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Category: Indirect Taxes

(2011) 22 STR 578 (Tri.-Ahmd.) — Ultratech Cement Ltd. v. Commissioner of Central Excise, Bhavnagar.

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CENVAT credit of service tax — Whether vehicles used in residential colony of assessee and insurance on residential buildings includible within the scope of ‘input services’.

Facts:
The appellant was denied the credit of service tax paid on the vehicles used in the residential colony of the appellant as also the credit of service tax paid on the insurance of the residential building on the ground that the same could not be considered to be ‘input service’. It was contended that the issue involved in the present case was related to the credit of service tax paid on the services used in activities related to business which covered all activities related to functioning of a business.

Held:
Referring to a number of case laws and relying on the decisions in the case of Manikgarh Cement v. CCE & Cus., Nagpur 2008 (9) STR 554 (Tri.- Mumbai) and Millipore India Ltd. v. CCE., Bangalore 2009 (13) STR 616 (Tri.-Bang.), respectively, it was held that the definition of input service being quite wide, an activity used for business purposes was held as ‘input service’ and the assessee was entitled to the credit of service tax paid on vehicles used in the residential colony of assessee and insurance on residential buildings.

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(2011) 22 STR 558 (Tri.-Ahmd.) Commissioner of Central Excise, Bhavnagar v. Gujarat Travels.

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Tour operator service — Vehicle not registered as a tourist vehicle but registered with the Regional Transport Authority under the PCOP (Contract Carriage Permit) — Whether liable to pay service tax — Appellate Authority holding that assessee not covered prior to 10-9-2004 when ambit expanded to cover any mode of transport — No reason to interfere in order.

Facts:
The respondents operating the tours in an omni-bus registered with the Regional Transport Authority covered under PCOP (Contract Carriage Permit) were not paying service tax on the ground that the tour was not being conducted in a tourist vehicle as defined in the Motor Vehicle Act. The respondents cited the case of Secretary, Federation of Bus Operators Association of Tamil Nadu, Chennai v. UOI and Ors., 2006 (2) STR 411 (Mad.), wherein it was held that the tour conducted by a contract carriage (and not by a tourist vehicle) do not fall within the definition of Tour Operator.

Held:
It was held that there was no reason to interfere in the order of the Commissioner (Appeals) holding that the respondents were not required to pay service tax. The Revenue’s appeal was rejected.

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(2011) 22 STR 553 (Tri.-Bang.) Commissioner of Central Excise, Hyderabad v. Vijay Leasing Company.

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Activity of mineral extraction, classification issue — Whether mining service or site formation and clearance service — Activity of site formation, etc. incidental to contract of mining undertaken — Activity not taxable under site formation and clearance service during relevant period i.e., prior to introduction of mining service w.e.f. 1-6-2007.

Refund — Whether tax paid on self-assessment is refundable — Self-assessment cannot be considered as assessment made by officer u/s. 73 of the Finance Act — Assessee justified in filing refund claim.

Facts:
The respondents being engaged in providing services of mining to their clients/principals got themselves registered under the category of ‘site formation and clearance, excavation and earthmoving and demolition’ service and accordingly paid service tax under the said category for the period 16-6-2005 and 30-9-2006. Pursuant to the introduction of separate service under the category of mining service w.e.f. 1-6-2007, they filed a refund claim for an amount of Rs.1,58,11,007 on the ground that their service would fall under the new category. The Revenue contended that the contract entered by the respondents with the principals indicated that the services were of excavation, drilling and demolition services. Moreover, the respondents having discharged the service tax liability on self-assessment could not file a refund claim. The respondents contended that the removal of overburdens and excavation of ore undertaken as per the contract would clearly fall under the category of mining services and was liable to be taxed accordingly. Further that the self-assessment would not amount to assessment done by an officer and hence there was no restriction for claiming the refund.

Held:
Relying on the High Court judgment in the case of Central Office Mewar Palaces Org. v. UOI, [2008 (12) STR 545 (Raj.)], the respondents were held to be entitled to the refund claim. Appeal of the Revenue was rejected.

