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DSP Merrill Lynch Limited Versus Commissioner of Service Tax, Mumbai And Vice-Versa

2016 (2) TMI 221 - CESTAT MUMBAI

Management consultancy services - Merchant Banking Services - Underwriting services - Stock broker services. - Receipt of Advisory fees, Retainership fees, Advisory fees for Mergers and Acquisitions ( hereinafter referred as M&A), fees for Merchant Banking services ( hereinafter referred as MBS), Management fees earned by appellant's subsidiary, fees for underwriting Government securities and some other minor fees. - Held that:- what is to be seen is the obvious legislative intent to tax mer .....

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r Financial Services and therefore our views given above in the case of Merchant Banking Services would hold in this case also. - The third category of service which have been classified under the Management Consultancy Service is the fees earned by the subsidiary of the appellant. We find that it has not been controverted by the department with any evidence that the payment is received in respect of activities undertaken by their subsidiary. The subsidiary is a separate legal entity under t .....

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to classify the service under Gonsulting Engineer Service' or under BAS. Therefore we are inclined to give the benefit to the appellant and hold that service tax is not payable on the service in question under Management Consultant Service. - The concept of Management Consultancy is clearly consultancy and technical assistance in the running of the affairs of an organization. The definition itself refers to various aspects of the working system of any organization. Whereas Mergers and Acquis .....

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retaries [Section65(85)] would all get covered under the definition of 'Management Consultancy Service'. It would render many entries otiose. - The legal position is that an interpretation of the scope of an entry should not be such which will lead to an illogical situation and lead to unnecessary complexity. The legislative intent should not be negated as held by the Apex Court in the case of Balaji Enterprises [1997 (5) TMI 108 - SUPREME COURT OF INDIA]. We respectfully follow the High Cou .....

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Mum and Appeal No. ST/57/2010-Mum - Final Order No. 85279 85280/16/STB - Dated:- 11-1-2016 - MR. P.S. PRUTHI, MEMBER (TECHNICAL) AND MR. RAMESH NAIR, MEMBER (JUDICIAL) For the Petitioner : Shri Shri Rohan Shah, Advocate with Shri Anay Vanhati, Advocate For the Respondent : Shri Roopam Kapoor, Commissioner (A.R) ORDER PER : P.S. PRUTHI Appeals arise from Order-in- Original No 16/STC/BR/0910 dated 19-11-2009 passed by the Commissioner Service tax. M/s DSP Merrill Lynch Ltd (DSP for short) are the .....

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n services provided by appellants subsidiary. 2. The facts are that the appellant had provided various types of professional financial services and recovered fees for the same under different heads, that is, Advisory fees, Retainership fees, Advisory fees for Mergers and Acquisitions ( hereinafter referred as M&A), fees for Merchant Banking services ( hereinafter referred as MBS), Management fees earned by appellants subsidiary, fees for underwriting Government securities and some other mi .....

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vices. The SCN was issued in Oct 2004. 3. The Ld. Counsel Mr Rohan Shah at the outset submits that they have a very strong case on limitation as far as the demand on Merchant Banking Services (MBS) and Mergers and Acquisitions (M&A) services are concerned. He related the history of the issue with the list of dates against each event as detailed below: LIST OF DATES AND EVENTS S. No. Date / Period Details of event 1. 16.10.1998 Introduction of Service tax category of Management Consultancy Se .....

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r the category of MCS, for activities undertaken by DSPML in relation to mergers and acquisitions 5. 01.02.2000 DSPML approached DGST for clarification on applicability of Service Tax on M&A services 6. 20.04.2000 DGST clarified that Service tax is applicable on M&A services 7. 16.06.2000 DSPML filed Writ Petition No. 1257 of 2000 before Bombay High Court challenging the liability of Service tax on M&A services 8. 07.11.2000 Bombay High Court disposed of the petition directing the CB .....

