Part B : Some recent judgements

1. Banking and other financial services:

Whether the service tax is leviable on equipment leasing and hire-purchase finance activities?

    Association of Leasing & Financial Service Companies v. Union of India, 2010 (20) STR 417 (SC)

    The issue before the Apex Court was whether hire-purchase and leasing transactions involved any element of service, in order for the service tax to apply, or such transactions were explicitly chargeable to VAT, being a tax in relation to goods.

    The appellants, members are engaged in the business of hire-purchase and leasing. 46th Amendment to the Constitution of India had inserted Article 366(29A) whereby a set of six transactions were enumerated therein to be deemed as sale of goods. These six transactions included the transfer of the right to use any goods for any purpose as well as hire-purchase transactions. Consequently, the entire amount paid to the hirer/lessor by way of instalments was chargeable to VAT. It was further argued that once the subject matter of hire-purchase and leasing was constitutionally characterised as a ‘deemed sale’, the transaction could not be taxed by the Central Government.

    The Supreme Court took note of this contention and concluded that the taxable service category ‘banking and other financial services’ under service tax, included within it hire-purchase and leasing transactions.

    The appellant’s members are non-banking financial companies (‘NBFC’). Certain NBFCs undertake activities of equipment leasing and hire-purchase financing in addition to giving loans. The concept of ‘banking and other financial services’ has been clarified with relevant explanations:

    (a) Funding or financing the transaction covers two different and distinct transactions i.e., the financing transaction and the equipment leasing/hire-purchase transaction. While the former is exigible to service tax, the latter is exigible to local sales tax/VAT.

    (b) There is a difference between a ‘finance lease’ and an ‘operating lease’. In the case of hire purchase agreement, the periodical payments made by the hirer is made up of (a) consideration for hire and (b) payment on account of purchase.

    (c) The taxable event is the rendition of service. The tax is not on material or sale; it is on activity/service rendered by the service provider to its customer. Therefore, the Centre undoubtedly had legislative competence to charge the tax on the above service.

    The Supreme Court upheld the charge of service tax on hire-purchase and leasing transactions, if forming part of financial leasing services under service tax law, notwithstanding that the same transactions were chargeable to VAT. There was no double taxation of one transaction to two taxes in this instance, as per the Supreme Court, even though both taxes were chargeable on the same base. It also noted that the service tax was, in fact, chargeable only on 10% of the finance or leasing charge.

II. HIGH COURT:

2. Admissibility of CENVAT credit of service tax:

Whether the services of repair, maintenance and civil construction used in residential colony for employees qualifies for input service?

    Commissioner of Central Excise, Nagpur v. Manikgarh Cement, 2010 (20) STR 456 (Bom.)

    The respondent-assessee engaged in the    manufacture of cement was disallowed the credit of service tax paid on repairs, maintenance and civil construction, etc. as the services were used in their residential colony on the ground that the said services were not covered under the    definition of input service and hence ineligible as input service.

    According to the Revenue, as per decision of the Apex Court in the case of Maruti Suzuki Ltd. v. Commissioner of Central Excise, Delhi, 2009 (240) ELT 641 (SC), it must be held that the CESTAT was wrong in holding that the assessee was entitled to credit of service tax paid on services of repair, maintenance and civil construction used in the residential colony, whereas as per the assessee, establishing a residential colony was indirectly connected with the manufacturing activity in question related to the business and therefore, the Tribunal was justified in holding that they were entitled to the credit.

    The High Court observed that establishing a residential colony for the employees and rendering taxable services in that residential colony may be a welfare activity undertaken while carrying on the business. However, to qualify as an input service, the activity must have nexus with the business of the assessee. The expression ‘relating to business’ in Rule 2(l) of the CENVAT Credit Rules, 2004 refers to activities which are integral to the business activity and not welfare activities undertaken by them.

    The High Court held that unless the nexus is established between the services rendered and the business carried on by the assessee, the benefit cannot be allowed. In the present case, rendering taxable services at the residential colony established by the assessee for the benefit of the employees is not an activity integrally connected with their business and therefore, the Tribunal was not justified in holding that the services such as repairs, maintenance and civil construction rendered at the residential colony constitutes ‘input service’ for claiming credit.

