CESTAT, AHMEDABAD BENCH
Commissioner of Service Tax, Bangalore
order no. a/723/wzb/ahd/2012
Appeal No. ST/429 of 2008
May 29, 2012
B.S.V. Murthy, Technical Member – M/s. Canara Bank (Canara Bank) is engaged in the business of banking and financial service in India. Investigation was taken up on the basis of intelligence that Canara Bank provided services of payment and receiving money on behalf of government in respect of various transactions. The investigation, show cause notice and adjudication have resulted in the impugned order in which it has been held that the services provided by Canara Bank in relation to payment of pension, transactions of various departments, public deposit, RBI Bonds, EPF, special deposit scheme, senior citizens saving scheme, compulsory deposit scheme are to be treated as taxable service. Further, Canara Bank also provides services of treasury service where the government does not have its own treasury and maintains currency chests on behalf of Reserve Bank of India (RBI). It has been held that these activities are also to be treated as taxable services. By the impugned order demand of service tax of Rs. 5,97,47,205/- with interest has been confirmed and penalty has been imposed under Sections 76, 77 and 78 of Finance Act, 1994.
2. The ld. Chartered Accountant on behalf of the appellant stated that he would like to place three submissions in support of his case and argued extensively and on behalf of Revenue Ld. A.R. also made elaborate submissions. The discussion and analysis by us are under three main arguments advanced by the appellants.
3. The three main arguments advanced are –
(i) The services provided are not covered by the definition of service tax at all;
(ii) RBI is exempt from service tax liability both as a receiver of service and as a provider of service; and
(iii) the services are statutory/sovereign functions of Government performed on behalf of Government and hence mot liable to service tax.
I. The services are not covered by the definition.
4. Before we proceed it is appropriate to reproduce the definition of service as regards banking and other financial services under which the services provided by the appellant have been held to be liable to service tax.
“Extract of Section 65(12) of the Finance Act, 1994 at the relevant time:
(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) [** ** **]
(iii) Merchant banking services;
[(iv) Securities and foreign exchange (forex) broking, and purchase or sale of foreign currency, including money changing;]Online GST Certification Course by TaxGuru & MSME- Click here to Join
(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; and
[(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;]”
5. There is no dispute that the department proposes to charge service tax on the appellant on the ground that the transactions involved in the present case are covered by “operation of bank accounts” in item No. (ix). It is the submission of the ld. Chartered Accountant that the transactions made in the present case for which service tax is proposed to be levied can not be called operation of the bank account at all. For this purpose, he drew our attention to the copy of Agreement entered into by Canara Bank with RBI. He drew our attention specifically to para (3) of the agreement which reads as under:
“The Reserve Bank of India shall not maintain a balance with the Nationalised Bank for the management of the accounts of the Central or State Governments and all sums due or due to from the Central or State Governments in the management of the aforesaid account shall be adjusted by the Nationalised Bank by book transfer with the balances which it holds with the Reserve Bank at such place or places at which there is an office or branch of the Banking Department of the Reserve Bank and in such manner as may be agreed upon between the Reserve Bank and the Nationalised Bank from time to time”.
6. He submits that this clearly shows that the appellant does not operate bank account at all as far as Government transactions are concerned. Operation of bank account means that they will have an account in the name of Government of India or RBI and on that account credit and debit entries are made as and when receipts/payments from the said account take place. Whereas the Agreement clearly provides that there is no question of any deposit being made by RBI or Government of India in Canara Bank nor any question of maintaining such an account. He also submitted that according to the Agreement, all the payments received from Government on a particular day are required to be transferred to the RBI by book transfer within the time limit specified by RBI failing which the appellant is liable to pay interest for the delayed transfer. As regards payments made by Canara Bank on behalf of the Government, he submits that the details are required to be sent to RBI which on behalf of the Government would credit the amount to Canara Bank. Thus unlike a normal bank account wherein the bank would receive money and credit to the account of the person and make payment only when there is sufficient balance, in the case of Government of India and RBI in spite of not having an account of Central Government or RBI, whether money is available in the account of the Government of India/RBI to make the payment, Canara Bank has to make payment as and when required by Government of India. This is totally unlike an operation of an account where no bank would make payment unless there is a positive balance in the account of the person. When there is a condition of transfer of money received on behalf of the Government by the appellant that the same should be credited within specified time limit, a similar condition when the money is paid and has to be received from Government is non-existent. Therefore he submits that in the absence of an account, the question of levy of service tax does not arise at all.
