Part B : Some Recent Judgments

1. Classification:

Marine Logistic Services to Offshore Support Vessels from 1-6-2007 to 15-5-2008 whether could be held as services in relation to mining ?

Union of India v. Indian National Shipowners Association, 2011 (21) STR 3 (SC)

The short question involved in the case relates to the classification i.e., whether the services provided by members of the Association could be covered as services in relation to mining of mineral, oil or gas as provided in section 65(105)(zzzy) of the Finance Act, 1994 (the Act) introduced with effect from 1-6-2007. The Association contended that they were appropriately covered by the provisions of section 65(105)(zzzz) of the Act dealing with supply of tangible goods for hire. This service was introduced from 16-5-2008. The members of the Association provided vessels to ONGC on time-charter basis for the period in question viz. 1-6-2007 to 15-5-2008. The scope of the work in addition also included services such as carrying men and material between base and offshore installation, carrying out routine surveillance in offshore, carrying out rescue operations if and when required and carrying out any other field work which would be within the capability of the chartered vessels. Earlier the High Court held that the nature of work carried out by the members of the respondent could not be said to be the work in relation to mining activity. The Supreme Court also found that none of the activities mentioned in the agreement with ONGC by one of the members could be said to be a service rendered in relation to mining of mineral, oil or gas. Therefore, it affirmed the order of the High Court looking into facts in issues only and left the question of law decided by the High Court, open to be considered at length in appropriate case.

2. Commercial training or coaching services:

Whether computer training institutes were exempt between 10-9-2004 and 15-6-2005?

Commissioner of C.Ex. v. Sunwin Technosolution P. Ltd., 2011 (21) STR 97 (SC)

The Department challenged the judgment of the Jharkhand High Court holding that service tax was not payable by the computer training institutes for the impugned period.

Initially a Notification dated 20th June, 2003 was issued providing exemption to vocational training institutes including computer training institutes. However, the said Notification was effective till 30th June, 2004. Later a new Notification dated 10th September, 2004 was issued, which exempted vocational training institute and recreational training institute from the levy of service tax but did not specifically cover computer training institutes. This Notification, however, was amended by Notification dated 7th June, 2005 (effective from 16th June, 2005), which specifically excluded computer training institutes from the scope of the exemption. Therefore, according to the respondent since the amendment in Notification dated 10th September, 2004 was made effective from June 16, 2005, it implied that computer training institutes stood exempted for the impugned period of 2004-2005 and the liability would arise only from 16th June, 2005.

The Department contended that the Government was fully conscious of the fact that computer training institutes were not to get exemption and the same was clear because these were excluded from the Notification dated 10th September, 2004 and Notification dated 7th June, 2005 was more or less in the nature of clarification. The Apex Court confirmed that since computer training institutes were was out of the scope of exemption from 10-9-2004, the liability existed for the impugned period.

II. High Court:

Does Cenvat credit of service tax on input services need to be reversed when inputs are removed?

Commissioner of C.Ex., Chandigarh v. Punjab Steels, 2011 (21) STR 5 (P & H)

The respondent, a manufacturer removed certain inputs from the factory without being used. The respondent did not reverse the CENVAT credit of service tax paid on input service (i.e., Goods Transport Service) so received in relation to purchase of inputs, as no provisions exist in the Rules in this regard. The Tribunal passed an order favouring the respondent. The Revenue filed an appeal raising a question of law whether CENVAT credit availed on input service at the time of receipt of inputs is required to be reversed at the time of clearance of inputs. The Revenue referred to Rule 3(5) of the CENVAT Credit Rules, 2004 (CCR) which specifies that Cenvat credit taken on inputs or capital goods needs to be reversed when the inputs are removed as such from the factory and contended that the respondent was required to reverse the CENVAT credit even of service tax on input services. Further, the Revenue also relied on Rule 5 of CCR which provides that CENVAT credit on inputs or input services is required to be reversed when the assessee is entitled to refund of tax paid on inputs or input services.

