The brief but welcome judgement by the Hon’ble Karnataka High Court has catered to a batch of appeals against the CESTAT order on the applicability of service tax on venture capital funds (VCF).
The High Court at the first instance dismissed the objection with regard to the maintainability of this appeal stating that the underlying dispute was with respect to the very liability of the assessee to pay service tax and not with respect to rate/valuation and thus maintainable before the High Court.
The High Court asserted that VCF was not liable to service tax taking into cognizance the functioning of the VCF observing as under:
- VCF, which is established as a trust is not recognized as a person and cannot be considered as a juridical person to charge service tax. For levy of tax, the entity has to be recognized under the said Act and the definition clauses of each statute must be read with the object and purpose of that statute and should not be extrapolated.
- VCF does not provide any service and acts as a ‘pass through’ holding the money belonging to contributors to be invested as per the advice of the investment manager. The funds from contributors are consolidated and invested by the investment manager.
- The doctrine of mutuality applied in the case of the VCF since the investment by contributors is held in trust by the fund and invested based on the investment manager’s advice and thus the contributors and the trust cannot be dissected as two different entities when commonality is established.
The judgment provides much-needed clarity on the imposition of service tax in the financial sector. However, the extent to which the same can be carried under the GST Act and Income Tax Act would need to be evaluated.