Activity of granting call option doesn’t qualify as rendering of service: CESTAT Delhi

Analjit Singh Vs Commissioner of Service Tax (CESTAT Delhi)

CESTAT Delhi held that granting “call option” is not an activity of rendering service. Thus, appellant has wrongly been held to have been a service provider while receiving “call option fee”.

Facts- The appellant is registered with Service Tax Commissionerate for rendering Management Consultant Services. Department had conducted audit of the appellant for the period 2007-08 to 2010-11 and it was observed that the appellant was having income in the form of “Call Option Fee” but has not paid service tax treating the said income non- taxable income.

Department formed an opinion that the said amount is received for rendering taxable service called “support service of business or commerce” as defined u/s. 65 (104c) and taxable u/s. 65 (105) (zzzq) of Finance Act, 1994. Rule 5 of service tax (Determination of Value) Rules, 2006 has also been invoked alleging that the amount received in the name of “Call Option Fee” has to be an amount includable in the taxable value. Accordingly, service tax amounting to Rs.12,94,09,931/- including education cess and higher education cess was demanded from the appellant alongwith proportionate interest and appropriate penalties. The said proposal has been confirmed vide the order under challenge. Being aggrieved the appellant is before this Tribunal.

Conclusion- Held that granting “call option” is not an activity of rendering service. The appellant was of this bonafide belief only, which is why the service tax on “call option fee” was not paid by the appellant. In view of these apparent facts on record and absence of any evidence about the positive act of the appellant to evade duty, we hold that the department has wrongly invoked the extended period of limitation.

Held that when appellant did not pay service tax under the bonafide understanding of the law and the matter essentially relate to interpretation of statute, extended period should not have been invoked.

Held that appellant has wrongly been held to have been a service provider while receiving “call option fee”. The demand of service tax has wrongly been confirmed.

FULL TEXT OF THE CESTAT DELHI ORDER

Present appeal has been filed to assail the Order-in-Original No.535/2012 dated 30^th November, 2015 which has adjudicated 3 Show cause notices served upon appellant, M/s. Analjit Singh(herein after referred as AS) as mentioned below:-

2. Facts relevant for present adjudication are as follows:-The appellant is registered with Service Tax Commissionerate for rendering Management Consultant Services. Department had conducted audit of the appellant for the period 2007-08 to 2010-11 and it was observed that the appellant was having income in the form of “Call Option Fee” but has not paid service tax treating the said income non- taxable income. The following amounts were found to have been received by the appellant, in foreign currency, as “Çall Option Fee‟”

3. Department formed an opinion that the said amount is received for rendering taxable service called “support service of business or commerce” as defined under section 65 (104c) and taxable under section 65 (105) (zzzq) of Finance Act, 1994. Rule 5 of service tax (Determination of Value) Rules, 2006 has also been invoked alleging that the amount received in the name of “Call Option Fee” has to be an amount includable in the taxable value. Accordingly, service tax amounting to Rs.12,94,09,931/- (Twelve Crores Ninety-Four Lacs Nine Thousand Nine Hundred and thirty-one only) including education cess and higher education cess was demanded from the appellant alongwith proportionate interest and appropriate penalties. The said proposal has been confirmed vide the order under challenge. Being aggrieved the appellant is before this Tribunal.

4. We have heard Mr.Sanjeev Sachdeva and Mr.Nikhil Kapoor, ld. Counsels for the appellant and Mr.Mihir Ranjan, Special Counsel for the Respondent.

