Month: April

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.

Background:
During the past decade, redevelopment of society/ properties has tremendously increased mainly in metropolitan cities like Mumbai. Increased redevelopment activities have inter alia attracted attention of the Preventive/Anti-Evasion Wing of the Service Tax Dept. and inquiry is initiated or show-cause notice is issued in this regard. Some of the significant implications impacting redevelopment activity are discussed hereafter.

Common features in redevelopment:

Some of the commonly found features redevelopment arrangements are listed below:

(i) Societies usually own buildings and are often lessees of the land owned by MHADA/other bodies on which the building is built;

(ii) These societies are entitled to additional FSI under relevant regulations or statute, which can be used for development upon payment of appropriate premium;

(iii) Such societies grant development right to the builders/developers to demolish existing building and construct new buildings. Builders/ developers pay the appropriate premium for additional FSI entitled to the society and utilise the same for additional construction and/or development;

(iv) Each existing occupant in the building of the society, is given a flat/office in the newly constructed building of a bigger area than the existing area free of cost or without any additional consideration;

(v) The entire cost of new building and other related cost is fully borne by the builders or developers;

(vi) Builder or the developer is fully entitled to the proceeds from sale of remaining flats/ shops/ commercial premises to be constructed by him on the society’s properties through sale in the open market; and

(vii) Existing occupants also receive a specified monetary compensation and reimbursement towards rentals for alternate accommodation during the period of demolition of old building and construction of new building.

Any redevelopment arrangement between a builder or a developer and the society is mutually beneficial to all the affected parties or can be described as a barter deal inasmuch as:

(i) In addition to monetary compensation and reimbursement of rentals, existing occupants get a flat/office of a higher area in a newly constructed building at no extra cost;

(ii) The society would get newly constructed property with enhanced area and improved or better facilities;

(iii) Builders/developers gain through realisation of sale/proceeds of additional flats/commercial premises at market price which far outweighs the cost of obtaining additional FSI, construction cost of the new building and payment of rentals to existing occupants, all put together.

Redevelopment: Whether a service by a builder or developer?

Service tax authorities have issued show-cause notices contending that the builders/developers do not own the property undertaken for redevelopment and ‘service’ is therefore provided by the builder/developer to the society. The issue therefore needs to be analysed in detail.

In order to be liable to service tax, it is essential that, ‘service’ is provided by a service provider. The term ‘service’ is not defined under the Finance Act, 1994 (‘Act’). However, some meanings attributed to ‘Service’ are as follows:

(i) ‘Service’ — Black’s Law Dictionary:

The act of doing something useful for a person or company for a fee.

A person or company whose business is to do useful things for others, a linen service.

An intangible commodity in the form of human effort, such as labour, skill, or advice, contract for services.

(ii) ‘Service’ — Magus Construction Pvt. Ltd. v. UOI, (2008) 11 STR 225 (Gau.)

In the said ruling, the following was observed by the Gauhati High Court:

Para 29 “In the light of the various statutory definitions of ‘service’, one can safely define ‘service’ as an act of helpful activity, an act of doing something useful, rendering assistance or help. Service does not involve supply of goods; ‘service’ rather connotes transformation of use/user of goods as a result of voluntary intervention of ‘service provider’ and is an intangible commodity in the form of human effort. To have ‘service’, there must be a ‘service provider’ rendering services to some other person(s), who shall be recipient of such ‘service’.”

(iii) Service — Jetilite (India) Ltd. v. CCE, (2011) 30 STT 324 (New Delhi — CESTAT)

An extract from the Tribunal’s observation is provided below:

Para 65 “Being so, taking into consideration the common understanding of the definition of the term ‘service’ as well as the definition of the term ‘taxable service’ under the said Act, it is evident that the service contemplated under section 65(19) is the one which relates to service rendered by the service recipient. It may be taxable service or may not be so. However, the situation invariably contemplates existence of two entities in order to bring the case within the scope of definition of business auxiliary service. One entity which provides service to others is called a service recipient. Another entity is one which provides service to the service recipient in relation to the service rendered by such service recipient to others, and such entity is called the service provider.”

