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TMI Blog2013 (6) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... of the amendment to Section 65(12)(a)(v) of the Finance Act, 1994 in the year 2007, deleting the words "but does not include cash management" and the effect of the subsequent Circular bearing No. 96/7/2007-S.T., dated 23-8-2007 issued by the Central Board of Excise and Customs (C.B.E. & C.) of the Ministry of Finance, New Delhi, is the subject-matter involved in all these cases. As a result of the said amendment, the petitioners, who are running chitty business in the State of Kerala, were sought to be brought within the purview of the Service Tax Net, which is under challenge. 2. The crux of the contentions raised by the petitioners is that, they are not covered by the Kerala Chitties Act, 1975 as made clear by a Full Bench of this Court in Oommen Panicker v. Muthoot Mini Chit Fund - 1995 KHC 68 = 1995 (1) KLT 401 (FB) that the amendment by way of Section 4(1)(a) brought about by the State of Kerala stands set aside as unconstitutional by a Division Bench of this Court in Dharmodayam Company v. Union of India - 2005 KHC 971 = 2005 (3) KLT 332 = ILR 2005 (3) Ker. 219 = 2005 (2) KLJ 412 = AIR 2005 Ker. 253; that the Chit Funds Act, 1982 enacted by the Central Government was still t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of Ext. P2 Circular (in WP (C) No. 2822/2008), which cannot by itself take the place of a charging provision, in the absence of any specific provision in the Statute. The Circular cannot override the provisions of the Statute, forms the basic contention. 5. Ext. P1 Circular dated 23-8-2007 (in WP (C) No. 32097/2007) is pressed into service to contend that the petitioners' institution stands outside the purview of tax net by virtue of the clear exclusion set forth in Section 65(12)(a)(v) of the Finance Act, 1994 and as such, they could not have been taxed for the first time on the basis of Ext. P1 Circular (in WP (C) No. 32097/2007), which according to the petitioners is on the basis of some astrological assumption and not based on any authority. It is also contended that tax cannot be levied without the authority by law, as envisaged under Article 265 of the Constitution of India. It is further contended that the issue, particularly with regard to the sustainability of Ext. P2 Circular (in WP (C) No. 2822/2008) has been considered by a Division Bench of Andhra Pradesh High Court and the contention raised by the petitioners similarly situated like the petitioners herein, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8). As mentioned herein before, there is no factual controversy in these cases and the issue is purely a legal question. 7. Sri. K.S. Bharathan, the learned counsel for the petitioner in WP (C) No. 32097/2007 led the arguments on behalf of the petitioners, assisted by the other learned counsel appearing on behalf of the petitioners in the other cases. The arguments on behalf of the respondents were mainly led by Sri. John Varghese, the learned Central Government Counsel and it was supplemented by the other Central Government Counsel in the concerned cases. 8. In support of the contentions raised by the petitioners as pleaded and mentioned above, the learned counsel for the petitioners submits that the chitty business being run by the petitioners is a special form of contract and there is no money lending business or debtor-creditor relationship, nor is there any service being rendered by the petitioners to the subscribers. The subscription effected by the members of the Chitty coming to the common pool, is disbursed to the person in whose name the Chitty is prized, either by way of lot or auction, of course after deducting the discount, the commission of the foreman and distribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 'addition' or by 'deletion' of the provisions as discernible from the law declared by the Apex Court in Kasinka Trading and Another v. Union of India and Another - 1995 KHC 746 = 1995 (1) SCC 274 = AIR 1995 SC 874 (paragraph 21, 22, 23) - 1994 (74) E.L.T. 782 (S.C.). The learned Standing Counsel also submits that all the relevant aspects, particularly including the correct provision of law were not brought to the notice of the Division Bench of the Andhra Pradesh High Court and as such, the decision reported in A.P. Federation of Chit Funds v. Union of India - 2009 (13) S.T.R. 350 (A.P.) has not been correctly rendered and cannot have any binding effect upon this Court. The learned Standing Counsel places reliance on the decisions rendered by the Apex Court in Shri Ram Krishna Dalmia v. Shri Justice S. R. Tendolkar - 1958 KHC 459 = AIR 1958 SC 538 = 1959 SCR 279 = 1959 (1) MLJ (SC) 67 = 61 Bom LR 192, East India Tobacco Co. etc. v. State of Andhra Pradesh and Another - 1962 KHC 629 = AIR 1962 SC 1733 =1963 (1) SCR 404 =1962 (13) STC 529, Raja Jagannath Baksh Singh v. State of Uttar Pradesh and Another - 1962 KHC 614 = AIR 1962 SC 1563 = 1963 (1) SCR 220 = 1962 (46) ITR 169 = 1962 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 11), rendered by a Division Bench of the Karnataka High Court. The learned counsel also submits that, since the mandate under Section 65(12) of the Finance Act, 1994 contemplates only specified services as mentioned thereunder, no other entry can be brought in, to make them suffer any adverse consequences. It is also stated that, interpretation of a legal provision in a taxing Statute has to be very strict and that the provision has to be taken as it is, without any exercise or exploration to analyse the 'spirit' of the Statute or the indentment or equity aspects involved. 