5. Ld. Counsel for the appellant has mentioned that the Frame work Agreement dated 5^th July, 2007 was entered into amongst AS & Mrs. Neelu Analjit Singh, ND Callus Info Services Pvt. Ltd.. M.V Healthcare Services Pvt. Ltd., and Scorpios Beverages Pvt. Ltd. (together. “the AS Companies”) with Vodafone India Services Pvt. Ltd. (hereinafter referred as “VISPL”) (formerly 3 Global Services Pvt. Ltd. (hereinafter referred as “GSPL”) and Vodafone International Holdings BV (“VIHBV”) as confirming party. The said Agreement provided that as and when permitted by applicable law including the limits imposed by the Government of India on foreign investment in the telecommunication sector, GSPL is entitled, directly or indirectly, to acquire the shares in Scorpios Beverages Private Limited (“the Call Option”) at the fair market value determined as provided in the Agreement. In consideration of the grant of “the Call Option” by AS to GSPL, GSPL or the affiliate agreed to pay USD 10.2 million per annum to AS effective from May 1, 2007. The consideration for the period effective from January 2009 was waived for commercial reasons. Ld. Counsel further mentioned that in May 2010, ND Callus Info Services Pvt. Ltd. purchased 51% shares of AG Mercantile Services Private Limited, which in turn owned an indirect equity in Vodafone Essar Limited. As a result of such acquisition, “the Call Option” automatically extended to AS’s indirect interest in AG Mercantile Services Private Limited for an amount of USD 3.213 million per annum as consideration to AS effective from May 21, 2010.

6. It is impressed upon on behalf of appellant that the allegation that Framework Agreement is an arrangement under which ^„AS‟ has been paid for holding the shares so that FDI is limited to 74% with the restriction on subscription or transfer of shares (clause 4.1 of Framework Agreement), is not only contrary to the facts as enumerated in clause 2.3 of SCN and under the terms of the Framework Agreement, but is also without basis, being contrary to the judgment dated 20 January 2012 of the Hon’ble Supreme Court of India in the Vodafone case (supra). The Framework Agreement provides the event involving change in FDI rules removing the restriction of foreign holding to 74% as merely a trigger event for exercise of “the Call Option” and not as the reason for entering into the option agreement. It would be relevant to note the recitals in the Framework Agreement which lucidly explain the reasons for entering into the agreement specifically the clause 4.3 of the said Framework Agreement. It is insisted that there is no reason to give an interpretation contrary to the express wordings of the Framework Agreement.

7. Ld. Counsel has also relied upon the decision of Hon’ble Supreme Court in the case of Vodafone International Holdings vs. Union of India and another reported in 2012 (341) ITR 1 (S.C.) where it has been held that Frame Work Agreements do not confer any right in the company who was granted “the Call Options” (Vodafone in that case). After considering the various clauses including clause 4.1 of Frame Work Agreement the Hon’ble Apex Court held that agreement is to confer call and put options to VISPL (Vodafone) and /or AS (M/s. Analjit Singh) and its associated companies. Thus, the Agreement was providing shareholders (such as AS) an exit root. Ld. Counsel further pointed out that Show Cause Notice has presumed that the Frame Work Agreement permitted GSPL to become an indirect shareholder. The same is factually and legally incorrect and baseless, as the appellant was an absolute and beneficial owner of the shares and not were party had any control over the said shareholding. While denying “the Call Option” to be a taxable service the meaning of “Call Option” is impressed upon that it is a type of financial instrument called derivatives. The Black’s Law Dictionary meaning of “Call Option” and various legal provisions under different statute have been impressed upon, according to which the derivatives are specifically included in the definition of securities (as per Securities Contracts Regulation Act, 1956). Thus, “the Call Option” contracts pertaining to securities are essentially a transaction in securities and can by no means be treated as taxable service under the provisions of Finance Act in force. The consideration paid for the sale of option is the consideration for a transaction in a security and is not a consideration for any taxable service rendered by the seller of the option to the buyer. Hence Service Tax is not leviable on such consideration. The granting of call option is wrongly alleged as a taxable service of “Support Service of Business and Commerce”. The Department is alleged to have interpreted the first part of definition of support service of business and commerce in a very wide manner.

8. The extended period of limitation for demand of duty is alleged to have been wrongly invoked as there is no suppression nor any misrepresentation also for the reason that the Department has wrongly alleged the impugned arrangement as a taxable service. Question of imposition of penalty also does not at all arise for the said reasons. With these submissions ld. Counsel has prayed for setting aside of the order under challenge and for the appeal to be allowed. Decision of High Court of Bombay in the case of Percept Finserve Private Limited and Ors vs. Edelweiss Financial Services Limited in Commercial Appeal (L) No.284 of 2019 in Commercial Arbitration Petition No.220 of 2014 decided on 02.02.2023 has also been relied upon.

