NBFC's VCF Investment Profits Not Service Taxable Though Clubbed With Management Fees: CESTAT Kolkata

The Kolkata Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) recently reiterated that the nomenclature used in an assessee's books of account cannot determine whether a transaction is liable to service tax.

Holding that the Revenue had failed to establish that profits earned by an NBFC from investing in a Venture Capital Fund were consideration for a taxable service, the bench observed,

"The revenue has relied upon the accounting nomenclature to confirm the demand on the profit/income earned on the investments, as both the profit from investment and management fees have been clubbed under the same accounting head. It is settled principle in law that the nomenclature used in books of accounts cannot determine the taxability of a transaction."

A bench of Judicial Member Ashok Jindal and Technical Member K. Anpazhakan allowed the appeal filed by Sastasundar Ventures Limited, formerly known as Microsec Financial Services Limited. It set aside a service tax demand of ₹65.19 lakh along with interest and penalties.

The dispute arose after the department treated ₹4.97 crore earned by the company from its investment in Adharshila Venture Capital Fund as consideration for fund management services. The Revenue argued that because the investment profits and management fees were shown under the same accounting head, the entire amount was taxable under "Banking and Financial Services."

The company argued that it was only a unit-holder in the venture capital fund and had earned the amount as investment income. It pointed out that service tax had already been paid on the separate management fees received from the fund. It also contended that the Department had relied only on accounting entries and not on any evidence showing that the disputed amount was consideration for a taxable service.

Accepting these submissions, the bench found that the company had merely received its share of investment profits and had not rendered any fund management service. It held that differences between ST-3 returns and financial statements, by themselves, could not justify a service tax demand. The burden to prove that a receipt represents consideration for a taxable service, it said, lies on the revenue.

The bench also held that royalty received for permitting the use of copyright could not be taxed as "Intellectual Property Service" because copyright is expressly excluded from the definition of "Intellectual Property Right" under the Finance Act, 1994. It further restored the company's CENVAT credit, set aside the penalties, and allowed the appeal with consequential relief.

For Appellant: Advocates Rahul Dhanuka and Shri Aditya Patwary, 

For Respondent (Revenue): R.K. Agarwal, Authorised Representative.