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Limitation — Delay of 53 days in filing appeal — Delay attributed to resignation of both employee handling service tax matters and his successor — Delay condoned — Section 86 of the Finance Act, 1994.

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Facts:
The appellant pleaded that the delay of 53 days in filing the appeal was owing to the resignation tendered by the employees handling service tax matters. The delay on part of the appellant was neither willful nor on account of any negligence and was beyond the appellant’s control.

Held:
The Tribunal held that the reasons given for the delay in application for condonation were justifiable and were aptly supported by an affidavit by a senior functionary and hence the delay of 53 days was condoned.

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(2011) 22 STR 533 (Tri.-Chennai) Trichy Inst. of Management Studies (P) Ltd. v. Commissioner of Central Excise, Trichy.

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Commercial training or coaching services — Parallel colleges, liability — Levy in respect of training and coaching which forms essential part of course, leading to issue of degrees, etc., not justified — Section 65(27) of Finance Act, 1994.

Facts:
The assessee was conducting classes for students enrolled in distance education programme of Alagappa University. The appellant contended that the coaching classes being in the nature of parallel colleges should be exempted from the payment of service tax. Further, as per the MOU executed between the Alagappa University and the institution run by the appellant, the institution was recognised as a centre for enrolling candidates for distance education programmes. The case of Malapuram Distt. Parallel College Association v. Union of India, 2006 (2) STR 321 (Ker.) was cited in support.

Held:
Applying the ratio of the High Court judgment in case of Malapuram Distt. Parallel College Association v. Union of India, 2006 (2) STR 321 (Ker.), it was held that service tax was not to be levied in respect of training and coaching provided by the appellant. Although it formed an essential part of the course or curriculum of a university leading to issuance of certificate or diploma or degree to the students recognised by law, is not justified to be commercial coaching. The appeal was allowed accordingly.

(2011) 22 STR 539 (Tri.-Bang.) — Mphasis Ltd. v. Commissioner of Central Excise, Bangalore.

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(2011) 23 STR 345 (Kar.) — Commissioner of Central Excise, Mangalore v. Dee Pee En Corporation.

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Quantum of penalty — Whether penalty could be levied at the rate of Rs.100 per day on failure to pay duty by the assessee for period prior to 10-9-2004.

Facts:
The issue for consideration was whether the appellant could levy penalty at the rate of Rs.100 per day on failure to pay duty by the assessee for the period prior to 10-9-2004 or not. According to the assessee, the provisions of section 76 to levy penalty at the rate of Rs.100 per day came only from 10-9-2004 and thus it could not be levied retrospectively. The Department relying on the judgment in the case of ETA Engineering Ltd. v. Commissioner of Central Excise, Chennai 2004 (174) ELT 19 (Tri.- LB) contended that even for the period prior to 10-9-2004, the Tribunal had confirmed the order of levying penalty at the rate of Rs.100 per day.

Held:
The Tribunal observed that the judgment of ETA Engineering Ltd. was not applicable to this case as it did not consider effective date of the amended provision. It was held that penalty at the rate of Rs.100 per day was leviable for the period 10-9-2004 onwards and not prior to the said date.

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(2011) 22 STR 656 (Tri.-Ahmd.) Fascel Ltd. v. Commissioner of S.T.

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Penalty — Actual amount not declared in ST-3 Return and intention to evade tax alleged — Tax demand with interest confirmed — Duty liability worked by appellants and no investigation by Revenue except issuance of SCN based on P/L account — Penalties set aside — Section 80 considered.

