No demand of service tax as Venture Capital Trust was not a Juridical Person

India Advantage Fund III Vs Commissioner of Central Tax (Karnataka High Court)

Conclusion: Trust and the Investors could not be regarded as two separate entities as the Trust Fund utilized the investments received by it to re-invest the same. Hence, in the absence of contradicting evidence, the Court upheld the Doctrine of Mutuality that “a person could not make profit from self”. Therefore, Trust Funds could not be categorized as a ‘Juridical Person’ under the purview of the Indian Finance Act, 1994.

Held: Assessee was a venture capital trust. Institutional investors contribute money to the trust fund and the same was managed by an Investment Manager. An investigation was conducted by Anti-Evasion Unit of the Jurisdictional Commissionerate against assessee. The investigating team took a view that assessee had retained certain portion of income distributable to the contributors which appeared to be service charge/fee for having managed the asset of the trust/fund on which service tax was required to be paid under the category of ‘banking and other financial services’ as defined under Section 65 (105)(zm) of the Finance Act, 1994. A show cause notice was issued to assessee proposing to demand service tax on ‘expenses incurred by assessee’ and ‘the amount paid to Class ‘C’ investors as return on investment’. Assessee contended that it was not liable to pay service tax because assessee was not covered within the definition of a ‘person’ as defined under the Act; assessee was not providing any service to the contributors; and assessee was not receiving any consideration from the contributors. On appeal, CESTAT had confirmed the demand. On appeal. It was held that the definition clauses of each statute must be read with the object and purpose of that statute only as intended by the legislature. Various statutes such as SEBI, GST, IBC recognized ‘trust’ as a person whereas the Finance Act did not. The issue involved in this case was liability to pay Service tax, therefore, the relevant statute was the Finance Act. The CESTAT had recorded that since the trust was treated as juridical person under SEBI, there was no reason why it should not be treated as a juridical person for taxation. This view of the CESTAT was untenable because, for the purpose of levy of tax, the entity had to be recognized under the said Act. In the instant case, the contributors and the trust could not be dissected as two different entities because, it was an admitted fact that contributors investment was held in trust by the fund and it was invested as per the advice of investment manager. In substance, fund does nor do an act. Hence, can be no service to self. Therefore the doctrine of mutuality must apply in the instant case.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

All these appeals involve common questions of law.

Hence, they are disposed of by this common order.

2. Learned Advocate adverted to records in CEA No.30/2021 filed by the assessee, directed against order dated July 07, 2021 in Final Order No. 20372-20402/2021 passed by CESTAT¹. Though this appeal has been admitted to consider 8 questions of law, at the time of hearing Shri. Shivadass, learned Senior Advocate submitted that following three questions only are relevant and has addressed arguments on those questions:

1. Whether the CESTAT has erred in holding the Appellant to be a juridical person?

2. Whether the CESTAT has erred in holding that the Appellant cannot be treated as a “trust” and failed to recognize its pass-through status, for the purpose of taxation statues?

3. Whether the CESTAT has erred in ignoring that the moneys and funds contributed by the Contributors, being the property of the Appellant, the asset management service, if any rendered, is by the Appellant for its own self?”

3. Briefly stated the facts of the case are, Appellant/Assessee is a venture capital trust². Institutional investors contribute money to the trust fund and the same is managed by an Investment Manager.

4. An investigation was conducted by Anti-Evasion Unit of the Jurisdictional Commissionerate against assessee. The investigating team took a view that assessee had retained certain portion of income distributable to the contributors which appeared to be service charge/fee for having managed the asset of the trust/fund on which service tax was required to be paid under the category of ‘banking and other financial services’ as defined under Section 65 (105)(zm) of the Finance Act, 1994³.

5. A show cause notice⁴ was issued to assessee proposing to demand service tax on ‘expenses incurred by the assessee’ and ‘the amount paid to Class ‘C’ investors as return on investment’. Assessee submitted its reply contending inter alia that it was not liable to pay service tax because:

• assessee was not covered within the definition of a ‘person’ as defined under the Act;
• assessee is not providing any service to the contributors; and
• assessee is not receiving any consideration from the contributors.

6. The proposal of demand was confirmed by the Commissioner of Service Tax, Bangalore North vide OIO⁵ dated 27.02.2012. On appeal, the CESTAT has confirmed the demand. Hence, this Appeal.

