SOME IMPORTANT AMENDMENTS IN SERVICE TAX

Point of Taxation Rules, 2011 (POT Rules) were introduced with effect from 01/04/2011. In terms of Rule 7(C) of the POT Rules (before their amendment by notification No.4/2012), various professional service providers viz. architects, interior decorators, practising chartered accountants, practising cost accountants, practising company secretaries, scientific or technical consultants, legal consultants and consulting engineers paid service tax on receipt basis if such services were provided in capacity as individuals, proprietors or partnership firm.

The POT Rules have been amended vide Notification No.4/2012-Service tax and the amended Rules come into effect from 1st April, 2012. The amendment has substituted Rule 7 and the new Rule 7 does not have provisions contained in the above Rule 7(C). This provision permitting payment of service tax on receipt basis now finds a place in Rule 6 of the Service Tax Rules, 1994 (Service Tax Rules) by way of a proviso in a modified form. The benefit of payment of service tax on the basis of payment towards the value of taxable service is now extended to all the service providers rendering service in capacity as individuals and partnership firms instead of the above eight stated categories of service providers. However the benefit is restricted only to those cases where the value of taxable services provided from one or more premises in aggregate did not exceed Rs. 50 lac in the previous financial year. In effect, all individuals and partnership firms whose gross receipts exceeded Rs. 50 lac in the Financial Year 2011-12 would now be required to pay service tax in accordance with the point of taxation as determined under the amended POT Rules i.e., earlier of the three events i.e., date of provision of service, date on which invoice is issued or the date of payment. In terms of the amended Rule 4A of the Service Tax Rules, the invoice is required to be issued within 30 days instead of 14 days. (In case of banking and financial services, the time limit to issue the invoice is extended to 45 days).

As a matter of fact, professionals like chartered accountants, legal practitioners etc. account their professional receipts on “cash basis” and this is accepted under section 145 of the Income Tax Act, 1961. Payment towards professional fees in many cases is made after a delay. Moreover, for a portion of fees of interior decorators or architects is customarily ‘retained’ by the clients until completion of long-drawn projects. Thus, the very basic purpose of permitting under the Income Tax Act, 1961 for maintenance of accounts on “cash basis” is not only defeated or contradicted by the above provisions becoming effective on 1st April, 2012 but it also appears unfair vis-à-vis all individuals or partnership firms maintaining their books of account on “cash basis”. In any case, as service tax is required to be paid on advances received for services to be provided. Therefore, if the amended rule are implemented without considering the difficulty and avoidable paper work, it is likely to cause hardship to all professionals.

CENVAT Credit Rules, 2004:
Capital goods:

The definition of ‘capital goods’ as provided in Rule 2(a) of the CENVAT Credit Rules, 2004 (CCR) has undergone some noteworthy amendments coming into force from April 1, 2012. Motor vehicle used for transportation of passengers or goods covered by Tariff Headings 8702, 8703, 8704 and 8711 are not considered as ‘capital goods’ and therefore the duty paid on such vehicles used for business purposes including trucks/lorries used for transportation of goods except in the case of *seven specified categories of service providers is not available as CENVAT credit. However, in the financial year 2012- 13, excise duty paid on tractors and special purpose motor vehicles such as breakdown lorries, crane lorries, fire-fighting vehicles, concrete mixer lorries, mobile radiological units and trailers covered by Chapter Entry 8716, etc. and their chassis would be available as CENVAT credit as these vehicles now form part of the definition of capital goods. Thus to a limited extent when these assets are required for a business activity, excise duty paid would be eligible for claiming credit against duty liability or service tax liability. However, service providers other than goods transport agencies such as logistics service providers, freight forwarders, clearing and forwarding agents, construction contractors, etc. purchase transport vehicles including refrigerated vans, etc. only for providing logistics services. The duty payable on such vehicles forms part of the cost to the service provider, as no CENVAT credit is available as they are not treated as capital goods and for these service providers, CENVAT credit will continue to be unavailable. However, authorised service stations possess special purpose motor vehicles fitted with equipments to provide emergency repair services ‘on-road’ when vehicles on road face breakdown. These vehicles are not used for transportation of goods or passengers. Since special purpose vehicles now qualify as capital goods, the motor vehicles specifically designed to provide specific services should qualify to be considered ‘capital goods’.