Facts:
The appellants engaged in providing telephone services were issued a show-cause notice (SCN) demanding service tax on noticing that the appellants had paid the service tax on lower amount than the income shown in the profit and loss account (P/L account). The appellants pleaded that the SCN was issued without any investigation/ verification and merely on the basis of the P/L account. Relying on the decision in the case of Martin & Harris Laboratories Ltd. v. CCE, Gurgaon 2005 (185) ELT 421 (Tri.-Delhi) and a host of other decisions, it was submitted that the Annual Report and P/L account were public documents and therefore on the ground of limitation, the whole demand was liable to be set aside. Moreover, the very fact that there was excess payment in one year and short payment in another year showed that there was no suppression, mis-declaration/fraud, etc. to invoke the extended time, whereas the Revenue contended that in view of the fact that ST-3 return did not reflect the correct position, suppression/ mis-declaration was rightly invoked.

Held:
The Tribunal observed that the appellants had reasonable cause for the alleged wrongful payment of service tax and hence it was held that the case was fit for invoking section 80 of the Finance Act, 1994 and the penalties were set aside.

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(2011) 22 STR 650 (Tri.-Bang.) — Vikas Coaching Centre v. Commissioner of Custom, Central Excise & S.T., Guntur.

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Valuation — Commercial training or coaching services — Whether hostel and mess charges includible while calculating the liability of service tax on their services.

Facts:
The appellants provided the service of ‘Commercial training or coaching’. In addition to the said taxable service, they also provided optional hostel and mess facility. The students opting for the hostel and mess facility were charged separately for the same. The appellants relied on the decision of the Tribunal in the case of Aditya College of Competitive Exams v. CCE, Visakhapatnam 2009 (16) STR 154 (Tri.-Bang.). According to the Revenue, hostel and mess charges were includible in the value of taxable service.

Held:
It was held that for calculating liability of service tax for providing commercial training or coaching service, the hostel and mess charges were not includible.

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2011 (22) STR 638 (Tri.-Chennai) — Commr. of Service Tax, Chennai v. State Bank of India.

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Whether provisions relating to suppression of facts invokable — Jurisdictional officer not intimated by concerned branch of SBI about providing both taxable and exempted service — No declaration made in ST-3 returns — Provisions of Rule restricting utilisation of credit clear — Tax evasion detected on audit — Longer period of limitation invokable.

Facts:
A branch of the State Bank provided both taxable and exempted service. During February 2005 the respondents utilised CENVAT credit exceeding the admissible limit of 20% amount as provided in the then Rule 6(3) of the CENVAT Credit Rules, 2004. The Department alleged that the said branch of SBI did not disclose to the Department that they provided exempted output service also and that they have taken service tax in excess of the admissible 20% amount. The said evasion came to light when the accounts of SBI were audited by the Departmental audit officers. As per the Revenue, this was a clear contravention of service tax law on part of the respondents with an intention to evade payment of service tax. Moreover, the longer period of limitation was rightly invoked. Citing the case of Pushpam Pharmaceuticals Co. v. Collector of Central Excise, Bombay, 1995 (78) ELT 401 (SC), it was inter alia contended that there was no intention to evade service tax and that the head office of the respondents had issued a circular asking the branches to utilise CENVAT credit keeping in view the admissible 20% amount. However, copy of such circular was not produced.

Held:
The Tribunal observed that several ingredients required for the purpose of invoking longer period of limitation u/s. 73 of the Finance Act, 1994 were available in the case such as misstatement, suppression as well as contravention of provision with intent to evade payment of tax. Accordingly, it was held that the period of limitation was invokable in this case. The appeal was remanded to the lower Appellate Authority as regards the merit of the case.

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(2011) 22 STR 625 (Tri.-Chennai) — Parmeshwari Textiles v. Commissioner of Central Excise, Tiruchirapalli.

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Refund of service tax paid on technical testing and analysis service availed by exporter — Exemption under Notification No. 41/2007-ST by way of refund denied stating that service provider’s invoices not specific to export goods — Policy of Govt. not to burden exports with domestic taxes — Impugned order set aside.

Facts:
The appellant was denied refund by the lower appellate authority in respect of service tax paid for technical testing and analysis service on the ground that the appellant had not fulfilled the conditions specified in Notification No. 41/2007-ST, dated 6-10-2007 and that the service provider’s invoices were not specific to the export goods. The appellant contended that the order of the lower Appellate Authority denying the refund was not justified and was given without taking in consideration the facts.

