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Without client-custodian relationship and without entrusting of securities for safe keeping, amounts received from Reserve Bank of India cannot be considered as custodial services taxable under Banking and Financial services.
Facts
The Appellant Bank acts as an “Agency Bank” for the sale of bonds to the public issued by the Reserve Bank of India. The Bank maintains the details of the subscriber, pays out interest and redeems the bond at the end of the tenor. In return, they are remunerated by the Reserve Bank of India by way of a brokerage for effecting the sales to the subscribers and a commission for the handling of sales, payment of interest and redemption value and for keeping Accounts. The Appellant has paid service tax on brokerage and commission received after 01/07/2003 under “business auxiliary service”. A Show Cause Notice was issued proposing levy of service tax under Banking and Financial services from 16/07/2001 alleging that the Bank carried out securities broking and also rendered custodial service by keeping accounts of the subscribers. The original authority confirmed the demand and the Appellant is in appeal.
Held:
The Tribunal noted that custodial services in relation to securities are primarily the safekeeping of the securities of a client and the services incidental thereto. The relationship of the Appellant with the Reserve Bank of India exists because of their potential of reaching out to a vast number of subscribers. The Reserve Bank of India is not a client as far as the securities are concerned because they are not the owners of the bonds. Further, it was also noted that a custodian for a fee performs incidental services viz. receiving the security, collecting interest or dividend on behalf of the investor and obtaining redemption value on instruction from the investor. However, in the present case the Appellant Bank itself pays the interest and the redemption value on behalf of the Reserve Bank. Thus, the bond subscriber only pays the bond price to the Bank and there is no client-beneficiary relationship with the bond subscriber. The Tribunal held that without client custodian relationship and without entrusting the securities for safekeeping, the services do not merit classification under Banking and Financial services and were liable under Business Auxiliary service only with effect from 01/07/2003.