The respondent contended that there exists a material difference in language used in Rule 3 and Rule 5 of CCR. Rule 3 provides for reversal of credit on inputs or capital goods and Rule 5 refers to reversal of credit on inputs or input services. Further, inputs and input service are separately defined under CCR. The Revenue cannot direct respondents to reverse the credit on input service merely on analogy. The Court held that Rule 5 on which reliance was placed by the Revenue, stood on different footing. There being no specific provision for reversal of CENVAT credit on service tax paid on input service, such a proposal was not in accordance with the law. Hence, the appeal by the Department was dismissed holding that there did not exist substantial question of law and tax could not be levied merely by inference.

4. Penalty:

Can penalty u/s.76 of the Finance Act, 1994 be reduced below the minimum prescribed limit?

Commissioner of C.Ex. and Customs v. S. J. Mehta & Co., 2011 (21) STR (Guj.)

The respondents paid service tax along with interest after the due date of payment. They also filed a belated service tax return. Due to the lapses, penalty of Rs.88,800 u/s.76 of the Act was imposed. The respondents in the appeal got the penalty amount reduced to Rs.25,000 on invocation of section 80 of the Act. The Revenue’s appeal was rejected by the Tribunal.

Reliance was placed on a similar case reported at 2010 (19) STR 641 (Guj.) where the High Court quashed the order of the Tribunal. Apart from this, on a conjoint reading of section 76 and section 80 of the Act, the High Court had taken the view that there exists no discretion to the authority for levying a penalty below the minimum prescribed limit. Following this decision, the order of the Tribunal was set aside and the issue was divided to be looked at afresh by the Tribunal.

III. Tribunal :

Whether promotion of logo or branding service could be held as ‘Business Auxiliary Service’?

Jetlite (India) Ltd. v. Commr. of C.Ex., New Delhi 2011 (21) STR 119 (Tri.-Delhi)

In the year 2003 to 2007 (hereinafter called as the ‘relevant period’) Sahara Airlines used the logo and advertisement of its group company Sahara India Commercial Corporation Ltd. on its stationary and tickets. The Tax Department claimed that display of information of construction projects of Sahara India Commercial Corporation on boarding passes and baggage tags amounted to advertising and consequently a business auxiliary service and thus demanded a huge sum as liability to tax form Jetlite which had taken over Sahara Airlines.

The contentions of the appellant were as under:

•     The appellant merely displayed logo of the group companies and were a part of the said group and were not rendering any service to Sahara Corporation. No other activity was carried out by them.

•     The activities did not relate to any service as such rendered by Sahara Corporation to its customers and hence the appellant could not have been charged of having rendered service in the nature of business auxiliary services.

•     Services of ‘brand promotion’ and ‘sale of space’ have been introduced in the said Act subsequent to the relevant period and hence the appellants could not be held to have rendered such service.

•     Activity of the construction and sale of immovable property does not amount to service and promotion of immovable property is not covered within the definition of ‘business auxiliary service’.

•     Not a single document on record suggested that the appellants had promoted or marketed any service of Sahara Corporation, i.e., the appellants did not carry out advertising activity for the projects of Sahara Corporation.

•     The sale of immovable property by Sahara Corporation could not be deemed to be service for the relevant period as Sahara Corporation constructed building for themselves and not for others. Further, letter dated 10-9-2004 of the Ministry of Finance, clarified that the builder constructing for himself did not render any service as such.

The submissions of the Department were as under:

•     Resolution by Sahara Corporation revealed that they had decided to use the services of the appellants for promoting their business and in consideration of which, the appellants were to receive certain amount per passenger.

•     Merely because end product is transferred by way of sale, that will not wipe out the effect of services rendered by Sahara Corporation.

•     Subject-matter of sale being that property constructed comprised various services to make the premises ready for sale.

•     If the interpretation of the appellants was to be accepted, it would defeat the very provision of law.

Rejecting the demand of the Department, the Tribunal held as under:

•     Mere printing of logo or the promotion of a brand without reference to any particular service provided by the client was not covered under BAS (Business Auxiliary Service).