7. The ld. A.R’s. submission regarding the same paragraph is that, the paragraph provides that all sums due to or due from the Central or State Governments in the management of the aforesaid account shall be adjusted by the Nationalised Bank by book transfer with the balances which it holds with the RBI. He also submits that this would mean that the Nationalised Bank is not required to make payment of all the money received on a day physically or otherwise to the RBI within the time limit. It would be sufficient if the amount is debited in the account of Nationalised Bank maintained with RBI. Similarly for the payment made, the amount can be received by making adjustment in the account of a Nationalised Bank maintained with RBI.
8. We have considered the submissions. We find that if we read paragraph-3 of the Agreement it gives an impression that Canara Bank has no need for making physical payment/receive payment from Government of India on every day or at regular interval. What emerges from paragraph-3 appears to be that RBI being a regulator of banks in the country, the Canara Bank is required to maintain an account with RBI for various purposes and instead of RBI having account or Government of India having account, this seems to be a working arrangement whereby Nationalised Banks have been permitted to make the debit/credit entries in the accounts maintained by them with RBI. This is contrary to the normal banking practice of banking as understood for others. In the normal case as submitted, customers open the account and customers can withdraw money and ask the bank to receive money. The procedure adopted by RBI is peculiar and appropriate when we see the nature of transactions and the relationship between the RBI and Nationalised Banks. Admittedly as per the RBI guidelines Canara Bank is acting as agent of RBI who is authorised to act on behalf of Government of India or State Governments and RBI is empowered to entrust this work to various other financial agencies wherever it is required. Therefore, in addition to the relationship of performing banking transactions for Government of India on behalf of RBI, there is a relationship of principal and the agent between RBI for Government of India and Canara Bank. What emerges from the facts of the case is that instead of principal having an account with the agent, the principal is asking the agent to maintain the account and make suitable entries. This is further supported by the fact that RBI have provided for inspection of offices of authorised agent and access to the books of account at any time. Needless to say an account holder of the Bank cannot ask the bank to give liberty to him for inspection. In the absence of this power, RBI would be unable to say that the Nationalised Bank maintain own account and make adjustments instead of maintaining an account in the name of the principal. Unfortunately as to how the account is operated in reality and how the debits and credits are made and who makes them and whether the claim made by the ld. Chartered Accountant that payments are made on daily basis by the bank to the RBI and receivables are received separately by way of transfer have not been verified by any one. The original adjudicating authority has simply stated in his order that they have admitted making the payments towards Government account and also receiving money on account of Government. The service of receiving money and crediting money on behalf of Government of India is an operation of banking account. For such services bank is paid service charges at the rates prescribed by RBI. The functions carried out by the agency bank is in relation to operation of banking account. The ld. Chartered Accountant also submitted that the services provided “in relation to” operation of bank accounts is not covered by the definition in view of the term used “namely” in the introductory paragraph of the definition. Therefore the service provided has to be operation of bank accounts to attract levy and not service in relation to banking account. In the absence of proper verification of above claims and the result of investigation not being clear, we are unable to come to the conclusion as to whether the performance of the agent’s functions by Canara Bank amounts to operation of bank account or not. It is quite clear that service provided in relation to Bank account is not covered under operation of bank account. If the submissions made by the ld. Chartered Accountant are factually correct (he has not produced any documentary support for this purpose), the service does not amount to operation of bank account. However the submissions are contrary to what emerges from the provisions of Agreement in para-3. In the normal course, we should have either remanded the matter or required documentary evidence to come to a conclusion. However, in view of the fact that we have found merit in the claim of the appellant for exemption from service tax which we are going to discuss subsequently in the subsequent paragraphs we consider that it is not necessary to reach a conclusion as to whether the process amounts operation of banking account even though from the Agreement it does appear to be so.
II. Canara Bank is eligible for exemption available to RBI as the agent of RBI.
9. The second submission made by the ld. Chartered Accountant is that the service provided is exempted from payment of service tax in view of the fact that the appellant is performing the functions which were to be performed by RBI as per the statutory provisions and RBI have named them as agent as per the statutory provisions and therefore in the capacity of agent of RBI the appellant is entitled to exemption which is provided to RBI vide Notification No. 22/2006 dated 13/4/2006. The Notification provides exemption in respect of the following:
(i) taxable services provided or to be provided by any persons, to the Reserve Bank of India;
(ii) taxable services provided or to be provided by any person, to the Reserve Bank of India when the service tax for such services is liable to be paid by the Reserve Bank of India under sub-section (2) of section 68 of the said Finance Act read with rule 2 of the Service Tax Rules, 1994;
(iii) taxable services received in India from outside India by the Reserve Bank of India under section 6A of the Finance Act, 1994.