Considering the fact that different types of redevelopment agreements are entered into between the societies and the builders/developers, it would be impossible to lay down any general proposition as to whether a redevelopment arrangement results in a service provided by a builder/developer to a society or not.

A redevelopment arrangement is usually for the mutual benefit of the affected parties to the contract. Though not described, it appears to be in the nature of a joint venture arrangement, wherein role of each party is specified and contracted for. Hence, there is a possibility of a view depending on the terms of an agreement that redevelopment arrangement does not result in any ‘service’ provided by builders/developers to the societies. At the most, services performed in pursuance of redevelopment arrangement by builders/developers, amount only to self-service which cannot be subjected to service tax.

In this regard the following observation of the Tribunal in Rolls Royce Industrial Power (I) Ltd. v. Commissioner, (2006) 3 STR 292 (Tribunal) may be noted:

“……………….. The terms of the contract do not envisage or involve providing any consulting or engineering help to the owner. The operator is fully autonomous and responsible for the performance of operation and maintenance. Whatever engineering issues are involved, it is for the operator to find solutions for, and attend to in the course of operation and maintenance. He is not required to render any advice or to take any orders from the owner. He cannot pass on the responsibility for operating the plant in any manner to the owner. Thus, there are no two parties, one giving advice and the other accepting it. Service tax is attracted only in a case involving rendering of service, in this case, engineering consultancy. That situation does not take place in the present case. Therefore, we are of the opinion that the duty demand raised is not sustainable”

Attention is also drawn to the following observation of the Bangalore Tribunal in Precot Mills Ltd. v. CCE, (2006) 5 STT 35 (Bang.-CESTAT)

“………………

M/s. Precot Mills Ltd. is a corporate entity. It has got various units which function as separate profit centres. When service is rendered by one unit to the other, debit note is raised for the value of service in order to evaluate the perfor-mance of a particular unit. Ultimately there is only one balance sheet for the legal entity for M/s. Precot Mills Ltd. and not for the separate unit. In other words, the appellants, M/s. Precot Mills Ltd. do not receive any valuable consider-ation for service rendered by one unit of the appellant to the other unit, in view of the fact that each unit is part of the same legal entity which is the appellant. To put it differently, when one renders service to oneself, as in the present case, there is no question of leviability of service tax.”

Although the facts in both the above cases are dissimilar, the ratio of the rulings is relevant to the issue of redevelopment arrangement.

Further, as regards the contention that there is no liability to service tax in case of self-supply of service, further support can be found from the following:

    Gauhati High Court Ruling in Magus Construction Pvt. Ltd. v. UOI, (2008) 11 STR 225 (Gau.)

    Dept. Circular dated 17-9-2004 on Estate Build-ers in regard to Construction Services

    Master Circular dated 23-8-2007 in regard to applicability of service tax on real estate builders

    Dept. Circular dated 29-1-2009 regarding im-position of service tax on builders

Nevertheless, it needs to be expressly noted that whether a particular redevelopment arrangement results in any service provided by a builder/devel-oper to a society or not would depend upon the facts and circumstances and in particular terms and structure of a redevelopment arrangement. Further, it is a highly contentious issue. If a view is adopted that there is no service provided by a builder/developer to a society, the same would have to satisfy the judicial test.

Applicable Service categories:
Service tax provisions do not contain any spe-cific category for redevelopment. Hence taxability would have to be determined on the basis of service categories relevant to construction activi-ties viz.:

    i) Commercial or industrial construction [section 65(25b)/65(105)(zzq) of the Act]

    ii) Construction of Complex [section 65(30a)/65(91a)/65(105)(zzzh) of the Act]

    iii) Works Contract [section 65(105)(zzzza) of the Act]

A substantial part of construction carried out in terms of a redevelopment arrangement would have to satisfy the essential taxability criteria specified in the definitions stated above in order to be made liable to service tax.