Held:
The Tribunal observed that it is the policy of the Government to encourage exports and not to burden the export consignments with domestic taxes like the service tax which is paid in relation to the input service. The order passed by the original authority allowing the refund of input service tax in respect of the export goods was upheld by the Tribunal.

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(2011) 23 STR 369 (Tri.-Bang.) — Ceolric Services v. Commissioner of Central Excise, Bangalore.

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Non-consideration of revised return filed belatedly — Return revised after lapse of 11 months — Rule 7C states revised return cannot be ignored just because it is filed after period provided in Rule 7B.

Facts:
Service tax was demanded and penalty was levied. The applicant had filed a return under Rule 7 of the Service Tax Rules, 1994 and subsequently revised it. The lower authority had not taken into consideration the revised return as it was filed after a lapse of 11 months and as per the rules, the revised return was to be filed within 60 days.

Held:
It was held that revised return cannot be ignored simply on the ground that the same was filed after the period provided under Rule 7B by virtue of section 7C of the Service Tax Rules 1994. The appeal was allowed by way of remand.

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(2011) 23 STR 367 (Tri.-Ahmd.) — Nemlaxmi Books (India) P. Ltd. v. Commissioner of Central Excise, Surat.

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Refund of Cenvat credit accumulated on export of goods — More than one refund claim filed for same quarter — Violation of condition No. 2A of appendix of Notification No. 5/2006-C.E. (N.T.) and not sustainable — Rejection of refund upheld.

Facts:
The appellants were exporting stationary items, namely, notebooks and exercise books which were exempted from duty. The appellants were availing Cenvat credit on the duty paid on inputs and accordingly filed among other applications, an application on quarterly basis for refund of the accumulated credit on account of export for an amount of Rs.69,024 for the quarter January 2007 to March 2007. The Commissioner (Appeals) upheld the order of the lower original authority and inter alia held that the second application filed by the appellants seeking refund of Rs. 69,504 was hit by condition 2(a) of Notification No. 5/2006-C.E. (N.T.) which allows for refund of Cenvat credit only in cases where claims for such refund are submitted not more than once for any quarter in a calendar year. The appellants contended that the Commissioner (Appeals) travelled beyond the scope of show-cause notice as the original authority had not rejected the refund claim on the ground of two applications being submitted for one simple quarter under the condition of 2A.

Held:
The Tribunal concurred with the order of the Commissioner (Appeals) and held that the plea for admissibility of refund was too feeble and devoid of any merits.

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(2011) 23 STR 346 (Tri.-Del.) — State Bank of Indore v. Commissioner of Central Excise, Indore.

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Banking and other financial services — Exemption under Notification No. 29/2004-ST for tax on interest in relation to overdraft, cash credit, bill discounting or exchange — Allegation that condition of interest being separately shown in invoice not fulfilled.

Facts:
The appeal was filed the Bank challenging the adjudication order levying service tax and cess. The appellant had followed all RBI guidelines and the debit slips in all transactions clearly disclosed interest and other receipts. The Department contended that the conditions of Notification No. 29/2004-ST exempting interests on overdraft facility, cash credit facility or discounting of bills, bills of exchange or cheques in relation to banking services were not fulfilled as the interest amount was not shown separately in any invoice, a bill or a challan issued for the purpose.

Held:
Strict interpretation was unwarranted if it is established that the claimant squarely falls within the exemption zone. However, it was necessary to satisfy the authority through evidence. Accordingly, the appeal was disposed of with a direction to the appellant to adduce evidence as required by the Notification.

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(2011) 23 STR 310 (Tri.-Del.) — Prakash Industries Ltd. v. Commissioner of Central Excise, Raipur.

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Adjudication — Adjournment of hearing to be at insistence of parties — Not for difficulty faced by authority or circumstances beyond its control — Limit of three adjournments has to be understood from facts of case — Fourth adjournment may be granted if circumstances demand and no choice left — Section 33A(2) of Central Excise Act, 1944 (the Act).