7. Shri. Shivadass, learned Senior Advocate for the assessee, submitted that:

• assessee did not provide any service to the contributors;
• investment manager provides service of asset management to the contributors;
• assessee acts as a ‘pass through’, wherein funds from contributors are consolidated and are invested by the investment manager;
• expenses incurred by assessee are not liable to service tax as per notification dated May 15, 2007;
• service tax is levied on amount charged for taxable services and the same has been clarified vide circular issued by CBIC dated August 21, 2003;
• reimbursement received by assessee in the course of its operation of fund is in the capacity of an agent and the same is exempt from service tax according to Section 5(2) of the Service Tax (Determination of Value) Rule, 2006;
• assessee is not a ‘person’ under the Act, therefore is not liable to discharge service tax;
• activity undertaken by assessee is covered under ambit of mutuality, therefore assessee and contributors cannot be dissected as two separate persons for levy of service tax.

8. In support of his submissions, Shri. Shivadass has relied upon following authorities:

i. Navin Chemicals and Mfg Co Ltd Vs. Collector of Customs⁶;

ii. Steel Authority of India Vs. Designated Steel Authority, Directorate General of Anti – Dumping and allied duties⁷;

iii. Commissioner of Central Excise, Customs and Service Tax-III Vs. Shriram Chits Private Ltd⁸;

iv. Commissioner of Service Tax Vs. Bhayana Builders⁹;

v. Union of India Vs. Intercontinental Consultants and Technocrats Private Limited¹⁰;

vi. Prathibha Pratishtan Vs. Canara Bank¹¹;

vii. State of West Bengal Vs. Calcutta Club Limited¹².

9. Opposing the appeal, Shri. Neeralgi, for the Revenue submitted that:

• the instant appeal is not maintainable as the issue involves rate of duty and as per Section 35L of the CE Act, appeal shall lie before Supreme Court for determination of any question with regard to the rate of duty;
• the fund accepts money from investors and makes profit by re-investing and distributes the profits to investors; and retains some portion of the same to its benefit;
• assessee’s funds are registered under VCF¹³ regulations issued under Securities and Exchange Board of India Act, 1992¹⁴ and accordingly assessee is a separate legal entity;
• assessee has a bank account, obtains necessary approvals, deducts TDS¹⁵ and has registration from SEBI, which only a ‘person’ can qualify;
• Doctrine of mutuality does not apply to the instant case, since definitions in the contribution agreements indicate a relationship between a buyer and a seller as the phrase term used is ‘purchase of units’;
• various articles of IOT¹⁶ of the fund are contrary to the principle of mutuality.

10. In support of above contentions, Shri. Neeralgi has placed reliance on following authorities:

i. Commissioner of Central Excise vs. Tirupathi LPG Industries Ltd¹⁷;

ii. Premier Irrigation Equipment Ltd vs. UOI¹⁸;

iii. Principal Commissioner of Central Excise and ST vs. Raja Dyeing¹⁹;

iv. Paramount Biotech Industries vs. UOI²⁰;

v. M/s Abraham Memorial Education Trust vs. C Suresh Babu²¹.

11. We have carefully considered rival contentions and perused the records.

12. At the outset, revenue has raised an objection with regard to maintainability of this appeal contending inter alia that the assessee ought to have approached the Hon’ble Supreme Court under Section 35L of the CE Act. It is settled that except an appeal involving the rate of duty, all other appeals are maintainable before the High Court. (See: Commissioner of Central Excise, Hyderabad Vs. M/s Shriram Refrigeration Industries²²). Revenue’s specific case is that assessee is liable to pay the service tax. Assessee has denied the liability. In Shriram Refrigeration, it is held as follows:

“6. It is required to be noted that the question was whether respondents were liable to pay the Central Excise duty or not.  The question is/was whether the respondents can be said to be manufacture of stators or not and therefore liable to pay central excise duty or not. The aforesaid dispute cannot be said to be  dispute either related to rate of duty and/or valuation. Only in a case where the dispute is with respect to the rate of duty and/or valuation, the appeals will lie to this court. In any other cases where the dispute is with respect to the liability of the assessee to  pay central excise duty the appeal shall be maintainable before  the High Court under Section 35(G) of the Central Excise Act.”

(Emphasis Supplied)

13. In this case, there is no dispute with regard to rate of duty in this case. The question is whether assessee is liable to pay the duty. Therefore, in our considered view, appeal is maintainable before this Court.

Re: Question No.(i)

14. It was argued by Shri. Shivadass that the Act does not recognize ‘trust’ as a person and assessee cannot be considered as a juridical person for the purpose of charging service tax. On the other hand, Shri. Neeralgi’s contention is that the trust is registered under the SEBI Act and it is treated as a ‘juridical person’ under the said Act; and therefore, the trust is a juridical person and is liable to pay service tax.