The scope of construction of complex/commercial or industrial construction liable to service tax has been expanded w.e.f. 1-7-2010 to tax advances received by builders/developers from prospective buyers for flats/offices which are under construction. The relevant extracts from Dept. Clarification clarifying the scope of expanded service in the Ministry’s Circular Letter D.O.F. No. 334/1/2010-TRU (Annexure B), dated 26-2-2010 was reproduced in February 2011 issue of BCAJ and therefore is not repeated here (refer para 2 on page 57)

In this context and as analysed in February Issue of BCAJ, Notification No. 36/2010-ST, dated 28-6-2010 provides that advances received by the builders/developers from prospective buyers prior to 1-7-2010 for flats/offices under construction have been exempted from the purview of expanded scope of construction of complex/commercial or industrial construction service. This exemption is extremely relevant inasmuch as, in many show-cause notices issued by the service tax authorities in the issue of redevelopment, the advances received by builders/developers from prospective buyers for the subsequent period is treated as value of taxable service, provided by a builder/developer to a society.

Redevelopment of flats/offices of existing occupants made prior to 18-4-2006 without any monetary consideration — Free of cost:

It is now a settled position that taxability to service tax is to be determined at the time when service is provided. In this regard, reliance can be placed on the Gujarat High Court ruling in Reliance Industries Ltd. v. CCE, (2010) 19 STR 807 (Guj.) and other rulings as well. Hence, in the context of construction services, taxability is to be determined based on the date on which relevant construction is completed.

Section 67 of the Act relating to valuation of a taxable service was significantly amended w.e.f. 18-4-2006. One of the more significant amendment relates to enactment of specific provisions for valu-ation of taxable services in cases where service is rendered for a consideration not determined in monetary terms (either fully or partly). This is discussed in para 1.6 below.

In terms of these provisions read with Rule 6 of the Service Tax Rules, 1994 as existed prior to 18-4-2006, no service tax is payable if services were rendered free or without any monetary consideration.

Vide, CBEC Circular No. 62/11/2003-ST, dated 21-8-2003, it was clarified that, even if a service is taxable, there will be no service tax if service is provided free, as value of service tax will be zero.

In the light of the foregoing, it would appear that in cases where flats/offices are allotted to existing occupants of a society in the new building (constructed prior to 18-4-2006) free of cost in pursuance of redevelopment agreement between a society and the builders/developers, there would be no liability to service tax in terms of the valuation provisions as they existed prior to 18-4-2006.

Redevelopment made for existing occupants after 18-4-2006:

Service tax is demanded in regard to flats/offices built and allotted to existing occupants free of cost by treating the entire sale proceeds of additional flats/commercial premises received by the builders/developers in the subsequent years as the value of taxable services. Hence this aspect needs a detailed discussion, more particularly after the introduction of the Valuation Rules w.e.f. 18-4-2006. The amended section 67 of the Act effective from 18-4-2006 has conceptually changed the provisions relating to valuation of service for the levy of service tax. In addition, Service Tax (Determination of Value) Rules, 2006 (Valuation Rules) have been notified to come into force from 19-4-2006.

Prior to its substitution, section 67 of the Act read as “For the purpose of this Chapter, the value of taxable service shall be the gross amount charged by service provider for such service provided or to be provided by him”. The newly introduced section 67 provides for ‘cost of service in the hands of recipient of service’ and ‘value of similar service’ as the basis for valuation, which is in complete departure from the earlier position in law which restricted itself to ‘gross amount charged’ by a service provider. Thus in the light of amended section 67 read with the Valuation Rules, the following is analysed.

Value of ‘similar’ service:

According to Rule 3(a) of the Valuation Rules, in case of a taxable service where consideration received does not consist wholly of money, then value is required to be determined, based on the gross amount charged by a service provider for similar service provided to any other person in ordinary course of trade.

