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TMI Blog2017 (7) TMI 224X X X X Extracts X X X X X X X X Extracts X X X X ..... (hereinafter referred to as the 'Revenue'). By the aforesaid Circular and Proceedings, the Revenue had called upon the assessees to pay the service tax on the running of chit funds as according to the Revenue, it was a service provided by the assessees which was covered under 'banking and other financial services', a taxable service under sub-section 12 of Section 65 of the Finance Act, 1994. Plea of the assessees was that the chit fund business does not amount to any service covered by the definition of 'banking and other financial services' as per the said term as defined in that provision, prevalent during the relevant period. The High Court has accepted the plea of the assessees and thereby quashed the Circular dated August 23, 2007 and consequently Proceedings dated December 18, 2007. It may be mentioned at this stage that we are concerned with the issue as to whether service tax is leviable on chit fund or not w.e.f. June 1, 2007, the date on which the Finance Act, 2007 came into effect. 2) In order to appreciate the controversy and resolution thereof, it would be apposite to first take note of the relevant statutory provisions of the Act. It would also be necessary to tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to whether such a service is covered by the term 'asset management'. As per the appellant, managing chit fund, which is a fund management service, is a specie of cash management, now stands included in the amended definition made effective from June 1, 2007. The assessees, on the other hand, maintain that even with the deletion of the words 'but does not include cash management' from sub-clause (v) of sub-section (12), chit fund does not get covered and for the purpose of coverage, it is to be shown that the chit fund services is 'asset management', while it is not so. 5) To understand the nature of chit fund business, we now refer to the relevant provisions of Chit Funds Act, 1982. Section 2(b) defines 'chit', in the following manner: "chit means a transaction whether called chit, chit fund, chitty, kuri or by any other name by or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical instalments over a definite period and that each such subscriber shall, in his turn, as determined by lot or by auction or by tender or in such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d after obtaining requisite licence from the RBI as per the provisions of Reserve Bank of India Act, 1954 (RBI Act), it would also become necessary to take note of some provisions of the RBI Act as well, which are relevant for the purposes of the present case. As per Section 45-I of the RBI Act, chit funds are categorised as financial institutions. Section 45-I (c) also defines the financial institution. Relevant extract whereof is as follows: "Financial institution" means any non-banking institution which carries on as its business or part of its business any of the following activities, namely:- (i) (ii) (iii) (iv) (v) managing, conducting or supervising, as foreman, agent or any other capacity, of chits or kuries as defined in law which is for the time being in force in any State, or any business, which is similar thereto; (vi)" Thus, the activity of managing, conducting or supervising chits or kuries is covered by the term 'financial institution'. 7) After the amendment in the Finance Act, 1994 vide Finance Act, 2007, amending definition of banking and financial services, clarification was issued by the Government vide Budget instruction dated February 28, 2007 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxing statute, namely, no tax can be imposed on the subject without words in the Act clearly showing an intention to lay a burden upon the assessee; that the taxing statute are to be interpreted strictly; and that if two views are possible, benefit of doubt would have to be given to the assessee. In the opinion of the High Court, the deletion of the words 'but does not include cash management' while amending sub-section (12) of Section 65 of the Finance Act would not serve any purpose. 10) We may note here that the case set up by the Union of India before the High Court was that it was all along understood by the parties that business of chit fund was in the nature of cash management. Since, the definition of 'banking and financial services' prior to June 01, 2007 specifically excluded 'cash management', the benefit was extended to the chit fund companies by not levying any service tax as they were in the business of cash management. According to the Revenue, the amendment, thus, brought chit fund companies within the purview of the service tax. It was submitted that sub-clause (v) of sub-section (12) specifically covers 'asset management' as 'banking and other financial service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which can be seen from the following discussion therein: "31.The nature of contentions raised, argued and dealt with before the High Court of Andhra Pradesh in A.P. Federation Chit Funds v. Union of India (2009 (13) STR 350 (A.P.)) is more discernible from Paragraphs 5,6,7 and 8 of the said verdict, which are extracted below: "5. Shri.N. Venkataramana, learned