Service Tax | Delhi High Court Deprecates Practice Of Issuing Clarifications To Bypass Advance Ruling Mechanism

The Delhi High Court has deprecated the practice of service tax authorities issuing clarifications to bypass the statutory mechanism of advance rulings for determining tax liability.

The Division Bench of Justices Avneesh Jhingan and Shail Jain made the observation while disposing of a writ petition filed by Bajaj Capital Ltd., which had challenged a 2007 communication issued by the Commissioner of Service Tax, Delhi, regarding the applicability of service tax to its activities.

Bajaj Capital was engaged in mobilising public savings into various schemes, including company deposits and bonds. It also acted as a principal broker for fixed deposit schemes of public sector undertakings, finance companies and private companies, and mobilised funds for banks in return for commission.

The company had approached the authorities seeking clarification on whether its activities were covered by the service tax regime. In response, the Additional Commissioner (Technical) stated that the commission received by Bajaj Capital as a principal broker to fixed deposit schemes amounted to taxable service as a commission agent under Business Auxiliary Service.

Before the High Court, Bajaj contended that it was a broker/facilitator and not an agent and that its activities could not be treated as taxable services under the relevant provisions.

The Union Government however submitted that the impugned communication was merely a reply to Petitioner's representation and was neither a circular nor binding on the authorities or Petitioner. It also stated that Petitioner's claim for refund would be considered independently in accordance with law.

The High Court noted that despite a specific query, neither party was able to point to any provision under the Finance Act, 1994 which permitted Petitioner to make such a representation or authorised the Commissioner to issue a clarification in response.

It referred to Chapter VA of the Finance Act, which provides for advance rulings. Under Section 96A, an applicant may seek determination of a question of law or fact regarding liability to pay service tax in relation to a proposed service. The Court noted that Petitioner did not fall within the statutory definition of an “applicant” and therefore could not seek an advance ruling.

The Court observed, “The practice of issuing clarifications being adopted to bypass the mechanism of advance rulings provided under the statute cannot be appreciated.”

It further held that the statutory authorities derive their powers from the statute and that the concerned respondent “was bestowed with no power to issue clarifications.”

The Court also relied upon its earlier decision in Mahanagar Telephone Nigam Ltd. v. Union of India, where it had held that there was no provision under the service tax law contemplating a procedure for seeking clarification from the jurisdictional service tax authority.

The Court further observed that whether service tax is leviable on a service, or whether an assessee is required to be registered, requires adjudication and involves the discharge of quasi-judicial functions.

Therefore, “the issuance of clarification interferes with the quasi-judicial discharge of functions,” it said.

The High Court declined to examine in the writ proceedings whether Bajaj Capital's activities were actually exigible to service tax.

It noted that the company had registered under the Act and had been paying service tax since 2004. The Court observed that determining the liability for the period from September 2004 to March 2006 would require examination of factual aspects, including the agency agreements and contracts between the petitioner and the banks and companies concerned.

As such, the Court disposed of the petition by directing the concerned authority to treat it as an application for refund of the deposited tax amount.

For Petitioner: Senior Advocate J.K. Mittal, with Advocates Vandana Mittal &  Aastha Kaushal, 

For Respondents: Shubham Tyagi, SSC with Namuti Ojha,