view that from 2005 onwards, the Finance Act of 1994 does not purport to levy Service Tax on members’ clubs in the incorporated form.

85. The appeals of the Revenue are, therefore dismissed.

In the impugned order, the issue regarding mutuality of interest had not been examined as it had been detailed discussed in the aforesaid judgement of the Hon’ble Supreme Court, and therefore such conclusions arrived at in the impugned order does not stand the scrutiny of law.

9.3 In the impugned order, learned Commissioner had confirmed the adjudged demands by invoking extended period of limitation, on the ground that after 16.05.2008, they ought to have paid service tax taking into account the change in law, and such failure on the part of the appellants can be treated as an act of not paying service tax or commission with intent to avoid tax.

9.4 From the facts of the case and the CERA Audit observations in their report for the period 2003-04 to 2006-07, they had examined the transactions undertaken by the appellants, and stated that in the legal documents it is clearly shown that the ‘trust’ and ‘trustee’ i.e., appellants are the same legal person. This has also been extracted and given in paragraph 32 & 38 of the impugned order. It has been held in a number of judicial decisions that in order to invoke extended period of limitation, there should be a deliberate act of suppression of facts, information with an intent to evade tax. In the case of Collector of Central Excise Vs. Chemphar Drugs & Liniments – 1989 (40) E.L.T. 276 (S.C.), the Hon’ble Supreme Court in its judgement delivered on 14.02.1989 have held that in order to invoke extended period of limitation and to saddle with any duty liability, there should be something positive other than mere inaction or failure on the part of the manufacturer/assessee, or conscious or deliberate withholding of information which they knew otherwise, is required to be established before it is saddled with any liability. In the present case, the appellants are on much stronger grounds, as the CERA audit having verified their activities and financial transactions have stated that there is absolute mutuality of interest and the trust and trustee-appellants are same legal person. Therefore, it appears that a clear interpretation that arises from such audit report which applies even after 01.07.2012, is that there is no service provided from one person i.e., trustee-appellant to another person i.e., trust created for securitisation. In the absence of proper substantiation of the grounds for invoking suppression, fraud, mis-statement etc., and lack of evidence or document to prove the same, it is not legally feasible to sustain the adjudged demands confirmed on the appellants. Therefore, in our considered view, the adjudged demands of service tax by invoking the extended period under Section 73 of the Act of 1994 does not stand the legal scrutiny. Consequently, imposition of penalties on the appellants under Sections 78 and 76 ibid are also not sustainable.

10. On the basis of the above decisions and analysis, and based on the judgement delivered by the Hon’ble Supreme Court in the case of Calcutta Cub Limited (supra), we do not find any merits in the impugned order, insofar as it has confirmed the adjudged demands of service tax by invoking the extended period of limitation and had imposed penalties on the appellants. Accordingly, we are of the considered view that the impugned order is liable to be set aside as the same does not stand the legal scrutiny. However, for the limited purpose of examination of the service tax demand on ‘management incentive fee’ or share from additional realization for the period after 01.07.2012 and if the same is liable for payment of service tax thereon, to be quantified, we consider that this case requires to be sent back to the adjudicating authority for redetermination of the tax liability.

11. In the result, the impugned order is set aside and the appeal is allowed by way of remand for limited purpose of examination of the issue as explained in paragraph 10 above. Needless to say, that reasonable opportunity of persona hearing should be given to the appellants and the documents and additional submissions, if any, to be made by the appellants should also be taken into account for the purpose of de-novo adjudication of the case.

(Operative portion of the order pronounced in open Court)

Notes:

1 Substituted for “to a customer” by the Finance Act, 2008, w.e.f. 16-5-2008.

2 Substituted for “twelve” by the Finance Act, 2015, w.e.f. 1-6-2015.