WHETHER THE SERVICES RENDERED IN CONNECTION WITH A CHIT BUSINESS ARE TAXBLAE SERVICES?

[Mr. M. GOVINDARAJAN]

The business of chit funds is strictly regulated by the Chit Funds Act, 1982.   It contains detailed provisions relating to registration of chits, commencement and conduct of chit business. Rights and duties of foreman, rights and duties of subscribers, termination of chits, meetings of general body of subscribers, provisions relating to winding up, disputes and arbitration and other miscellaneous provisions. The issue to be discussed in this article is whether the services rendered in connection with a Chit business are taxable services with reference to a recently decided case law.

In ‘Delhi Chit Fund Association V. Union of India’ – 2013 (4) TMI 630 - DELHI HIGH COURT  the petitioner is an association of chit fund companies based in Delhi. Notification No. 26/2012-ST, dated 20.06.2012 gives abatement to the services provided in relation to chit to the extent of 70% subject to the condition that CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.

The petitioner filed a writ petition before the High Court with the prayer to quash the Notification NO. 26/2012-ST, dated 20.06.2012 to the extent of chit fund business.   The appellants relief on the definition of the term ‘service’ under Section 65B (44). The definition excludes an activity which constitutes ‘merely a transaction in money or actionable claim’. A chit business is a transaction in money and it is obvious that a transaction by money itself cannot be a service in the sense of being an activity carried out by any person for consideration.  

It is further contended that explanation to the definition makes it clear than an activity relating to the use of money or its conversion from one form, currency or denomination to another form, currency or denomination shall not be treated as a transaction in money and therefore will be chargeable to service tax and by holding so, it seeks to put at rest any ambiguity that may arise in the interpretation of the definition of the term ‘service’. The only service in relation to a transaction in money or actionable claim, which is taxable, according to the explanation, being the activity relating to the use of money or its conversion from one form, currency or denomination to another form, currency or denomination for which a separate consideration is charged, it clearly implies that all other services rendered in connection with a transaction in money or actionable claim, including the services rendered by the foreman of a chit business, stand excluded from the definition. Therefore it is contended that the commission received by the foreman or any other person conducting the chit business is not subject to service tax.

The Revenue are controverted the contentions of the petitioner.

The High Court analyzed the definition of the term ‘service’.   A proposition cannot exclude something from the definition unless it is included in the definition.   Section 65B (44) of the Finance Act defines ‘service’ as any activity carried out by a person for another for consideration.   This implies that there are four elements in the definition as detailed below:

• The person who provides the service;
• The person who receives the service;
• The actual rendering of the service; and
• The consideration for the service.

The opening words of the definition consist of the above four aspects or characteristics and unless all the four are present, the activity cannot be charged with service tax.   A mere transaction in money or actionable claim cannot under the ordinary notions of a service be considered as a service, neither can it be considered as falling within the first part of the definition because it lacks the four constituent elements which are required by the definition.   In a mere transaction in money or actionable claim, no service is involved; there is just the payment and receipt of the money.

The word ‘money’ is defined by Section 65B(33) as legal tender, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveler cheque, money order, postal or electronic remittance or any similar instrument but shall not include any currency that is held for its numismatic value.

The High Court further analyzed that it is necessary to examine what could have been the intention of the legislature in excluding it from the definition.   It is not the mere transaction in money or actionable claim that is sought to be excluded from the definition but what is sought to be excluded is any service rendered in connection with a transaction in money or actionable claim. But the difficulty which could arise in this line of reasoning can be that the language of the exclusionary part of the definition in terms refers to the very activity which constitutes a transaction in money and contains no reference to any service rendered in connection therewith.   The possible answer to this conundrum is that the legislature deemed it fit, ex abundant cautela to exclude an activity which constitutes merely a transaction of money, which even otherwise could not have been considered as a service in any sense of the word.   This however appears to be a farfetched answer. A clue to a proper interpretation of the exclusionary part of the definition is embedded in Explanation 2. This explanation carves out an exception to the exclusionary part of the definition by providing that any activity relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination to another form, currency or denomination for which a separate consideration is charged shall not be considered as a transaction in money.

In a Chit business, the subscription is tendered in any one of the form of ‘money’ as defined in Section 65B (33). It would, therefore, be a transaction in money. So considered, the transaction would fall within the exclusionary part of the definition of the word ‘service’ as being merely a transaction in money. This would be the result if the argument that the exclusionary part of the definition in clause (a) is considered to have been enacted as ex abundant cautela; if the argument based on Explanation 2 read with the exclusionary part of the definition is accepted as correct, even then the services rendered by the foreman of the chit business for which a separate consideration is charged, not being an activity of the nature explained in the said Explanation, would be out of the clutches of the definition.   Either way, there can be no levy of service tax on the footing that the services of a foreman of a chit business constitute a taxable service.

The High Court allowed the writ petition. The Notification No.26/2012-ST, dated 20.6.2012 issued by the Government of India, Ministry of Finance (Department of Revenue) is quashed to the extent of the entry in Sl. No.8 thereof.