Senior Counsel appearing on behalf of the petitioner mainly contended that merely because of deletion of certain expressions under the aforesaid sub-clause (12) of S. 65 of the Finance Act, 2007, the nature of business done by the petitioner cannot be roped in, as long as the levy is not made specifically in respect of such transactions in clear words. Therefore, even otherwise it has been contended that in view of the nature of chit transaction as already been explained to by the Apex Court, it cannot come within the parameters of any of the exemptions under the Finance Act as exists. Even otherwise, it is stated that the respondents herein cannot take upon themselves by imposing of levy proposals on totally different class by mere issuance of circular which itself is without any jurisdiction. 6. Shri Vedula Venkataram ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act (Chit Funds Act 1982) was to regulate the chit and control the activity for the foreman and protect the interest of the subscribers which essentially in the realm of fund management." 33. True, the provisions in a 'taxation statute' have to be interpreted strictly, as made clear by the Apex Court. But when "all sorts of fund management" were sought to be taxed, giving exception only to 'cash management' under the unamended provision and when it came to be excluded after the amendment to S.65(12)(a)(v) in the year 2007, this Court finds that, each and every instance of 'fund management' need not be separately mentioned in the provision, to attract the tax liability. Even as per the unamended statute, when the exception was only to a limited extent i.e., in respect of 'cash management', the deletion of the exception has revived "all forms of fund management" with full vigour and vitality, which cannot be watered down. To put in other words, the term "all forms of fund management" forms the genus, of which, 'cash management' is one of the species. The exception given to the specie (cash management) is taken away by deleting the same in the year 2007, after which, all forms of fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unication dated February 5, 2002 explaining the meaning of the term 'cash management' and also opining that chit fund may not be regarded as providing any taxable service in view of detailed note dated January 29, 2001 which was appended along with said letter dated February 05, 2002. After receiving this clarification, Ministry of Finance, Government of India issued Circular No. 41/4/2002 dated March 15, 2002 addressed to the officials of Central Excise and Customs as well as service tax clarifying that banking and other financial services will not include the service rendered by the chit fund and, therefore, no service tax was payable. 14) Amendment was carried w.e.f. June 1, 2007 whereby the words 'but does not include cash management' were deleted. This provision remained on statute book upto June 30, 2012. By Finance Act, 2012, entire scheme of service tax was completely changed and overhauled with the introduction of altogether new system of service tax. There was a paradigm shift in the service tax regime. Initially, service tax was levied only on three services by the Finance Act, 1994. The Finance Act, 1996 extended the levy to three more services. Twelve more services we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion remained till 2012. Earlier, each individual service on which tax was levied (known as taxable service) was defined. Secondly, the definition of service given now contains a negative list which is contained in Section 66D of the Act. In other words, it specifically excludes certain transactions from the ambit of service. Thus, those transactions which are specifically excluded are not liable for service tax. Any other kind of service which qualifies the definition of 'service' contained in the Act would be exigible to service tax. 16) The term service is defined in Clause 44 of Section 65B of the Act which reads as under: "44. "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include - (a) an activity which constitutes merely,- "(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or (ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or (iii) a transaction in money or actionable claim; (b) a provision of service by an employee to the empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y" means 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; 11. A mere transaction in money represents the gross value of the transaction. But what is chargeable to service tax is not the transaction in money itself since it can by no means be considered as a service. The exclusionary part of the definition of the word "service" however refers to "an activity which constitutes merely a transaction in money or actionable claim". Since a mere transaction in money or actionable claim cannot under the common notions of a service be considered as a service by any stretch of imagination, it is necessary to examine what could have been the intention of the legislature in excluding it from the definition. The obvious answer is that 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 coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the object of an Explanation and observed as follows:- "52. Thus, from a conspectus