Service tax- RBI NOT LIABLE THEN ITS AGENT BANKS MAY NOT BE LIABLE

[C.A. DEV KUMAR KOTHARI]

Principal and agent:

The general commercial rule is that obligations of an agent cannot exceed that of his principal. Therefore, an agent will not be liable for a financial obligation towards any commercial liability or statutory liability if the principal on whose behalf agent is working is not liable.  Exceptions can however, be found in some circumstances by way of statutory provision or by way of contractual understanding or  where the principal is an undisclosed principal and the third parties dealing with the agent has dealt as if the agent is principal and not as an agent of the principal.

Liability of RBI and its agents:

Reserve Bank of India is a statutory body, carrying out various sovereign functions. Therefore, RBI may not be liable to service tax by way of specific exemption or by way of general rule of exemption in relation to sovereign functions.

Other Banks acting as agent of RBI:

RBI does not have its own larger network by way of branches and offices. RBI is not generally dealing with public as any other bank can do. Therefore, many functions of RBI are carried out by other banks. Other Banks work as an agent of RBI is such circumstances. Therefore, obligations of other banks acting as agent of RBI will not exceed those of RBI by way of general rule. Therefore, other banks acting as agent of RBI should not be called upon to pay service tax, if the RBI would not be liable to pay service tax if it carried its functions by itself.   

Disputes by revenue:

The revenue is not even accepting broader commercial principal as discussed above and raising SCN and demands form banks for service tax on services which are carried out by banks on behalf of RBI and the customer or client of RBI is also the government to whom services are rendered.

Case before CESTAT, Bangalore - pre deposit exempted:

In Canara Bank v. Commissioner of Service Tax vide APPEAL NO. ST/ST/281/2008 IN ST/429/2008 question of levy of service tax on bank on services rendered by bank on behalf of RBI arose. The case is at the stage of exemption from pre deposit. The CESTAT vide its order dated SEPTEMBER 24, 2009 granted such exemption finding prima facie strong case in favor of bank. The order is analyzed below:

The appellants (bank/service provider) have not raised any challenge to the legality or constitutionality of the levy under the Act. (per author- such challenge can only be by way of Writ Petitions before any High Court or the Supreme Court).

Appellants have made out a prima facie case against the demand.

Regarding objections of revenue on grant of stay on strength of Apex Court decision in the case of Siliguri Municipality which was relied on by the Bombay High Court in the judgment reported in (2006 (2) STR 234 (Mum), it was contended that stay should be in exceptional circumstances and not, as a rule, in proceedings under Article 226 of the Constitution grant any stay on recovery of taxes save under very exceptional circumstances.  The grant of stay in tax matters should be an exception and not the rule.

The Tribunal in this regard held that we have considered this judgment and do not find it relevant to the case at hand. The judgment held that by an interlocutory order issued by High Court in exercise of its writ jurisdiction should not stay the recovery of a tax imposed by a public authority, as a rule.  The case law relates to stay of impost and pursuant recovery of a tax.

The revenue has not raised any other ground to deny stay.

Service tax is  an indirect tax, the impugned tax is a liability borne ultimately by the customers of the bank. 

In this case, departments of union government are the clients of the RBI.

Therefore, service tax on the activity which is exempt when undertaken by the RBI need not be levied when  the same activity is undertaken by another bank as its agent.

The applicant bank has made out a strong prima facie case against the demand of tax, interest and penalties imposed on them on the strength of judgment in the Cement Allocation Coordinating Organization case cited. 

In the above circumstances, Tribunal ordered waiver of pre-deposit and granted stay of recovery of the dues, pending decision in the appeal.

Service tax on activity which is exempt when undertaken by RBI need not be levied when same is undertaken by another bank as its agent

CESTAT, SOUTH ZONAL BENCH, BANGALORE

Canara Bank v. Commissioner of Sales* Tax

*Should be service tax

 APPEAL NO. ST/ST/281/2008 IN ST/429/2008

SEPTEMBER 24, 2009

RELEVANT EXTRACTS :

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7. We find that in the instant case, the appellants have not raised any challenge to the legality or constitutionality of the levy under the Act.  On the other hand they have made out a prima facie case against the demand relying on judgment of the Apex Court.  In the Siliguri Municipality case relied on by the Mumbai High Court in the judgment reported in (2006 (2) STR 234 (Mum), the Apex Court had observed that a public authority such as a municipality could not function if its source of revenue was blocked by an interim order.  Municipality had to maintain essential services like water supply, street lighting and public streets etc., apart from running public institutions like schools, dispensaries, libraries etc.  Grant of interlocutory order would paralyze the administration and dislodge the entire working of the municipality.  The High Court had lost sight of the serious ramifications while making interlocutory order.  In the judgment impugned, the Hon'ble Calcutta High Court had restricted the Siliguri Municipality from recovering graduated consolidated rate on the annual value of holdings in terms of the amended provisions of Section 123 & 124 of the Bengal Municipal Act 1932.  It was observed that High Courts should not, as a rule, in proceedings under Article 226 of the Constitution grant any stay on recovery of taxes save under very exceptional circumstances.  The grant of stay in tax matters should be an exception and not the rule.  We have considered this judgment and do not find it relevant to the case at hand. The judgment held that by an interlocutory order issued by High Court in exercise of its writ jurisdiction should not stay the recovery of a tax imposed by a public authority, as a rule.  The case law relates to stay of impost and pursuant recovery of a tax.

8. The revenue has not raised any other ground against the application for waiver of pre-deposit and stay of recovery of the adjudged dues.  Service tax being an indirect tax, the impugned tax is a liability borne ultimately by the customers of the bank.  In this case, departments of union govt are the clients of the RBI.  Therefore, service tax on the activity which is exempt when undertaken by the RBI need not be levied when the same activity is undertaken by another bank as its agent.  We find that the applicant bank has made out a strong prima facie case against the demand of tax, interest and penalties imposed on them on the strength of judgment in the Cement Allocation Coordinating Organization case cited.  In the circumstances, we order waiver of pre-deposit and stay recovery of the dues, pending decision in the appeal.