TMI Blog2020 (7) TMI 245X X X X Extracts X X X X X X X X Extracts X X X X ..... p, the residual surplus was not to be distributed amongst the members but were to be transferred to specified entity having similar objects. Assessee has sole authorization from RBI to operate the payment systems in India. The overall regulation as well as supervision was to be exercised by RBI in terms of PSS Act, 2007. Although the assessee was not created under PSS Act, 2007 but it was sole authorized arm of RBI to carry out payment settlement system in India in a professional manner by utilizing the latest technology. The overall purpose was to achieve broad-based social objective to bring efficiency in the clearing systems in India with a view to benefit society at large. Hence, it could be concluded that the assessee s objectives were to promote the welfare of general public. Clearing functions of RBI were divested to the assessee with the emergence of PSS, Act 2007. The electronic payment infrastructure created by the assessee would enable a larger section of the society to enjoy unparalleled secure and convenient payment systems. The systems being developed by the assessee would bring down cost of clearing transactions which would ultimately benefit public at large ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould not be covered by the proviso to Sec. 2(15) - assessee was engaged in creating infrastructure facilities to improve the clearing mechanism. However, by creation of this facility, the assessee would ultimately be rendering the services to various entities and therefore, the fine distinction between the expression facility and services, in such a case, would get blur. On the facts and circumstances, it would not be correct to say that the assessee was merely creating facility and not providing any services and not hit by proviso to Sec.2(15). We do not find much substance in this argument. Assessee has been granted a valid registration u/s 12AA of the Act which has never been revoked by the revenue authorities - The registration has been granted post-insertion of proviso to Sec.2(15). Therefore, considering the said fact alone, the deduction could not be denied to the assessee. However, the said fact on standalone basis, in our considered opinion, would not entitle the assessee to claim the exemption u/s 11 12 which is evident from the terms of registration certificate itself. Considering all and applying the theory of dominant purpose test, the inevitable conclus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) The CIT(A) overlooked that the appellant was formed as a Not for Profit Company under section 25 of the Companies Act, 195h and was prohibited by its object clause from carrying on any activity on commercial basis. 3) The AO and the CIT(A) ought to have held that the entire history / genesis behind the formation of the appellant, the manner of and purpose behind the formation of the appellant, the fact that the appellant had been licensed by the Central Government under section 25 of the Companies Act and the tact of involvement of the Ministry of Finance and Reserve Bank of India in the formation of the appellant clearly showed that the appellant's case did not come within the scope of the proviso to section 2(15) of the Act. 4) The CIT(A) erred in holding that Re.1 per transaction charged by the appellant to banks was consideration for services rendered by the appellant even though admittedly the appellant had merely provided an infrastructure facility to banks and recovered costs thereof. He failed to appreciate that provision of an infrastructure facility to banks cannot be equated with rendering of a service. 5) The CIT(A) erred in holding that profit motive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of environment monuments, objects / places of historic interest and advancement of any other object of general public utility. The first proviso to Sec 2(15) as introduced by The Finance Act, 2008 w.e.f. 01/04/2009 provide that the last limb i.e. advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or for any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity. The proviso has two limbs and provide that the advancement of any other object of general public utility shall not be a charitable purpose if it involves the carrying on of: - (i) any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, (ii) irrespective of the nature of use or application, or retention, of the income from such activity. The Finance Act, 2010 added 2nd proviso to provide that 1st proviso shall not apply if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese arguments. A chart has been placed before us to dispel the observations of lower authorities that the assessee was charging fees with a view to earn profit while rendering certain services and therefore, it was not eligible to claim the stated benefit. As per the chart, the fees charged by the assessee has drastically been reduced by 70% from Re.1/- per transaction in AY 2010-11 to Re.0.30 per transaction in AY 2020-21 as tabulated below: - Date of Resolution Period Rate per transaction (INR) Reduction (%) From To From 1st January, 2010 (i.e from commencement of activity 31st March 2010 1 - 23rd March 2010 1SI April 2010 8th August 2010 0.8 20% 30th July 2010 9th August 2010 30th April 2015 0.5 50% 20th May 2015 1st May 2015 30th September 2017 0. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foresaid decisions. Hence, the assessee would be eligible to claim the benefit of Sec. 11 12. 