@JUDGMENTTAG-ORDER
S. Vaidyanathan, J@mdashChallenging the validity of the Notification No. 27/2008-Service Tax, dated 27.5.2008 issued by the second respondent, in and by which, the services provided in relation to chit, have been defined and thereby made the service rendered by chit fund companies/firms are taxable service, the petitioner has come forward with the present writ petition.
2. The petitioner is an association of chit fund companies based in Trichy. The brief case of the petitioner is that the service tax was first introduced by the Parliament in 1994 by enacting Chapter V in the Finance Act, 1994 (in short, on rendition of service by the provider of service to the receiver. Section 65(105) of the Act contains the list of taxable services. From time to time, number of services were added by way of insertions in the said section by way of notifications. The Finance Act, 2001 introduced a new category of taxable service - '' banking and other financial services'' by inserting clause (zm) in Section 65(105) of the Act. Later the term ''banking and other financial services'' was defined by the Parliament by inserting Section 65(12) of the Act, wherein, only "asset management" was included and "cash management" was not included. After the ''banking and other financial services'' became a taxable service, the Revenue department started demanding the chit fund companies/firms to pay service tax on the foreman''s commission earned by them on the ground that clause (v) of Section 65(12) made all forms of fund management taxable. When the matter took up to the Reserve Bank of India, by Circular No. 41/4/2002, dated 15.3.2002, it was clarified by the RBI that chit fund companies/firms do not manage any fund and thereby, the service rendered by the chit funds will not fall in the category of taxable service as defined in Section 65(72)(zm) of the Act. However, later the Parliament by the Finance Act, 2007, amended the above definition of ''banking and other financial services'' by deleting the words "but does not include cash management" from clause (v) of Section 65(12) of the Act. According to the second respondent, "cash management service" has become a taxable service by virtue of the said deletion. The grievance of the petitioner is that the second respondent has patently misquoted the clarification issued by the RBI. With the objective of making the chit fund companies/firms liable to pay service tax, knowing full well that the Act does not contain any provision to make the service rendered by the chit fund companies/firms taxable.
3. According to the petitioner, the second respondent issued the impugned notification, widening the scope of Section 65(12) of the Act in the guise of granting partial exemption to the services provided in relation to chits, by defining the term ''chit'' in the said exemption notification which term is not found anywhere in the Act as amended. By virtue of the impugned notification, the second respondent has made the service rendered by chit fund companies/firms a taxable service. Therefore, the impugned notification issued by the second respondent, being an executive, is a colourable legislation inasmuch as the term ''chit'' has not been found place in the Finance Act. Hence the writ petition.
4. On behalf of the respondents, it is stated that the impugned notification is only a clarificatory in nature, with regard to the amendment brought to Section 65(12)(a)(v) of the Act and by virtue of the amendment of the statutory provision, the liability of tax on the service rendered by the chit fund companies/firms was fastened. The RBI has specifically clarified by the Circular, dated 23.8.2007 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 zone and the impugned Notification has only clarified the meaning of "Chit", which cannot be declared as ultra virus as contended by the petitioner. Hence, the respondents sought for dismissal of the writ petition.
5. Heard the learned counsel for the petitioner and the respondents and perused the entire record.
6. According to the learned counsel for the petitioner, the second respondent has no authority to issue the impugned notification granting partial exemption to the services rendered in relation to chits, where there is no such taxable service listed in the Act itself. He pointed out that by issuing the impugned notification, the second respondent has exceeded the power of delegated legislation vested in him by widening the scope of Section 65(12) of the Act by an executive act which cannot be permitted. He contended that the Act itself does not contain any provision to make the service rendered in relation to chit a taxable service, the second respondent cannot issue the impugned notification and thereby, making such service as taxable.
7. According to the petitioner, the role of chit operator is to bring together a group of persons, each person agreeing to contribute a certain sum of money every month/quarter to the chit and to pay the chit amount so contributed by the subscribers to the ''prized subscriber'' who is selected in accordance with the provisions of the Chit Fund Act, after appropriating an amount not exceeding 5% of the chit amount to meet the expenses of running the chit, remuneration, etc., as permitted by the Chit Fund Act, 1982. The subscribers neither pay the instalments in cash nor do the chit operators pay the chit subscribers and the payments to the prized subscribers are done only through cheques, except in the case of chits of very small denominations where the instalments are in the order of Rs. 500/- or Rs. 1000/- and in such cases also the Chit Funds Act mandates that the amount should be deposited in the specified bank account. Thus, it is contended by the petitioner that there is no cash management was involved in chit transaction since no chit operator manage any cash. Therefore, the service rendered by chit fund companies/firms cannot be termed as taxable service in order to levy service tax thereon.