9. While rebutting these submissions ld. Departmental Representative has mentioned that all these submissions as made by the appellant before this bench have meticulously been dealt with in the impugned order and it has correctly been held that the entire transaction in the present case, as envisaged in the FrameWork Agreement, is not a mere “call option” by the appellant to GSPL on the SBP shares.

10. From the facts of the case, Adjudicating Authority found that ^„AS‟ did not have the shares of Vodafone International Holdings BY (hereinafter referred as VIH) initially. It also declined an offer of investment in Telecom Investment India Limited, an Indian company [hereinafter referred as TII] having a beneficial direct or indirect interest of 19- 54% in HEL’s issued equity share capital unless helped financially. GSPL agreed and provided financial assistance. After that, AS was provided financial assistance through VIHBV and its associate to purchase shares in the TII, which were offered back to VIH and associated through a holding subsidy structure. The adjudicating authority conceived the entire transaction as under:

(a) VIH wished to secure its control over HTI, purchase

(b) Under prevalent regulations, only 74% could be purchased, and thus, 26% was not available to VIH.

(c) VIH approached AS to hold part of 26% holding for which funds were arranged with the help of VIH

(d) AS purchased the holding and offered it back to VIH through call option

(e) VIH’s interest in the purchasing entity was secured as its business interest was safeguarded by using an AS group companies as support

11. Thus, the entire transaction was an action of serving, helping or benefitting, which is service and Adjudicating Authority has correctly held it as taxable service under Section 65(104 c) as “Support Service of Business or commerce” of the Finance Act 1994. It is incorrect to say that the adjudicating authority has confirmed the demand for service tax without jurisdiction.

12. Moreover, the contention of the Appellant that the Supreme Court in the case of Vodafone International Holdings B.V. Vs Union of India [2012] 341 ITR 1 (SC) has held that this was an agreement to confer a call option appears misappreciation as in para 51 of the Judgment of Hon’ble Chief Justice Kapadia and Justice Kumar and in para 33 of the concurring judgment has not decided the issue. It only appears to be mere reproduction of the factual matrix. As the Hon’ble Supreme Court has neither decided this issue nor the same was before it for decision, it is wrong to assert that the conclusion of the Adjudicating authority was contrary to the Judgment rendered by the Supreme Court.

13. Regarding the submission of appellants about “the Call Option” being a derivative or a right as securities under the Securities Contracts (Regulation) Act 1956 (the SCRA”), the Adjudicating Authority found that section 18A of SCRA provides regarding contracts in derivatives that notwithstanding anything contained in any other law for the time being in force contracts in derivatives shall be legal and valid if such contracts are-

(a) traded on a recognized Stock Exchange;

(b) settled on clearing houses of recognizes Stock Exchange in accordance with the rules and bylaws of such a Stock Exchange.

14. In the present case, the contract of call and put option entered by the parties was neither traded on a recognized Stock Exchange nor settled on a clearing House of the recognized stock exchange in accordance with the rules and bylaws of such exchange therefore said contract entered by the parties not a legal and valid contract as per the provisions of SCRA and cannot be treated as a valid contract of derivatives. Hence, the same cannot be treated as securities, as claimed by the appellant.

15. Ld Departmental Representative further impressed upon that though it is also a fact that Put/call options have become acceptable worldwide. Still, in India till2013, their legality was questionable when a notification under Sections 16 and 28 of the Securities Contracts (Regulation) Act, 1956, was published by SEBI on 03.10.2013 to include ^„Options Contracts‟ within its sphere. SEBI, on various occasions, had clarified that call options and put options are illegal for two reasons:

(1) these Contracts cannot be considered valid derivatives contracts as they can only be traded on stock exchanges and not through private contracts between parties and

(2) these privately contracted options give the parties the right to put or call at a future date which makes it invalid “spot delivery contract” under SCRA SEBI treated it as a violation of notification no SO 184(E) dated 1st march,2000 issued by SEBI. SEBI vide Notification dated 03.10.2013 has rescinded the previous notification of 2000 and treated the exercise of an options contract as valid, provided it satisfies the three cumulative conditions outlined in the notification.

