TMI Blog2017 (7) TMI 224X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 held by the business. When we understand the aforesaid concept of cash management, the answer we are seeking becomes obvious. Insofar as activity of chit fund is concerned, it does not amount to cash management. Once we have held that chit fund business is not cash management or a business of managing cash, no further discussion on this issue is even required. However, dehors the issue of cash management, we are of the view that activity of managing chit fund does not amount to management of any type of fund. Even as per the definition from dictionary relied upon by the Revenue, fund is an aggregation or deposit of resources from which supplies are or may be drawn for carrying on any work, or for maintaining existence. For our reasons given above, we affirm the conclusion in the impugned judgment of the Andhra Pradesh High Court [2008 (7) TMI 227 - HIGH COURT ANDHRA PRADESH]. We als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessary to take into account the nature of operations performed by the assessees which are governed and regulated by the Chit Fund Act, 1982. 3)With the enactment of the Finance Act, 1974, for the first time the Parliament imposed the levy of service tax on rendition of services by the service providers to the service receivers. It is covered by Chapter V of the Act. Section 65 thereof as it stood prior to June 1, 2007 (This Section stands repealed w.e.f. July 1, 2012), contains certain definitions. Sub-section (12) defines banking and other financial services which reads as under: banking and other financial services means (a) the following services provided by a banking company or a financial institution including a non-banking financial company or any other body corporate or any commercial concern, namely: (i) (ii) (iii) (iv) (v) asset management including portfolio management, all forms of fund management, pension fund management, custodial, depository and trust services, but does not include cash management ; (vi) (vii) (viii) (ix) 4) Though, the definition of banking and other financial services as contained in sub-section (12) i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount. Explanation.- A transaction is not a chit within the meaning of this clause, if in such transaction, - (i) some alone, but not all, of the subscribers get the prize amount without any liability to pay future subscriptions; or (ii) all the subscribers get the chit amount by turns with a liability to pay future subscriptions Section 12 of the Chit Funds Act, 1982 prohibits chit fund companies from conducting any other business, except with the general or special permission of the State Government. Section 14 of the Chit Funds Act, 1982 provides that no person carrying on chit fund business shall utilize the moneys collected in respect of business (other than commission or remuneration payable to such person or interest or penalty, if any, received from a defaulting subscriber), except for (a) carrying on chit business; or (b) giving loans and advances to non-prized subscribers on the security of subscriptions paid by them; or (c) Investing in trustee securities within the meaning of section 20 of the Indian Trusts Act, 1882 (2 of 188 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Government vide Budget instruction dated February 28, 2007 wherein it was stated as follows: 7.6 (ii) At present cash management is specifically excluded from the scope of this service. Specific exclusion of cash management is being omitted. Consequently, cash management services will be leviable to service tax under this service. Some clarifications are issued by the RBI as well, from time to time, touching upon the nature of business of chit fund. We shall refer to these circulars/clarifications at the relevant stage. 8) After taking note of the relevant statutory provisions under different enactments, facts leading to the present dispute may now be recapitulated, which are in a very narrow campus as the main dispute is purely of a legal nature. It so happened that after the amendment of definition of banking and financial services w.e.f. June 1, 2007, the Government issued Circular No.96/7/07-ST dated August 23, 2007 stating that activity of chit fund is in the nature of cash management and, therefore, leviable to service tax under banking and other financial services . Likewise, the Commissioner of Customs, Central Excise and Service Tax also issued Letter HQST 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally covers asset management as banking and other financial services and categorically mentions that all forms of fund management are to be treated as asset management . As per the Revenue, cash management is one of the forms of fund management . The High Court, however, has not agreed with this submission on the ground that the Revenue could not rely upon the dictionary meanings assigned to fund and there had to be specific provision in the Act covering chit funds. 