4. Au Contraire, Ld. CIT-DR supported the stand of lower authorities by submitting that the assessee s case was hit by proviso to Sec.2(15) since it was carrying out systematic commercial activities for the benefit of participating banks which led to huge value additions for these banks. There was no element of charity in assessee s activities. The Ld. CIT-DR also assailed the submissions that the assessee was created by an act of parliament and it was submitted that RBI was not its promoter. It was also submitted that core principle of forming the assessee was to assist public and private sector banks in carrying out their commercial activities involving receipts and payments by charging a fee. At the best, the activities could be for general public good and India being a welfare state, such mechanism only advances the economic activity and supports the payment system leading to economic buoyancy. However, there was no element of charity in the domain of the governance. The Ld. CIT-DR drew attention to the fact that the assessee reflected surplus of ₹ 11.50 Crores against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t proposes to develop a secure, dedicated and robust communication system for banking and financial sector and other participants and gateways for communication including providing network for participation by all categories of banks and financial institution. No objects of the company would be carried out without permission of the competent authorities and no objects were to be carried out on commercial basis. The income of the company was to be applied solely for the promotion of stated objects. No portion of income could be paid as dividend, bonus or otherwise by way of profit to its members. As per clause-XI of the Memorandum, in case of winding up or dissolution of the company, the residual surplus was not to be distributed amongst the members but were to be transferred to specified entity having similar objects. The 9 subscribers are the participating bankers who agree to subscribe one share each in the entity. The authorized share capital of the assessee has been set at ₹ 300 Crores consisting of 3 crores equity shares of ₹ 100/-each. As per Article-191, The company is specifically prohibited from distributing profits, in any manner, including payment of any divi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement systems (BPSS), set up by Govt. of India vide Gazette notification dated 18/02/2005, granted in-principle authorization to NPCI for operating various retail payment systems in the country. The RBI granted authorization to NPCI to take over the operations of National Financial Switch (NFS) from the Institute of Development and Research in Banking Technology (IDRBT) on October, 15,2009. The assessee was incorporated in Dec. 2008 and it was incorporated as a Section 25 company under the Companies Act and aimed to operate for the benefit of all the member banks and their customers. Sufficient reserves were provided to assessee company so that the company could operate on high volume payment services. There were various core promoter banks for the assessee which include SBI, PNB, Canara Bank, Bank of Baroda, Union Bank of India, Bank of India, ICICI Bank, HDFC Bank, Citibank and HSBC. 6.6 The main objects of the assessee company, as noted by Ld.AO, in para 4.5, are as follows: - 1. To promote the activities of bankers clearinghouse, owning, establishing operating, maintaining and consolidating payment system is for local, regional and national settlement of funds through ele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it did not have any profit motive and its activities could not be termed as business. It was also argued that it was part of government mechanism for acting on behalf of government and no other party could engage in the activity of the assessee. Lastly, the assessee argued that it was for benefit of people at large and eligible to claim the impugned benefit. 6.9 However, the said pleas were rejected in the background of the fact that the activities of NFS was service in relation to business of all banks involved. Banks are commercial entities and the facility so provided would be huge value addition to the services of any bank to their customers in order to increase volume, business and ultimate profits of the banks. The other pleas also could not find favor with Ld. AO. 6.10 The other arguments taken by assessee were summarized in para 4.8 of the order. The assessee, inter-alia, submitted that it was a nonprofit company registered u/s 25 of The Companies Act and its income could not be distributed by way of dividend. It was granted registration u/s 12AA after seeing its no-profit activity. Further, it charges fee merely to meet the cost of operations and income so gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant. The contentions and submissions of the appellant are being discussed and decided here in under: i. The appellant submitted that its benefits were available to general public at a very nominal cost and hence it is charitable in nature. In this regard it is mentioned that the appellant has charged ₹ 1 per transaction from customer bank. There is nothing brought on record by the appellant that the cost to the appellant per transaction Is more than ₹ 1 and hence its submission regarding cost being nominal remains unsubstantiated. ii. It was stated that there was no intention to make profit and hence its activities are charitable. In this regard it is mentioned that during the