11. The scope of enactment of Chit Funds Act, 1982 to save the members/subscribers from the acts/misdeeds of unscrupulous foreman and to control/relegate the activities in connection with the Chitty business has been vividly explained by the Apex Court in the decision in Shriram Chits and Investments (P) Ltd. v. Union of India and Other - 1993 KHC 818 = 1993 Supp (4) SCC 226 = AIR 1993 SC 2063. As observed by the Apex Court, 'Chit fund' is perhaps the oldest indigenous institution in India and the origin of Chitty, Kuri or Chit fund is traceable beyond more than a century in the rural parts of southern India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State and the applicability of the Chit Funds Act, 1982, it is true that a Full Bench of this Court as per the decision reported in Oommen Panicker v. Muthoot Mini Chit Fund - 1995 KHC 68 = 1995 (1) KLT 401 (FB) held that the Kerala Act would not apply to the Chits conducted by the petitioners from 'Jammu Tawi' or 'Faridabad' (places from outside the State of Kerala). It was to get over the said situation, that the relevant provision of the said Act was amended in the year 2002, which came to be challenged in Dharmodayam Company v. Union of India - 2005 KHC 971 = 2005 (3) KLT 332 = ILR 2005 (3) Ker. 219 = 2005 (2) KLJ 412 = AIR 2005 Ker. 253 and such other connected cases. This Court declared the amendment as unconstitutional, which led to the challenge before the Apex Court in appeal, preferred at the instance of the State. As per the amendment, the chitties registered outside the State, having 20% or more of its subscribers normally residing in the State were brought within the ambit of the Kerala Chitties Act, 1975, which was contended as ultra vires, being repugnant to the Constitutional provision under Section 254(1) and the provisions of the Central Chit Funds Act, 1982. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1975 stands repealed except for the limited purposes of Section 6 of General Clauses Act, 1897. If and when the Central Government brings into force the Chit Funds Act, 1982 by a notification in State of Kerala, under Section 1(3), Section 90(2) will come into play and thereby the Kerala Chitties Act, 1975 shall continue to apply only to chits in operation on the date of commencement of the Central Chit Funds Act, 1982 in the same manner as the Kerala Chitties Act, 1975 applied to chits before such commencement. 13. The concept of tax on service was introduced as per Chapter V of Finance Act, 1994 and the tax implement occurs on rendition of service by the service provider to the service recipient. Section 66 is the charging provision and the measure of taxation is the amount charged by the provider, on the recipient, with an exemption upto the gross figure of 10 lakhs. So as to deal with the issue involved in these cases, it is quite appropriate to refer to some of the provisions of the Statute, particularly Section 65(12) which defines the term "Banking and other financial services" and Section 65(105) which deals with the "taxable services" with specific reference to sub-clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Bank had pointed out that, business of Chit funds is to mobilise 'cash' from subscribers and effectively cause movement of such cash, to keep it working and therefore the activity of 'Chit fund' is in the nature of 'cash management', which stands specifically excluded from the scope of "Banking and other financial services" as defined under the relevant provisions of the Finance Act, 1994. Accordingly, it was clarified that the 'banking and other financial service' will not include the service rendered by Chit funds and in turn, the services rendered by the Chit funds will not fall in the category of 'taxable services' as defined under Section 65(105)(zm) of the Finance Act, 1994. 15. Things took a different turn, when there occurred an amendment to the Finance Act, 1994 in the year 2007, whereby the words "but does not include cash management" as it appeared in Section 65(12)(a)(v) came to be deleted. Whether by deletion of the above words, the petitioners could be brought within the purview of tax net by the Statute itself or whether such an attempt is made only by issuance of Ext. P2 Circular (in WP (C) No. 2822/2008), is the point. 16. Admittedly, Ext. P2 Circular dated 23- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of 'business chit funds', where cash management service was provided for a consideration in respect of banking and other financial services, whereas in the case of 'simple chit funds', where there is no consideration, levy of Service Tax will not arise. The Circular also clearly specifies that the views stated therein only reflect the interpretation of law, which is not to be treated as part of law and it does not override the legal provisions and that the statutory provisions must be referred to and they will prevail (Clause 8). 