11) We may mention, at the outset, that mere deletion of the words but does not include cash management by 2007 amendment may not serve the purpose of the Revenue. When these words were there in sub-clause (v), those companies doing the business of cash management were specifically excluded. After deletion of those words, we have to look into the definition of asset management in amended form and, therefore, the Revenue has to establish that the chit fund business is a service which comes within the scope of asset management . Conscious of this fact, the Revenue has argued that since asset management includes all forms of fund management and as the cash management is one of the form of fund management , ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suance of circular which itself is without any jurisdiction. 6. Shri Vedula Venkataramana, learned counsel appearing on behalf of petitioners has adopted broadly the submissions made by Shri.N. Venkataramana, senior counsel. However, he sought to restrict his submissions as regards the validity of the circular rather than going beyond to hold that the nature of chit transactions would fall within asset management on the deletion of expression under the later amended Finance Act. He further contended that by the impugned action, the respondents are only trying to enlarge the scope of sub-clause (12) of S. 65 of the Finance Act, 2007 by way of circular without there being any legislative transanction or statutory basis. Hence, the impugned action is liable to be set aside. 7. Shri.K. Rajashekar Reddy, learned Assistant Solicitor General, appearing on behalf of the respondents have sought to sustain the entire impugned action and the circulars issued by the respondents contending that the expression cash management is inclusive one and the impugned circulars are only clarificatory, therefore the question of statutory interpretation as such does not arise and whatever sought to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specie (cash management) is taken away by deleting the same in the year 2007, after which, all forms of fund management become taxable. It has to be noted that, there is absolutely no challenge against the statutory provision i.e., in respect of the amendment brought about in the year 2007 and this being the position, the tax liability stands governed, not by virtue of the Circular, but by virtue of the amended provision. The idea and understanding of the petitioners to the contrary, is quite wrong and misconceived. 12) We, therefore, feel that neither the Andhra Pradesh High Court in the impugned judgment nor Kerala High Court in the aforesaid judgment has addressed the matter in right perspective. According to us, in order to levy service tax on the chit fund business, as per amended definition of sub-section (12) by the Amendment Act, 2007, it is necessary to understand the meaning of cash management and to see as to whether the activity of managing chit fund amounts to cash management. Thereafter, the second question would be as to whether cash management is a form of fund management . Only then it would be covered by the expression asset management and exigible to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee services by the Finance Act, 1994. The Finance Act, 1996 extended the levy to three more services. Twelve more services were brought under the service tax net by the Finance Act, 1997 and its scope was further enlarged by the Finance Act, 1998 when twelve more services were brought under the service tax net. Three services were exempted from the service tax by the Finance Act, 1998 and one more service by the Finance Act, 2000. Its scope was further widened by the Finance Act, 2001 when service tax was extended to include fifteen more services. The Finance Act, 2002 further levied service tax on ten more services. The Finance Act, 2003 brought 8 new services within the ambit of service tax. Further, the Finance (No.2) Act, 2004 brought 13 new services under service tax which included re-introduction of service tax on 3 services and also made applicable service tax on risk cover in life insurance under the life insurance service, whereas this service was introduced in the year 2002. The Finance Act, 2005 brought 9 new services under the service tax net. The Finance Act, 2006 brought 15 new services under the service tax net. The Finance Act, 2007 brought 7 new services under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 of the Constitution; or (iii) a transaction in money or actionable claim; (b) a provision of service by an employee to the employer in the course of or in relation to his employment; (c) fees taken in any Court or tribunal established under any law for the time being in force. Likewise, negative list of service is contained in Section 66D of the Act and all those services which are mentioned therein are not liable for service tax. 17) Interestingly, in the context of chit fund business, a question arose as to whether it would be service within the aforesaid definition and this issue came to be considered by Delhi High Court in the case of Delhi Chit Fund Association v. Union of India (2013 (30) STR 347 (Del) . The Delhi High Court examined the nature of chit fund business, keeping in mind the dicta of this Court in Sriram Chits and Investment (P) Ltd. v. Union of India (AIR 1993 SC 2063) wherein the nature of chit fund business is explained in detail and came to the conclusion that it was not a service as per the definition of service contained in Section 65B(44) of the Act. Following discussion in the judgment is relevant in this behalf: 10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inition 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 could arise in this line of reasoning can be that the language of the exclusionary part of the definition in terms refers to the very activity which constitutes a transaction in money and contains no reference to any service rendered in connection therewith. The possible answer to this conundrum is that the legislature deemed it fit, ex abundanti cautela, to exclude an activity which constitutes merely a transaction in money, which even otherwise could not have been considered as a service in any sense of the word. This however appears to us to be a far-fetched answer. A clue to a proper interpretation of the exclusionary part of the definition is embedded in Explanation 2. This Explanation carves out an exception to the exclusionary part of the definition by providing that any activity relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination to another form, currency or denomination for which a separate consideration is charged shall not be considered as a transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 context and other clauses of the Act, so as, as far as possible, to make a consistent enactment of the whole statute or series of statutes relating to the subject matter , as held in Canada Sugar Refining Company v. R. , (1898) A.C. 375, a principle that is frequently applied in case of difficulty in construing a statute. In N.T. Veluswami's case (AIR 1959 SC 422), a three-judge Bench of the Supreme Court speaking through T.L. Venkatarama Aiyar, J, held as follows: . It is no doubt true that if on its true construction, a statute leads to anamolous result, the courts have no option but to give effect to it and leave it to the legislators to amend and alter the law. But when on a construction of a statute, two views are possible, one which results in an anamoly and the other, not, it is our duty to adopt the latter and not the former, seeking consolation in the thought that the law bristles with anamolies . 13. If these rules of interpretation are applied, it appears to us that even if it is assum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 definition is accepted as correct, even then the services rendered by the foreman of the chit business for which a separate consideration is charged, not being an activity of the nature explained in the said Explanation, would be out of the clutches of the definition. Either way, there can be no levy of service tax on the footing that the services of a foreman of a chit business constitute a taxable service. 18) The High Court, thus, held that chit fund business was not exigible to service tax. Pertinently, SLP (C) No. 24998 of 2013 filed by the Revenue against the aforesaid judgment of Delhi High Court has been dismissed by this Court vide order dated January 7, 2014. 19) It is also relevant to mention that by Finance Act, 2015, definition of service contained in sub-section (44) of Section 65B of the Act has been amended by adding explanation 2 which reads as under: Explanation 2 For the purposes of this clause, the expression transaction in money or actionable claim shall not inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red 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 to be implemented and acted upon by the parties to the contract. Therefore, it is a special form of contract contemplated by Entry 7 of List III of Seventh Schedule of the Constitution of India and it cannot be termed as money lending business. It is clear that the foreman does not lend his money to any of the subscribers. The foreman acts only as person to bring together the subscribers and certain obligations are cast upon him with a view to protect the subscribers from the mischief and fraud committed by the foreman in view of his position. The amounts are paid to the subscribers as per the chit and in accordance with the provisions of the Act. It will not be correct to state that each subscriber lends money to the person who gets chit earlier. It cannot also be construed that the person who gets chit later should be treated as the moneylender. The agreement between the parties that is entered as per Section 6 of the Act, only provides for distribution of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere 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 of discount shall be distributed among all the subscribers. In a way, the said amount of discount which the successful bidder has foregone becomes the dividend which is to be distributed to all the subscribers after deducting a fixed amount representing the commission payable to the foreman. Foreman is a person who organises the auction and conducts the proceedings. From the aforesaid procedure in which this business is conducted it also becomes clear that those subscribers, who delay the bidding or do not bid, stand to gain and they receive maximum share in the discounts. If seen from this angle, the chit is somewhat like a recurring deposit with the bank. In fact, there is no bar on the foreman of the chit fund also to participate in the bidding, as a subscriber. 