(i) the title and ownership of the underlying securities are held continuously by the selling party to such contract for at least one year from entering into the contract.

(ii) the price or consideration payable for the sale or purchase of the underlying securities, according to the exercise of any option contained therein, is in compliance with the laws for the time being in force as applicable, and

(iii) the contract is settled by way of actual delivery of the underlying securities, i.e. if the underlying securities are disposed of before one year or if the underlying securities are not delivered at the time of the exercise of the option.

16. It is submitted that the subject framework agreement was entered on 05 July 2007 when SEBI treated it as invalid; therefore, it could not be a valid derivative then. Hence the adjudicating Authority was justified in holding it, not a security. Moreover, it is admitted that it was not traded on a recognized stock exchange.

17. The appellant has also contended that the grant of the call option to GSPL as per the Framework contract is an actionable claim, which has been held by the supreme court as “goods” in the case of Sunrise associates Vs Govt. of NCT of Delhi and others (2006) 5 SCC 603 and therefore beyond the scope of the Act. In this regard, the respondent Department humbly submits that the cited case of Sunrise associates pertained to the sale of lottery tickets, which cannot be compared to the present arrangement of retaining the option to keep control over the entire structure.

18. With the submissions above, ld. Departmental Representative concluded that the confirmation of demand of service tax in respect of all three show cause notices under Section 73(2) is within the jurisdiction of the Adjudicating authority. She has correctly concluded that the Appellant has provided taxable service to Vodafone international holdings (VIH) based on the fact that the Appellant was paid the consideration for the call option for holding shares. As such, it supported the business compulsion/ requirement of VIH

19. Finally, it is submitted that the defect from 1.7.2012 the categorization of services is only for accounting purposes. All the activities included in the definition of service and not findings a place in the negative list of services under section 66D of the Act are subjected to Service Tax. The service provided by the appellant is not covered by any of the services mentioned in the said negative list nor are exempted by way of any notification. Therefore, the appellant was liable to pay service tax on the “Call Option Fees” received by him. Impressing upon no infirmity in the findings in the order under challenge, the appeal is prayed to be dismissed.

20. As regards as to whether the activities covered by definition of support service of business or commerce, ld. Departmental Representative has submitted that the definition of the said service in Section 65 (104c) of Finance Act clarifies that the definition is inclusive one.

(b) It is clear that the definition of support services of business or commerce above is a mean and inclusive definition. The definition will include the item specifically mentioned therein, but the meaning is not limited to them. A look at the definition of “support services of business or commerce” indicates that it means services provided concerning business or commerce. Therefore, if any service has been provided concerning business or commerce, that will be sufficient to bring the service under the scope of the term. However, if any service falls under the purview of any of the following, then they are not to be treated as a service rendered about business or services

[i] evolution of respective customers;

(ii) telemarketing,

(iii) processing or purchase order and fulfillment services; (iv) information and tracking of delivery schedules;

(iv) managing distribution and logistics;

(v) customer relationship management services,

(vi) accounting and processing of transactions;

(vii) operational or administrative assistance in any manner [after 01.05.2011);

(viii) formulation for customer service and pricing policies;

(ix) infrastructural support services; and

[xi]other transacts sun processing

(IX) Adjudicating Authority in the impugned order dated 30.11.2015 has categorically rejected the Appellant’s submission that the call option could not be traded like other call options. She has discussed in length in para 108 of the impugned order to conclude that in the instant case, the appellant’s option was exercisable on a future date, meaning thereby, the transaction would not qualify as a spot delivery contract as defined in Section 2(1) of the Securities Contracts (Regulations) Act 1956. Moreover, the said “call option” doesn’t qualify as a legal and valid derivative contract in terms of Section 18A of the securities contracts (regulations) Act 1956 as it is exclusively traded on the stock exchange and settled in the clearing house of the recognized stock exchange. Thus, the pre-agreed buyback of shares through the “call option” is invalid.

21. Having heard the rival contentions, we observe following to be the moot question of adjudication:-

1) Whether the Service Tax is leviable on the amounts received by the appellant during the period 2007-08 to 2013-14 for granting “call options” to Global Service Pvt. Ltd. (GSPL) or Vodafone India and their associate companies under the frame
work agreement dated 05.07.2007 with Vodafone International Holdings B.V. (Vodafone) acting as the confirming party to the frame work agreement.