Input service: The Finance Act, 2011 significantly restricted the scope of the definition of ‘input service’ provided in Rule 2(1) of CCR by specifically providing artificial exclusions. A small relaxation is now made by amending the definition of input service.

With effect from 1-4-2011 till 31-3-2012, except in case of *seven specified services, credit was not available for service tax paid on insurance and repairs or maintenance of motor vehicles. Now, credit in respect of service tax on insurance services and of repair or maintenance services will be available to manufacturers of motor vehicles for vehicles manufactured by them and to insurance service providers for the motor vehicles insured or reinsured by them. The insurance service however will be restricted to reinsurance and third-party insurance for insurance companies and in-transit insurance for the vehicle manufacturers according to the Government-Tax Research Unit’s letter dated 16-3-2012.

In case of hiring of a motor car or any other tangible goods for use, the credit of service tax paid was restricted from 1-4-2011 till 31-3-2012 to only *seven categories of service providers. In case of hiring of vehicles or any other goods, credit for service tax paid will be available to the extent such vehicles or goods hired are considered ‘capital goods’ for an assessee as a manufacturer or as a service provider.

As discussed above, the motor vehicles used for transportation of passengers and goods, covered by tariff headings 8702, 8703, 8704 and 8711 and their chassis are not considered ‘capital goods’ except for *seven categories of service providers. Implications of the above is that e.g., if a machinery or any other equipment which qualifies to be ‘capital goods’ for a manufacturer or a service provider, service tax paid on hiring of such machinery will now be available. By excluding this service in entirety, except to the specified seven categories from 1-4-2011 to 31-3-2012, the service used for bona fide business use was not treated as input service as it was specifically excluded. With the amendment, credit of service tax paid on such services will be available.

Removal/disposal of capital goods after use:

•     In Rule 3(5) of CCR, in its third proviso it was provided that when capital goods on which CENVAT credit has been taken are removed after they are used i.e., as second-hand capital goods, the manufacturer or service provider was required to pay an amount equal to CENVAT credit taken on such capital goods, as reduced by 2.5% for each quarter of a year or part thereof from the date of taking CENVAT credit in case of capital goods other than computers and computer peripherals. In case of computers and its peripherals, considering that they become obsolete fast, accelerated reduction or depreciation is allowed whereby at the end of fifth year, the value becomes Nil [i.e., 10% of every quarter of the first year (40% in the first year)] in the first year, 8% of every quarter of the second year (32% in the second year), 5% of every quarter of the third year (20% in the third year) and 1% for each quarter of fourth and fifth year (8% in aggregate in fourth and fifth year).

•    In a separate sub-clause viz. in sub-clause (5A) of the said Rule 3 of CCR, it was provided that when any capital goods are cleared as scrap and waste, the manufacturer was required to pay an amount equal to the duty leviable on the transaction value of the sale of such capital goods as scrap. This was applicable only to those capital goods on which CENVAT credit was taken. When such capital goods were sold as waste and scrap, the service provider was not required to pay any amount.

•     Now, with effect from 17th March, 2012, both the above provisions are aligned in a common rule viz. the substituted sub-rule (5A) in place of the third proviso in sub-rule (5) and the erstwhile sub-rule (5A) as discussed above. The implications of the substituted sub-rule (5A) of Rule 5 is that 17th March 2012 onwards, whether capital goods are disposed of as second-hand goods or waste and scrap and whether by a manufacturer or a service provider and if CEN-VAT credit was taken on such capital goods, the assessee would pay amount equal to CENVAT credit taken as reduced at the same rates (as applicable prior to the amendment provided above) in case of computers and other capital goods as the case may be. However, if the amount so calculated is less than the duty levi-able on the actual transaction value of the sale of such used capital asset, then the amount equal to the duty leviable would be required to be paid by the assessee.

Thus, service providers are now required to pay an amount equal to the duty on sale of any capital goods, whether as scrap or otherwise. For instance, if a computer was sold after 5 years of its date of receipt, no amount equal to the duty on its sale was required to be paid. However, now with effect from 17-3-2012, on sale of second-hand capital goods or scrap value of any capital goods whether a manufacturer or a service provider as the case may be will be required to pay an amount equal to the duty payable on its transaction value or an amount equal to CENVAT credit as reduced by permissible deprecation, whichever is higher. Further, hardship is expected to be faced for sale of very old assets as scrap or the transfer of various capital goods occurring in slump sale, mergers and acquisitions, etc. as the assessee may find it hard to prove whether CENVAT credit was at all taken. At times, even when records are available, the unit of measurement for virgin capital goods may be different from the unit of measurement for scrap. Scrap may be sold based on say kilogram, whereas at the time of purchase per unit price or per meter price may have been applied. Therefore, removal of scrap ideally should have been subjected only to transaction value for reversal of credit as in the past.

