TMI Blog2019 (4) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational PLC assumed the responsibilities to facilitate subscription of the bond by general investors outside India and in the event they fail to achieve 100% subscription of the general investors, the said lead mangers undertook to subscribe the unsubscribed bonds. This fact has not been disputed by the Revenue. The services provided by the foreign service provider are akin to the definition of the underwriting services and not Banking or other Financial service , particularly merchant banking service. No doubt, under scope of merchant banking, the underwriting is also as an activity, but considering the overall stipulation and conditions in the subscription agreement dt.24.00.2009 between the Appellant and M/s Goldman (Sachs) Asia LLC M/s Morgan Stanley Co. International PLC, it could be safely inferred that even though the amount paid for the services by the Respondent has been described as Management underwriting commission and selling commission , but the core service provided by the Lead Managers is that of underwriter service and not managerial service for the issue of Bonds as is evident particularly clause 4.1.33 where under it is mentioned that none of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the activities are similar to that of merchant banking services as per Circular 09.07.2001 and consequently fall under the scope of banking and other financial services. Consequently, demand notice was issued to the Respondent for recovery of the Service Tax amounting to ₹ 1,85,43,863/- with interest and penalty. However, on adjudication, the learned Commissioner dropped the proceedings initiated against the Respondent, observing that the services rendered by them do not fall under the category of banking and other financial services as defined under Section 65(105)(zm) of Finance Act, 1994. Hence, the Revenue is in appeal. 3. The learned A.R. Shri M.K. Sarangi for the Revenue has submitted that the Respondent has entered into an subscription agreement dt.24.09.2009 with M/s Goldman (Sachs) Asia LLC M/s Morgan Stanley Co. International PLC (referred to as Joint Lead Managers ) with respect to the services to be provided as joint lead manager in connection with the issue of 5% FCCB of US$ 500,000,000. The Lead Manager are to receive 0.75% of the bond amount for the service provided by them. It is his contention that as per the department, the service rendered by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vided in relation to issue management, either by making arrangement regarding selling, buying or subscribing as manager, consultant, advisor or rendering corporate advisory service in relation to issue management, which inter alia, consists of service of underwriter and portfolio manager. Thus, merchant banking service covers bunch of services including underwriting. Unless the service provided is underwriting simplicitor, it will fall under the category of merchant banking service as per legislative intent. Hence, the said service shall be covered under Rule 3(iii) of Import Service Rules 2006, and as such the place of provision of service is not relevant. 7. Referring to Securities Exchange Board of India (Underwriters) Regulations, 1993, underwriter has been defined in Regulation 2(f) to mean a person, who engages in the business of underwriting of an issue of securities of a body corporate; as per the Regulation 2(fa), underwriting has been defined to mean an agreement with or without condition to subscribe security of a body corporate when the existing shareholders of such body corporate or the public do not subscribe to the securities offered to them. As per Regulation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal confronted with the question between competing entries of classification viz. merchant banking service vis- -vis under writing service. It ultimately held that Axis Bank has issued and sold the GDRs to lead manager who in turn, to resell all or portion of the offered GDRs to subsequent purchasers, hence the said service cannot be considered as underwriting service. 10. Further referring to the Tribunal decision in the case of Sesa Sterilite Ltd Vs CCE dated 25.09.2017, he has submitted that show cause notice was issued to them for demand of service tax under underwriting of the firm as well as optional American Depository shares (ADS), commission paid was sought to be taxed under underwriters service . There is no adjudication of the dispute whether the service rendered falls under the category of underwriting service or otherwise. The demand was set aside in view of Rule 3(ii) of Import Service Rules, 2006 and following the earlier decision in Jubilant Life Science Ltd. s case. The case is different and more so the decision in the case of Jubilant Life Science was held per incuriam in Axis Bank Ltd s case as there was no adjudication on nature of service and its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In support , the Ld. Advocate has referred to Clause 4.1.33 of the said agreement. It is their contention that the arrangement between the respondent and lead manager was to secure full subscription of the FCCB issue and the said activity is in the nature of underwriter service as defined under Section 65(105)(z) of Finance Act, 1994. Further, the learned Advocate has submitted that the underwriter services were fully performed outside India; hence would not constitute import of services in terms of Section 66A of Finance Act, 1994 read with Rule 3 of Taxation of Services (provided from outside India and received in India) Rules, 2006. Therefore, the Respondent cannot be subjected to service tax under reverse charge mechanism as held by the adjudicating authority. Revenue s present appeal to classify the services under taxable category of banking and other financial service is arbitrary, mis-placed and un-tenable. 