22. To adjudicate the same, we observe following to be the apparent admitted facts :

23. In the light of the facts above, we need to understand the concept of “call options”. As per Black’s Law Dictionary “Option” means:

“The right (but not the obligation) to buy or sell a given quantity of securities, commodities, or other assets at a fixed price within a specified time”.

An option may be, inter alia, a call option or a put option, depending upon whether the right is a right to buy or a right to sell. A “Call Option” is defined in Black’s Law Dictionary³ as:

“An option to buy something (esp. securities) at a fixed price even if the market rises; the right to require another to sell”,

The Dictionary defines “Put Option” as:

“An Option to sell something (esp. securities) at a fixed price even if the market declines; the right to require another to buy”, Statute also defines ^„Options in Securities’

Section 2 (d) of the Securities Contracts (Regulations) Act, 1556 “option in securities” means a contract for the purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi, a galli, a put, a call or a put and call in securities;

24. The said definition of “Option in Securities” specifically includes a put, a call or a put and call-in securities.

It is also relevant to note the definitions of ^„Derivative‟ as given in the SCRA. Section2(ac) of the SCRA defines ‘derivative’ as follows:-“derivative” includes-

(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;

(B) a contract which derives its value from the prices, or index of prices, of underlying securities;”

Further, ‘derivatives’ as well as ‘rights in securities’ are specifically included in the definition of “securities” in Section 2(h) of the SCRA:-

“securities” include-

(i) shares, scripts, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

(ia) derivative;

(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;

(ic) security receipt as defined in clause (zg) of section 2 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002:

(id) units or any other such instrument issued to the investors under any mutual fund scheme;

(ii) Government securities;

(iia) such other instruments as may be declared by the Central Government to be securities; and

(iv) rights or interest in securities;”

25. We also observe that the said definition of securities under the SCRA was made applicable for Service Tax also, by virtue of sub­section 65(93) of the Act. The said provision, as in force up to 31.06.2012, stated that:

“securities” has the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);

26. From the above provisions it become clear that the “Call Option” is a derivative or a right in securities. Both of which are specifically included in the definition of “securities” in section 2 (h) & 2 (d)of the Securities Contracts (Regulation) Act, 1956 (SCRA). Securities are otherwise regarded as “goods” under normal parlance. Therefore, it is held that a grant of “Call Option‟ is a transaction in goods hence cannot be subject to levy of service tax. The imposition of service tax on goods is beyond the scope of Finance Act, 1994.

27. This proposition has been drawn by Hon‟ble Supreme Court in similar set of circumstances about the same transaction of ^„give and take‟ of shares between the parties herein with a similar Frame Work Agreement as is involved in the present case involving almost same Companies as are involved herein.

28. We rely upon the decision of Hon‟ble Supreme Court in the case of Vodafone International Holdings B.V. vs. Union of India reported in 2012 (341) ITR 1 (S.C.)(supra)wherein it is held:

That the “Call Option” granted by the appellant created a contractual right in the hands of GSPL to purchase and receive the underlined SBP shares from the appellant in future, upon occurrence of certain specified events. Accordingly, GSPL had an incorporeal right to purchase the SBP shares in future upon happening of specified events. Such incorporeal right is defined under section 3 of Transfer of Property Act 1882 to be an actionable claim”. Such actionable claim has been held by Hon‟ble Supreme Court of India to be “goods” in the case titled as Sunrise Associates vs. Government of NCT of Delhi reported as 2006 (5) SCC 603. The imposition of Service tax on such actionable claim is held by Hon‟ble Apex Court, to be beyond the scope of the act and the demand of service tax is held to be without jurisdiction.