25) In Sriram Chits Investment (P) Ltd. case, this Court declared the following propositions pertaining to the business of chit funds: (a) The Act, in pith a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Cash Management Services organised by the Administrative Staff College of India, Hyderabad on September 26, 2011, he explained this term as under: the fundamental objective of cash management is optimisation of liquidity through an improved flow of funds . Good cash management is a conscious process of knowing when, where, and how a company s cash needs will occur; knowing what the best sources for meeting additional cash needs; and being prepared to meet these needs when they occur by keeping good relationships with bankers and other creditors. 29) Even on the application of the aforesaid definition explaining cash management, it would be difficult to sustain the argument of the Revenue that chit fund activity amounts to cash management. In common parlance as well as in banking field, cash management is understood as managing the surplus cash of a person or a company. Mr. Vishwanath ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 cannot only reduce the risk of financial distress but can also make a positive contribution to the profit of the firm. Therefore, need is felt to properly manage the aforesaid current assets which include cash as well. In this sense, cash management refers to management of cash balance and the bank balance including the short terms deposits. The cash is obviously the most important current assets, as it is the most liquid and can be used to make immediate payments. Insufficiency of cash at any stage may prevent a firm from discharging its liabilities or force it to sell its other assets immediately. On the other hand, extreme liquidity may take the firm to make uneconomic investments. This underlines the significance of cash management. The term cash is generally used in two different ways: One, it may include currency, cheques, drafts, demand deposits held by a firm i.e., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anagement. 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 held by the business. 32) When we understand the aforesaid concept of cash management, the answer we are seeking becomes obvious. Insofar as activity of chit fund is concerned, it does not amount to cash management. 33) The matter can be looked into from another angle as well. The aforesaid description of cash management as a management tool in any case, throws doubts on the claims of the Revenue and it cannot be claimed by the Revenue that the position as to whether chit fund business is cash management is specific or certain. We are dealing with a taxing statute and when we find that goods falls within the domain of uncertainty, it would be difficult to lean in favour of the Revenue. In Commissioner of Income Tax (Central)-I, New Delhi v. Vatika Township Private Limited (2015) 1 SCC 1) , a Constitution Bench of this Court highlighted that taxing statutes hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pounded 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)], the Supreme Court clearly acknowledged this basic and long-standing rule of statutory construction: (L Ed p. 598) Tax statutes should be strictly construed; and if any ambiguity be found to exist, it must be resolved in favour of the citizen. Eidman v. Martinez [46 L Ed 697 : 184 US 578 (1902)], L Ed p. 701 : US p. 583; United States v. Wigglesworth [2 Story 369 (1842)], Story p. 374 and Mutual Benefit Life Insurance Co. v. Herold [198 Fed 199 (1912)], Fed p. 201, affirmed in Herold v. Mutual Benefit Life Insurance Co. [201 Fed 918 (CCA 3d 1913)] ; Parkview Building Loan Assn. v. Herold [203 Fed 876 (1913)], Fed p. 880 and Mutual Trust Co. v. Miller [177 NY 51 : 69 NE 124 (1903)], NY p. 57. 41.4. Again, in United States v. Merriam [68 L Ed 240 : 263 US 179 : 44 S Ct 69 (1923)], the Supreme Court clearly state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 fund management. Once we have held that chit fund business is not cash management or a business of managing cash, no further discussion on this issue is even required. However, dehors the issue of cash management, we are of the view that activity of managing chit fund does not amount to management of any type of fund. Even as per the definition from dictionary relied upon by the Revenue, fund is an aggregation or deposit of resources from which supplies are or may be drawn for carrying on any work, or for maintaining existence. Mr. Radhakrishnan has relied upon the following dictionary meanings of fund management and asset management: (a) Fund A fund is a source of money that will be allocated to a specific purpose. A fund can be established for any purpose whatsoever, whether it is a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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