By Vinay Jain, Chartered Accountant, & Sachin Mishra, Advocate

1. Whether the activity of management and maintenance of industrial plots under MID Act, 1961 by MIDC is leviable to service tax under Finance Act, 1994? Whether the aforesaid activity undertaken by the MIDC is statutory function and not liable to service tax?

Facts & Pleadings: M/s MIDC (herein after referred to as “the Respondents”) are established under Maharashtra Industrial Development Act, 1961. The purpose of its formation is to promote and assist in establishment, growth and development of industries in the State of Maharashtra. The Respondents are rendering several services such as management and maintenance of the industrial area developed by it and are also collecting certain charges from the plot holders.

According to the Appellant i.e. the department, the services provided by the Respondents to the plot holders are covered under the category of ‘management, maintenance and repairs’ services under section 65 (64) of Finance Act, 1994. The Appellant has further alleged that the activity performed by the Respondents is not a part of its statutory functions and hence, the charges collected by the Respondents for performing/ rendering such services is leviable to service tax under the provisions of Finance Act, 1994.

The Respondents have denied the allegations of the Appellants by relying upon the decisions of Apex Court in the case of Ramtanu Co-operative Housing Society and Anr. Vs. State of Maharashtra and Ors. AIR 1970 SC 1771 and Managing Director, Haryana State Industrial Development Corporation and Ors. Vs. Hari Om Enterprises and Anr., 2009 16 SCC 208 to submit that the Respondents are a wing of the State Government which performs statutory functions and hence they are eligible for exemption under Circular No. 89/7/2006 dated 18.12.2006.

Judgment: The Honorable High Court agreeing with the contentions of the Respondent has held that the activities such as management and maintenance of the industrial area are statutory obligations of the Respondents as provided under Section 14 of the MID Act, 1961. Further, relying on the two decisions of Hon’ble Supreme Court mentioned above and on CBEC Circular dated 18.12.2006, the Hon’ble High Court has held that the Respondents are acting as a wing of the government. Thus, the Respondents are eligible for exemption to public authorities provided under Circular No. 89/7/2006 dated 18.12.2006. The Hon’ble court also imposed cost on the department for unnecessary involving MIDC in such litigation.

Commissioner of Central Excise, Nashik Vs. Maharashtra Industrial Development Corporation, Mumbai High Court order dated 23.8.2017 in Central Excise Appeal No. 164 of 2015

Maharashtra Industrial Development Corporation

2. Whether the collection agency services rendered by the assignor of debt in a securitization transaction be leviable to service tax under the category of ‘Business Auxiliary Services’?

Facts & pleadings: M/s Sundaram Finance Limited (hereinafter referred to as “SFL”) is a non-banking financial company. SFL is in the business of extending loans to various clients for purchase of vehicle etc. The loans are paid back on regular EMI basis. SFL entered into agreement, with a Trust/Special Purpose Vehicle (herein after referred to as “SPV”) to whom SFL has sold these loan receivables. Simultaneously, SFL also entered agreement with SPV which mandate SFL to collect all these loan receivables on the fixed periodicity and deposit the same with SPV. For such operation of receiving EMI payments and remitting the same to SPV, SFL is paid a consideration called as "Securitization Service Fee".

According to the department, the activity of collection of receivables which are mandated as per the agreements and entitles SFL "Securitization Service Fee" is clearly an activity which is incidental or auxiliary to the support service relating to billing, collection, recovery of cheque, remittance of amount and will be correctly liable to service tax under the tax entries 'Business Auxiliary Service' as the same will fall under clause (iv) of Section 65 (19) prior to 10.9.2004. Thereafter, it will fall under clause (vi) read with clause (vii) of the said tax entry.

Judgment: The Hon’ble CESTAT while rejecting the claims of the Revenue has held that the contractual arrangements between SFL & the SPV is on principal to principal basis and the obligation to collect the cheque and deposit as per the schedule of agreements is nothing but an obligation in pursuance of the main agreements of upfront sale of future receivables. The Hon’ble Tribunal has further held that the cheques and other bills collected by SFL are on their own account which are further passed on in terms of agreement with the SPV. Hence there is no tripartite arrangement between SFL, SPV and the customers. Even in case of non-collection of such amounts from borrower, SFL must discharge the amount due to SPV, from their resources. This will only indicate that the transaction is a financial arrangement on principal to principal basis. In other words, the collection activity undertaken by the SFL is merely a condition of the main contract and not a separate activity for consideration and hence, the activity will not be classifiable under the category of Business Auxiliary Service.

CCE & ST, LTU, Chennai vs. Sundaram Finance Ltd., CESTAT, Chennai, decided on 16.11.2017 in the Final Order dated 42948-42949/2017

Sundaram Finance Ltd.

Note: The Whole decisions can be downloaded from the CTC website under Knowledge Centre.

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