Conditions for allowing credit:

Rule 4 of CCR provides conditions for allowing CENVAT credit. Sub-rules (1) and (2) of the said Rule 4 provides for condition vis-à-vis output service provider that inputs and capital goods, respectively, are eligible for CENVAT credit when they are received in the premises of output service provider. With effect from 1-4-2012, a proviso is inserted under both the sub-sections to provide that the CENVAT credit in respect of inputs as well as capital goods may be taken when inputs or capital goods are delivered to the provider of service, subject to documentary evidence of delivery and location of inputs or capital goods as the case may be. Thus the condition of receipt of inputs or capital goods in the premises of the output service provider is deemed to be fulfilled by a mere documentary evidence of delivery of capital goods or inputs. For instance, if a person providing site formation and clearance services purchases a dumper, such ‘capital goods’ cannot be practically received in the premises of the service provider. Therefore, the proviso would dispel practical difficulty in implementation of the condition of the receipt of inputs or capital goods in the premises of the output service provider.

Distribution of credit by Input Service Distributor:

Rule 7 dealing with distribution of CENVAT credit by input service distributor is replaced as a whole with effect from 1st April, 2012. Input service distributor means an office of a manufacturer or producer of final products or output service provider which receives invoices towards purchase of input services and which in turn would issue invoice or challan for distribution of credit of service tax paid on such services to its units located elsewhere. Hitherto, there were only two simple conditions underlying distribution of credit viz.:

•     Credit distributed against the invoice or challan would not exceed the amount of service tax actually paid.

•     Credit of service tax attributable to service used in a unit exclusively engaged in manufacture of exempted goods or providing exempted services would not qualify to be distributed.

Now, retaining the above two conditions, further two conditions are laid down, thus implying restrictions on the distribution of eligible credit. These conditions are:

•     Credit of service tax attributable to service used wholly by a unit would be distributed only to such unit; and

•     Credit of service attributable to service used for more than one unit such as common services like audit services would be distributed pro rata on the basis of the turnover of the concerned unit to the sum total of the turnover of all the units to which the service relates. For the purpose of this condition, the unit would include premises of output service provider and premises of a manufacturer including the factory whether registered or not and the term ‘turnover’ is required to be determined as it is required to be determined under Rule 5 of CCR for the purposes of refund. In effect, these conditions would increase substantial paper-work for the input service distributor.

Interest: Recovery of CENVAT credit wrongly taken:

Rule 14 of CCR deals with situations when CENVAT credit is taken or utilised wrongly or is erroneously refunded, and the same is payable by a manufac-turer or provider of output service with interest. Since Rule 14 provides for interest liability on CEN-VAT credit ‘taken or utilised wrongly’, there were numerable disputes occurring between the revenue and assessees as to whether interest is leviable on the amount of credit was ‘taken’ by the assessee in the CENVAT credit account, but not ‘utilised’ against any liability of excise duty or service tax. The appeal by the revenue in the case of Maruti Suzuki Ltd. reported in (2007) 214 ELT 173 (P&H) was dismissed by the Supreme Court wherein the P&H High Court had upheld the Tribunal’s decision that no interest was payable when CENVAT credit was taken but not utilised. However, the Supreme Court in the case of UOI v. Ind-Swift Laboratories Ltd., (2011) TIOL 21 SC-CX held that the High Court erroneously held that interest cannot be claimed from the date of wrong availment of CENVAT credit. It had further held that provisions are to be read as a whole. We find no reason to read the word ‘or’ as the word ‘and’ which appears between the expression ‘taken’ or ‘utilised wrongly’ or ‘has been’ erroneously refunded. In (2011) 266 ELT 41 (Guj.) CCE v. Dynaflex P. Ltd., it was held that when a wrong entry was reversed voluntarily before utilisation, no interest was payable. The amendment made in the Rule 14 now by using the words ‘taken and utilised wrongly’ in place of ‘taken or utilised wrongly’ is well intended to extend fairness and to put an end to the controversy over payment of interest from the date of availment of wrong credit instead of its utilisation, if any.