15. The definition clauses of each statute must be read with the object and purpose of that statute only as intended by the legislature. Various statutes such as SEBI, GST, IBC recognize ‘trust’ as a person whereas the Finance Act does not. The issue involved in this case is liability to pay Service tax, therefore, the relevant statute is the Finance Act. Hence, the contention urged by Shri. Neeralgi is untenable.

16. The CESTAT has recorded in para 37.4 of the impugned order that, since the trust is treated as juridical person under SEBI, there is no reason why it should not be treated as a juridical person for taxation. This view of the CESTAT is untenable because, for the purpose of levy of tax, the entity has to be recognized under the said Act.

17. Accordingly, we answer the first question as affirmative and in favour of the assessee.

Re: Question No.(ii)

18. It was argued by Shri. Shivadass that assessee-trust was created by the settlor-ICICI Venture Funds Management. Assessee Trust collects funds from entity like LIC, SBI etc. Based on Investment Manager’s advise the trusts invest in port folio companies. There are different classes of unit holders. Class ‘A’ and ‘B’ unit holders are over and above 100 Crores. Class ‘C’ Unit holder is an investment manager in itself.

19. Shri. Shivadass gave a hypothetical example about the transaction details of the entire fund management as follows:

• investment mangers contribution is Rs. 1 Crore;
• Capital from ‘A’, ‘B’ and ‘C’ Units is Rs. 100 Crores. Cumulatively, 100+1= 101 Crore;
• if the total income of the fund for 10 years is Rs. 80 Crores;
• the gross fund available with the Trust would be 101+80=181 Crores;
• the operating expenses works out to about Rs.5 Crores;
• the net distributable fund would be 181-5=176 Crores;
• preferred rate of return payable to Class ‘A’ and ‘B’ contributor is 6% which works out to Rs. 60 Crores;
• return of capital to Class ‘C’ holder will be its contribution namely, Rs. 1 Crore;
• in the result, the total fund available for distribution works out to Rs.176-160-1= 15 Crores;
• the additional return on investment to Class ‘A’ and ‘B’ contributors would be 80% of Rs. 15 Crores= Rs. 12 Crores;
• the remaining balance of 20% of Rs. 15 Crores= Rs. 3 Crores shall go to Class ‘C’ contributor.

20. Thus the total amount remaining with the Trust will be nil.

21. In substance, Shri. Shivadass contended that the fund does not make any profit nor does it provide any service, therefore, imposition of Service tax is untenable. We find merit in this argument because, the assessee acts as a ‘pass through’, wherein funds from contributors are consolidated and invested by the investment manager. It acts as a trustee holding the money belonging to contributors to be invested as per the advice of the investment manager.

22. Accordingly, we answer the second question in the affirmative and in favour of the assessee.

Re: Question No.(iii)

23. It is not in dispute that contributors are institutional investors. We may note that doctrine of mutuality applies when commonality is established between the contributors and participators. In the instant case, the contributors and the trust cannot be dissected as two different entities because, it is an admitted fact that contributors investment is held in trust by the fund and it is invested as per the advice of investment manager. In substance, fund does nor do an act. Hence, can be no service to self. Therefore the doctrine of mutuality must apply in the instant case.

24. Accordingly, we answer the third question as affirmative and in favour of the assessee. Hence the following:

ORDER

(i) Appeals are allowed.

(ii) Order dated July 07, 2021 in Final Order No. 20372-20402/2021 passed by CESTAT²³ is set-aside.

(iii) Questions of law are answered in favour of the assessee against the Revenue.

No Costs.

Notes:

¹ Customs, Excise, Service Tax Appellate Tribunal

² Established under Indian Trust Act, 1882

³ ‘the Act’ for short

⁴ dated March 25, 2011

⁵ Order-in-Original

⁶ (1993) 4 SCC 320

⁷ 2017 (349) ELT 193 (S.C)

⁸ (2023) 3 Centax 12 (S.C)

⁹ 2018 (10) G.S.T.L 118 (S.C)

¹⁰ 2018 (10) G.S.T.L 401 (S.C)

¹¹ (2017) 3 SCC 712

¹² 2019 (29) GSTL 545 (S.C)

¹³ Venture Capital Fund

¹⁴ ‘the SEBI Act’ for short

¹⁵ Tax Deduction at Source

¹⁶ Indenture of Trust

¹⁷ 2017 (351) ELT 149

¹⁸ 1998 (100)ELT(Kar)

¹⁹ 2017 (5) G.S.T.L.231 (P&H)

²⁰ (2014) 120 Compcas 18 All

²¹ Crl. O.P Nos 12630 &12661 of 2012

²² 2022-VIL-76-SC-CE, para 6