13. Referring to the judgment of the Tribunal in Jubilant Life Science Vs CCE Noida 2013 (29) STR 529 (Tri-Del), the learned Advocate for the Appellant submitted that the issue is no more res integra and the learned Commissioner has rightly placed reliance on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m time to time by the department from the date chart for the period from 28.04.2010 to 24.07.2012. It is their contention that since all the facts have been within the knowledge of department and nothing has been suppressed, therefore invoking larger period of limitation is unsustainable. They have referred to the following judgments:- i) Jet Airways (I) Ltd Vs CST Mumbai 2016 (44) STR 465 (Tri-Mum) ii) Reliance Industries Ltd Vs CCE LTU 2016 (44) STR 42 (Tri-Mum) iii) Arviva Industries (I) Ltd Vs CCE Mumbai-III 2005 (179) ELT 506 (Tri-Mum) iv) Richardson Cruddas (1972) Ltd Vs Collr. of C.E. Nagpur 1999 (110) ELT 874 (Tri.) v) Commissioner Vs Bentex Industries 2004 (173) ELT A 079 (SC) vi) Commissioner Vs Binny Ltd 2003 (156) ELT A 327 (SC) vii) CCE Vs Punjab Chem Pharma 2001 (135) ELT 227 16. Further, they have submitted that since the issue invoked in the present case is interpretation of law, also larger period of limitation cannot be invoked and referred to the Judgments in the case of i)NRC Vs CCE Thane 2007 (5) STR 308 (Tri-Mum). ii) Shri Shakti LPG Ltd. Vs CCE Vishakapatnam - 2005(187)ELT487(Tri-Bang). Besides, when there is conf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is entered into between two parties for leasing of a specific asset, (ii) such contract is for use and occupation of the asset by the lessee. (iii) merchant banking services; (iv) securities and foreign exchange (forex) broking: (v) asset management including portfolio management, all forms of fund management, pension fund management, custodial, depository and trust services, (vi) advisory and other auxiliary financial services including investment and portfolio research and advice, advise on mergers and acquisitions and advise on corporate restructuring and strategy. (vii) provision and transfer of information and data processing; and (viii) banker to an issue services; and (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, over draft facility, bill discounting facility, safe deposit locker, safe vaults, operation of bank accounts; (b) foreign exchange broking and purchase or sale of foreign currency, including money changing provided by a foreign exchange broker ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) or (b), it shall be classified under the sub-clause which occurs first among the sub-clauses which equally merit consideration. 21. In order to determine the applicability of the aforesaid competing entries to the facts of the present case, it is also necessary to read the relevant conditions/clauses of the Subscription arrangement/agreement dated 24.9.2009 entered in to between the Respondent and the said M/s Goldman (Sachs) Asia LLC M/s Morgan Stanley Co. International PLC, the Lead Managers, who have provided the services to the Respondent, which is produced below:- (1) SEA GOA LIMITED (the Issuer ) and (2) GOLDMAN SACHS (ASIA) L.L.C. ( Goldman Sachs ) and MORGAN STANLEY CO. INTERNATIONAL PLC as Joint Bookrunners and Joint Lead Manager (the Joint Lead Managers ). The issuer and the Joint Managers wish to record the arrangements agreed between them in relation to an issue of US$ 500,000,000 5% Convertible Bonds due 2014 [the Bonds , which expression shall, where the context so admits, include Bonds evidenced by a global certificate (the Global Certificate ) representing the Bonds]. Definitive Certificates, if required to be issued, will be in registered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t may agree with the Joint Lead Managers. 1.5 Conditions: The terms and conditions of the Bonds (the Terms and Conditions ) shall be in the form set out in Schedule 1 to this Agreement, with such changes as may be agreed in writing between the issuer and the Joint Lead Managers. The Terms and Conditions shall be consistent with a term sheet dated 24.09.2009 which shall form part of Schedule 1. 2. Agreements by the Joint Managers 2.1 Subscription: The Joint Lead Managers severally agree to subscribe and pay for the Bonds in the amounts set out in Schedule 5 at the Issue Price less the deductions referred to in Clause 8 on the Closing Date on the terms of this Agreement. 2.2. Restrictions: Each Joint Lead Manager severally and not jointly represents, warrants and agrees that it has complied and will comply with the terms set forth in Schedule 2. 