year under consideration it has received income of ₹ 17.58 crores from the business transactions out of which surplus of ₹ 11.50 crores has been generated which is nothing but profit only. Further as rightly mentioned by the assessing officer, for applicability of proviso to section 2(15), profit motive is not required to be proved. On perusal of the income and expenditure account for the year ended 31 March 2010 it is noted that the total expenditure booked is only ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activity which directly or indirectly facilitates the rendering of any service in relation to any trade, commerce or business, is carried on by trust, then it will be covered under proviso to section 2(15). Accordingly, contention of the appellant is not acceptable. iv. The appellant contended that it is functioning on behalf of Govt. i.e. RBI and hence the activity is not for profit. In this regard it is mentioned that the Company has not been created by any Act of Parliament. There are several banks that are under the control of RBI but they are not exempt from tax. Even otherwise in the case of Entertainment Society of Goa Vs. CIT (2013) 23 ITR 549 (Mum)(Trib) it was held that ' the proviso to section 2(15) will also apply to a regulatory body or a body incorporated by Government as the section does not provide any exception under the proviso. The contention of the appellant Is therefore not acceptable. v. The appellant also stated that under section 13(2)(d), there should be inadequate remuneration or other compensation which is not the case of the appellant. In this regard it is mentioned that the AO has invoked provisions of section 13(1)(c)(ii) which says that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus the general purpose or as stated in the memorandum may be a beneficial one, but it would violate section 13(1)(c)(ii) read with section 13(3) where the benefit is primarily confined to the members of the institution itself or employees of a particular firm or company covered under the ambit of section 13(3), however large the number of beneficiaries may be. Also in the case of Chamber of Commerce Vs. CIT (1936) 4 ITR 397 , Hon'ble Allahabad High Court, discussing the test for charity , observed that element of 'altruism' must be present i.e. to say Before an institution can be held to be charitable there must be an element of altruism, that is to say, the beneficiaries must not be able to claim the benefit. Thus as discussed above, the appellant has failed this test also. vi. In view of the facts and legal position as discussed above, I am of the considered opinion that that the AO has rightly denied the exemption u/s. 11. It is evident that Ld. CIT(A) has, inter-alia, observed that for the applicability of proviso to Sec. 2(15), profit motive is not required to be proved. Further, the activity of NFS-ATM switch would be in the nature of render ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n from Finance Ministry and views of various concerned parties. The copy of the report has been placed in the paper-book. In paras 27-43 of the report, the Committee referred to the background and framework of NPCI and discussed issues raised by officers of RBI on NPCI being given the task of implementing the PSS. At para-29, the Report quotes Finance Ministry as stating that NPCI would be a Section 25 company owned and operated by banks and that no bank or bank group can have shareholding of more than 10% and shares would be held by as many banks as possible and it was also decided that RBI would have representation on the Board. Para-32 of the Report take note of RBI s reply that RBI has not been operating the clearing system to generate income. Income generation was only incidental. RBI started the cheques processing center as a part of its initiative to build a sound cheque clearing system. A need was felt to consolidate all clearing centers under an umbrella organization to bring efficiency and standardization of procedures and practices. Further, the profits to be generated by the new company were not to be paid to the shareholders as dividend but would be used only for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In October 2009, IDRBT handed over NFS to NPCI. Since the takeover, NPCI has made various improvements in technology and usage of NFS. Since NFS facilitates interbank ATM transactions, it is also used as a backbone network infrastructure for other NPCI products like IMPS, AEPS, etc. With the inclusion of Scheduled Commercial Banks, Foreign Banks, Cooperative Banks, etc. as its members, NFS is the leading ATM network in the country. To take an example, if a customer of Punjab National Bank (PNB) uses an ATM of State Bank of India (SBI) to withdraw ₹ 10,000, then, SBI will claim ₹ 10,000 from PNB through the payment mechanism provided by NPCI. NPCI will recover ₹ 10,001 from PNB (including its charge of Re.1) by debiting this amount to PNB and will credit ₹ 10,000 to SBI. Certain other charges and government levies are also recovered on actual basis on these transactions, which are pass-through costs. In this transaction, Re.1 is the income of the Appellant, which has gradually been reduced over the years. In case a customer of SBI uses the ATM of SBI, then, NPCI does not come into the picture. Immediate Payment Service (IMPS) This facility is sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere to be transferred to specified entity having similar objects. 