A two-judge bench of the Supreme Court in Union of India & Ors v. M/S. Margadarshi Chit Funds (P) Ltd. etc, categorically held that the chit fund business are not subject to service tax as it was not covered by sub-clause (v) of sub-section 12 of Section 65 after its amendment by Finance Act, 2007.
The respondent-assessees, in the instant case, impugned the departmental circular No. 96/7/2007-ST dated August 23, 2007 wherein it was stated that service tax is payable on the running of chit funds as it was a service provided by the assessees which was covered under ‘banking and other financial services’. The Andhra High Court accepted their plea that the chit fund business does not amount to any service covered by the definition of ‘banking and other financial services’ as per the said term as defined in that provision, prevalent during the relevant period.
Coming to the legislative history, the bench noted that when the definition of ‘banking and other financial services’ was incorporated to the Act, services of cash management was specifically excluded from it. However, in the year 2007, the definition was amended by deleting the words ‘but does not include cash management’.
The department was of the view that managing chit fund, which is a fund management service, is a specie of cash management. It contended that sub-clause (v) of sub-section (12) specifically covers ‘asset management’ as ‘banking and other financial services’ and categorically mentions that ‘all forms of fund management’ are to be treated as ‘asset management’. According to them, since asset management includes all forms of fund management and as the cash management is one of the form of ‘fund management’, chit fund companies would be covered thereby. It was therefore, said that service tax is payable on such service w.e.f 1st June 2007.
The department further relied on a recent decision of the Kerala High Court in the case of All Kerala Association of Chit Funds v. Union of India wherein the High Court refused accept the findings of the Andhra Pradesh High Court in the above case and observed that cash management is one of the forms of fund management and would, therefore, be covered by the expression ‘asset management’.
The bench noted that mere deletion of the words ‘but does not include cash management’ by 2007 amendment may not serve the purpose of the Revenue.
Rejecting the contentions of the department, the bench said that neither the department nor the Kerala High Court had adverted to the issue in proper perspective by defining what amounts to cash management and whether cash management is specie of fund management.
The bench said that in order to levy service tax on the chit fund business, as per amended definition of sub-section (12) by the Amendment Act, 2007, it is necessary to understand the meaning of ‘cash management’ and to see as to whether the activity of managing chit fund amounts to cash management. “Thereafter, the second question would be as to whether cash management is a form of ‘fund management’. Only then it would be covered by the expression ‘asset management’ and exigible to the service tax..,” it said.
It noted the decision in Delhi Chit Fund Association v. Union of India wherein the Delhi High Court held that chit fund business are not a service as per the definition of ‘service’ contained in Section 65B(44) of the Act and therefore, it is not exigible to service tax.
In the light of the amendment in the definition of the term ‘service’ in the year 2015, the bench noted that activity carried out by foreman of a chit fund for conducting or organising a chit in any manner is to be covered by the expression ‘transaction in money or actionable claim’. “Thus, it has been brought specifically within the definition of service by the aforesaid amendment which takes effect from June 15, 2015. Therefore, there is no dispute that w.e.f. June 15, 2015, service tax is payable on chit fund.”
Dismissing the appeal, the bench held that the term ‘cash management’ as understood in common parlance would not embrace chit fund business.
It was further said that the activity of managing chit fund does not amount to management of any type of fund. “it refers to a fund which is normally created by a business or an organisation for a specific purpose and then utilised for the said purpose. A bare look at the aforesaid definitions compels us to hold that chit fund cannot be treated as fund management as understood in the sense the term is known in business parlance.”
Read the full text of the Judgment below.