of the authorities referred to above, it is manifest that the object of an Explanation to a statutory provision is- (a) to explain the meaning and intendment of the Act itself, (b) where there is any obscurity or vagueness in the main enactment, to clarify the same so as to make it consistent with the dominant object which it seems to subserve, (c) to provide an additional support to the dominant object of the Act in order to make it meaningful and purposeful, (d) an Explanation cannot in any way interfere with or change the enactment or any part thereof but where some gap is left which is relevant for the purpose of the Explanation, in order to suppress the mischief and advance the object of the Act it can help or assist the Court in interpreting the true purport and intendment of the enactment, and (e) it cannot, however, take away a statutory right with which any person under a statute has been clothed or set at naught the working of an Act by becoming an hindrance in the interpretation of the same". Moreover, "every clause of a statute should be construed with reference to the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) which refers to a transaction in money or actionable claim. Be that as it may, if the exclusionary part of the definition [i.e., clause (a)(iii)] is construed on its own terms there would be an anamoly in as much as what was not a "service" in the first place within the opening words of Section 65B (44) would fall to be excluded - a construction that would be aimless or futile; but if that part is construed in the light of or with the aid of Explanation 2 and what it signifies or implies, then the anamoly gets ironed out or removed, as we have explained earlier. Obviously, we have to prefer the latter interpretation and not the former. 14. In a chit business, the subscription is tendered in any one of the forms 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 ex abundant cautela; if the argument based on Explanation 2 read with the exclusionary part of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... June 15, 2007 to June 30, 2012, the outcome whereof depends upon the definition of banking and financial service contained in sub-section (12) of Section 65 of the Act and particularly sub-clause (v) thereof as amended in 2007. 22) Having noted the aforesaid historical background, we now proceed to discuss the two questions that arise for consideration as the answer thereto will determine the issue involved in these appeals. Question No.1 - Whether chit fund activity can be treated as business of cash management? 23) We have already reproduced definition of' chit' as contained in Section 2(b) of the Chit Funds Act. This nature of chit transactions is lucidly explained in the case of Shriram Chits and Investment (P) Ltd. v. Union of India & Ors. (1993 Supp. (4) SCC 226) Relevant portion thereof describing the nature of chit funds business is as follows: "The provision in Section 6 relating to entering into Chit agreement clearly shows that a contract has to be entered into between the subscribers and the foreman and in view of the definitions provided in Sections 2(b), 2(c), 2(d), 2(e) and 2(j) enforceable contract comes into existence and the Act provides how the contract has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, this kind of agreement is entered into with 20 persons. These 20 persons i.e. subscribers agree to subscribe Rs. 5,000/- per month for 20 months. In this manner, every month Rs. 1,00,000/- are contributed by these 20 persons. Out of this amount, foreman deducts his commission, say, Rs. 10,000/- (which is regulated by the provisions of Chit Funds Act). Remaining amount of Rs. 90,000/- would be the prize amount. This amount would be given to one of the subscribers as determined by lot or by auction or by tender or in such other manner as may be specified in chit agreement. If it is by auction, then the subscribers may give their bids offering the discount. The subscriber offering maximum discount shall be successful subscriber. It may be mentioned that there is a cap on such a discount which laid down in the Chit Funds Act and a subscriber cannot offer more discount than the maximum limit stipulated under the Chit Funds Act. If there are more than one subscribers offering maximum discount, then the successful subscribers would be chosen by draw of lots. Successful subscriber would get the prize amount, i.e., the amount after deduction of the discount offered by him. The amount o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing observations from that judgment may be noted: "20. The word "service" has not been defined in the Act. Its dictionary or etymological meaning may or may not be appropriate. We would, however, notice its dictionary meaning: "Work done or duty performed for another or others; a serving; as, professional services, repair service, a life devoted to public service. An activity carried on to provide people with the use of something, as electric power, water, transportation, mail delivery, telephones, etc. Anything useful, as maintenance, supplies, installation, repairs, etc., provided by a dealer or manufacturer for people who have bought things from him." 27) Bearing in mind the aforesaid caution, we may refer to the dictionary meaning of the term cash management as shown by the learned senior counsel for the Revenue: "Cash Management : Cash management is a broad area having to do with the collection, concentration, and disbursement of cash including measuring the level of liquidity, managing the cash balance, and short-term investments." 