3. Information Technology Service: Service tax:

Should information technology software be considered goods or services?

Infotech Software Dealers Association v. Union of India, 2010 (20) STR 289 (Mad.)

The petitioner, an association of software resellers prayed for a writ to declare S. 65(105)(zzzze) of Chapter V of the Finance Act, 1994 as null and void, ultra vires and unconstitutional of provisions of Article 245, Entries 92C and 97 of List I and Entry 54 of List II and contended as follows:

•     Softwares are considered as ‘goods’ and are liable to VAT, as the transaction is of sale of goods.

•     Imposing service tax on canned software would result in increase in cost by 13% and if VAT and service tax both are levied, then the cost may increase up to around 25%.

•     Software was held to be goods by the Supreme Court in the case of Tata Consultancy Services v. State of Andhra Pradesh, (2004 (178) ELT 22). Dominant intention of the transaction should be considered, following the judgment in Bharat Sanchar Nigam Ltd. v. Union of India and Others, (2006 (2) STR 161), to determine whether the transaction would be considered as sale or service. In the present case, the transaction is related to supply of goods on which only VAT should be levied.

•     When a transaction is covered by VAT under Entry 54 of State List, the Central Government does not have the competence to introduce service tax under Entry 97 of Union List.

The respondents put forth the following claims:

•     The standardised softwares are not like any other goods and it may not be considered as sale, es-pecially when the software is supplied with End User Licence Agreement. The software requires a key to activate the software. Further, updates are also provided by the original manufacturer to the end user for a definite period. Therefore, original manufacturer only provides the right to use to the end user and it is not provided with a right to tamper, modify or rectify error of such software.

•     The said transaction involves three activities, namely, right to install such software, right to run such software and receive updates. Therefore, the same may not be considered as absolute sale. The canned software is capable of being sold off the shelf and the same is excisable goods. However, in case of customised software, service element can be segregated clearly. Providing ‘right to use’ constitutes service which is liable to service tax.

Though Entry 92C is inserted, the same is not given effect to and therefore the residual Entry 97 empowers Union to enact the law.

The Court made the following observations:

•     Article 366(12) of the Constitution of India defines ‘goods’ to include all materials, commodities and articles. Goods as defined are of wide connotation and include everything of use or value which can be the object of trade and commerce.

•    The Apex Court in Tata Consultancy Services (supra) had held that the test to determine whether the property is goods or not depends on the capability of abstraction, consumption, use and whether the same can be transmitted, transferred, delivered, stored, possessed, etc. Since software program consists of various commands, it becomes goods, once the appellant makes copies of the same. It may be pertinent to note that the buyer is purchasing intellectual property and not the media. Moreover, while concluding on definition of goods by majority in the Apex Court, observed that goods includes tangible as well as intangible ones. Whether an item would be considered as goods, should be decided based on the following attributes, namely, (i) utility, (ii) capable of being bought and sold, (iii) capable of being transmitted, transferred, delivered, stored and possessed.

•     In case of 20th Century Finance Corporation [2000(6) SCC 12] it was observed that the transfer of right to use goods is the basis to tax and not the delivery of the goods. However, such goods must be available at the time of transfer of right to use such goods as held in BSNL case (supra).

•     The present case does not deal with branded or unbranded software, therefore, the issue is not discussed at length, however in view of the above-stated judgments software is ‘goods’ for the purpose of Article 366(12).

•    Software other than packaged one is priced inclusive of cost of initial installation and modi-fications required. However, copyrights of the software are protected with the creator. Sale of such software is with a condition for exclusive use by the customer and the effective possession and control is passed on to the buyer and annual maintenance charges are recovered for certain services which are chargeable to service tax.

•     Packaged software attracts excise duty, whereas customised software is exempted from excise duty vide Notification No. 6/2006. Further, document to title conveying the right to use such information technology software services is ex-empted from Basic Customs Duty vide Notification No. 21/2002.