29. In Vodafone (supra) case Hon‟ble Supreme Court has considered involving almost same companies as are involved herein. Though the department has taken plea that it is only in 2013 that SEBI granted validity to contracts providing for pre-emptive rights, right of first offer, tag along right, drag-along right and call & put options by revoking notification of year 2000. Hence for the period in question the “Call Options” were not legalized. However, we observe that in Vodafone case (supra) Hon‟ble Supreme Court has discussed and analyzed ‘Call Options’ at length and there seems not even a whiff that the ‘Call Option’ was illegal or not a valid contract. The judgment is prior amendment of 2013 in SCRA, 1956. Para 65(d) of the judgment in Vodafone case (supra) the nature of ‘Çall Options’ and their relevance in merger and acquisitions has been discussed clarifying that ‘Call Option’ is a transaction in securities. The department’s plea that ‘Framework Agreement’ was an arrangement for holding shares in question was not a ‘Call Option’ but was that of retaining of option by VIH to keep control over the entire structure has also been rejected by Hon’ble Apex Court. In para 74 to 76 of the judgment in Vodafone case (supra) Hon’ble Supreme Court has construed the ‘Framework Agreement’ and held that the agreement did not confer any rights to Vodafone, and it was an agreement to confer call and put options to VISPL and/or the appellant and its Associate Companies. In the light of these observations of Hon’ble Supreme Court we hold that the Framework Agreement contemplated the transfer of SBP Shares upon exercise of the Call Option granted to GSPL, the requirement/ obligation on the Appellant to hold the underlying shares which were the subject of the Call Option was ancillary and necessary for the Call Option to be enforceable. Accordingly, the consideration could not be attributed, and was not paid, for such an ancillary requirement as it had no separable commercial value. Therefore, the consideration was not for the restriction contemplated under clause 4.1 but for the grant of the Call Option. Accordingly, we hold that the findings of the said case are squarely applicable in the present case also. Though department has taken the plea that section 20 of SCRA prohibits options in securities but we observe that the said provision was omitted in the year 1995 itself. Otherwise also, the Hon’ble Supreme Court decision in the case of Vodafone case (supra) has not adduced that the “call option” was illegal or not a valid contract. Hon’ble High Court of Bombay in an arbitration decision in petition No.220/2014 in the case of Edelweiss Financial Services vs. Percept Finserve has held that section 18 A of SCRA does not purport to invalid any contract.

30. Coming to the department’s plea that the transaction of ^„Framework Agreement’ amounts to ^„Support Service of Business and Commerce’ we have also perused definition of ^„Support Service of Business or Commerce’ as come under section 65 104 (c) of Finance Act which reads as follows:-

“Support services of business or commerce” means services provided in relation to business or commerce and includes evaluation of prospective customers, telemarketing, processing of purchase orders and fulfillment services, information and tracking of delivery schedules, managing distribution and logistics, customer relationship management services, accounting and processing of transactions, operational assistance for marketing, formulation of customer service and pricing policies, infrastructural support services and other transaction processing.”

31. We observe that the definition consists of two parts:

In the first part, the service is defined to mean services provided in relation to business or commerce. However, the second part categorizes the specific services. We hold that 2^nd part of the definition has to be interpreted as restricting the scope of the 1st part. Thus the two parts of the definition when read together give an exhaustive definition of what activities are covered under the definition. In the sense that only such services are covered within the first part as are similar in nature to the services specifically mentioned in the second part. We draw our support from the decision of Hon‟ble Apex Court in the case of Godfrey Philips IndiaLtd vs. State of UP – AIR 2005 (SC) 1103 wherein the earlier decision of Privy Counsel in Dilworth vs. Commissioner of Stamps (1899) A C 99 was relied upon. This Tribunal also in the case of Air Liquid North India Pvt. Ltd. vs. CCE, Jaipur reported as 2012 (27) STR 295 (Tri.-Delhi) while relying upon Godfray Philips (supra) case has held that the similar transaction as the case in question was not covered under the scope of ^„Business Support Service”. The
Departments appeal against the said order of the Tribunal has been dismissed by Hon‟ble Rajasthan High Court in a case reported as 2018 (8)TMI 1291.

