By Puloma Dalal, Jayesh Gogri, Chartered Accountants
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Issue of classification – whether lead manager’s services and underwriting services can it be considered as one single service when provided by the same service provider? Bar of limitation is applicable as the issue was open at the time of the audit and no objection was raised thereon. No liability arises under reverse charge mechanism in relation to services provided prior to 18-04-2006.
Facts: Appellant appointed J. P. Morgan Securities Ltd., UK as the lead manager for issuance of Foreign Currency Convertible Bonds (FCCB) and also the underwriter of the issue. The services were provided by a person outside India to a person in India and hence the provisions of reverse charge mechanism were attracted. Audit was conducted agreeing that lead manager’s services were covered under “Banking & Financial Services” and underwriting services were covered under “Underwriting Services” and thus service tax was payable on “Banking & Financial Services” under reverse charge mechanism and it was paid by the Appellant. Later, on investigation conducted by the Director General of Anti-Evasion, New Delhi it was contended by the department that both the services were provided as bundled services and thus, service tax was applicable on the entire amount under reverse charge mechanism under the category of “banking & financial services”. Further, the respondent also filed an appeal in the matter of levying service tax under reverse charge on services received from outside India prior to 18-04-2006.
Held: Dispute arises since under reverse charge mechanism, “banking & financial services” is liable to tax in respect of the location of the recipient (in the present case India) and “underwriting services” is liable to tax if performed in India (in the present case outside India) and it is the question of classification. It was held that underwriting services cannot be classified as banking & financial services as (a) underwriting services are incidental to lead manager’s services as both are totally different in nature and the remuneration is also separately fixed for both the services, (b) underwriting services are not to be provided only by the merchant bankers and thus to be considered as composite service, (c) dominant nature of the service is not the lead manager’s service and (d) underwriter’s service was covered since 1998 before the introduction of banking & financial services and hence as per section 65A(c) of the Finance Act, 1994 it will be considered as underwriter’s services only. Since underwriter’s service is subjected to tax u/s. 66A of the Act and considering that it is performed outside India, in terms of Rule 3 of the Import Rules, service tax cannot be levied.
Even on the ground of limitation, Appellant’s case is strong as the department was aware of the issue during the audit and initially the department had agreed upon the contention of the Appellant and the tax paid under the head lead manager’s service was reflected in the ST3 returns also.
Further, the services relating to FCCB were provided prior to 18-04-2006. The department’s appeal for levy of tax on services prior to 18-04-2006 would not survive in view of the ratio laid down in 2008-TIOL-633-HC-Mum-ST Indian National Shipowners Association vs. UOI which was affirmed by the Supreme Court.
