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MAPRANAM FINANCE AND INVESTMENT COMPANY (P) LTD vs UOI and Others (High Court)

Whether the activity  of the Chitty establishments  was constituting any  'cash management' to attract service tax. Held, yes.

Service Tax on Chitty business - Consequence of the amendment to Section 65 (12)(a)(v) of the Finance Act 1994 in the year 2007, deleting the words "but does not include cash management" and the effect of the subsequent Circular bearing No.  6/7/2007-ST dated 23/08/2007 issued by the CBEC of the Ministry of Finance, New Delhi. As a result of the said amendment, the petitioners, who are running chitty business in the State of Kerala, were sought to be brought within the purview of the Service Tax Net which is under challenge.

Whether petitioner liability to take registration for the purpose of Service Tax and as to the liability, if any to remit the tax as envisaged under Section 66 of the Finance Act, 1994. The petitioners contend that no tax liability was there, ever since the enactment of the Finance Act, 1994, which by itself shows that there was no intention to impose Service Tax upon the entities like the petitioners as they stand apart as a different class, who according to the petitioners are not rendering any service. It is also stated that, by virtue of the definition of the terms "banking and other financial services" as defined under Section 65 (12) of the Finance Act and "taxable services" as defined under Section 65(105)(zm), they do not pursue any activity, which is taxable and stood excluded from the purview of tax net. Merely by deletion of some words under Section 65(12)(a)(v) by virtue of Amendment Act in the year 2007, the tax net cannot be widened to bring in the petitioners, making them liable for service tax. It is for the first time in the year 2007, that the petitioners were sought to be included in the tax net, that too, on the basis of Ext.P2 Circular (in W.P.(C) No.2822/2008), which cannot by itself take the place of a charging provision, in the absence of any specific provision in the statute. The Circular cannot override the provisions of the statute, forms the basic contention.

Ext.Pl Circular dated 23/08/2007 (in W.P.(C) No.32097/2007) is pressed into service to contend that the petitioners' institution stands outside the purview of tax net by virtue of the clear exclusion set forth in Section 65(12)(a)(v) of the Finance Act, 1994 and as such, they could not have been taxed for the first time on the basis of Ext.Pl Circular (in W.P.(C) No.32097/2007), which according to the petitioners is on the basis of some astrological assumption and not based on any authority. It is also contended that  tax cannot be levied without the authority by law, as envisaged under Article 265 of the Constitution of India. It is  further contended that the issue, particularly with regard to the sustainability of Ext.P2 Circular (in W.P.(C) No.2822/2008) has been considered by a Division Bench of Andhra Pradesh High Court and the contention raised by the petitioners similarly situated like the petitioners herein, was upheld and the said Circular has already been set aside as per the decision reported in A.P.Federation of Chit Funds v. Union of India (2009 (13) SRT 350 ( A.P).

The respondents have filed counter affidavit in most of the cases seeking to sustain the Circular and the steps taken .to impose the 'Service Tax. It has been asserted that Ext.P2 Circular (in W.P.(C) No.2822/2008) is only 'clarificatory' in nature, with regard to the effect of the amendment brought about in the year 2007, to Section 65(12)(a) (v) of the Finance Act 1994. It is not on the basis of Ext.P2 Circular (in W.P.(C) No.2822/2008) that the tax liability was sought to be imposed, but, by virtue of the amendment of the statutory provision. It is stated that tax can be imposed either 'by incorporation' or 'by deletion' of a provision in the existing statute, to the requisite extent, which in fact has been brought about as per the amendment in 2007. The effect of such amendment has alone been explained in the Circular and as such, the contention of the petitioners that the liability to pay tax has been brought about by virtue of the Circular is thoroughly wrong and misconceived. It is also slated that the very Finance Act, 1994, vide Section 65(45) stipulates that 'financial institution' has the same meaning as assigned to it under Section '45-1' of the -Reserve Bank of India Act, which takes in; managing, conducting or supervising as Foreman, Agent or in any other capacity of Chits, Kuries as defined in any law which is for the time being in force in any State or any business, which is similar thereto [Clause (c)(v)].  It was since the unamended Section 65 (12)(a)(v) of the Finance Act, 1994 clearly excluded 'cash management "from the purview of the taxable sweep that Ext. Pl Circular (in W.P.(C) No.32097/2007) was issued by the RBI making it clear that the activity of running a business in Chitties clearly amounts to cash management and as such, stood excluded from the purview of taxation. Pursuant to the amendment made to the very same provision, by deleting the words "but does not include cash management", the exclusion given disappeared, thus bringing the Chitty business as well within the taxable net; which alone has been clarified vide Ext.P2 Circular (in W.P.(C)No, 2822/2008. As mentioned herein before, there is no factual controversy in these cases and the issue is purely a legal question.