•     Software sold through Internet downloads would not satisfy the test of ‘goods’, since it does not fit within the ambit of ‘IT software on any media’.

•    In case of exclusive sale, legislative competence of the State Government under Entry 54 of List II should be accepted and in case when service element is involved, Entry 97 has power to impose service tax.

•     However, the case of software is not of exclusive sale and therefore, introduction of IT software services is constitutionally valid. Moreover, the nature of transaction is of utmost importance. As held by the Supreme Court in Gannon Dunker-ley’s case (IX STC 353), dominant intention of the parties decides the tax route. The Apex Court observed that in the case of composite contracts not covered by Article 366(29A), unless the transaction in truth represents two distinct and separate contracts, States would not have power to levy VAT.

•     To form a view whether the transfer of software amounts to sale or services in case of software resellers, the following eminent factors can be looked upon:

(a) Through Master End-user Licence Agreement, normally the developer grants right to use and the copyrights of the software are kept with developer in case of all types of software i.e., canned, packaged or customised.
(b) Further, through that Master End-user Licence Agreement, the members of the association enter into an End-user Licence Agreement. ‘End user’ is the one who uses the product/ service but he does not have any contact with the developer.
(c) Therefore, the transaction is not sale of software as such, but is sale of contents of the data stored in the software, which would amount to service. Only when there is a transfer of right to use any ‘goods’, it would be considered deemed sale under Article 366(29A).

•     In the present case, the appellants’ contention was that software is considered as ‘goods’ and therefore, the transaction should be considered as ‘sale’. However, it was argued that though software is ‘goods’, all transactions need not be in the nature of ‘sale’, it may vary as per the terms of End-user Licence Agreement. As discussed earlier, Parliament has the power to introduce service tax levy on Information Technology Software services under Entry 97 of Union List. However, all transactions have to be perceived from an independent view whether to be considered as sale or service.

•     Finally, the Court dismissed the writ petition holding that software are ‘goods’ and whether a transaction would amount to sale or service would depend upon the facts of each transaction.

4.    Outdoor catering service — Service tax v. sales tax:

Whether food and beverages supplied to passengers on board trains is leviable to VAT or not?

Indian Railways C. & T. Corp. Ltd. v. Govt. of NCT of Delhi, 2010 (20) STR 437 (Delhi)

The petitioner, a Government company provided catering services on board trains run by the Indian Railways. The consideration for these services is included in the fare charged by the Indian Railways collected from the passengers, and then paid to the company by Indian Railways. They had paid service tax on 50% of the value, availing abatement provided under the law, however, no VAT was paid thereon by them.

The issue before the Court was whether the petitioner was liable to VAT. The Court observed as follows:

•     It is open to the States to levy sales tax/Value Added Tax on the whole of the consideration, in transactions of sale of goods, such as sale to a customer in a restaurant, irrespective of the incidental element of service which is necessarily involved in sale of goods of this nature.

•     In case of composite transactions, there are two distinct contracts, one for sale of goods and the other for providing services. In respect of the present case, it is not permissible to fragment such a composite contract, so as to levy VAT on the component which involves sale of goods.

•     In the case of Tamil Nadu Kalyana Mandapam Assn. v. Union of India (UOI) and Ors., (2004) 135 STC 480, it was held that services rendered by out-door caterers are clearly distinguishable from the service rendered in a restaurant or hotel. Outdoor catering has an element of personalised service provided to the customer. The customer is at a liberty to choose the time and place where the food is to be served and the service element is more weighty, visible and predominant. However, in case of a restaurant, the customer’s choice of food is limited to the menu card.

•     In view of the petitioner, providing of food, snacks and water to the passengers on board the trains is altogether different from an outdoor catering service. The passengers travelling in the trains are served food and beverages as per a fixed menu approved by the Railway Board. Neither the petitioner nor the passenger has any choice in respect of articles to be served in the trains or with respect to the quantity each passenger gets.

•     The transaction of providing meals and snacks to the passengers is not a composite contract.

