ST leviable on Venture Capital Funds established as trust & rendering portfolio management services to contributors

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  • Last Updated on 2 September, 2021

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Case details: ICICI Econet Internet and Technology Fund v. Commissioner of Central Tax, Bangalore Bench - [2021] 128 taxmann.com 281 (Bangalore - CESTAT)

Judiciary and Counsel Details

    • S.S. Garg, Judicial Member, and P. Anjani Kumar, Technical Member.
    • Vikram Nankani, Sr. Adv. for the Appellant. 
    • P.R.V. Ramanan, Spectral Counsel, AR for the Respondent.

Facts of the Case

The appellants were Venture Capital Funds (VCF) established as a trust under Indian Trusts Act, 1882, and registered with SEBI. The appellants’ properties (i.e, money contributed by investors) were held in trust for benefit of beneficiaries, who were contributors to Funds (Contributors/Beneficiaries). The department launched investigation into taxability of services rendered by appellant Fund under entry ‘Banking and other financial services’ in section 65(12).

The investigation resulted in issue of series of notices demanding service tax on said activities, which were confirmed by adjudicating authority. The appellant submitted that service tax was not payable as it was not providing any taxable services. It was submitted that to levy service tax, there must be a service, but in this case service tax can’t be levied and filed appeal.

CESTAT Held

The honorable CESTAT found that appellant had been performing commercial operations/functions i.e. an economic activity and concept of trust was only a façade. It was found that appellant trusts were mutual funds engaged in Portfolio management and had violated principles of mutuality by concerning themselves in commercial activities and by using discretionary powers to benefit a certain class of investors or nominees or employees or subsidiaries and thus could no longer be treated as trusts for purposes of taxation statutes.

The appellants had discretion over distribution of dividend/profit to entities other than subscribers and had devised structure of fund in such a manner that AMC and/or their nominees would get huge sums of money in guise of Performance fee, carried Interest, with twin motives of benefitting AMC and/or their nominees at expense of subscribers and avoiding taxes. Thus, funds although named trusts, had been initiated with a profit motive, and activities were akin to those of a Bank or financial Institution. Therefore, the trust was managing funds of contributors and thereby rendering service to contributors and this service squarely fell under Asset Management as applicable under Banking and Other Financial Services and therefore service tax will be leviable on amounts shown as performance fee, carried interest and other expenses.

Case Review

List of Cases Referred to

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