8.2 The RBI in its vision document 2005-08 (issued during May, 2005) titled as Payment Systems in India take note of the fact that with a view to help with the payment settlement process, the facility of ATMswitch was set up and operated by IDRBT, Hyderabad. A need has been felt that Indian Retail Clearing function, in its entirety, could be entrusted to a separate legal entity at national level and RBI could provide settlement services for all the clearing systems, besides being regulator and supervisor of the payments systems. The Broad framework of the proposed new national entity was elaborated therein. The formation of national level entity would ensure uniformity of structure, operations and procedures. This entity would deploy professionally skilled competent personnel to manage and run clearing operations and pave the way for conducting all clearing functions at national level leading to better information dissemination and better customer education on various services and systems. The document also envisages drafting comprehensive legislation on payment system by way of a payment system bill. The main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s initiative to build a sound cheque clearing system. A need was felt to consolidate all clearing centers under an umbrella organization to bring efficiency and standardization of procedures and practices. Further, the profits to be generated by the new company were not to be paid to the shareholders as dividend but would be used only for further development of payment system. 8.5 At the time of passage of the PSS Bill, 2006 the then Hon ble Finance Minister, inter-alia, reiterated that NPCI was a non-profit corporation and a Section 25 company and that its income would not be distributed as dividends but would be ploughed back for creation of infrastructure. He further stated that NPCI will be a public sector corporation owned by Public Sector Banks, who will own not less than 51% in NPCI. 8.6 Accordingly, NPCI was incorporated as Section 25 Company and it was specifically provided in its Memorandum of Association that none of its objects shall be carried out on a commercial basis. The income and the property of NPCI shall be applied solely for the promotion of its objects and that no part thereof shall be paid or transferred by way of dividend, bonus or otherwise by way o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could safely be concluded that the primary objective of the assessee was to administer the payment settlement system for the larger benefit of general public and not to run the clearing system in a commercial manner or on a commercial basis. 8.10 So far as the issue of charging of fees is concerned, we find that the assessee was engaged in providing technology intensive infrastructure facilities at national level and would obviously require funds to meet the operational cost which would necessitate the charging of fees by the assessee. However, the said fact would not materially alter the primary objective for which the assessee entity was created. It is also evident that the fee charged by the assessee per transaction has drastically been reduced by as much as 70% over several years which would only bolster assessee s claim that it was not running as commercial organization and its primary motive was not to make profits. 8.11 The observation of Ld. AO that the assessee paid Service Tax of ₹ 17 Crores, in our opinion, would not be determinative of assessee s primary objective. The liability to pay service tax arose to the assessee under separate enactment in view of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 8.15 Another argument raised is that the assessee has been granted a valid registration u/s 12AA of the Act which has never been revoked by the revenue authorities. The registration has been granted post-insertion of proviso to Sec.2(15). Therefore, considering the said fact alone, the deduction could not be denied to the assessee. However, the said fact on standalone basis, in our considered opinion, would not entitle the assessee to claim the exemption u/s 11 12 which is evident from the terms of registration certificate itself. It has clearly been mentioned in clause-4 of the registration certificate that registration u/s 12AA does not automatically exempt the income of the Trust. The question of taxability of the income of the Trust has to be examined and decided by Ld. AO based on the activities, compliance with various statutory and other requirements etc. Further, the fact that whether the assessee has actually carried out its activities as per its objects or not, could only be determined on the basis of its financial statements which would be available only at the time of framing of assessment. At the time of registration, the only thing that was required to be seen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding the constitutional validity of the 1st proviso, has held that in both the activities i.e. (i) activity in the nature of trade, commerce or business or (ii) any activity of rendering any service in relation to any trade, commerce or business, dominant and prime objective is to be seen. If the dominant objective was profit motive , the trust would not be entitled to claim its objective to be charitable in nature. On the other hand, if the institution is not driven primarily by a desire or motive to earn profits, but to do charity through the advancement of an object of general public utility, it would be an institution established for charitable purposes. It was also observed that