•     The element of service by way of heating the food, heating/freezing the beverages and then serving them to the passengers is purely incidental and minimal required for the sale of food and beverage in this transaction.

•     Once the property in those goods is transferred to Indian Railways, on account of their being loaded on the trains and kept in the gadgets belonging to Indian Railways, those goods become the property of Railways and at the time of service of those goods to the passengers, title in the goods vests in the Railways and not in the petitioner-company. Thus, it can be said that merely by loading, the property got transferred.

•     In case, if an accident takes place before the food is served to the passengers, nothing prevents the petitioner agreeing to bear the risk, despite property in the goods having already been transferred to the purchaser. However, risk and reward may not be the conclusive criteria to decide the date of transfer of property in goods.

•     At the time of execution of the contract, as soon as the meals and snacks are cooked and, being in a deliverable state, are appropriated to the contract by loading them on the compartments of Indian Railways and keeping them in the equip-ment belonging to the Railways, the property in the goods passes on to the Indian Railways. Future goods are also chargeable to VAT.

•     Payment to the petitioner is required to be made by the Indian railways even if the food is not consumed by the passenger.

•    The constitutional right cannot be denied to the State, to levy such a tax merely because service tax authorities have already collected service tax from the petitioner.

It was held that the transaction between the petitioner and the Indian Railways does not amount to a contract of providing outdoor catering service but is a transaction of sale of food and beverages by the petitioner-company to the Indian Railways.

5.    Recovery of dues:

Are directors personally liable for arrears of State and Central Sales Tax dues from the Company?? Om Prakash Walecha v. State of Haryana, 2010 (20) STR 384 (P & H)

The question before the High Court was whether the directors can be made personally liable to pay arrears of Central and State Sales Tax dues of a company. The Department contended that u/s.18 of the Central Sales Tax Act 1956, if the Company is wound up then the arrears of State and Central Sales Tax can be recovered from any person who was director for the period when the tax became due. However, in the present case, the company was not wound up or formally liquidated and other judgments on the subject-matter were not disputed by the Department. Therefore, the High Court allowed the writ petition.

III.    TRIBUNAL:

6.    Appeal:

Whether Committee of Commissioners can review the order already reviewed by the previous Committee of Commissioners?
Commissioner of C. Ex., Surat-II v. Gujarat Borosil Ltd., 2010 (20) STR 377 (Tri.-Ahmd.)

The Committee of Commissioners reviewed the order passed in favour of the respondents and found the same in accordance with the law and decided not to file appeal against it. The respondents applied for refund as a consequential relief and the same was rejected by the Department.

Thereafter, the Committee of Commissioners again reviewed the earlier order and filed an appeal with application for condonation of delay of 440 days. The Department contended that the length of delay was not relevant and what really matters is ‘sufficient cause’ for delay and that the Tribunal should liberally construe the phrase ‘sufficient cause’. The order was passed without considering the Supreme Court’s decision in the case of CCE, Allahabad v. Hindustan Safety Glass Works Ltd., (2005 (181) ELT 178).

The assessee contended that the Committee of Commissioners did not have power to review earlier order of the Committee of Commissioners and the case relied upon by the Department was not applicable to the fact of their case.

The Tribunal observed that the Committee had taken a conscious decision of not filing the appeal. Moreover, the said decision of Hindustan Safety Glass Works was available at the time of passing the order and also at the time of review. Therefore, it could not be considered as ‘sufficient cause’ for condonation of delay. Further, subsequent Committee of Commissioners cannot again review the order passed by the precedent Committee of Commissioners, since the matter had attained finality. The appeal was thus dismissed.

7.    CENVAT credit:

(i)    Whether service tax paid on C & F services is allowed as CENVAT credit to a 100% EOU?

Adani Pharmachem (P) Ltd. v. Commissioner of C. Ex., Rajkot, 2010 (20) STR 386 (Tri.-Ahmd.)

