Refund of service tax

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

24 May 2013 Can service tax paid on Chit Business be refunded in light of judgment of Delhi High Court in the case of Delhi Chit Fund Association Vs Union of India Dt 23-04-2013. If Yes, please let me know the process.

C A S.S.Agarwal, M.Com.,LL.B,

C A S.S.Agarwal, M.Com.,LL.B, (Expert)
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14 July 2013 As per the judgement no Service tax is payable as it is based on mutuality. The judgement is reproduced as below:

THE HIGH COURT OF DELHI AT NEW DELHI
SUBJECT : FINANCE ACT, 1994
Judgment delivered on: 23.04.2013
W.P. (C) 4512/2012
DELHI CHIT FUND ASSOCIATION .......Petitioner
versus
UNION OF INDIA & ANR. .......Respondents
Advocates who appeared in this case:
For the Petitioner : Mr Venkatraman, Sr. Adv. with Mr Ravi Sikri, Mr Hari
Shankar, Mr Ayush Kumar, Advocates.
For the Respondent : Mr Rajeeve Mehra, ASG with Mr Mukesh
Anand, Mr Aditya Malhotra, Advcoates for R-1.
Mr Kamal Nijhawan, Sr. Standing Counsel for R-2.
CORAM:-
HON’BLE MR JUSTICE BADAR DURREZ AHMED
HON’BLE MR JUSTICE R.V.EASWAR
JUDGMENT
R.V.EASWAR, J
1. The short question which arises in this writ petition is whether the
provision of services in relation to conducting a chit business is a taxable
service for the purposes of section 65B(44) of the Finance Act, 1994 inserted
w. e. f. 1st July, 2012.
2. The petitioner is an association of chit fund companies based in Delhi.
By a notification No.26/2012 issued on 20th June, 2012, the Department of
Revenue, Ministry of Finance of the Government of India exempted: -
“the taxable service of the description specified in column (2) of the Table
below, from so much of the service tax leviable thereon under section 66B
of the said Act, as is in excess of the service tax calculated on a value which is equivalent to a percentage specified in the corresponding entry in column
(3) of the said Table, of the amount charged by such service provider for
providing the said taxable service, unless specified otherwise, subject to the
relevant conditions specified in the corresponding entry in column (4) of the
said Table, namely: -
Sl. No.
Description of taxable service
Percentage
Conditions
(1)
(2)
(3)
(4)
8
Services provided in relation to chit
70
CENVAT credit on inputs, capital goods and input services, used for
providing the taxable service, has not been taken under the provisions of the
CENVAT Credit Rules, 2004.
3. The petitioner prays that the notification should be quashed in so far
as it seeks to subject the activities of a business chit fund companies to
service tax to the extent of 70% of the consideration received for the
services. The contention of the petitioner is that there is no question of
exempting a part of the consideration received for the services in chit fund
business when the law provides that such services are not taxable at all in the
first place.
3. In order to appreciate the contention a few provisions have to be
noticed. The Finance Act, 1994 provided for the levy of service tax in India
for the first time. It received several amendments in the course of the time.
Originally service tax was levied on the basis of a selective approach; in
other words certain taxable services were specified in section 65(105) of the
said Act and it was those services that were chargeable to service tax. A
drastic change was made w. e. f. 1st July, 2012 when the comprehensive
approach was sought to be introduced by the Finance Act, 2012. The tax
regime contemplated under the comprehensive approach was to treat all
activities as services chargeable to service tax, except those placed in the negative list or specifically exempted. This fundamental change was
brought about by defining “service” in section 65B(44) in the following
manner: -
“(44) "service" means any activity carried out by a person for another for
consideration, and includes a declared service, but shall not include—
(a) an activity which constitutes merely,—
(i) a transfer of title in goods or immovable property, by way of sale, gift or
in any other manner; or
(ii) such transfer, delivery or supply of any goods which is deemed to be a
sale within the meaning of clause (29A) of article 366 of the Constitution;
or.
(iii) a transaction in money or actionable claim;
(b) a provision of service by an employee to the employer in the course of or
in relation to his employment;
(c) fees taken in any Court or tribunal established under any law for the time
being in force.
Explanation 1.—For the removal of doubts, it is hereby declared that
nothing contained in this clause shall apply to,—
(A) the functions performed by the Members of Parliament, Members of
State Legislature, Members of Panchayats, Members of Municipalities and
Members of other local authorities who receive any consideration in
performing the functions of that office as such member; or
(B) the duties performed by any person who holds any post in pursuance of
the provisions of the Constitution in that capacity; or
(C) the duties performed by any person as a Chairperson or a Member or a
Director in a body established by the Central Government or State
Governments or local authority and who is not deemed as an employee
before the commencement of this section.