•     The service of brand promotion is brought in as a separate taxable service by the Finance Act, 2010 with effect from 1-7-2010 and before this date, brand promotion activity was not taxable under BAS.

•     Construction of immovable property on its own behalf and its sale does not constitute a service and therefore, even if such activities were promoted, it did not amount to ‘promotion or marketing of service provided by the client’. Furthermore, Memorandum or Articles of Association is not sufficient to establish that there was service for promotion or marketing provided. Similarly, relying on registration certificate, one cannot conclude about the liability to service tax. The Department has to place on record factual matrix which would disclose basic information, which would enlighten as to the activity of the firm.

•     The adjudication order went beyond the show-cause notice in confirming the demand by referring to various activities that Sahara Group carried on that were not alleged in the show-cause notice.

•     The onus to establish classification and taxability was on the department was not discharged by the Department.

Hence, the appeal was allowed holding that the appellant’s service could not be taxed as Business Auxiliary Service.

6. CENVAT credit:

a) Whether input service used for outward transportation is eligible for benefit as CENVAT credit?

Somaiya Organo Chemicals v. Commr. of C.Ex. & Cus., Aurangabad 2011 (21) STR 114 (Tri.-Mumbai)

The appellant paid service tax on the insurance policy in respect of goods transported from the factory to the port of export.

In case of export of goods, it has been held that input service includes services rendered for outward transportation upto place of removal of goods and service tax paid to facilitate goods to reach the place of removal has to be eligible for benefit of CENVAT credit. Insurance service was taken by the appellant for transportation of goods from the factory to the port of export. Thus, input service was used for the business activity undertaken up to the place of removal of goods. The Tribunal held that the appellant was entitled to take input service credit.

b) Is Cenvat credit available on air-ticket booking service for paying excise duty on manufacture of final products ?

Somaiya Organo Chemicals v. Commr. of C.Ex. & Cus., Aurangabad 2011 (21) STR 114 (Tri.-Mumbai)

The respondent was engaged in the activity of manufacture. Various air journeys were undertaken by employees for business purpose.

Revenue in appeal claimed that air-ticket booking service was not an input service as there was no nexus between air-ticket booking service and manufacturing activity. The respondent con-tended that ‘the object of CENVAT scheme is to allow credit on inputs used in or in relation to manufacture of final product and to allow credit on input services used in or in relation to manufacture of final product as well as in relation to business of manufacture’. Business activity cannot be restricted to mere manufacturing activity and it covers all activities that are related to business. The term ‘in relation to business’ cannot be given a restricted meaning and expenses incurred as a result of commercial expediency are covered by the said term. The appeal was allowed.

7. Commercial or Industrial Construction service:

Whether laying of pipeline covered as ‘Commercial or Industrial Construction service ?

Dinesh Chandra Agarwal Infracon P. Ltd. v. Commissioner of Central Excise, Ahmedabad 2011 (21) STR 41 (Tri.-Ahmd.)

The appellant provided service of laying of long-distance pipelines for the transfer of water in the State of Gujarat under a contract with the Gujarat State’s Sewerage Board, an independent body constituted under an Act of the State Government.

The Tribunal observed that service tax would be payable under the service head, ‘Commercial or Industrial Construction Service’ only if the service was provided to any person by a commercial concern and in relation to commercial or industrial construction service.

The appellant did satisfy the first condition mentioned above; however the second condition was not very certain. ‘Commercial or Industrial Construction Service’ was chargeable to service tax if it was used for the furtherance of business or commerce. As the canal built by the Government was not falling under commercial activity, service tax was held to be not chargeable.

Water purchased by the Board was distributed to rural and urban areas for the purpose of irrigation and drinking at subsidised rates and the operating cost was also not recovered by them. To set up an establishment for water supply was a part of the duties and functions of the State to provide its citizens with a better living. Accordingly, the services provided were held to be not covered as commercial or industrial construction service and therefore the appeal was allowed.

