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2015 (6) TMI 695 - CESTAT MUMBAI

2015 (6) TMI 695 - CESTAT MUMBAI - TMI - Demand of service tax - Banking and other Financial services - taxability of Arrangement fees - Service Tax on Agent's Bank fee - Invocation of extended period of limitation - Difference of opinion - matter to be placed before the Hon'ble President for reference to the Third Member on the following points:-

(i) Whether in the facts and circumstances of the case, the Arrangement fee and Agent's Bank fee are taxable in the hands of the appellant .....

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stances of the case as held by the learned Member (Judicial). - Appeal No. ST/672/11 - Dated:- 5-6-2015 - Anil Choudhary, Member (J) And P S Pruthi, Member (T),JJ. For the Appellant : Shri A R Krishnan, CA, Girish Raman, CA For the Respondent : Shri K M Mondal, Special Counsel ORDER Per: P S Pruthi: This appeal is directed against the Order No. 09/STC-1/SKS/11-12 dated 19.09.2011 passed by the Commissioner of Service Tax, Mumbai-I holding that service is provided by the appellant under the categ .....

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their international acquisition and capital expansion, from various overseas banks. In order to find lenders / lender syndicate, the appellant [ a borrower] appointed various banks/institutions abroad as Mandated Lead Arrangers (MLAs). The MLAs were paid "arrangement fees" which is essentially a fee paid for arranging lenders/lender syndicate for the appellant borrower. 3. A show-cause notice was issued to the appellant stating that they are paying various service charges to different .....

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ign financial institutions do not have any office or establishment in India, it was alleged that the Service Tax on the above service charges (arrangement fees and agent fees) paid by Tata Steel Ltd. becomes payable by Tata Steel Ltd., on reverse charge basis, being the recipient of services in terms of Section 66(A) of the Finance Act read with Taxation of Services [provided from outside India and received in India] Rules 2006 read with rule 2(1)(d)(iv) of the Service Tax Rules, 1994 under ' .....

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efore, in the Order only the balance demand of ₹ 8.05 crores is discussed. This amount of Service Tax of ₹ 8.05 crores arises from payments made by Tata Steel Ld. on two accounts namely, Arrangement fees (including road show expenses) and Agency fees paid to Mandated Lead Ararngers (MLA) and Agent Banks respectively. 4.1 While confirming the demand of ₹ 8.05 crores, Commissioner observed that the Arrangers provided loan arrangement service as well as lending service and the loa .....

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under the definition of this taxable service. That is, the loan arrangement fee paid to the banks by the appellant is nothing but a service in relation to lending. The other part of the demand pertains to Agency fee which is charged by the banks appointed as Agent bank to facilitate the process of administrating the loan. The functions of the agents are; inter-alia - i. Maintaining contact with the borrower and representing the view of the lenders. ii. Monitor: Monitoring the compliance of borro .....

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at the demand for the period prior to 18.04.2006 is also sustainable in view of CBEC Circular No. 275/7/2010 CX-8A dated 30.06.2010 and Notification No. 36/04-ST dated 31.12.2004 issued under Section 68 (2) read with Rule 2(10(d)(iv) of the Service Tax Rules. On the issue of time bar, Commissioner held that the payment of said Arrangement fee and Agency fee was never declared to the department and therefore extended period of 5 years is applicable. He also imposed penalties under Sections 76 &am .....

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dicated loan facility. The commitment letter has the following salient features:- "……………. Syndication: ......... The Mandated Lead Arranger will manage all aspects of the syndication in consultation with you, including the timing of all offers to potential Lenders, the acceptance of commitments, and the determination of the amounts offered and the compensation provided ............. Commitment Termination: The Underwriters commitments and agreement of the .....

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by, any claim or dispute relating to any other matter. You also agree to pay all costs and expenses of the Banks (including, without limitation, fees and disbursements of counsel) incurred in connection with the enforcement of any of its rights and remedies under any of the Document............... Annexure (to Commitment letter) Lender: A group of international and Indian banks to be selected by the Mandated Lead Arranger in consultation with the Borrower.............. Arrangement Fees: 1.2% of .....