2.3 Agreement Among Managers: The Joint Lead Managers agree as between themselves that they will be bound by and will comply with the International Capital Market Association Standard Form Agreement Among Managers version 2 (the Agreement Among Managers ) and further agree that references in the Agreement Among Managers to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ificate and the completion of the register of Bondholders shall constitute the issue and delivery of the Bonds. 7.2 Payment: Against such delivery the Joint Lead Managers will pay or cause to be paid to the Issuer the net subscription moneys for the Bonds (being the aggregate amount payable for the Bonds calculated at the Issue Price less the commission and concession referred to in Clause 8. Such payment shall be made by a depository (the Common Depositary ) common to Euroclear Bank S.A./N.V. as operator of the Euroclear System and Clear stream Banking, societe anonyme, on behalf of the Joint Lead Managers in US dollars in same day settlement funds for value on the Closing Date to such US dollar account outside India as shall be notified by the Issuer to the Joint Lead Managers not later than five days prior to the Closing Date; and 8. Commissions and Concession The Issuer agrees to pay to the Joint Lead Managers a combined management and underwriting commission and selling commission of 0.75 per cent of the aggregate principal amount of the Bonds. Such commission and concession shall be deducted from the subscription moneys for the Bonds as provided in Clause 7. 9. E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir foreign exchange requirement and to attract the foreign investment decided to issue convertible bonds of value US$ 500,000,000, which are convertible into the equity shares of the Respondent on maturity, had approached M/s Goldman (Sachs) Asia LLC M/s Morgan Stanley Co. International PLC for issue of the Bonds who also to act as their underwriter. The said M/s Goldman (Sachs) Asia LLC M/s Morgan Stanley Co. International PLC, through the subscription agreement obliged for distribution of security issued to the public and if it cannot be sold, they would be required to retain the security themselves on the closure of the offer. The Respondent heavily relied upon Clauses 1.1, 1.2, 1.3, 2.1, 2.2, 4.1.33, 7.1, 7.2, 8 and Schedule 5 to the said subscription agreement in arguing that the essence and dominant nature of the subscription contract is that of underwriting service and not of consultancy or managerial service in relation to issue of Bonds, which are ancillary service. The learned Advocate for Respondent laying emphasis on Clause 4.1.33 of the said agreement has submitted that M/s Goldman (Sachs) Asia LLC M/s Morgan Stanley Co. International PLC were appointed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t with the argument that the contract has to be considered as a whole and classified considering it as a single service and subjected it to tax. This is because the services are distinct in nature and the contract lays down the services as distinct services with separate remuneration fixed for the two services. Further if at all it is to be considered as one single bundle we do not agree with the contention of Revenue that the dominant nature of the service is that of Lead Manager s services, since JPMS is earning a higher commission by underwriting the issue taking the risk involved. Further from the facts of the case as stated by JLSL, that the issue was wholly subscribed by JPMS, the Lead Manager service was a minimal part of the contract in this particular case. Further Underwriting Service is specified in a sub-clause of Section 65(105) which occurs earlier than the sub-clause in which Lead Manager s Service occurs. So going by the criterion laid down in Section 65A(c) of Finance Act, 1994, the service will get classified under Underwriting Services . Therefore we hold the view that the Underwriting Service rendered by JPMS to JLSL is distinct from the Lead Manager servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to make offer to the public or existing shareholders and whatever is not subscribed that has to be purchased/subscribed in terms of agreement by the person i.e. underwriter. In the said case, since Joint Lead Manager has purchased the GDR initially for resale subsequently, the Tribunal held that the service provided cannot be considered as an underwriter service, but fall under the category of Banking and other Financial Service providing the underwriting service. 25. In our opinion, there is no apparent conflict in the in the judgments of this Tribunal in Jubilant Life Science Ltd s case and Axis Bank Ltd s case on the concept of underwriter service or what constitute an underwriter service. It is clear that the role of an underwriter as defined under the relevant SEBI Rules adopted in the Finance Act,1994 on the issue of securities to shareholders or public is to bear the risk of non-subscription of securities/bonds offered and to subscribe that portion of the securities/bonds issued against the underwriting commission agreed to be paid to them. In the present case, it is clear that the Respondent issuer issued bonds of value of US $500,000,000 which are convertible into equit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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