CESTAT, MUMBAI BENCH
Commissioner of Service Tax, Mumbai-I
ICICI Bank Ltd.
AND C.J. MATHEW, TECHNICAL MEMBER
ORDER NOS. A/2793-2794/15/STB
APPEAL NOS. ST/349 AND 350/2011
AUGUST 6, 2015
S.S. Gupta, CA for the Appellant. Ms. P.V. Sekhar, Dy. Commissioner (AR) for the Respondent.
C.J. Mathew, Technical Member – M/s ICICI Bank Ltd has filed an appeal contesting Order-in-Original no. 04/ST-II/KKS/2011 dated 28th February 2011 in which Commissioner of Service Tax, Mumbai-II has confirmed service tax of Rs. 91,80,371/- for rendering of “banking and other financial services” valued at Rs. 15,83,07,200/- for the period from 16th July 2001 to 31st March 2004 and interest thereon while refraining from imposition of the penal provisions of Finance Act, 1994. Revenue, too, is aggrieved by the impugned order to the extent that “cum-tax” value has been adopted for determining the value of the taxable service and has filed its appeal for resolution of this issue. Both the appeals are taken up for disposal in this order.
2. The circumstances leading to the impugned order relate to relief and savings bonds issued by the Reserve Bank of India wherein M/s ICICI Bank acts as “agency bank” for sale of bonds to the public. In this role as “receiving office”, subscribers to the bonds, detailed in the Bond Ledger Account (BLA), are enrolled directly by M/s ICICI Bank or through brokers. This “receiving office” registers brokers, accepts forms and payments, issues certificates, maintains Bond Ledger Accounts, pays interest at specified intervals, redeems the bond at the end of tenor and pays brokerage. In return, they are remunerated by the Reserve Bank of India which, as per their agreement, is brokerage for sale effected directly by M/s ICICI Bank to subscribers and a separate commission for the handling of sale, payment of interest and redemption value and keeping accounts. On the brokerage, commission and service charge received from Reserve Bank of India, M/s ICICI has paid service tax of Rs. 40,76,137/- as provider of “business auxiliary services” for the period between 1st July 2003 and 31st March 2004. According to the show cause notice DGCEI/MZU/I&IS’A/12(3)16/2004 dated 17th October 2006 issued by Additional Director General, DGCEI, M/s ICICI Bank has carried out securities brokering for which commission of one per cent of total bond value has been remunerated by RBI and has also rendered custodial service by maintaining the Bond Ledger Account and services incidental thereto both of which were liable as “banking and other financial services” defined in section 65 (12) of Finance Act, 1994 and thus taxable under section 65(105)(zm) of Finance Act, 1994. It has been the contention of M/s ICICI Bank that they are liable to service tax under section 65(105)(zzb) of Finance Act, 1994 as providers of “business auxiliary service” defined in section 65 (19) of Finance Act, 1994 after its introduction on 1st July 2003 and that as “receiving office” they do not render “banking and other financial service”.
3. The original authority held that M/s ICICI Bank has sold bonds, which have been ascertained to be government securities, directly to subscribers and has earned brokerage thereon from the Reserve Bank of India which is liable to tax. It was also held that by issuing Certificate of Holding, by opening of new and maintenance of old Bond Ledger Accounts and by paying interest as well as redemption value, the “receiving office” has rendered custodial service liable to tax. In arriving at the conclusion that the claim of M/s ICICI Bank to be taxable as provider of “business auxiliary service” is not tenable, the original authority has attempted to distinguish between the two taxable services with reference to Section 65A of Finance Act, 1994, by holding that, in the context of the definition specifying “banking company”, that status of the organisation is the key to specificity that will determine classification under Section 65(12).
4. In the departmental appeal before us, it is contended that valuation of the taxable service on “cum-tax” basis relying on the decision of the Tribunal in Rampur Engineering Co. Ltd v. CCE  5 STT 386 (New Delhi – CESTAT) is flawed as the agreement between the Reserve Bank of India and M/s ICICI Bank has proceeded on the premise of non-taxability and, having thus excluded the tax component in the remuneration, contravenes the onus laid down by the Hon’ble Supreme Court in Amrit Agro Industries Ltd. v. CCE 2007 (210) ELT 183.
5. The learned Chartered Accountant appearing for M/s ICICI Bank submits that it is amply clear in the impugned order that there is no ground to invoke the extended period and hence the demand is barred by limitation of time. He further contended that Bond Ledger Account is merely a system of accounting of receipts and disbursements and that such an accounting arrangement cannot, ipso facto, change the status of the “receiving office” from an agency bank to that of custodial service provider because custodial service as defined in clause 2(e) of the SEBI (Custodian of Securities) Regulation, 1996 involves safe-keeping of securities on behalf of, and rendering services incidental thereto, a client; in the matter of relief bonds, there is no agreement for such service with the bond-purchaser who alone can be described as client. The “receiving office” has entered into an agreement only with Reserve Bank of India which is not the owner of the bonds and is, therefore, not a client. That the rendering of service to customers, and consideration thereof, is essential for determination of taxability wherever the taxable service refers to customer is canvassed by reference to decision of the Tribunal in Diebold Systems (P) Ltd v. CST  12 STT 346 (Chennai). Decision of the Tribunal in HDFC Bank Ltd. v. CST  57 taxmann.com 405/51 GST 495 (Mum. – CESTAT), Enam Securities (P.) Ltd. v. CST  58 taxmann.com 96/51 GST 427 (Mum. – CESTAT) and Canara Bank v. CST  22 taxmann.com 298 (Ahd. – CESTAT) were relied upon on behalf M/s ICICI Bank to claim the exclusion of matters relating to sovereign function, such as issue of government bonds, from service tax.