merely because a fee or some other consideration is collected or received by the assessee, it would not lose its character of having been established for a charitable purpose. The dominant activity of the assessee was to be examined. If it was not business, trade or commerce then any such incidental or ancillary activity would also not fall within the categories of business, trade or commerce. Although the revenue s Special Leave Petition [SLP] against the same has been admitted by Hon ble Supreme Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot aimed at excluding the genuine charitable trusts of general public utility but was aimed at excluding activities in the nature of trade, commerce or business which were masked as charitable purpose. The decision of Hon ble Delhi High Court in Institute of Chartered Accountants of India V/s DGIT [358 ITR 91 04/07/2013] was also referred to in the stated decision of Hon ble Bombay High Court and ultimately the application of dominant activity test was upheld. 8.18 The Hon ble Gujarat High Court in the case of Ahmedabad Urban Development Authority V/s ACIT [396 ITR 323 02/05/2017] has observed that the expression trade, commerce and business must be read in the context of the intent and purpose of Section 2(15) of the act and the same was not meant to exclude entities which are essentially for charitable purposes but conducting some activities for a consideration or a fees. The test which has to be applied is whether the predominant objective of the activity involved in carrying out the object of general public utility was to sub-serve the charitable purpose or to earn profit. Where profit making is the predominant object of the activity, the purpose, though an object of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order 10.1 Before parting, we would like to enumerate the circumstances which have led to delay in pronouncement of this order. The hearing of the matter was concluded on 21/01/2020 and in terms of Rule 34(5) of Income Tax (Appellate Tribunal) Rules, 1963, the matter was required to be pronounced within a total period of 90 days. As per sub-clause (c) of Rule 34(5), every endeavor was to be made to pronounce the order within 60 days after conclusion of hearing. However, where it is not practicable to do so on the ground of exceptional and extraordinary circumstances, the bench could fix a future date of pronouncement of the order which shall not ordinarily be a day beyond a further period of 30 days. Thus, a period of 60 days has been provided under the extant rule for pronouncement of the order. This period could be extended by the bench on the ground of exceptional and extraordinary circumstances. However, the extended period shall not ordinarily exceed a period of 30 days. 10.2 Although the order was well drafted before the expiry of 90 days, however, unfortunately, on 24/03/2020, a nationwide lockdown was imposed by the Government of India in view of adverse circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the notice board. 8. Quite clearly, ordinarily the order on an appeal should be pronounced by the bench within no more than 90 days from the date of concluding the hearing. It is, however, important to note that the expression ordinarily has been used in the said rule itself. This rule was inserted as a result of directions of Hon ble jurisdictional High Court in the case of Shivsagar Veg Restaurant Vs ACIT [(2009) 317 ITR 433 (Bom)] wherein Their Lordships had, inter alia, directed that We, therefore, direct the President of the Appellate Tribunal to frame and lay down the guidelines in the similar lines as are laid down by the Apex Court in the case of Anil Rai (supra) and to issue appropriate administrative directions to all the benches of the Tribunal in that behalf. We hope and trust that suitable guidelines shall be framed and issued by the President of the Appellate Tribunal within shortest reasonable time and followed strictly by all the Benches of the Tribunal. In the meanwhile (emphasis, by underlining, supplied by us now), all the revisional and appellate authorities under the Income-tax Act are directed to decide matters heard by them within a period of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 2020 . It has been an unprecedented situation not only in India but all over the world. Government of India has, vide notification dated 19th February 2020, taken the stand that, the coronavirus should be considered a case of natural calamity and FMC (i.e. force majeure clause) maybe invoked, wherever considered appropriate, following the due procedure . The term force majeure has been defined in Black s Law Dictionary, as an event or effect that can be neither anticipated nor controlled When such is the position, and it is officially so notified by the Government of India and the Covid-19 epidemic has been notified as a disaster under the National Disaster Management Act, 2005, and also in the light of the discussions above, the period during which lockdown was in force can be anything but an ordinary period. 10. In the light of the above discussions, we are of the considered view that rather than taking a pedantic view of the rule requiring pronouncement of orders within 90 days, disregarding the important fact that the entire country was in lockdown, we should compute the period of 90 days by excluding at least the period during which the lockdown was in f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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