No Service tax leviable on Chit Fund business even after June 1, 2007 – SC dismisses SLP against Order of the Hon’ble AP High Court
Union of India Vs. Andhra Pradesh Federation of Chit Funds [(2015) 53 taxmann.com 237 (SC)]
The sub-clause (v) of Section 65(12) of the Finance Act, 1994 (the Finance Act) providing the definition of ‘Banking and Other Financial services’ was amended vide the Finance Act, 2007 (effective from June 1, 2007) by deletion of the expression ‘but does not include cash management’. Thus, w.e.f. June 1, 2007, transactions involving cash management were brought under the Service tax net.
Thereafter, the Central Board of Excise & Customs (the CBEC) vide Master Circular No. 96/7/2007-ST dated August 23, 2007 (the Master Circular) confirmed chargeability of Service tax on Chit fund business. In the said Master Circular, the CBEC covered the Chit fund business under the category of ‘Banking and Other Financial services’. Thereby, calling upon foreman to pay Service tax on the consideration received for providing services in relation to the Chit fund business.
However, validity of the Master Circular was questioned by way of a writ petition in the case of Andhra Pradesh Federation of Chit Funds Vs. Union of India [(2008) 17 STT 491 (AP)] wherein the Petitioners contended that the very assumption by the Respondents to treat the Chit fund business to fall within the ambit of asset management is neither correct nor valid in law and no liability can be fastened on them for the first time on a totally new arena by issuance of a Circular as long as the Finance Act is not properly modified or amended to bring within its fold Chit fund transactions.
The Hon’ble High Court of Andhra Pradesh after considering at length the issues involved, held that in the absence of a specific statutory definition of ‘cash management’ or even ‘asset management’, the question of its wider interpretation either by seeking to include or exclude any other transactions or business does not arise and is not permissible and thereby quashed the Master Circular imposing Service tax on Chit fund business.
Later on, on the similar issue, divergent judgment was given by the Hon’ble High Court of Kerala upholding validity of Service tax on Chit fund business in the case of All Kerala Association of Chit Funds Vs. Union of India [2013(29) STR 557(Ker.)].
Accordingly, the matter was taken to the Hon’ble Supreme Court of India by way of a Special Leave Petition (“SLP”) filed by the Union of India against the judgment of the Hon’ble High Court of Andhra Pradesh.
Recently, the Hon’ble Supreme Court of India has dismissed the SLP filed by the Union of India against the judgment of the Hon’ble High Court of Andhra Pradesh, meaning thereby that the decision of the Hon’ble High Court in the said matter holds good.
Our Comments: Here we would like to draw your attention towards the scenario post Negative List regime also. Effective from July 1, 2012, the definition of ‘Service’ given under section 65B(44) of the Finance Act, specifically excludes those activities which are qualified as merely a transaction in money. Further the CBEC vide Entry No. 8 of the Abatement Notification No. 26/2012-ST dated June 20, 2012 (effective from July 1, 2012) [“the Abatement Notification”] provided that only 70% of the gross amount is chargeable to Service tax for services provided in relation to Chit fund subject to the conditions specified therein.
The same was also challenged before the Hon’ble High Court of Delhi in the case of Delhi Chit Fund Association Vs. Union of India [(2013) 32 taxmann.com 332 (Delhi)], wherein the Hon’ble High Court quashed Entry No. 8 of the Abatement Notification and held that the act of a foreman, who conducts auction of Chit fund amount among contributors, does not fall under the definition of ‘Service’ provided under Section 65B(44) of the Finance Act. It is merely a transaction in money and accordingly falls outside the purview of the definition of ‘Service’ provided under the Finance Act.
Even the SLP filed against the judgment of the Hon’ble High Court of Delhi was dismissed by the Hon’ble Supreme Court of India in the case of Union of India Vs. Delhi Chit Fund Association [(2014) 42 taxmann.com 52 (SC)].
Conclusion: By applying the inferences of the above discussed provisions and judgments, it can be construed that the consideration received for providing services in relation to the Chit fund business, being merely a transaction in money, would not be exigible to Service tax either prior or post Negative List regime.