32. It stands established from the definition above that from the entire above discussion, it is clear that the activity of giving “call option” is not an activity of rendering service. It is rather a transaction dealing in goods. Department has relied upon the dictionary meaning of commerce to mean buying and selling of commodities and upon apex court decision in Gannon Drunkly & Company Madras Ltd. vs. State of Madras reported in 1954 (15) STC 216 wherein trade and commerce both denote an idea of sale and purchase with a view to make profit. But in the light of above discussion this plea itself is observed to falsify department’s own stand of alleging consideration received in transaction of sale and purchase as consideration towards rendering taxable service.

33. In Edelweiss Financial Services vs. Percept Finserve (Arbitration Petition No. 220 of 2014), wherein it has been held that Section 18A of the SCRA does not purport to invalidate any contract. Though the adjudicating authority below has relied upon the CESTAT decision in Rohan & Rajdeep Infrastructure vs. CCE&ST, Ludhiana 2015 (39) STR 102. It is submitted that this decision cannot be relied upon, since the earlier decision in the case of Air Liquide North India (P) Ltd (supra) was not cited or considered. Further, the principle of Noscitur a Sociis was not cited before or considered by CESTAT. Therefore, the said decision has to be regarded as rendered per incuriam or sub silentio. Hence is held to be out of scope of the Finance Act 1994. The demand is held liable to be set aside. In addition, the order confirming the demand is held to be an order without jurisdiction.

34. Post the introduction of the negative list regime, the term ‘service’ is defined under Section 65(B)(44) of the Act. By virtue of exclusion clauses, “goods” have interalia been specifically excluded from the definition of ‘service’. The term ‘goods’ has been defined in section 65B(25) as:

“goods’ means every kind of moveable property other than actionable claims and money; and includes securities, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under contract of sale.”

35. Therefore, securities are specifically included in the definition of ‘goods’. The term ‘securities’ has been further defined in Section 65B(43) of the Act as:

“(43) “securities” has the meaning assigned to it in clause (h) of section 2 of the Securities Contract (Regulation) Act, 1956;”.

36. The SCRA further defines securities to include both “rights in securities” and “derivatives”, The grant of call option by the Appellant to GSPL results in the transfer of Appellants right in securities, and the creation of a derivative contract which derives its value from underlying securities. Rights in securities and derivatives are specifically included in the definition of securities in the SCRA. Therefore, call options clearly fall within the activities excluded from the scope of the definition of ‘service’ in Section 65B (44).

37. The impugned Show Cause Notice has been issued by invoking the extended period of limitation. However, from the order under challenge, we observe that there is no discussion regarding any specific act on part of appellant which may establish the intent to evade tax. There is no discussion regarding which of the situation listed in clause (a) to (e) of the proviso to section 73 (1) of Finance Act is attracted.

38. From the entire above discussion, it is clear that granting “call option” is not an activity of rendering service. The appellant was of this bonafide belief only, which is why the service tax on “call option fee” was not paid by the appellant. In view of these apparent facts on record and absence of any evidence about the positive act of the appellant to evade duty, we hold that the department has wrongly invoked the extended period of limitation. We draw our support from the decision of this Tribunal in the case of Grindwell Norton reported as 2018 (1) TMI 715 (Tri. Ahmd.) wherein it was held that when appellant did not pay service tax under the bonafide understanding of the law and the matter essentially relate to interpretation of statute, extended period should not have been invoked. Resultantly, we hold the impugned Show Cause Notice to have been barred by time. As far as the imposition of penalty is concerned for the same reason as discussed above, we hold that penalty has wrongly been imposed. We rely upon the decision of Hon‟ble Supreme Court in the case of UOI vs. Rajasthan Spinning and Weaving Mills reported as 2009 (238) ELT(3) (SC) wherein it has been held that the evidence of deliberate deception by the assessee with an intent to evade duty is necessary for imposing penalty, same has been the observation of Supreme Court in the subsequent decision in the case of CCE, Chandigarh vs. Pepsi Food Ltd. reported as 2010 (260) ELT 481 (SC).

39. From the entire above discussion, we hold that appellant has wrongly been held to have been a service provider while receiving “call option fee”. The demand of service tax has wrongly been confirmed. The Finance Act has wrongly been invoked and the penalty has also wrongly been imposed. For these reasons the order under challenge is hereby set aside. Consequent thereto, the appeal is allowed.

[Pronounced in the open Court on 19/07/2024]