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20 February 2024

Venture Capital Funds, rendering services of asset management, are not liable to service tax

The Karnataka High Court has set aside the CESTAT Order which had held that a Venture Capital Fund (VCF) set up as a Trust is a ‘distinct entity’ separate from its contributors/investors.  Disregarding the principle of mutuality of interest, the Tribunal had held that a VCF was rendering taxable services of portfolio or asset management to its contributors for a consideration on which service tax was liable.

Trust not a juridical person under Finance Act

Allowing a bunch of appeals, the High Court in its Judgement dated 8 February 2024 found untenable the Tribunal’s view that since the trust is treated as a juridical person under SEBI, there is no reason why it should not be treated as a juridical person for taxation. Observing that the definition clauses of each statute must be read with the object and purpose of that statute only as intended by the legislature, the Court noted that the issue involved in this case was liability to pay service tax and therefore the relevant statute was the Finance Act, 1994, and that the said Finance Act does not recognize ‘trust’ as a person.

VCF acted as ‘pass through’ only

Further, the Court answered in affirmative the question as to whether the CESTAT erred in holding that the assessee cannot be treated as a ‘trust’ and failed to recognize its pass-through status, for the purpose of taxation statues. It noted that the assessee acted as a ‘pass through’, wherein funds from contributors were consolidated and invested by the investment manager. The Court observed that the assessee acted as a trustee holding the money belonging to contributors to be invested as per the advice of the investment manager.

Doctrine of mutuality is applicable

Also, the High Court in India Advantage Fund III v. Commissioner observed that the contributors and the trust cannot be dissected as two different entities because, it is an admitted fact that the contributors’ investment is held in trust by the fund and it is invested as per the advice of investment manager. Holding that the doctrine of mutuality must apply in the instant case, the Court held that in substance, the fund does not do an act, and that there can be no service to self.

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