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00,000/- million for the borrower i.e. Tata Steels Ltd. 6.1 Referring to the above Agreements, the learned Counsel argued that: (i) The Order-in-Original seeks to tax the Arrangement services as services 'in relation' to 'lending' on the premise that lending is covered under a specific clause under 'banking and other financial services' viz., clause (ix) - 'lending'. The MLAs services are to the borrower and not to the lender and hence it is 'in relation to .....

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bliterate the fact that the arrangement fees is paid for arranging a loan for the borrower and not for lending. If Arrangement fees is considered as "in relation to lending" since it is paid to the lenders then it will have the character of 'interest' and interest is excluded from value of taxable service - hence not liable for service tax - Rule 6(2)(iv) of Valuation Rules. (ii) The service is provided beyond the Indian territory - hence not liable to tax. The MLA's are ab .....

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ers and not as lenders. All the lenders are not arrangers. Hence the two activities viz., 'arrangement' and 'lending ' are distinct. The very fact that 6 out of 16 lenders were not arrangers and have not received any arrangement fees itself indicates that 'arrangement of loan' and lending i.e. 'giving of loan' are two different activities and not the same. For example Citibank N.A. Baharain Branch [who lent 12.63% of the facility] was not an arranger but another a .....

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arrangers and all arrangers are not necessarily lenders. [Arrangers have also become lenders for about 77% of the facility. Hence the two activities viz. 'arrangement' and 'lending' are distinct. 6.3 The learned C.A. also argued that for the Arrangement fee paid prior to 18.04.2006, the importer of service was not liable to Service Tax as this is the settled position in law. In this regard he referred to Board Circular No. 276/08/09-CX 8A dated 26.09.2011 which also rescinded Bo .....

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oner of Service Tax, Ahmedabad 2009 (16) STR 748 (Tri. - Ahmd.) iii. KPIT Cummins Infosystems Ltd. Vs. Commissioner of Central Excise, Pune-I - 2014 (33) STR 105 (Tri. - Mumbai) to justify that Service Tax is not payable when the services are received abroad. 7. The learned Special Counsel Shri K.M. Mondal, appearing on behalf of Revenue, reiterated the findings of the Commissioner. He drew our attention to the show-cause notice where it has been stated that since the foreign financial instituti .....

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Sood, Head of Tax Administration and Planning, M/s Tata Steel stating that they did not pay Service Tax as they were under the impression that the Arrangement of loan and services provided under Commitment letter dated 4.8.2006 does not come under the provisions of 'Banking and other Financial Services'. Shri Sood acknowledged the payment of expenses towards road shows conducted by the MLAs. The learned Special Counsel further stated that all other fees like agency fee etc are an integra .....

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ed that all these provisions under the statute clearly state that Service Tax will be leviable on import of services when they are received by the recipient located in India. On an issue raised by the learned C.A. regarding non-mention in the show-cause notice of specific clause of the definition of "Banking and other Financial Services" in which the service in question falls, he stated that the relevant provisions i.e. 65(105)(zm), which provides for levy of Service Tax on service pro .....

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ery Mills Vs. CC&CE - 1991 (56) ELT 76 (T) para 12. 7.3 On the issue of limitation, his contention was that the appellant never declared the payment of Arrangement fees and Agency fees to the department. Further, the fact that they were aware of the leviability of Service Tax is indicated by the payment of ₹ 9,76,01,442/- by them out of the total demand of ₹ 17,79,10,086/-. He relied on Tribunal's judgment in the case of Housing Development Corporation Ltd. Vs. Commissioner o .....

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ined a Commitment letter from the syndicate comprising of ABN Amro Bank, Citibank and Standard Chartered Bank, who committed, vide their letter dated 4.8.2006 to the appellant to act as Mandated Lead Managers of the 'Facility'. The 'Facility' was to arrange US$ 750 million syndicate loan facility. The MLAs committed to manage all aspects of the syndication in consultation with the appellant including the timing of offers to potential lenders, acceptance of commitments and determi .....