Adjudication — Denial of request of cross-examination of persons whose statements were relied in SCN — Denial on ground that the case was based on documentary evidence and not on statements of persons.

Held:
Adjudicating authority pre-judged the issue and acted with pre-conceived mind — Natural justice principles to be followed by quasi-judicial authorities depending on facts/circumstances of case.

Appeal — Right to appeal not taken away and cannot be denied on ground of delay.

Facts:
An SCN was issued to the appellants demanding duty on unaccounted produces pursuant to the search and seizure. Notices were also sent to transporters. The Commissioner addressed a letter dated 26th September, 2008 to one of the appellants whereby the appellants’ request for cross-examination of witnesses was rejected and final date of hearing was intimated to the appellants.

The two issues requiring consideration are relating to misconstruction of provisions of law comprised u/s.33-A of the Act and the arbitrary rejection of the request for cross-examination of the persons whose statements were recorded and relied upon documents for conclusion in the matter.

The appellants contended that the Commissioner misconstrued the provisions contained in section 33-A of the Act which provided for granting of adjournment of hearing to a party for not more than three times as this was only an outer limit for number of days for hearing and thereby pleaded denial of natural justice. Referring to the Supreme Court decision in the case of State of West Bengal & Ors. v. Shivananda Pathak & Ors., (1998) 5 SCC 513 it was contended that the letter dated 26th September, 2008 clearly disclosed that the Commissioner had pre-judged the issue and had a biased approach in relation to the right of the appellants to cross-examine the persons whose statements were recorded and to be relied upon for the findings. This amounted to violation of principle of natural justice. According to the Revenue, the allegation of the appellants of biased attitude was devoid of substance. Such allegations cannot be made at a later stage after the final order was delivered. The appellants were uncooperative from the commencement of the proceedings. Further, relying on the decision in the case of Debu Shah v. Collector of Customs, 1990 (48) ELT 302, inter alia it was contended that in quasi-judicial proceedings authorities were not bound by strict rules of evidence and procedure and further contended that the information received from various sources could be relied upon without making it available to the parties.

Held:
The Tribunal observed that the fourth adjournment could be granted u/s.33A of the Act on the basis of valid and justifiable reasons. The decision of the Commissioner to decide about the claim of the appellants for cross-examination of the witnesses was premature on account of the fact that there was no defence placed on record for the appellants. Following the decision in the aforementioned Shivananda Pathak’s case, it was observed that the rejection of the request for cross-examination on part of the Commissioner clearly disclosed legal bias. Also, the rules of natural justice are applicable to quasi-judicial authorities depending upon the facts and circumstances of the case as observed in the case of A. K. Kraipak v. Union of India, AIR 1970 Supreme Court 150. The appellants were well within their rights to challenge the appeal as the appellants had the right to challenge the interlocutory order either immediately after the passing of order or to challenge the same along with the final order. Setting aside the impugned order, the appellants were permitted to file detailed reply to the SCN on or before 20th October, 2009 and the Commissioner was directed to dispose of the matter, in any case before 31st March, 2010. The appellants would not be entitled to seek adjournment more than three times in the matter. The matter was remanded with the consent of both the parties before the Commissioner at Indore to avoid further complications in the matter.

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(2011) 23 STR 299 (Tri.-Del.) — Sahni Video Movies v. Commissioner of Central Excise, Chandigarh-II.

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Video tape production services — Exemption to individual professional videographer — Benefit of exemption denied in first appeal as not claimed earlier — Appeal allowed.

Facts:
The appellants being an ‘Individual professional videographer’ was denied exemption of service tax as exemption was not claimed earlier. The Department argued that the appellant being an individual videographer operating from his home was not liable to pay any service tax. Notification No. 7/2001-ST, dated 9-7-2001 stated that service tax on taxable service provided to a client by an individual professional videographer in relation to video tape production was exempt.