18. Coming to the scope of Ext. P2 Circular, it is settled law, that the Circular issued by the Departmental Authorities can never override the specific provisions of the Statute. So also it cannot be disputed that no tax can be imposed without any authority of law, by virtue of Article 265 of the Constitution of India and the taxing Statute specifically enables the realisation of such tax. The scope of Section 37(B) of the Central Excise Act and the effect of the Circular issued thereunder came to be dealt with in detail by the Apex Court as per decision reported in Orient Paper Mills Ltd. v. Union of India - 1969 KHC 653 = AIR 1969 SC 48 = 1969 (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inds that, the scope and object of the Circular is very much discernible therefrom, particularly Clause 8 which reads as follows : Clause 8 : "Views stated in the Circular reflect the interpretation of the law and the current practice of the department. This Circular is not to be treated as part of law and does not override the legal provisions. The relevant statutory provisions must be referred to and they will provide." Clause 8 proclaims in explicit terms that the Circular does not bring about any liability or such other instance by itself, where the statutory provision is sought to be referred to. The authority who issued the Circular was very much conscious and aware of the already existing statutory provisions and it is only in clarification of the same, [especially by virtue of the amendment brought about in the year 2007, deleting the words "but does not include cash management" from then existing provision of Section 65(12)(a)(v)], that the position was explained, making other clarifications as well, pointing out that tax liability will be there only in respect of Chitty transaction involving a 'consideration' as in the case of the 'business chit funds', while attracting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustodial, Depository and Trust Services but did not include 'Cash Management'. But for the last limb, the provision enabled taxation in respect of the above services as well, whereby a very wide sweep was provided so as to have included all forms of 'fund management' providing an exception to "cash management'. In view of the different terminology used, as to the 'fund management' and 'cash management' separately, the institutions involving 'cash management' were never to attract any tax liability. The Statute of course does not define the terms 'fund management' or 'cash management' and hence it was always possible to have a controversy, whether the activity pursued by the Chitty establishments was 'cash management' to get an exclusion, although the provision very well took in all forms of fund management. 23. Whether the activity of the Chitty establishments was constituting any 'cash management' to attract the tax got attention of the Central Board of Excise and Customs, who sought for clarification of the Reserve Bank of India, by virtue of the pivotal role of the RBI under the RBI Act in Economic Affairs and also by virtue of Section 65(45) of the Finance Act, 1994, wherein t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments, is not 'cash management' (as in WP (C) No. 1703/2011 - Ground 'E'). If it is not 'cash management', then they were very much liable to be included even as per the unamended provision of Section 65(12)(a)(v). It was only by virtue of the exemption given to the activity of 'cash management', as advised by the RBI, that the Central Board of Excise and Customs issued Ext. P1 (WP (C) No. 32097/2007) clarification in the year 2002, holding that no tax liability could be fixed on Chitty transactions, it being a 'cash management'. In other words, for the purpose of getting absolved from the tax liability as per the Finance Act, 1994, the petitioners accepted their status as 'cash management' institutions. But on deletion of the excision clause from Section 65(12)(a)(v) by virtue of the amendment in 2007, at least some of the petitioners have taken a 'U' turn to contend that, their activity is 'not cash management'. This can't but be a paradox and this Court can only say that the petitioners are not justified in blowing hot and cold simultaneously. 26. Coming to the actual business being pursued by Chitty establishments like the petitioners, the nature of activity has been discussed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... virtue of the exclusion clause under the unamended provision and the position took a turn around, on deletion of the exclusion clause in the year 2007. Even otherwise, when an amendment was made by the law makers deciding to take away the exclusion, the reason is obvious i.e., the concerned institution/transaction is also to be subjected to tax, bringing the same within the taxable net. This is a 'conscious exercise' pursued by the law making authority and the provision, by virtue of the amendment, has enabled to have such a course. In other words, it is by virtue of the statutory prescription, on deleting the adverse clause by way of amendment, that the taxability got surfaced, tearing the veil and not by virtue of Ext. P2 Circular (WP (C) No. 2822/2008). In the said circumstances, the taxable instance is not liable to be termed as due to any 'deemed fiction'. The taxable instance is resulted as per the amended statutory provision, notwithstanding the setting aside of Ext. P2 Circular (WP (C) No. 2822/2008) by the Bench of High Court of Andhra Pradesh and this Court most respectfully disagrees with the finding rendered therein. 