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nexure-I states, inter alia, that the lenders would be a group of International and Indian Banks to be selected by the Mandate Lead Managers in consultation with the appellant. The Annexure also provides for payment of fees by the appellant to the MLAs as under:- "Arrangement Fees: 1.2% of the facility amount payable upfront. Agency fee: USD 15000 per annum. The fees will be paid annually in advance, initially within 5 days of the signing the Facility Agreement or upon the date of first dra .....

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amely - ABN Amro Bank, Banca Monte De Paschi Di Siena S.P.A., Banca Intesa S.P.A., The Bank of Tokyo, Calyon, Citibank N.A., DZ Bank AG Deutsche Zentral, Export Development Canada, First Commercial bank; Malayan Banking Berhad, Mizuho Corporate Bank Ltd., National Bank of Dubai, Societe Generale, Hong Kong, Standard Chartered Bank, Sumitomo Mitsui Banking Corporation, Taiwan Cooperative Bank, Manila. The Facility Agreement is an exhaustive Agreement running into 100 pages and provides the terms .....

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fiduciary of any other person, (b) neither the Agent nor the Arranger shall be bound to account to any Lender for any sum or the profit element of any sum received by it for its own account." Section 5 clause (11) provided for the Arrangement fee to be paid by the Borrower to each Arranger party and Agency fee to be paid by the borrower to the Agent. 8.2 From the Commitment letter and Facility Agreement, it is clear to us that there are two services involved - one is the service provided b .....

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r a group of institutions, who can provide finance to the appellant. The Arrangement fee is truly a fee paid to the Arranger in his capacity as Arranger notwithstanding the fact that the Arranger may ultimately also become the lender. The issue whether the two activities are distinctly separate needs to be addressed first because the Commissioner in his order appears to have confused the matter while stating that the "loan arranger and lenders are same and therefore, this is a straight forw .....

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to be resolved is whether the activity of MLAs in arranging finance is an activity that can be termed as a service rendered by a Banking company/financial institution in relation to "Banking and other Financial Services" classified under Section 65(105)(zm) of the Finance Act, 1994. The service is defined as below: "(zm) to any person, by a banking company or a financial institution including a non-banking financial company or any other body corporate or commercial concern, in rel .....

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…………. (ix) other financial services, namely, lending, issue of pay order, demand draft, cheque, letter of credit and bill of exchange, transfer of money including telegraphic transfer, mail transfer and electronic transfer, providing bank guarantee, overdraft facility, bill discounting facility, safe deposit locker, safe vaults; operation of bank accounts 9.1 The learned C.A's contention is that only the activity of 'lending' is covered under this service .....

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is considered as "in relation to lending" then it will take the character of interest which is excluded from the value of taxable service under Rule 6(2)(iv) of Valuation Rules. The learned Special Counsel, on the other hand, contended that the activity of lending is involved in the present situation. 9.2 We note that the definition at clause (ix) uses the word 'lending'. This leads to the question whether service provided by the MLAs to the borrower (appellant) is not that of .....

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the contention of the learned C.A. The other contention that if the service is considered as in relation to lending, it will partake the character of interest which is excludable from taxable value, is also not acceptable. We have seen that the service provided by MLAs is the service of arranging on which tax has been demanded. It is different and distinct from the service of actual lending which involves interest. Therefore, the argument of the learned C.A. does not appeal to us and we do not a .....

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nsidered as provided beyond the Indian Territory. We are not impressed by the learned C.A.'s contention. In fact, the learned Special Counsel has rightly taken support of statutory provisions to counter the argument of the learned C.A. We may examine the statutory provisions. (a) First, Section 66A, the charging Section, which passes liability to service receiver on services received from outside India, clearly provides under clause (b) that the services should be such as "received by a .....

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o taxable services..........". In our view, the services are received in India, which we will clarify below:- Rule 3 further goes on to state in para (iii), as under:- "(i) and (ii) ................... (iii) specified in clause (105) of section 65 of the Act, but excluding- (a) sub-clauses (zzzo) and (zzzv); (b) those specified in clause (i) of this rule except when the provision of taxable services specified in clauses (d), (zzzc), (zzzr) and (zzzzm) does not relate to immovable prope .....