Held:
Though the benefit of the Notification was claimed in the first appeal, the authority had rejected the claim on the ground that it was not claimed earlier. However, the Tribunal stated that exemption could be claimed at any stage if it was available to the litigants, and thus the exemption was allowed to the appellant.

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(2011) 23 STR 295 (Tri.-Delhi) — Norasia Containers Lines v. Commissioner of Central Excise, New Delhi.

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Special Economic Zones (SEZ) — Exemption —Containers provided to units in SEZ — Exemption denied as containers partly used inside and partly outside SEZ — Containers used by units for bringing inputs and carrying finished goods out of SEZ — Impugned service of supply of containers, exempt.

Facts:
The appellants were engaged in providing containers to various units in SEZ. Service tax was demanded on the ground that containers have been used partly in and partly outside SEZ. According to the appellants, in terms of the SEZ Act, 005 and the Rules thereunder, payment of service tax was exempted if taxable services were provided to a unit in the SEZ and the appellants had exactly done that irrespective of the fact that the container had carried cargo out of the SEZ territory, exemption could not be denied to them. ST Notification No. 4/2004 which limits the exemption to service consumed within the SEZ uses the expression ‘for consumption of services’ within such SEZ, but at the same time, also uses the expression ‘taxable services provided to a unit of the SEZ.’

Held:
Section 26 of the SEZ Act and Rule 31 of the SEZ Rules, 2006 make it clear that there was no restriction regarding the consumption of the services and the exemption was extended to the services rendered to a unit in the SEZ for the purpose of authorised operation i.e., for bringing inputs for manufacture and carrying finished goods out of SEZ for export purpose, in the SEZ. Thus, the impugned services relating to supply of containers in SEZ units were exempted from service tax.

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(2011) 38 VST 159 (P & H) M/s. Goyal Motor Parts v. State of Punjab

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Rate of tax — Sale of digital inverters with UPS facility — Information technology products — Taxable at 4% — Schedule Entry 60(27) of Punjab Vat Act, 2005 — Tribunal cannot brush aside reports of technical experts.

Facts:
The appellant sold microteck digital inverters, manufactured by M/s. Microteck International, as UPS-EB having extra facility of UPS (Uninterrupted Power Supply) to run computers and paid 4% rate of tax being covered by sub-entry (27) of entry 60 of Schedule B of the Punjab VAT Act, 2005. The designated authority held it taxable @12.5% being covered by residual entry. The Appellate Authority relying on report of certain laboratories allowed appeal, against which the Department filed appeal before the Punjab VAT Tribunal. The Tribunal allowed appeal filed by the Department and held that only such uninterrupted power supply (UPS) products which were information technology products were to fall in Entry 60 of Schedule B and any other product even if named UPS would be chargeable @12.5% tax. The appellant referred substantive question of law to the Court for determination arising out of the order passed by the Tribunal.

Held:
The product sold by the appellant is an electronic power source which stores the energy in batteries connected to it when the AC source is present and converts this energy automatically to AC power when the input AC source fails and automatically feeds so generated AC powers to load connected and returns to mains when the AC source comes back to the input side. As per certificate of IIT Delhi the product sold by the appellant is a UPS. This could be used both as inverter as well as in computers. The appellant sold the goods in the market through retailers and was not in a position to determine as to what use the goods would be put to, as the same would be entirely at the discretion of purchaser.

The Court following the decision of the Madras High Court in case of State of Tamil Nadu v. M/s. Vinyl Cable Industries, (1993) 88 STC 430 and decision of SC in case of M/s. Hindustan Poles Corporation, (2006) 145 STC 625 held that goods in question sold by the appellant fulfil all the conditions of an UPS and hence taxable at 4%. The Court further held that the Tribunal fell in error in brushing aside the reports of technical experts opining that goods in question were UPS.

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(2011) 23 STR 341 (A.P.) Commissioner of Central Excise, Visakhapatnam-II v. Sai Sahmita Storages (P) Ltd.

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Availment of Cenvat credit by storage and warehouse provider — Without using cement and TMT bar, the assessee could not provide storage and warehousing services — Assessee entitled to credit of Central Excise duty paid on these items — No penalty could be imposed without a finding on suppression and irregular claim of CENVAT credit.