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mp;A advisory and Merchant Banking services 13. 27.06.2001 CBEC issued Order No. 1/1/2001-ST clarifying that advice in relation to M&A is also includable under the taxing entry of MCS 14. 17.09.2001 Show Cause Notice demanding ₹ 31.73 lakhs on advice rendered in relation to M&A for the period 16.10.1998 to 31.03.1999 15. 17.10.2001 Reply to above SCN dated 17.09.2001 16. 05.06.2002 Adjudication Order confirming the levy proposed vide above SCN 17. 19.08.2002 DSPML filed appeal from .....

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ry of BFS Proceedings No. 2 (presently under consideration) 23. 18.07.2002 Audit by Service tax Section of Central Excise Commissionerate 24. 14.11.2002 DSPML s letter submitting quantitative details of fees received 25. 20.10.2004 Show Cause Notice proposing levy of Service tax on several activities undertaken from April, 2000 to Dec, 2001 (1999-2003 for underwriting) 26. 24.12.2004 DSPML s Reply to above Show Cause Notice 27. 10.02.2005 24.02.2005 24.03.2005 29.03.2005 02.01.2007 26.02.2009 02 .....

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appeal to the Tribunal challenging above Order-in-Original to the extent it dropped levy of Service tax of ₹ 3,66,96,304 32. 20.12.2011 Stay Hearing before the Tribunal and Stay Order granting full stay towards recovery of tax from DSPML Anay Banhatti anaybanhatti@elp-in.com Show details He submits that that there are no elements of fraud, collusion, willful misstatement, suppression of facts, and contravention of any of the provisions of the Chapter with intent to evade payment of servic .....

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y out all activities of a merchant banker being registered with the SEBI. It was also informed that they are registered with SEBI as a stock broker and an underwriter. Therefore, there was no concealment of their activities which are stated by the Department to be covered under Management Consultancy Services, Underwriting services and Stock broker services. In their letter to the DG Service Tax, they had enclosed their letters addressed to M/s L & T, Digital Equipment(India) Ltd and other c .....

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filed before the High Court by them in which the prayer was only to, inter alia,  not to recover any service tax or insist on procedural compliance for Petitioners activities specified at para 4(iii) of this Petition.. He submits that when the High Court Order is read with the petition, it appears that there was no bar on issue of show cause notice. 3.1 The Ld. Counsel contends that once show cause notice was issued on 17.9.2001 demanding duty of ₹ 31.73 lakhs on activity of advise ren .....

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e of Steel Cast Ltd. Vs. Commissioner of Central Excise, Bhavnagar 2009 (14) STR 129 (Tri.-Ahmd). He distinguishes the Tribunal decision in the case of HSBC Securities & Capital Markets (I) Pvt. Ltd. Vs. Commissioner of Service Tax, Mumbai 2014 (33) STR 530 (Tri.Mum.) stating that in this case it was held that the appellants had not produced any evidence which indicates that they had any doubt or they approached the departmental authorities for clarification. Whereas in their case they had a .....

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riod December 1999-March 2000. It is therefore not possible for the department to presume that the appellant had intention to provide services during the period April-June 2000 unless it is declared in the ST.3 Return. Full disclosure was not made by the appellant. He further submits that the decision in the case of HSBC is not applicable. The finality on the issue for the period October 1998 to March 1999 in appellants own case will not come in the way of invoking extended time period as the v .....

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urt had directed CBEC to clarify the position, which was done in June 2001. In the circumstances, it was held that respondent could not have known that the services rendered were in the nature of Management Consultancy Services. We find that in the case of Steel Cast Ltd (supra), the invocation of longer period of limitation was rejected on the ground that a lot of confusion prevailed on the relevant issue during the relevant time. The facts in the present case are at variance with the facts in .....

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r back to the High Court directions and now take a stand that the confusion was still prevailing and, therefore, they could not deposit the tax for the period April June 2001. We may even say that this would, in a way, amount to not complying with the spirit of High Courts Order. It is a different matter that the Banking service was introduced from 1.7.2001, which covered under its ambit the various financial services rendered by the appellant. But the question remains why the appellant after p .....