8. The issue involved in this writ petition has been squarely covered by the decision of the Kerala High Court reported in "
"20. Coming to the scope of Ext. P2 Circular, it is settled law, that the Circular issued by the Departmental Authorities can never override the specific provisions of the statute. So also it cannot be disputed that no tax can be imposed without any authority of law, by virtue of Art. 265 of the Constitution of India and the taxing statute specifically enables the realization of such tax. The scope of S. 37(B) of the Central Excise Act and the effect of the Circular issued thereunder came to be dealt with in detail by the Apex Court as per decision reported in
21. Contention of the respondents seems that Ext.P2 (W.P (C) No. 2822/08) Circular by its own does not bring about any tax liability and that the liability actually flows down from the statute itself; particularly by virtue of the amendment made in the year 2007 to S. 65(12)(a)(v) whereby the words "but does not include cash management" were excluded. The contention of the petitioners is that the tax liability was brought for the first time, only as per the Circular, which position has been upheld by a Division Bench of the High Court of Andhra Pradesh and that the Circular has been set aside. This being the position, no liability can be mulcted upon the petitioners, demanding Service Tax in respect of Chitty transactions; contend the petitioners.
22. In view of the dispute as to the contents of the Circular and the Statute, it has become necessary to examine the same and to see whether the Circular attempts to dictate the law, providing for imposition of tax for the first time, without any enabling provision in the statute. On going through the contents of Ext. P2 (W.P(C) No. 2822/08) Circular, this Court finds that, the scope and object of the Circular is very much discernible therefrom, particularly Clause 8 which reads as follows:
Clause 8: "Views stated in the Circular reflect the interpretation of the law and the current practice of the department This Circular is not to be treated as part of law and does not override the legal provisions. The relevant statutory provisions must be referred to and they will provide".
23. Clause 8 proclaims in explicit terms that the Circular does not bring about any liability or such other instance by itself, where the statutory provision is sought to be referred to. The authority who issued the Circular was very much conscious and aware of the already existing statutory'' provisions and it is only in clarification of the same, [especially by virtue of the amendment brought about in the year 2007, deleting the words "but does not include cash management" from then existing provision of S. 65(12)(a)(v)], that the position was explained, making other clarifications as well, pointing out that tax liability will be there only in respect of Chitty transaction involving a ''consideration'' as in the case of the ''business chit funds'', while attracting no such tax in the case of ''simple chit funds''. In view of the unequivocal expression in Clause 8 of Ext. P2 (W.P (C) No. 2822/08) Circular, pointing out that the Circular is not to be treated as part of law and does not override the legal provisions and that the relevant statutory provisions must be referred to and they will prevail, no doubt could have arisen in the minds of anybody, as if the Circular had attempted to fix the tax liability for the first time without any regard to the statutory provisions. This Court finds that the Clause 8 in Ext. P2 (W.P (C) No. 2822/08) Circular was presumably not specifically brought to the notice or highlighted before the Division Bench of Andhra Pradesh High Court while rendering the decision in
24. Then, the question is whether there is anything in the statutory provision, so as to sustain the taxable instance. There is a 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
25. As mentioned hereinbefore, as per the unamended provision under S. 65(12)(a)(v), the ''banking and other financial services'' meant Asset Management, including Port Folio Management, all forms of Fund Management, Pension Management, Custodial, Depository and Trust Services but did not include ''Cash Management''. But for the last limb, the provision enabled taxation in respect of the above services as well, whereby a very wide sweep was provided so as to have included all forms of'' fund management'' providing an exception to ''cash management''. In view of the different terminology used, as to the ''fund management'' and ''cash management'' separately, the institutions involving ''cash management'' were never to attract any tax liability. The statute of course does not define the terms ''fund management'' or ''cash management'' and hence it was always possible to have a controversy, whether the activity pursued by the Chitty establishments was ''cash management'' to get an exclusion, although the provision very well took in all forms of fund management.
26. 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 R.B.I under the R.B.I Act in Economic Affairs and also by virtue of S. 65(45) of the Finance Act 1994, wherein the word ''financial institution'' has been assigned the same meaning as defined under S. 45T of the R.B.I Act 1934. After considering the matter, the R.B.I gave an opinion that the transaction well amounted to ''cash management'' and it was in the said circumstance, that Ext. P1 (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 S. 65(12)(a)(v), of the Finance Act 1994.
27. Admittedly, the words "but does not include cash management" came to be deleted from S. 65(12)(a)(v) as per the amendment brought about in the year 2007, where upon 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 S. 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 S. 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) (cited supra).
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33. Some of the petitioners herein have got a contention that their activity running the Chit funds does not constitute a ''service'' and that procuration of the fund from the different subscribers, putting it together, sharing the dividend, disbursement of the amount to the prized subscriber after realising the commission payable to the Foreman, etc., are only an ''incidental activity''. If it is an ''incidental activity'', what else is the ''main activity'' is not disclosed. The role of the Foreman has already been explained by the Apex Court in
In view of the above, this Court is of the view that the above decision will hold good to the present Writ Petition also. Accordingly, the Writ Petition fails and it is dismissed. No costs. Consequently, connected MPs are closed.