Facts:
The assessee provided storage and warehousing services. They used cement and TMT bars for construction of warehouses and took credit on Central Excise duty paid on cement and TMT bars which was disallowed, against which the assessee filed an appeal before the Commissioner (Appeals) who dismissed the appeal and allowed the Department’s claim of suppression regarding availment of Cenvat credit on ineligible goods.

Held:
CESTAT referred to the judgment of the Supreme Court in Maruti Suzuki Ltd. v. Commissioner of Central Excise, Delhi III, 2009 (9) SCC 193 wherein it was held that “all goods used in or relation to the manufacturer of the final products qualify as inputs” and had rectified the decision of the Appellate Authority by allowing credit. The Court confirmed CESTAT’s stand on allowance of credit and consequently non-levy of penalty.

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2011) 23 STR 213 (Del.) — Pearey Lal Bhawan Association v. Satya Developers Pvt. Ltd.

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Renting of immovable property — Service tax being indirect in nature — Lessee was liable to pay the same in absence of any specific arrangement in lease deed on introduction of the levy on the said category.

Facts:
The plaintiffs had a lease arrangement with the defendants in 2006 for maintenance of common services and facilitates in respect of leased premises. The agreement stated the liability to pay municipal, local and other taxes was of plaintiffs. However, there was no specific mention as to who would bear service tax. The Finance Act, 1994 introduced service tax w.e.f. 2007. The plaintiffs contended that the said tax being in nature of indirect tax, had to be deposited by the service provider only after collecting the same from the receiver. They claimed that the tax was on the service and not on the service provider; and by virtue of section 83 of the Finance Act, 1994, it is presumed by law that the tax is to be collected from the service receiver. According to the defendant, the plaintiffs was law bound to bear all or any taxes levied by MCA, DDA, L&DO and or Government, local authority, etc. The defendants also relied on the ruling of the High Court of Allahabad in Thermal Contractors Association v. Dir Rajya Vidyut Utpadan Nigam Ltd., 2006 (4) STR 18 which inter alia held that “The payer of service tax is entitled to realise the same from its consumer; however it always depends on the contract entered into between the parties”.

Held:
The issue was decided in favour of the plaintiffs. While observing the ruling of the Supreme Court in All India Federation of Tax Practioners v. Union of India, 2007 (7) SCC 527, the Court held that service tax is consumption-specific as it does not constitute a charge on the business but on the client. Further, relying on All India Taxpayers Welfare Association v. Union of India & Others, 2006 (4) STR 14, the Court observed that as per section 12A of the Central Excise Act, 1944 r.w.s. 83 of the Finance Act, 1944, invoice and other documents should bear the amount of service tax. Section 12B of Central Excise Act, 1944 r.w.s. 83 of the Finance Act, 1944 contemplates that service is deemed to have been passed on to the service receiver. The agreement was silent on service tax levy as it was not anticipated at the time of making argument.

Therefore, even in absence of an express provision in law, but based on the overall scheme of the legislation, service tax could be collected from the recipient and accordingly, the plaintiffs were eligible to collect service tax from the defendant.

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(2011) 23 STR 212 (Ker.) — Commissioner of Central Excise & Custom, Kochi v. Oriental Steel Trunks Agrico Industries.

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Interest and penalty — Tax with interest paid before SCN — Tribunal having no jurisdiction to consider matter relating to interest while disposing penalty appeal — Appeal allowed partly.

Facts:
The Tribunal set aside penalty by taking into consideration the payment of service tax along with the interest by the respondent before the issuance of show cause notice (SCN). The Revenue contended that the Tribunal had no authority to discuss about the respondent’s claim for refund of excess interest paid, since the appeal was filed in relation to penalty. The respondent relied on the Circular published by the Department granting time for compliance with statutory provision in regard to payment of service tax.