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n relation to import of services, Rule 2(i)(d)(iv) of Service Tax Rules, 1994, defines a person liable to pay Service Tax as:- "(iv) in relation to any taxable service provided or to be provided by any person from a country other than India and received by any person in India under Section 66A of the Act, the recipient of such service." 10.1 The learned C.A. contended that since the money has been lent abroad and the MLAs are abroad, therefore, the Service Tax is not payable. On a clos .....

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at the activity of MLAs as Arrangers and the activity of lenders of finance are distinct activities. When the learned C.A. states that the activity is taking place abroad, he is forgetting that it is actually the activity of lending of money by the lenders into the Bank of the appellant, which is taking place abroad. The MLAs have clearly provided the services to the appellant M/s Tata Steel in India and informed them of the terms and conditions of their Commitment including the fees/expenses th .....

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006 (supra). This Circular only states, in para 4.2.3, that "..........it may be noted that only service received in India are taxable under this provisions..........". This Circular does not help the appellant as we have already held that service in question is received in India. 11.1 The reliance on the case of Cox and Kings India Ltd. (supra) also does not come to the support of the appellant. In the case of Cox and Kings, the issue was about the service provided by tour operators o .....

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he precedents i.e. Ahmedbhai Umarbhai & Co and Ishikawajma-Harima Heavy Indus. Ltd., it is clear that even composite transactions involving a raft of apparently taxable services are susceptible and ought to be, vivisected, to ascertain which of the services or components thereof fall within the ambit of the Act and which services fall outside such ambit. As services provided for outbound tours are provided and consumed outside the Indian territory; are beyond the province and purview of the .....

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ax is not a tax on the pursuit of the profession of providing a taxable service but is a tax on the provision of a taxable service, a destination based consumption tax. (k) The fundamental fallacy in the substantive premise of the adjudicating authority, in our considered view, is applying the provisions of the Act (which authorises the levy and collection of service tax as a destination and consumption based tax and in respect of a service defined and enumerated in the Act to be a taxable servi .....

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territory must be excised from the gross consideration received, even where the service is provided and consumed partly within India and partly without." The facts in Cox and Kinds were entirely different. The main service provided was outbound tour which took place outside India. In the present case, the only service is of Arrangement of finance by MLAs and not of actual lending and the service is clearly provided to the appellant i.e. M/s Tata Steel in India. The service of Lending abroa .....

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e were received by REL in India. It has been argued on behalf of the assessee, on the strength of a circular of the CBEC as well as certain decisions of the Hon'ble Supreme Court, that there can be no levy of service tax on REL under Section 66A of the Act unless the service provided by Silverdale abroad is shown to have been received in India by REL. It has been argued that those services were totally performed abroad and not received in India and therefore the assessee is not liable to pay .....

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es (Provided from Outside India) Rules, 2006 is captioned in such a way that (for purposes of Section 66A) taxable services provided from outside India should be received in India. However, it is pertinent to note that Rule 3, in its body, refers to "such services as are received by a recipient located in India for use in relation to business or commerce". The phrase "received by a recipient located in India" found in the text of Rule 3 matches the phrase "received by a .....

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enough. The question can be rephrased - whether, under Section 66A, a recipient, located in India, of a taxable service provided by a person located outside the country can be deemed to have provided the service in India. This fundamental issue was not framed or examined by the adjudicating authority in this case. In our view, the issue requires to be addressed in de novo proceedings." From the above, it is clear that the Tribunal held that the factual issue was not framed or examined by th .....

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to COFACE France who were also abroad. In the case of Intas, service tax was demanded on the service of Technical Testing and Analysis carried out abroad on behalf of Intas. In the case of KPIT Cummins, software development and consultancy service was provided by branches of KPIT abroad to overseas customers. The common stream of facts in all the three cases is that services were rendered /provided abroad and therefore not leviable to service tax in India. Whereas in the present case of Tata St .....