28. The nature of contentions raised, argued and de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same are liable to be dismissed. 8. Having considered the submissions made and on perusal of the material, the crux of the matter for consideration is as to whether the petitioners' business i.e., chit fund fall within the mischief of expression "cash management", as amended under sub-section 12 of Section 65 of the Finance Act, 2007 and consequently under the impugned circular issued by the respondents is valid?" From the above, it is evident that the scope of the terms "all forms of fund management" before the deletion of the words "but does not include cash management" and after the deletion vide the amendment in 2007, was not specifically projected or adverted to. The thrust was more with regard to the meaning of the expression 'cash management', though the provision was extracted in paragraph 11. The verdict passed by the Apex Court in AIR 1993 SC 2063 - 1993 KHC 818 = AIR 1993 SC 2063 =1993 Supp (4) SCC 226 (cited supra) was also referred to, extracting the relevant portion in paragraph 10, wherein it was held that : "the foreman does not lend his money to constitute any money lending business and that the dominant purpose of the Act (Chit Funds Act, 1982) was to regu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position of Service Tax, the financial institutions which could be brought into the taxable net as proposed, very much included the Chitty business as well, though no tax liability was fixed till 2007, by virtue of the exclusion clause under Section 65(12)(a)(v). So also, there is nothing wrong on the part of the Board (C.B.E. & C.) for having obtained clarification from the RBI, who is a statutory authority created under the RBI Act and in view of the pivotal role of the RBI in the economic affairs of the country, under the said Statute. When a reference is made to Section 45-I of the RBI Act, to describe the meaning of the term" financial institution" as given under Section 65(45) of the Finance Act, 1994, this Court finds that, there is no much weight in the contention of the petitioners that no tax liability could be introduced in 2007, as Section 45-I of the RBI Act was very much there till 2007, despite which no tax liability was fixed upon the petitioners. This is for the obvious reason that, there cannot be any estoppel at all, to the provisions of law. 31. As mentioned hereinbefore, no provision of law is under challenge in any of these writ petitions; particularly the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . That does not mean that a new and distinct charge cannot be introduced under the Finance Act. Exigencies of the financial year determine the scope and nature of its provision. If the Parliament has the legislative competence to introduce a new charge of tax, it may exercise that power, either by incorporating that charge in the Income Tax Act or by introducing it in the Finance Act or for that matter, in any other Statute. The Apex Court observes : "therefore what is not "income" under the Income Tax Act can be made "income" by a Finance Act, an exemption granted by the Income Tax Act can be withdrawn by the Finance Act or the efficacy of that exemption may be reduced by the imposition of a new charge." The Apex Court has observed in paragraph 54 of the decision rendered in T.N. Kalyana Mandapam Association v. Union of India and Others in (2004) 5 SCC 632 - 2004 KHC 790 = 2004 (2) KLT SN 54 = AIR 2004 SC 3757 = 2006 (3) S.T.R. 260 (S.C.) = 2004 (167) E.L.T. 3 (S.C.), that levy of Service tax on a particular kind of service could not be struck down on the ground that, it does not confirm to a common understanding of the word "service", so long as it does not transgress any speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 33 = 1963 (1) SCR 404 = 1962 (13) STC 529, yet another Constitution Bench of Supreme Court observed in paragraph 4 and 6 that, the State has a wide discretion in selecting the persons or objects to tax and that the Statute is not open to attack on the ground that it taxes only some persons or objects and not others and that a State does not have to tax everything, in order to tax something. 37. In The Twyford Tea Co. Ltd. v. Kerala State - 1970 KHC 34 = AIR 1970 SC 1133 = 1970 KLT 181 = (1970) 1 SCC 189, the observations of the Constitution Bench are to the effect that the burden of proving discrimination is always heavy and heavier still, when a taxing Statute is under attack. Applying the principle approved by the Court in AIR 1962 SC 1733 - 1962 KHC 629 = 1963 (1) SCR 404 = 1962 (13) STC 529 (cited supra), the Court observed that, if a State can validly pick and choose one commodity for taxation and that is not open to be attacked under Article 14 the same result must follow, when the State picks out one category of goods and subjects it to taxation. 38. In R.K. Garg v. Union of India and Others -1981 KHC 729 = (1981) 4 SCC 675 = AIR 1981 SC 2138 = 1982 (133) ITR 239 another C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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