Explanation 2.—For the purposes of this clause, transaction in money shall
not include any activity relating to the use of money or its conversion by
cash or by any other mode, from one form, currency or denomination to
another form, currency or denomination for which a separate consideration
is charged.
Explanation 3.—For the purposes of this Chapter,—
(a) an unincorporated association or a body of persons, as the case may be,
and a member thereof shall be treated as distinct persons;
(b) an establishment of a person in the taxable territory and any of his other
establishment in a non-taxable territory shall be treated as establishments of
distinct persons.Explanation 4.—A person carrying on a business through a branch or
agency or representational office in any territory shall be treated as having
an establishment in that territory;”
4. Section 66B provided for the charge of service tax on and after the
Finance Act, 2012. That section is as follows: -
“66B.Charge of service tax on and after Finance Act, 2012 – There shall be
levied a tax (hereinafter referred to as the service tax) at the rate of twelve
per cent on the value of all services, other than those services specified in the
negative list, provided or agreed to be provided in the taxable territory by
one person to another and collected in such manner as may be prescribed.”
5. A negative list of services which were not taxable was set out in
section 66D. It is not necessary to reproduce the said list as it is not the
petitioner’s case that the services rendered by the chit companies are
included in the negative list and hence not taxable. Section 66E contains a
list of “declared services” which are subjected to service tax by virtue of
section 65B(44) which is quoted above. There are other provisions relating
to valuation of the taxable services, registration, furnishing of returns,
assessment and recovery, penalties, etc, which are not relevant for the
purpose of the present writ petition.
6. It is necessary to give a brief account of the operations of a chit fund
business. Supposing 50 persons come together to organise a chit. Let us
further suppose that each of them undertake to contribute `1,000/-. The total
chit amount would be `50,000/-. Let us further suppose that the fund would
operate for a period of 50 months. Thus the member subscribers and the
number of months for which the chit would operate would be the same. In
this example at the end of each month, an amount of `50,000/- (`1,000/- x
50) would be available in the kitty of the chit fund. The said amount would
be put to auction and those subscribers who are interested in drawing the
money early because of their needs may participate in the auction. The
successful bidder who is normally the person who offers the highest discount
is given the chit amount. For example if there are three bidders offering to
take the chit of `50,000/- for `40,000/-, `37,500/- and `35,000/- respectively,
the chit would be given to that subscriber who is willing to take it for
`35,000/- since he has offered a discount of `15,000/-. This leave a balance
of `15,000/- (`15,000 – `50,000) in the kitty. The amount of `15,000/- which
represents the discount which the successful bidder has foregone becomes
the dividend which is to be distributed to all the subscribers after deducting a fixed amount representing the commission payable to the “foreman”. A
foreman is normally a person who organises the auction and conducts the
proceedings. If in the example given above, the commission payable to the
foreman is fixed at 5%, then after deducting `2,500/- (5% of `50,000/-, the
chit amount) the balance of `12,500/- would be distributed among all the 50
subscribers so that each would get `250/-. This amount of `250/- can be set
off by the subscribers against the second month’s installment of `1,000/-
payable by him and he can give only `750/-. The auction would be repeated
in the subsequent months and the same procedure is followed. Any
subscriber who delays the bidding or does not bid at all stands to gain the
maximum discount. The chit is thus somewhat like a recurring deposit with
the bank. There is no bar on the foreman of the chit fund also participating
as a subscriber.