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es not know whether the activities are performed and payments for all the activities were received during the period April- June 2000. This knowledge can only be sourced from the ST returns. It must be appreciated that in the returns no payments are shown to have been received prior to April 2000. Therefore Department had no knowledge that services continued to be rendered during April-June 2000. A legal obligation is cast upon the appellant to declare the value of taxable services under ST-3 Re .....

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inancial services for the period July 2000 onwards in the ST-3 Return for the period April-September 2000, but they failed to declare the value of services rendered during the period April-June 2000 in the same return. The system of service tax payment is such that department can check the factum of value of services only from what is declared in the ST-3 returns. In the present case the fact that services having value were rendered became known to the department only when audit was conducted in .....

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response to that certain agencies have represented and it is in that context that the said order was issued to clarify the doubts of such agencies. Appellants have not produced any evidence which indicate that they had such doubt and for they have approached the departmental authorities for clarification about their Service Tax liability on this aspect. In fact, after issue of the clarification 37-B Order, it was the duty of appellant to pay the tax for the past period (at least normal period) .....

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to 1982 on 28.2.1984. Subsequently, another show cause notice was issued covering the years 1982-1983 to 1986-1987 invoking the extended time period. The Honble Apex Court held that once the first show cause notice was issued, the second show cause notice could not be issued invoking the extended time period as the facts were already in the knowledge of the authorities. Whereas in the present case it is not known to the authorities that the appellants are continuously providing all the service .....

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y. It was all the more obligatory on the part of the appellant since they had pursued the matter in the High Court who directed CBEC to issue a clarification which was done on 27.6.2001. It can even be said that the spirit of the Bombay High Court order was not followed by the appellant. Therefore, in our considered view, the extended period of limitation is invokable in the present case. 6. We may now come to the issue on merits. 6.1 Ld counsel submits that the Merchant Banking Services are hea .....

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and other Financial services was proposed to be introduced in the budget of 2001. The TRU circular F.No. B 11/1/2001 clarified that new entries were introduced w.e.f from 16.07.2001 to bring to tax new assessees. The judgements below have held that where a new service tax entry is introduced without amendment to an earlier entry, then the activity specifically covered under the new service tax entry are brought to tax only with the introduction of such new service tax entry 1) Glaxo Smith Kline .....

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ancial services with effect from 16.07.2001 and from that date the company had paid service tax. According to him the said service deals only with management of an organisation or system of an organisation. If held otherwise, various entries in the service tax law would become otiose, such as services provided by chartered accountants (section 65 (83)), cost accountants (section 65 (84), company secretaries (section 65 (85), etc. Most noteworthy is the fact that the definition of management cons .....

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ading to absurdity should be avoided. He also states that the decision of the Tribunal in HSBC case (supra) is erroneous as various judgements have not been correctly considered in this case and therefore it is a decision per incuriam. He relies on the Hon ble Supreme Court judgement in the case of Balaji Enterprises versus Collector of Central excise - 1997 (92) ELT 3 (SC) to say that legislative intent cannot be frustrated. 6.3 As regards the other categories of services, the ld counsel submit .....

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ervices exemption was granted to services in relation to computer software by notification 4/99 dated 28.2.1999. The fees for underwriting of Government Securities is not taxable in view of the decision in the case of Commissioner of Service tax versus Kotak Mahindra Capital Co Ltd 2014-TIOL-77-CESTAT- MUM and CBEC circular number 126/08/2010 dated 10.8.2010. Lastly there are miscellaneous services which pertain to miscellaneous income, that is, write back of credit balances in payable accounts, .....

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ention is that if a service is covered specifically under the scope of another service at a later date, it does not mean that it was not covered under the scope of the earlier service. What is important is to determine whether the service being provided is covered under the definition of the earlier service. He invites reference to the letter of JS (TRU) dated 28.02.2006 stating that some newly specified services may also contain services which are presently covered under some of the existing se .....