10. The ld. Chartered Accountant relied upon the decision of the Hon’ble Supreme Court in the case of State of Madras v. Cement Allocation Coordinating Organisation vide No. (1971)2SCSS/587 & Manu/SC/0636/1997). The Id. A.R. on the other hand submitted that the exemption is provided only to RBI and not to any other bank. He submits that it is settled law as per the decisions of the Hon’ble Supreme Court that exemption notification has to be implemented strictly and when terms/the words used are clear, no other interpretation would not be possible. He relied upon the decision of the Hon’ble Supreme Court in the case of Uttam Industries 2011(265) ELT 14 (S.C). Further he relies upon the CBEC letter No.Dy.No.l74/Com(ST)/07 dated 26.07.2007 wherein it was clarified that the request for exemption from service tax on services provided by SBI to/on behalf of RBI have been found to be not feasible. He submits that after this clarification all other banks that are rendering similar services to/on behalf of the RBI have been paying service tax and therefore the appellant is not eligible for exemption. We find that the clarification issued by the Board is in reply to a letter requesting for exemption. The question as to whether the service is taxable or not and whether the exemption provided to RBI is admissible to its agents or not have not been examined. Normally, if such issues are examined and a circular is issued, reasoning behind the circular and issues raised are discussed in the letter so issued. In the absence of such details, the letter dated 26.07.2007 would not be of help to Revenue. This is unlike consideration of issues by a quasi judicial forum where the issues are examined in the light of facts and circumstances of the case and applicability of statutory provisions to the same and judicial pronouncements. Therefore we are bound to take note of the circular and in the event we find the circular to be applicable to the facts and circumstances, follow the same. Therefore, the circular does not and cannot mean that the decision has to be in line with it. Similarly, the fact that other banks are paying service tax cannot also be a ground for rejecting the claim of the appellant to exemption since the issue is whether the appellant is liable or not and not whether others are liable. The ld. Chartered Accountant stated if Canara Bank was paying and all others were not paying, will the revenue force others to pay or allow Canara Bank not to pay. The department does not take a view on the basis of facts but on the basis of law. Special statutory provisions have been made such as Section 11(C) Central Excise Act, 1944 where by citing the practice followed can be considered and levy of tax can be foregone. Levy cannot be based on equity. No doubt as pointed out by ld. A.R. the notifications have to be interpreted strictly. The question arises whether an exemption available to the principal is available to the agent or not.
11. There is no dispute that the appellant is performing an agency function and this function flows from RBI Act, 1934. It would be appropriate to reproduce Section 21, 21(a) and Section 45 of RBI Act, 1934.
“21. Bank to have the right to transact Government business in India.
(1) The Central Government shall entrust the Bank, on such conditions as may be agreed upon, with all its money, remittance, exchange and banking transactions in India, and, in particular, shall deposit free of interest all its cash balances with the Bank:
Provided that nothing in this sub-section shall prevent the Central Government from carrying on money transactions at places where the Bank has no branches or agencies, and the Central Government may hold at such balances as it may require.
(2) The Central Government shall entrust the Bank, on such condition as may be agreed upon, with the management of the public debt and with the issue of any new loans.
(3) In the event of any failure to reach agreement on the conditions referred to in this section the Central Government shall decide what the conditions shall be.
(4) Any agreement made under this section shall be laid, as soon as may be after it is made, before Parliament.
21A. Bank of transact Government business of States on agreement.
(1) The Bank may by agreement with the Government of any State undertake-
(a) all its money, remittance, exchange and banking transactions in India, including in particular, the deposit, free of interest, of all its cash balances with the Bank; and
(b) the management of the public debt of, and the issue of any new loans by, that State.
(2) Any agreement made under this section shall be laid, as soon as may be after it is made, before Parliament.
45. Appointment of Agents.
(1) Unless otherwise directed by the Central Government with reference to any place, the Bank may, having regard to public interest, convenience of banking, banking development and such other factors which in its opinion are relevant in this regard, appoint the National Bank, or the State Bank or a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, or a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, or any subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959, as its agent at all places, or at any place in India for such purposes as the Bank may specify.
(2) When any bank is appointed by the Bank as its agent under sub-section (1) to receive on behalf of the Bank any payment required to be made into the Bank, or any bill, hundies or other securities required to be delivered into the Bank, under any law or rule, regulations or other instructions having the force of law, the same may be paid or delivered into the bank so appointed as the agent of the Bank.”
12. From the above it can be seen that RBI have the right to transact Government business and allow an agent to perform its function. From the Agreement also it is quite clear that Canara Bank have been appointed as an agent. We find ourselves in Agreement with the submissions made by ld. Chartered Accountant that the decision of Hon’ble Supreme Court on this issue would be applicable to the facts and circumstances of the case. The decision was rendered on this issue in the case of State of Madras v. Cement Allocating Co-ordinating Organisation dt. 1.9.1971.