7. The business of chit funds is strictly regulated by the Chit Funds Act,
1982. It contains detailed provisions relating to registration of chits,
commencement and conduct of chit business. Rights and duties of foreman,
rights and duties of the subscribers, termination of chits, meetings of general
body of subscribers, provisions relating to winding up, disputes and
arbitration and other miscellaneous provisions. Suffice to note that section
11 recognises that a chit business can be known by several names such as
chit, chit fund, chitty, kuri, etc. Dealing with the Chit Funds Act, the
Supreme Court in Sriram Chits & Investment (P) Ltd. vs. Union of India :
AIR 1993 SC 2063 has laid down the following propositions: -
(a) The Act, in pith and substance, deals with special contract and
consequently falls within entry 7 of list III of the 7th Schedule to the
constitution of India;
(b) A chit fund transaction is not a case of borrowing, nor is it a loan
transaction. If a subscriber advances any amount, he does so only to one of
the members;
(c) The funds of the chit fund belong to the entire lot of subscribers;
(d) The amounts are in deposit which the stake holder only holds a trust
for the benefit of the members of the fund;
(e) The foreman acts only as a person to bring together the subscribers
and he is subject to certain obligations with a view to protecting the
subscribers from any mischief or fraud committed by him by using the
position;
(f) Commission is payable to the foreman for the service rendered by him
as he does not lend money belonging to him.8. The precise question that arises for consideration in this writ petition
is whether the services rendered in connection with a chit business are
taxable services or not. The contention advanced on behalf of the petitioner
is based on the definition of the word “service” in section 65B(44). The
contention is that the definition excludes an activity which constitutes
“merely a transaction in money or actionable claim”; a chit business is a
transaction in money and it is obvious that a transaction in money by itself
cannot be a service in the sense of being an activity carried out by any
person for consideration. Therefore, there can be no question of excluding
what is not a service from the definition and that being so, what stands
excluded is a service rendered in relation to a transaction in money and chit
business being a transaction in money, the services rendered in connection
with the said business is excluded from the definition. This argument is
sought to be supported by reference to Explanation 2 to Section 65B(44).
According to the petitioner, this Explanation makes it clear that an activity
relating to the use of money or its conversion from one form, currency or
denomination to another form, currency or denomination shall not be treated
as a transaction in money and, therefore, will be chargeable to service tax
and by holding so it seeks to put at rest any ambiguity that may arise in the
interpretation of the definition of “service”. The only service in relation to a
transaction in money or actionable claim, which is taxable, according to the
Explanation, being the activity relating to the use of money or its conversion
from one form, currency or denomination to another form currency or
denomination for which a separate consideration is charged, it clearly
implies that all other services rendered in connection with a transaction in
money or actionable claim, including the services rendered by the foreman
of a chit business, stand excluded from the definition. It is accordingly
submitted that the commission received by the foreman or any other person
conducting the chit business is not subject to service tax. These contentions
are stoutly controverted on behalf of the respondents.
9. We shall first address the argument that what is excluded is only a
service in relation to an activity which constitutes merely a transaction in
money or actionable claim. The basis of this argument is the principle that a
provision cannot exclude something from the definition, unless it is included
in the definition. Section 65B(44) defines “service” as any activity carried
out by a person for another for consideration. This implies, as pointed out
on behalf of the petitioner, that there are four elements therein: the person who provides the service, the person who receives the service, the actual
rendering of the service and, lastly, the consideration for the service. The
opening words of the definition consist of the above four aspects or
characteristics and unless all the four are present, the activity cannot be
charged with service tax. A mere transaction in money or actionable claim
cannot under the ordinary notions of a service be considered as a service,
neither can it be considered as falling within the first part of the definition
because it lacks the four constituent elements which are required by the
definition. In a mere transaction in money or actionable claim, no service is
involved; there is just the payment and receipt of the money. The word
“money” is defined in section 65B(33) in the following manner: -
“(33) “money” means legal tender, cheque, promissory note, bill of
exchange, letter of credit, draft, pay order, traveler cheque, money order,
postal or electronic remittance or any similar instrument but shall not include
any currency that is held for its numismatic value;
10. A mere transaction in money represents the gross value of the
transaction. But what is chargeable to service tax is not the transaction in
money itself since it can by no means be considered as a service. The
exclusionary part of the definition of the word “service” however refers to
“an activity which constitutes merely a transaction in money or actionable
claim”. Since a mere transaction in money or actionable claim cannot under
the common notions of a service be considered as a service by any stretch of
imagination, it is necessary to examine what could have been the intention of
the legislature in excluding it from the definition. The obvious answer is
that it is not the mere transaction in money or actionable claim that is sought
to be excluded from the definition but what is sought to be excluded is any
service rendered in connection with a transaction in money or actionable
claim. But the difficulty which could arise in this line of reasoning can be
that the language of the exclusionary part of the definition in terms refers to
the very activity which constitutes a transaction in money and contains no
reference to any service rendered in connection therewith. The possible
answer to this conundrum is that the legislature deemed it fit, ex abundanti
cautela, to exclude an activity which constitutes merely a transaction in
money, which even otherwise could not have been considered as a service in
any sense of the word. This however appears to us to be a far-fetched
answer. A clue to a proper interpretation of the exclusionary part of the
definition is embedded in Explanation 2. This Explanation carves out an
exception to the exclusionary part of the definition by providing that any
activity relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination to another form,
currency or denomination for which a separate consideration is charged shall
not be considered as a transaction in money. Therefore, if the only activity,
for which a separate consideration is charged, and which cannot be
considered as a transaction in money is the activity mentioned in the
Explanation, and service tax would accordingly be charged on the
consideration received in respect of such an activity, then it follows that all
other cases of transaction in money shall stand excluded from the charge of
service tax, including the consideration charged for the services of a foreman
in a chit business. The Explanation, therefore, seems to offer a clue to the
problem which appears to us to be a creation of the very confounding
manner in which the definition is found to have been drafted. However, we
have to make sense of what we have.
