The Karnataka high court has held that investment management activities undertaken by venture capital funds should not attract service tax.

The high court overturned the Customs Excise & Service Tax Appellate Tribunal’s order which held that service tax was applicable on the expenses incurred by the Venture Capital Funds as the fund was providing asset management services to the contributors.

It held that ‘Carried interest’ paid on Class ‘C’ units held by the investment manager is nothing but the expense incurred by the fund, on which, the fund is liable to pay tax.

The court in the case ICICI Econet Internet and Technology Fund Vs. The Commissioner of Central Tax observed that “the taxpayer acts as a ‘pass-through’, wherein funds from the contributors are consolidated and invested by the investment manager. The taxpayer acts as a trustee holding the money belonging to the contributors for onward investing based on the advice of the investment manager.”

“The fund does not make any profit nor does it provide any service and, therefore, the imposition of service tax is untenable,” the court said.