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iod 1.10.2005 to 31.3.2007. Part of the period is prior to 18.4.2006, when the Section 66A was introduced. Section 66A specifies that the charge of Service Tax on services received from outside India shifts to the receiver services in India. It is now a settled matter that Service Tax on import of service on reverse charge mechanism (on receiver) is not leviable prior to this date. Both sides agreed that only demand for the period on or post 18.4.2006 sustains. We have already held that the Arra .....

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spect of Agent fees. Therefore, service tax is held to be payable on Arrangement fees and Agent fees for the period on or after 18.4.2006. 13. The contention of learned C.A. that show-cause notice does not categorically specify clause (ix) of Section 65(12) does not vitiate the proceedings. We find that the show-cause notice does mention Section 65(12) which defines 'Banking and other Financial Services' The show-cause categorically refers to the classification of service under Section 6 .....

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se notice is valid in the eyes of law..........." Reliance is also placed on the Hon'ble Apex Court's judgment in the case of J.K. Steel Ltd. Vs. UOI - 1969 (2) SCR 418 which held that "if the exercise of power can be traced to a legitimate source, the fact that the same was purported to have been exercised under a different power does not vitiate the exercise of power in question." Therefore, the proceedings initiated under the show-cause notice are valid in law. 14. On t .....

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uty for the period 1.10.2005 to 31.3.2007. It is quite natural that the department will take some time to assess the case after examining all documents and recording the statements of the appellant's officials. The fact remains that the appellant never disclosed the activity of receiving services from MLAs abroad. 14.1 The learned Special Counsel correctly placed reliance on the case of Housing Development Corporation Ltd. (supra), in which it was held that "the fact remains that after .....

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rge the plea of bona fide belief was to make enquiries from the Central Excise authorities or some reputed legal firm regarding dutiability of the item manufactured by it.....". We note that the appellant is not new to Indirect Tax law. They are a very large company with adequate resources at their command for taking advice. The least they should have done was to make enquiries from the department, which they did not do. They also made some payment of Service Tax on services towards Letter .....

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As regards penalties, we note that the claim for bona fide belief is not acceptable as held by us above. Therefore, the benefit of Section 80 of the Finance Act, 1994 has no application to the facts of the present case. The Commissioner has rightly imposed equal amount of penalty on the appellant under Section 78 of the said Act. In addition to this, the Commissioner has also imposed penalty on the appellant under Section 76 of the said Act for failure to make payment of service tax in time. Bot .....

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to the period prior to 18.4.2006, which we have held to be not sustainable. Therefore, we order the appellants to pay ₹ 5,22,35,092/- as Service Tax under the category of "Banking and other Financial Service". The penalty ordered by the Commissioner under Section 76 is upheld on the amount of Service Tax payable from 18.4.2006 till the actual payment of the outstanding amount of Service Tax. Appropriate interest as applicable under Section 75 of the Act is also payable. We uphold .....

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same is paid vide the agreement between the Tata Steel Ltd. (borrower) and the Loan Arranger Bank. The remuneration for the arrangement was paid by the borrower-assessee to the Arranger Bank. I further hold that the word 'lending' appearing in clause (ix) of Section 65(12) will not include borrowing. As borrowing is not included under the Section 65(12), I hold that no Service Tax is exigible on the 'arrangement fee' paid by the appellant company to the Arranger Banks. The role .....

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nds of the appellant, as the appellant has not received any such services. It is only by way of facilitation that the appellant-borrower will face difficulty, as it has entered into an agreement with the several Bank which had lent to the appellant, to correspond with each in respect of policy matters and/or giving or accepting notice and/or in case of any dispute, will of them together. That it is by way of facilitation in which the Agent Bank interacts with all other lending Bank and on behalf .....

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om the Agent Bank. Accordingly, I hold that no Service Tax is payable on the Agent Bank fees paid by the appellant-borrower to the nominated Agent Bank of the lenders. As I have decided the issue of taxability in favour of the appellant company and against the Revenue, I refrain from entering the question whether the service is received in India. Thus, the appeal is allowed and the impugned order is set aside. 22. So far the point of limitation is concerned, it is an admitted fact that the whole .....

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