Brief analysis of ‘similar’ — Some of the meanings attributed to ‘Similar’ are as under:

•     ‘Similar’ means resembling or similar; having the same or some of the same characteristics— (Webster’s Online Dictionary)

•     ‘Similar’ means ‘having a marked resemblance of likeness; of a like nature of kind — (Oxford English Dictionary)

On the basis of the foregoing, it would appear that the word ‘similar’, does not mean identical but there should be resemblance between two services in order to constitute the services as similar services. Various factors would have to be considered in order to determine whether two services are similar or not.

In the context of Central Excise, the Supreme Court has observed with reference to ‘electrical appliances normally used in the household and similar appliances used in hotels’ etc., that “the statute does not contemplate that goods classed under the words of ‘similar description’ shall be in all respects the same. If it did, these words would be unnecessary. These were intended to embrance goods not identical with those goods.” [Nat Steel Equipment v. Collector, (1998) 34 ELT 8 (SC) quoted and followed in CCE v. Wood Craft Products Ltd., (1995) 77 ELT 23 (SC)]

Valuation on the basis of equivalent money value of consideration:

Rule 3(b) of the Valuation Rules provides that where the value cannot be determined in accordance with clause (a) [i.e., Rule 3(a) on basis of value of similar service], the service provider shall determine the equivalent money value of such consideration which shall, in no case be less than the cost of provision of such taxable service.

Thus, if the value of similar services cannot be ascertained, the ‘value’ will be ‘equivalent value of consideration’. Such ‘equivalent value’, to be determined by service provider himself, shall not be less that cost of provision of such service.

It is pertinent to note that Valuation Rules make no provision for method of calculation of ‘cost’ of the taxable services. No guidelines have been issued by CBEC prescribing methodology to be adopted for the purposes of valuation.

Implications in the context of redevelopment:

Under a redevelopment arrangement, flat/office is provided to an existing occupant free of cost, in pursuance of an agreement between a society and the builder/developer. Hence, immediate beneficiary of redevelopment is the flat/office occupant, whereas society would be a remote beneficiary of redevelopment in the existing sense that there would be enhancement of property value and increased/better facilities that would be available.

Whether or not there is a flow of consideration (monetary or otherwise) from a builder/developer to a society in terms of amended section 67 of the Act, is a highly complex and contentious issue for which there is no ready answer.

Assuming, there is flow of ‘consideration’ arising from the redevelopment arrangement between builders/developers to a society, the taxable value of service in terms of Valuation Rules would be determined as under:

    i) Option 1 — Amount equivalent to the gross amount charged by a builder/developer to any new buyer of flat/office for similar service provided in the ordinary course of trade and gross amount charged is the sole consideration.

This would have to be determined based on an examination of the facts of a given case duly supported by independent documentary evidences.

    ii) Option 2 — In case, value cannot be determined in accordance with Option 1 above, builder/developer would have to determine equivalent money value of such consideration, which shall not be less than the cost of provision of taxable service factoring mainly cost incurred for obtaining FSI, the en-tire cost of construction, rentals paid for the period during demolition and construction period, etc. This will differ depending on the facts of each case.

As yet, no methodology is prescribed by CBEC to determine equivalent monetary value of consideration in terms of the Valuation Rules. However, in this regard, recourse may be made to Guidelines issued by CBEC under Central Excise for computing cost of captive consumption liable to excise duty, on the basis of Cost Accounting Standard (CAS 4) issued by The Institute of Cost & Works Accountants of India. This basis has been approved by the Supreme Court in CCE v. Cadbury India Ltd., (2006) 200 ELT 353 (SC).

In case there is any liability to service tax on the builder/developer, it would appear that the same would be subject to various benefits available under the applicable exemption/abatement notifications granting full or partial exemption from payment of service tax.

Alternatively, benefits may also be available under the CENVAT Credit Rules, 2004 subject to compliance of stipulated conditions.

Conclusion:
Redevelopment of properties is a very complex subject and issues relating to service tax under re-development are equally complex. Issues involved are likely to be litigated extensively in due course of time. Till the time, there is a reasonable level of clarity on the complex subject, it would be in the interest of concerned builders/developers to factor service tax while finalising redevelopment arrangements.