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der the Management Consultant Service. Further submits that where an income is booked in the account of the Principals and is not apportioned separately as per shareholding pattern of the subsidiary, it cannot be said that the subsidiary has provided the service. 7.2 Regarding the reliance by the appellant on the case of Glaxo Smith Kline (supra), he submits that the same pertains to provision of service of manpower. And the Tribunal observed that the charges are executory costs and not advisory .....

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d fees towards software development projects. 8.2. As regards the MBS, we find that Revenue has mainly relied on the decision of the Tribunal in the case of HSBC (supra) in which it was held that even though such services were covered under the Banking and other financial services from 16.7.2001, the same will be covered under Management Consultancy Service also prior to 16.7.2001. Tribunal relied on Section 65A to hold that when the activity is equally classifiable under two categories, it shal .....

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ner and includes any person who renders any advice, consultancy or technical assistance, in relation to financial management, human resources management, marketing management, production management, logistics management, procurement and management of information technology resources or other similar areas of management;] 65 (10)Banking and other financial services means, the following services provided by a banking company or a financial institution including a non-banking financial company, na .....

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ch and advice, advice on mergers and acquisitions and advice on corporate restructuring and strategy; and (vii) Provision and transfer of information and data processing. Section 65A is also reproduced below: 65A. Classification of taxable services - (1) For the purposes of this chapter, classification of taxable services shall be determined according to the terms of the sub-clauses (105) of section 65. (2) When for any reason , a taxable service is prima facie, classifiable under two or more su .....

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le. (c) when a service cannot be classified in the manner specified in clause (a) or clause (b), it shall be classified under the sub-clause which occurs first among the sub-clauses which equally merits consideration. (3) The provisions of this section shall not apply with effect from such date as the Central Government may, by notification, appoint. We find that in the present case the dispute is for the period April 2000 to December 2001 whereas Section 65A was inserted in the Finance Act, 199 .....

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auses (iii) and (vi) of the definition of Banking service during the relevant period, it becomes apparent that the same cannot be classified under Management Consultancy Service. In reaching this conclusion, we find support in the language of the Finance Bill 2001, which refers to a new service tax entry of Banking and other Financial services. The TRU Circular F.No.B11/1/2001-TRU also terms the entry as a new service tax entry. The judgments in the case of Glaxo Smith Kline (supra) and Indian N .....

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h Court held that Introduction of new entry and inclusion of certain services in that entry would presuppose that there was no earlier entry covering the said services. Therefore, prior to introduction of entry (zzzzj), the services rendered by the members of the 1st petitioner were not taxable. Creation of new entry is not by way of amending the earlier entry. It is not a carve out of the earlier entry. Therefore, the services rendered by the members of the 1st petitioner cannot be brought to t .....

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to tax as aluminium in crude form. If Waste and Scrap was already included in Item No. 27(A), there would not have been any need for making the entry (aa). The amendment left sub-item (a) of Item 27 untouched. Moreover, every type of waste and scrap was not made taxable after the amendment made on 1-3-1981. Only the type of waste and scrap mentioned in Explanation III were subjected to duty. Sludge, dross, scalings, skimmings, ash and other residuals were left out. Before 1-3-1981 there was no g .....

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e manufacturing process was certainly not aluminium in crude form . From this judgment we conclude that what is to be seen is the obvious legislative intent to tax merchant banking services under the category of banking service w.e.f. 16.7.2001 and not to see any intended meaning of legislation in the definition of Management Consultant Service. We hold that the MBS cannot be classified under Management Consultancy Service and therefore no service tax is payable. 8.3. Service tax has been dema .....

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Financial Services and therefore our views given above in the case of Merchant Banking Services would hold in this case also. 8.4. The third category of service which have been classified under the Management Consultancy Service is the fees earned by the subsidiary of the appellant. We find that it has not been controverted by the department with any evidence that the payment is received in respect of activities undertaken by their subsidiary. The subsidiary is a separate legal entity under the .....