11. It is the function of an Explanation to explain the meaning and effect
of the main provision to which it is an Explanation and to clear up any doubt
or ambiguity in it. Ultimately, however, it is the intention of the legislature
which is paramount and a mere use of a label cannot control or deflect such
a function. This is the principle laid down by a Constitution Bench of the
Supreme Court in Dattatraya Govind Mahajan & Ors. vs. State of
Maharashtra & Anr. : (1977) 2 SCC 548. In S. Sundaram Pillai, etc. v. P.
Lakshminarayana Charya and Ors. : AIR 1985 SC 582, a three-Judge Bench
of the Supreme Court considered the object of an Explanation and observed
as follows: -
“52. Thus, from a conspectus of the authorities referred to above, it is
manifest that the object of an Explanation to a statutory provision is –
(a) to explain the meaning and intendment of the Act itself,
(b) where there is any obscurity or vagueness in the main enactment, to
clarify the same so as to make it consistent with the dominant object which it
seems to subserve,
(c) to provide an additional support to the dominant object of the Act in
order to make it meaningful and purposeful,
(d) an Explanation cannot in any way interfere with or change the
enactment or any part thereof but where some gap is left which is relevant
for the purpose of the Explanation, in order to suppress the mischief and
advance the object of the Act it can help or assist the Court in interpreting
the true purport and intendment of the enactment, and
(e) it cannot, however, take away a statutory right with which any person
under a statute has been clothed or set at naught the working of an Act by
becoming an hindrance in the interpretation of the same.”Moreover, “every clause of a statute should be construed with reference to
the context and other clauses of the Act, so as, as far as possible, to make a
consistent enactment of the whole statute or series of statutes relating to the
subject matter”, as held in Canada Sugar Refining Company Vs. R. (1898)
A.C. 375, a principle that is frequently applied in case of difficulty in
construing a statute. In N. T. Veluswami’s case (AIR 1959 SC 422), a threejudge Bench of the Supreme Court speaking through T.L. Venkatarama
Aiyar, J, held as follows :
“……… It is no doubt true that if on its true construction, a statute leads to
anamolous result, the courts have no option but to give effect to it and leave
it to the legislators to amend and alter the law. But when on a construction
of a statute, two views are possible, one which results in an anamoly and the
other, not, it is our duty to adopt the latter and not the former, seeking
consolation in the thought that the law bristles with anamolies”.
12. If these rules of interpretation are applied, it appears to us that even if
it is assumed that there is an ambiguity or doubt in the interpretation of the
exclusionary part of the definition of the word “service” and as to what types
of activities in relation to a transaction or money or actionable claim are
exempted from the levy of service tax, that doubt or ambiguity gets cleared
up on a careful examination of the implications of the Explanation 2. The
Explanation has been enacted only “for the purposes of this clause” and
since it is placed below clause (c), strictly speaking it is relevant only for the
purpose of the aforesaid clause. However, clause (c) refers to fees taken in
any Court or Tribunal established under any law for the time being in force.
It is obvious that Explanation 2 can have no relevance to this clause. If we
refer to clause (c) immediately below which the Explanation is placed, we
find that the said clause refers to duties performed by any person as a
Chairperson or a Member or a Director in a body established by the Central
Government or State Governments or local authority and who is not deemed
as an employee before the commencement of this section. It is obvious that
the Explanation can have no relevance to this clause also. In these
circumstances we are constrained to hold that Explanation 2, when it says
“for the purpose of this clause”, the reference can only be to clause (a) and
more precisely to sub-clause (iii) which refers to “a transaction in money or
actionable claim”. Be that as it may, if the exclusionary part of the
definition [i.e., clause (a)(iii)] is construed on its own terms there would be
an anamoly in as much as what was not a “service” in the first place within
the opening words of Section 65B (44) would fall to be excluded –