8. Penalty:

Should penalty be leviable in case service tax is paid along with interest after issuance of show-cause notice?

Rockwool Insulation v. CCE, Rajkot 2011 (21) STR 62 (Tri.-Ahmd.)

The appellant engaged in providing construction services paid service tax after the due date along with interest. However, part payment of service tax was made by the appellant after the issuance of show-cause notice (SCN). Penalty was levied on the appellant for non-payment of service tax along with interest.

Further, the appellant also collected service tax from their customers and admitted that the service tax was not paid because of financial difficulty. Thus, having regard to collection of service tax and non -payment, penalty was considered warranted and the case was remanded for re-determination of penalty imposable.

9. Principles of natural justice:

Show-cause notice issued by the revisionary authority violating the principles of natural justice.

Klockner Desma Machinery Pvt Ltd v. CST, Ahmedabad 2011 (21) STR 37 (Tri.-Ahmd.)

In the present case the demand of service tax raised against the appellant was initially dropped by the Assistant Commissioner and then taken for review by the Commissioner. Show-cause notice was issued by the Commissioner on 13-1-2010 requiring the appellant to file reply within seven days of receipt of notice and appear for personal hearing on 20th, 21st or 22nd January. The appellant applied for an extension of time to reply on 18-1-2010. There was no reference in the impugned order to said reply of the assessee. It was held that a period of seven days granted to the assessee to file a reply and personal hearing on three consecutive days in accordance with the principles of natural justice. The matter was remanded to the Adjudicating Authority for fresh decision observing principles of natural justice.

10. Rebate : Export of services:

Whether non-filing of prior declaration leads to rejection of rebate claim?

Manubhai & Co. v. CST, Ahmedabad 2011 (21) STR 65 (Tri.-Ahmd.)

The appellant claimed refund under Notification No. 12/2005-ST being service tax paid on input services used in services exported by them. The said Notification provides for filing of declaration describing the quantity, value, rate of duty, amount of tax payable on inputs, value and amount of service tax and cess payable on input services prior to the date of export. The Authority was of the opinion that the assessee could not claim refund on the ground that the appellant had not filed of non-filing declaration before export. It was further held that the notification is divided into two parts. The first part gives conditions to be fulfilled for granting of refund and the second part gives the procedures to be followed and that the requirement of a declaration in the Notification cannot be treated as a mere procedural requirement.

The appellant argued that substantive benefit can-not be denied on the ground of procedural lapses. The Tribunal held that failure to file declaration is not sufficient to hold that the assessee did not pay service tax on input services. Non-observance of a procedural condition was of a technical nature and cannot be used to deny the substantive concession.

11. Refund:

Whether refund is allowable when service tax is paid in case when the assessee fails to take benefit of small scale exemption?

Cancio E.P. Mascarenhas v. CCEx., Goa 2011 (21) STR 17 (Tri.-Mumbai)

Notification 6/2005 provided for threshold exemption of service tax on taxable services of the value not exceeding Rs.8 lakh to a service provider in the relevant year. The appellant did not know about this benefit and paid service tax on commission received from his client. On becoming aware, the appellant filed a refund claim of service tax paid by them. However, it was rejected on the ground that the appellant had not exercised the option for claiming the benefit of threshold exemption Notification. Departmental authorities submitted that the appellant paid tax by fulfilling the condition 2(1) of the said Notification which says that a service provider can opt to pay service tax and not avail the benefit of exemption, but the option once exercised shall not be withdrawn during the remaining part of the year. In this regard the assessee contended that the benefit of exemption Notification was available in any financial year subject to fulfilment of conditions specified in the Notification. The assessee could not take the decision in advance as he got registered in November 2007 and could not opt for exemption during the financial year. Hence, condition of 2(1) of the said Notification was not applicable to the appellant. Apart from this, the appellant also did not recover service tax from clients and paid service tax as an honest taxpayer. The appeal was allowed and the refund was allowed.