6. Learned Departmental Representative reiterated the grounds of appeal and intimated that the decisions cited on behalf of M/s ICICI Bank are in dispute before the Hon’ble Supreme Court. It was also contended that M/s ICICI Bank having issued Certificate of Holding to subscribers of relief bonds cannot claim to be anything other than Custodian.
7. We observe that the assessee has discharged service tax of Rs. 40,76,137/- for the period after 1st July 2003 on the entire remuneration earned from RBI with the introduction of tax on “business auxiliary service”. In connection with the demand on brokerage earned prior to 1st July 2003, this Tribunal has held in the cases cited by the learned Chartered Accountant that brokerage earned on sale of government securities is not taxable. The confirmation of tax of Rs. 31,92,050/- on brokerage earned for the period from 16th July 2001 to 30 June 2003 in the impugned order is, therefore, not sustainable. Hence, the sole issue for determination is whether the gamut of activities performed by M/s ICICI Bank after sale of bonds is tantamount to custodial services and, therefore, renders them liable to tax of Rs. 44,62,861/- on the handling commission, turnover commission and service charge for rendering of “banking and financial services” from 16th July 2001 to 31st March 2004 of which there is no dispute on Rs. 25,50,678/- already paid by assessee as taxable under “business auxiliary service” for the period from 1st July 2003 to 31st March 2004.
8. Without doubt, M/s ICICI Bank is a banking institution; however, to determine that section 65(12) finds favour over section 65(19) for classification of the activity relating to bonds solely on the ground that the assessee is a banking company fails to obtain statutory justification which attributes no less of primacy to the activity itself and the beneficiary of activity. All activities of a banking company may not be within the ambit, of section 65(12) and in choosing between two different taxable services, the test of specificity laid down in section 65A cannot be validated merely by reference to its status as a banking company while ignoring the rest of a particular definition as the original authority appears to have done.
9. We refer to the relevant portion of section 65 (12) of Finance Act, 1994:
‘Banking and Other Financial Services” means –
(a) the following services provided by a banking company or a financial institution including a non-banking financial company or any other body corporate or commercial concern, namely:-
(v) asset management including portfolio management, all forms of fund management, pension fund management, custodial, depository and trust services,
It can be seen that custodial services find specific mention in the description as a part of “banking and other financial services”. Custodial service is defined in clause 2(e) of the SEBI (Custodian of Securities) Regulation, 1996 as
‘(e) “custodial services” in relation to securities means safekeeping of such securities of a client and providing services incidental thereto, and includes –
(i) maintaining accounts of securities of a client;
(ii) collecting the benefits or rights accruing to the client in respect of securities;
(iii) keeping the client informed of the actions taken or to be taken by the issuer of securities, having a bearing on the benefits and rights accruing to the client, and
(iv) maintaining and reconciling records of the services referred to in sub-clauses (i) to (iii);’
From the above, it is clear that custodial services in relation to securities is primarily the safekeeping of the securities of a client; the secondary function is that of providing services incidental thereto – a few of such services are included in the definition. Sans client-custodian relationship and sans entrusting of securities for safekeeping, the incidental services are not relevant. Once a client has entrusted the safekeeping of securities to a custodian, the custodian may maintain accounts relating to the security and collect the benefits accruing to the client as incidental activities. Without such entrustment the relationship is not one of custodianship.
10. Examining the scheme of “receiving office” in relation to government bonds, it appears that Reserve Bank of India utilizes the reach of specified banking companies to garner subscribers. The numbers would have been restricted if the Reserve Bank of India were to route the sale through its own offices across the country. These identified banks maintain details of subscriber, pay out interest as and when due and record the disposal of the bonds. In return, they are compensated with certain commissions by the Reserve Bank of India as laid down in the agreement with the Reserve Bank of India. The relationship with Reserve Bank of India exists because of the potential for reaching out to 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. The agreement between Reserve Bank of India and assessee-appellant for handling the administrative minutiae of managing the bond issue does not fall within the scope of custodianship.
11. There is no evidence of subscribers handing over custody of bonds to ICICI Bank; on the contrary, the subscriber details are entered in a register by the “receiving office” and interest is paid out at specified intervals to the bond-holder. A custodian, under a specific contract with security-owning clients, performs incidental services. In return for a fee, the custodian will receive the security, collect the interest or dividend on behalf of the investor from the borrower and obtain the redemption or sale value of the security on instruction from the investor. A perusal of the scheme of the Reserve Bank of India also eliminates such a scenario. The bond subscriber does not pay the ICICI Bank anything more than the bond price and it is from the Reserve Bank of India that assessee-appellant obtains the remuneration. And the assessee-appellant pays out interest and redemption value on behalf of the Reserve Bank of India. In short, there is no client-beneficiary relationship with the bond-subscriber. Without rendering of custodial services, it would not be correct to hold that the appellant is liable to service tax for the consideration received from the Reserve Bank of India as handling commission, turnover commission and service charge in the category of “banking or other financial” service.
12. For the above reasons, the appeal of assessee is allowed by setting aside the demand for tax prior to 1st July 2003 in the impugned order. The claim of the assessee to be taxed as provider of “business auxiliary service” is upheld. There being no differential tax to be collected, the departmental appeal on valuation and penalty is dismissed.