28) In the inaugural address delivered by Shri Vepa Kamesam, then Deputy Governor, Reserve Bank of India at a Workshop on "Marketing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving idle cash or unrealised dues and wants the same to be utilised in a proper and fruitful manner, managing the said idle cash would amount to cash management. These are the services generally offered by the banking institutions to their clients. Aswath Damodaran in his book Corporate Finance has spelled out the management of cash in the following manner: "Every business has to maintain a cash balance to meet needs that can be managed only with cash. The convenience and liquidity associated with keeping cash also carries a cost, however, for cash does not earn a return for the business. Some businesses hold cash equivalents, such as Treasury Bills, which provide almost all of the convenience of cash but also earn a return for the holder, albeit one lower than earned by the business on real projects." 31) In business management, this aspect is studied with a specific focus in mind. It is accepted as a reality that one of the most important factors for failure of business firms is the shortage of working capital which emerges due to lack of attention to proper management of current assets i.e. cash, inventories, receivables etc. An efficient management of these current assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn and thereby increasing the profitability of the firm. Thus, the challenge before any business is to assess how much holding of cash is needed for day to day business, that is, for the purpose of business transactions as a precautionary measure, and even keeping in mind speculative motive in order to take advantage of potential profit making situations etc. Further, after setting apart cash for the aforesaid purposes which is to be held, how the surplus cash is to be invested so that it yield proper returns instead of keeping the surplus cash idle. At the same time, the company should also be in a position to liquidate the investment and realise cash immediately if situation so demands. For this, the Manager is supposed to ensure that the firm is having right quantity and the right liquidity from right source at right place and at the right time. All this is known as cash management. Cash management, thus, deals with optimisation of cash as an asset and for this purpose various decisions are to be taken for proper management thereof. The cash management schemes are, thus, built around two goals: (a) to provide cash needed to meet the obligations and (b) to minimise the idle cash ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the interpretation which favours the subjects, as against the Revenue, has to be preferred. This is a well-established principle of statutory interpretation, to help finding out as to whether particular category of assessee is to pay a particular tax or not. No doubt, with the application of this principle, the courts make endeavour to find out the intention of the legislature. At the same time, this very principle is based on "fairness" doctrine as it lays down that if it is not very clear from the provisions of the Act as to whether the particular tax is to be levied to a particular class of persons or not, the subject should not be fastened with any liability to pay tax. This principle also acts as a balancing factor between the two jurisprudential theories of justice - Libertarian theory on the one hand and Kantian theory along with Egalitarian theory propounded by John Rawls on the other hand. 41.3. Tax laws are clearly in derogation of personal rights and property interests and are, therefore, subject to strict construction, and any ambiguity must be resolved against imposition of the tax. In Billings v. United States [58 L Ed 596 : 232 US 261 at p. 265 : 34 S Ct 421 (1914) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 71] still holds the field. It reads: "In a Taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used." To this may be added a rider: in a case of reasonable doubt, the construction most beneficial to the subject is to be adopted. But even so, the fundamental rule of construction is the same for all statutes, whether fiscal or otherwise. "The underlying principle is that the meaning and intention of a statute must be collected from the plain and unambiguous expression used therein rather than from any notions which may be entertained by the court as to what is just or expedient". The expressed intention must guide the court." 35) We, therefore, hold that the term 'cash management' as understood in common parlance would not embrace chit fund business. Question No.2 - Whether chit fund can be treated as a form of fund management? 36) We may mention that the entire case of the Revenue was that chit fund amounts to cash management and cash management is one of the forms of fun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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