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. The reliance is placed by Revenue on 96/7/2007-ST dt. 23.8.2007 is incorrect. The circular does not relate to the issue at hand. The circular merely clarifies that sub-contractor of a contractor is essentially a taxable service provider himself. In the present case, the subsidiary is the service provider and therefore tax, if any is payable by the subsidiary. Therefore, we hold that service tax is not payable on this amount. 8.5. Service tax has been confirmed on services performed in relation .....

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formation Technology Service was specifically excluded from the scope of Business Auxiliary Service(BAS). Both these facts indicate Government s intention to classify the service under Gonsulting Engineer Service or under BAS. Therefore we are inclined to give the benefit to the appellant and hold that service tax is not payable on the service in question under Management Consultant Service 9. The next group of services on which service tax is demanded is the fees for underwriting government s .....

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ctions; (ii) Write back of credit balances in payable A/c; (iii) Recovery of expenses from client; (iv) Recovery of bad debts,. We find that these activities, as the very nomenclature shows, are actual adjustments of expenses/debts etc. There is no service involved in these activities. Therefore no service tax is payable on these activities. 11. Revenue has challenged the vacation of demand on Merger and Acquisition services by the Commissioner on the grounds of limitation. We may examine the is .....

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r entry speaks of Business Auxiliary Services of the client, whereas the subsequent entry speaks of display of logo per se to be amounting to promotion and advertisement of the business activity of the client. In relation to the earlier entry, the activity conducted by the service provider should disclose promotion and marketing of the service rendered by the service recipient to the others and there must be tangible evidence to establish the same. In case of subsequent entry mere fact of displa .....

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o. The whole concept of management consultancy as related in the definition of Management Consultant does not give an impression that specific service such as Mergers and Acquisitions is covered by it. As we have discussed above, the concept of Management Consultancy is clearly consultancy and technical assistance in the running of the affairs of an organization. The definition itself refers to various aspects of the working system of any organization. Whereas Mergers and Acquisitions is a hig .....

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on65(85)] would all get covered under the definition of Management Consultancy Service. It would render many entries otiose. It is settled law that a service tax entry should be interpreted a contextual manner. Reliance is placed on the Tribunal judgment in the case of Board of Control for Cricket in India Vs. Commr. of S.T., Mumbai 2007 (7) S.T.R. 384 (Tri.-Mumbai). It was held that - 9. In view of the above guidelines laid down by Honble High Court, the expression in relation to, though exp .....

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ted in AIR 1957 S.C. 121 held that terminating the services of all the employees on taking over railway company by Govt. of India cannot be considered as retrenchment. Inasmuch as retrenchment connotes that the business itself is being continued, but the portion of the staff or labour is discharged as surplusage. In view of the above ordinary acceptation, the Supreme Court held that termination of services of all the workmen as a result of closure of business cannot be properly described as retr .....

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ading to absurdity has to be avoided. 15. Our above view also gets support from the fact that another head of sale of space or time for advertisement and sponsorship services stands created for the purposes of service tax w.e.f. 1-5-06. However, the taxable services in relation to sponsorship services specifically excluded sponsorship of sport events. As such, we find that a subsequent entry having been enacted covering the activity without any change of the existing entry, has to be interpret .....

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of new tariff entry do imply that the coverage in the new tariff for the purposes of tax was an area not covered by the earlier entry. It was so held in case of Glaxo Smithkline Pharmaceutical Ltd. reported in 2006 (3) S.T.R. 711 (T) = 2005 (188) E.L.T. 171 (Tri.-Mumbai) as also in case of M/s. ZEE Telefilms Ltd. & M/s. Star India (P) Ltd. v. CCE, Mumbai reported in 2006 (4) S.T.R. 349 (Tribunal) = 2006-TIOL-945-CESTAT-MUM. If it is held that the activity of sponsorship and sale of space we .....

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