“4. The charging Section under the Madras General Sales Tax Act, 1959 is Section 3. It brings to all taxable turnover of a dealer as defined in the Act. The expression “dealer” is defined in Section 2 (g). Because of Section 2(g)(iii) a Commission agent is also considered as a ‘dealer’ for the purpose of the Madras General Sales Tax Act, 1959. Hence the taxable turnover of a Commission agent is liable to be brought to tax. The only other provision that we need refer is Rule 6 of the Rules framed under the Act. That rule reads:
The tax or taxes under Section 3, 4 or 5 shall be levied on the taxable turnover of the dealer. In determining the taxable turnover, the amounts specified in the following clauses shall, subject to the conditions specified therein, be deducted from the total turnover of a dealer.
(c) all amounts falling under the following two heads, when specified and charged for by the dealer separately, without including them in the price of the goods sol:
(i) freight; and
(ii) charges for packing, that is to say, cost of packing materials and cost of labour and other such like services.
5. The first question that we have to consider is whether an agent of a principal who is also a dealer under the Act is entitled to the same rights as his principal has under the Act. Under the general law the agent merely represents his principal. Therefore, while functioning within the scope of the agency he can exercise all the rights which his principal could have exercised. In fact, in the case of an ordinary agency, the agent merely acts for his principal. This provision must hold good even under the Madras General Sales Tax Act unless otherwise provided therein. The fact that for the purpose of that Act an agent is considered as a dealer does not alter the legal position in other respects. Excepting to the extent otherwise provided in the Madras General Sales Tax Act the agent must be held to represent his principal while dealing with the goods of his principal; he merely steps into the shoes of his principal. He is entitled to the same exemptions as his principal would have got had he dealt with the concerned goods himself. Agents are considered as dealers under the tax so as to effectively enforce the provisions of the Act. But that provision does not convert an agent into a principal for all purposes under the Act.”
13. The above observations of the Hon’ble Supreme Court make it clear that exemption to the principal would be available to the agent also. For this purpose, since the agent is eligible for the exemption which is available to the principal in terms of the relationship with the principal of the agent and not because of exemption granted specifically to the agent or principal, we have to hold that the appellant is eligible for exemption. If RBI were to undertake the activity there would have been no question of levy of service tax. It was also brought to our notice that RBI is not paying service tax.
Same functions being carried out by RBI are exempted, therefore, we hold that the benefit of exemption available to RBI would be available to the agent i.e. Canara Bank.
III. The services are in the nature of statutory/sovereign functions and hence not liable to service tax.
14. It is the submission of the ld. Chartered Accountant that the appellant is performing statutory functions and therefore they are not liable to pay service tax. For this purpose, the ld. A.R. relied on the clarification issued by the Board. Ld. A.R. cited Circular No. 96/7/2007 ST dt. 23.8.2007 to submit that if a sovereign/public authority provides a service, which is not in the nature of statutory activity and the same is undertaken for a consideration (not a statutory fee), then such cases, service tax would be leviable as long as the activity undertaken falls within the scope of a taxable service as defined. This is a general clarification and can not be applied without examining each of the transactions separately. Moreover the circular is general and issue-wise discussion would be required. Further we find that the submission from the ld. Chartered Account that the decision of the Tribunal in the case of UTI Technology Services v. CST Mumbai wherein the service tax liability was for the amount received for rendering the service of issuance of PAN Cards was held to be not liable to service tax is applicable in the present case. In the normal course this function would have been performed by Government Treasury and where the government does not have its own treasury, RBI/authorised banks are performing the functions. Similarly, PAN cards have to be issued by Income Tax Department and this function is entrusted to UTI Technology Services and, therefore, the Tribunal hey that it has to be treated as statutory/sovereign function and is not liable to service tax. In the case of Janata Sahakari Bank Ltd. v. CCE Pune-II, the commission received for disbursement of salary to Government Servants was held not liable on the ground that it is in relation to statutory functions of Government. Even though we find prima facie that the submissions are correct, we feel that more detailed consideration is required especially in view of the fact there are several functions performed on behalf of Government and all the functions may or may not come under statutory/sovereign function. One example is maintenance of PPF accounts. Question arises whether maintenance of PPF can be considered as statutory function. PPF is run by the Government as a welfare measure and is not required to be performed by Government. In view of the fact that we have already held that the appellant is eligible for exemption as an agent of RBI, we consider that this issue may not be considered at this stage.
15. The extended period has been invoked in this case. Detailed discussions made above would show that the question involves interpretation of law and facts in this case and therefore we consider invocation of extended period is not called for. Since we have held that the appellant is eligible for exemption on merits, the question of imposition of penalty also does not arise. In the result the appeal is allowed with consequential relief to the appellant.