The Department contended that the order passed by the Commissioner (Appeals) was based on the Tribunal’s decision in the case of Gujarat Ambuja Cement Ltd. v. CCE, Ludhiana 2007 (212) ELT 410 wherein it was held that the appellants were not eligible for CENVAT credit. However, the appellants relied on the Departmental Circular and the Tribunal’s decision in case of CCE, Rajkot v. 6 respondents including appellants.

The Tribunal allowed the CENVAT credit of service tax?paid?on C&F services to the appellants who are 100% EOU for the reason that the place of removal in case of C&F or FOB exports is load port.

(ii)    Whether various services used by the appellants qualify to be input services in terms of Rule 2(l) of the CENVAT Credit Rules, 2004?

Commissioner of Cus. & C. Ex., Raipur v. H. E. G. Ltd., 2010 (20) STR 312 (Tri.-Del.)

•     Services utilised in relation to generation of steam and electricity towards maintenance of the plant:

Since the steam and electricity generated was not liable to excise duty and therefore, service utilised in relation thereto was not available as CENVAT credit in Department’s view. However, since the issue was decided in favour of the assessee in case of Sanghi Industries Ltd. v. CCE, Rajkot (2009(13)    STR 167) and the services were used within the factory premises, CENVAT credit was held as allowed.

•     Car insurance:

The Department contended that excise duty paid on cars was not allowed as CENVAT credit and therefore, car insurance was also not allowed. However, the respondents submitted that repairs and maintenance of car was allowed as credit in case of CCE, Jaipur-II v. J. K. Cement Works, (2009(14)STR 538). The Tribunal allowed credit treating insurance as maintenance activity.

•     Maintenance of air cooler, pay loader, dumper repairing and changing of damaged asbestos sheet of canteen building within factory:

The Department contended that this was not used in or in relation to manufacture of final product. However, the activity was undertaken within the factory premises and it had nexus with the business activity and therefore was allowed.

•     Security services at a place other than factory premises:

Since the direct nexus with activities relating to manufacture was not established, the Tribunal remanded back the matter to the original authority.

•     Rent-a-cab services:

The services were utilised by executives in relation to procurement of raw material, sale of finished goods and therefore, the same was held as connected to the business activity and was allowed. Reliance was placed on Ace Glass Containers Ltd. v. CCE, Meerut-II, [2010 (250) ELT 110].

•     Commission on sales:

Commission paid in relation to procurement of orders and consequently for business activity was held as allowable.

•    Mobile phone services:

Following the Gujarat High Court’s decision in the case of CCE v. Excel Crop Care Ltd., [2008 (12) STR 436], this was allowed.

(iii)    Does the activity of commission agent for sales promotion fall under the definition of
‘input service’?

Commissioner of C.Ex., Jallandhar v. Ambika Over-seas, 2010 (20) STR 514 (Tri.-Delhi)

A manufacturer-exporter of tools appointed an overseas commission agent for sales promotion activities in the overseas market. They paid service tax along with interest on the commission as recipients and took eligible credit of the same, treating the services of agents as ‘input service’. This was challenged by the Department holding that services rendered by them cannot be held to be utilised in the manufacture of final products and therefore, cannot be treated as inputs services. The activity of a commission agent was considered a post removal activity.

Since the definition of ‘inputs services’ included any services used in relation to ‘sales promotion’, the activities of overseas commission agents were clearly part of sales promotion activities, the case was decided in favour of the respondents.

(iv)    In case of closure of factory, can cash refund of CENVAT credit be claimed?

Commissioner of C. Ex., Ludhiana v. Manish Spinning Mills (P) Ltd., 2010 (20) STR 540 (Tri.-Delhi)
The assessee’s finished goods were destroyed in a fire. They applied for remission to the Commissioner. The Assistant Commissioner granted refund in the form of CENVAT credit. The Commissioner (Appeals) had accepted the plea of the assessee for cash refund. Relying on the case of Slovak India Trading Co. P. Ltd. v. CCE, Bangalore, 2006 (205) ELT 956 (Tri.-Bang.) upheld by the Karnataka High Court in 2006 (201) ELT 559 (Kar.) wherein it was held that Rule 5 of the CENVAT Credit Rules, 2002 did not expressly prohibit cash refund of unutilised credit, the Tribunal held that the ratio of the decision was applicable to the present case and therefore Revenue’s appeal against cash refund was rejected.