Hon`ble high court observed that, the contention for the petitioners that, merely by deletion of some words from the existing provision, no taxable instance can be brought about which on the other hand has to be effected by a positive incorporation. This Court finds it difficult to accept the said proposition.   As made clear by the Apex Court in the decision reported in Kasinka Trading and another Vs. Union of India and another [1995 (1) SCC 274], power to tax very much involves the power to amendment as well, either by incorporation or by deletion.  When the existing statute does not provide for taxing a particular instance, it can be amended by way of positive incorporation. Similarly, when the statute reckons the power to tax a particular instance but gives some exclusion, as a result of which tax cannot be realised (in so far as the exclusion stands), the moment   when  the   exclusion  clause  is  deleted   by  virtue of an amendment, the barrier is gone and it very well comes within the taxable net.  The point to be considered is, whether the amendment brought to the Finance Act 1994 in the year 2007 is to the said extent, so as to sustain the taxation.

Whether the  activity  of the Chitty establishments was constituting any 'cash management'  to attract the tax got attention of the Central Board of Excise and Customs, who sought for clarification of the Reserve Bank of India, by virtue of the pivotal role of the RBI under the RBI Act in Economic Affairs and also by virtue of Section 65 (45) of the Finance Act 1994, wherein the word 'financial institution' has been assigned the same meaning as defined under Section 45 T of the RBI Act 1934. After considering the matter, the RBI gave an opinion that the transaction well amounted to 'cash management' and it was in the said circumstance, that Ext.Pl (in W.P.(C).No.32097/2007) Circular was issued in the year 2007 by the Board (CBEC), letting all known, that Chitty transaction did not attract any Service Tax, as 'cash management' was specifically excluded under Section 65 (]2)(a)(v) of the Finance Act 1994.

Admittedly, the words "but does not include cash management" came to be deleted from Section 65 (12)(a)(v) as per the amendment brought about in the year 2007, whereupon the sweep of the provision got widened and all forms of fund management came to be reckoned for the purpose of taxation. In other words, when the unamended provision provided to impose tax in respect of service involving all  forms of fund management, exemption was given to services involving, 'cash management', which rescued the petitioners earlier. But as per the amended provision, deleting the words "but does not include cash management", the term "all forms of fund management" came to be revitalized with full vigour and wider reach. This being the position, the legal provision, part of which was 'dormant' because of the exclusion under Section 65 (12)(a)(v), came to be 'live' and potent pursuant to deletion of the exclusion clause.  As such, the respondents are justified in  contenting that the amendment of the statute in the year 2007 by deleting the word "but does not include cash management" to Section 65 (12)(a)(v) has brought about the tax liability upon the Chitty transactions; which alone has been   clarified by Ext.P2 Circular (in W.P.(C).No.2822/08) and it was never brought about for the first time as per Ext.P2, on its own. This Court finds that, the scope of the term "all forms of fund management" with exemption to the 'cash management' and the effect of deletion of the relevant portion revitalizing the partly dormant clause of "all forms of fund management", was not properly highlighted or caused to be considered by the Division Bench of the High Court of Andhra Pradesh, while passing the verdict in 2009 (13) STR 350(AP).

Further it was observed that, the concept of Chitty, the procuration and disbursement of  the  fund, nature of   liability to affect future installments, rights and liberties of the Foreman to get commission for the service rendered, the dividend distributable among the subscribers, (based on the discount facilitated on prizing the Chits) etc., have been discussed  in detail  by the Apex  Court  in  M/s.Shriram  Chits & Investments Pvt. Ltd., Vs. Union of India and others, (AIR 1993 SC 2063),   pointing out that, it is not a money lending business and that there is 'no debtor-creditor relationship' between the Subscriber and the Foreman. Collection of subscriptions from the different subscribers to the common fund, facilitating-disbursement of the prized amount and distribution of the dividend after realizing the commission, forms an essential feature of management of the concerned' fund. When it is not a loan, but a fund procured in the manner as specified therein to be dealt with, catering to the need of the Subscriber, it essentially is part of management of the fund, though the fund is generated and disbursed without much time gap. This however, cannot tilt the balance in any manner, as to the nature of the fund, more so, when, all the traits and characteristics of ‘fund management’ are very much there.

In the case of  M/s. Shriram  Chits & Investments Pvt. Ltd., Vs. Union of India and others, as reported in AIR 1993 SC 2063, wherein if was held that: "the foreman  does  not  lend  his  money to constitute any  money lending   business and that  the  dominant   purpose  of  the  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".

Observing the Apex court judgment (Supra) hon`ble high court held that true, the provisions in a  'taxation  statute' have to- be interpreted strictly, 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 Section 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 fund management become taxable. It has to be rioted 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.

In the light of the definition of the terms, 'Banking and Financial Institutions under Section 65(12)(a)(v), "Taxable Service" under 65(105)(ZM) and the reference made to Section 45-1, of the RBI Act under Section 65 (45) of the Finance Act 1994, defining the term 'Financial Institution' as inclusive of 'Chitty business' as well, under sub Clause (c)(v).

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Category Service Tax, Other Articles by - Rupesh Srivastava 



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