8.    Manufacturer: Service tax under commis-sioning and installation service:

Whether service tax is leviable on erection, commissioning and installation services rendered by a manufacturer on which excise duty is already paid by including the same in the assessable value?

Alidhara Texspin Engineers v. Commissioner of C. Ex. & Customs, Vapi, 2010 (20) STR 315 (Tri.-Ahmd.)
The appellants were engaged in the manufacturing of textile machineries. The appellants were entering into a composite contract for sale and supply of such machineries in fully installed, commissioned and in operational condition. Moreover, gross amount charged was inclusive of installation and commissioning charges and excise duty was levied on the same. Further, such work was sub-contracted and the sub-contractor was paying service tax on the same. The Department held that the appellants were engaged in providing erection, installation and commissioning services u/s.65(39a) of the Finance Act, 1994 and it levied service tax on the whole gross amount charged in absence of segregation of quantum of such service charged received by the appellants. It was held that S. 65(39a) of the Finance Act, 1994 covered commissioning and installation agencies, whereas the appellants were a manufacturing unit and had paid excise duty on the same treating the process as incidental to comple-tion of manufactured product. Relying on various judgments, the appeal was allowed.

9.    Stock broker’s service:
Whether the sub-broker is liable to pay service tax when the stock broker has paid service tax on the same transaction?
Vijay Sharma & Co. v. Commissioner of C. Ex., Chandigarh, 2010 (20) STR 309 (Tri.-LB)

The Revenue submitted that the sub-brokers reg-istered with SEBI or made application for registration under SEBI Act, 1992, were covered within the definition of stock broker u/s.65(101) of the Finance Act, 1994 with effect from September 10, 2004. Further, the services provided by sub-brokers or stock -brokers in relation to sale or purchase of listed securities are taxable services and sub-brokers were liable for service tax. The appellants contended that they paid service tax to the main broker who ultimately has discharged the same on behalf of the sub-broker. A sub-broker provides services to a stock-broker who in turn provides services to its clients. Therefore, sub-brokers are not liable to service tax since sub-brokers and stock- brokers are agent and principal and this would amount to double taxation.

There being conflicting judgments of the Tribunal for the issue, the High Court referred the matter to the Larger Bench for deciding the same afresh in view of the amendment in the law.

The Larger Bench observed that sub-brokers were covered in the definition of stock-broker with effect from September 10, 2004. However, service being event of levy of tax, same service cannot be taxed twice. Therefore, the sub-brokers and the stock-brokers being agent and principal, the same transaction shall not be liable to double taxation. In the present case, the matters were remanded back for verification of payment of service tax by stock brokers. ?If?found that the stock-broker had paid service tax on behalf of the sub-broker, then the Department was directed to reduce the sub-broker’s demand.

10. Waiver of penalty:

Whether delay in obtaining registration and pay-ment of service tax amounts to evasion?
Star Energy Systems v. Commissioner of Service Tax, Ahmedabad, 2010 (20) STR 479 (Tri.-Ahmd.)

The appellant is a proprietor providing erection, commissioning and installation services. The category came into effect on 1-7-2003, however the appellant got itself registered on 26-10-2004 and voluntarily paid service tax with interest for the period 1-7-2003 to 26-10-2004 and on filing the returns, the Department began proceedings. Thereafter, with the introduction of Notification No. 18/2003-ST exemption benefit was claimed by the appellant whereby individuals providing commissioning and installation services were provided exemption. The appellant did not challenge the liability of service tax or seek refund of the same, but requested for waiver of penalties. It was held that an individual to be treated as a commercial concern cannot be accepted. In spite of the fact that the appellant could have challenged the liability, he did not even seek refund of voluntarily paid service tax and interest. Therefore, it cannot be said that there was an intention to evade tax and the appeal was allowed.