Held:
The Court allowing the appeal partly, vacated the part of the Tribunal’s order declaring the respondent’s entitlement for refund of interest as interest was not connected with penalty, whereas penalty part was not interfered with.

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Sale to and from SEZ — Whether in Course of Export/Import

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Introduction

An interesting issue lingers on — Whether sale to a unit in Special Economic Zone (SEZ) by a Domestic Tariff Area (DTA) unit or by SEZ unit to DTA unit amounts to sale/purchase in the course of export/ import? The issue arises because SEZs have been given special status by Special Economic Zones Act, 2005 (SEZ Act, 2005).

Sale in course of Export/Import under Sales Tax Laws

As per Article 286 of Constitution of India, no tax can be levied on sale/purchase taking place in the course of export and import. Section 5(1) and 5(2) of CST Act, 1956 defines when a sale/purchase is said to take place in the course of export/import. The said definitions are reproduced below for ready reference:

“5. When is a sale or purchase of goods said to take place in the course of import or export

(1) A sale or purchase of goods shall be deemed to take place in the course of export of the goods out of the territory of India only if the sale or purchase either occasions such export or is affected by a transfer of documents of title to the goods after the goods have crossed the customs frontiers of India.

(2) A sale or purchase of goods shall be deemed to take place in the course of import of the goods into the territory of India only if the sale or purchase either occasions such import or is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India.”

The accepted meaning of the above section is that the goods should be going out of Indian territory or should be coming from outside Indian territory. Unless this fact is present, the argument of sale in the course of export/import is almost not tenable. In relation to SEZ, there is special enactment i.e., SEZ Act, 2005. In the said Act, SEZ is given a special status as foreign territory for various purposes. The transactions with SEZ unit by a DTA unit (either sale or purchase) are to be routed through import/ export formalities like, filing of bill of entry, etc. Therefore, a debate arises as to whether it can be said to be sale in the course of export/import for the purposes of the Sales Tax Acts.

Analysis of legal position
In light of the above definition of sale in course of export/import in section 5(1) and 5(2), reproduced above, it can very well be stated that there is no possibility to consider sale/purchase transactions with SEZ as in course of export/import. This view has now been approved by the Allahabad High Court. Reference can be made to judgment in the case of M/s. India Exports v. State of U.P. & Others, (Civil Misc. W.P. No. 1488 of 2009, decided on 11- 2-2011 (All.).

In this case the facts were that the petitioner was a unit in SEZ. It cleared its manufactured goods i.e., furniture for sale to a DTA unit. The petitioner claimed this sale to the DTA unit as its export or in other words sale in the course of import and not liable to sales tax. The Sales Tax authorities levied CST as applicable to normal sale and hence this writ petition before the High Court. Before the High Court section 53(1) of the SEZ Act was relied upon. The said section is reproduced below for ready reference:

“The Special Economic Zones Act, 2005

“53. Special Economic Zones to be ports, airports, inland container depots, land stations, etc., in certain cases. A Special Economic Zone shall, on and from the appointed day, be deemed to be a territory outside the customs territory of India for the purposes of undertaking the authorised operations.

(2) A Special Economic Zone shall, with effect from such date as the Central Government may notify, be deemed to be a port, airport, inland container depot, land station and land customs stations, as the case may be, u/s.7 of the Customs Act, 1962 (52 of 1962): Provided that for the purposes of this section, the Central Government may notify different dates for different Special Economic Zones.”

Important arguments
Some of the important arguments of the petitioner were as under:

(i) Sale from SEZ to DTA are sales in the course of import on which Central Sales Tax is not leviable under Article 286 and section 5(2) of the Central Sales Tax Act and for which no exemption notification is required.

(ii) Rule 47(1) of the SEZ Rules requires the buyer of DTA to submit import licence and Rule 47(4) provides for valuation and assessment of goods cleared for DTA to be made in accordance with the Customs Act and Rules; Rule 48 (1) requires the buyer of DTA to file a bill of entry for home consumption applicable to goods imported into India and Rule 48(2) provides for valuation of goods for customs duty in accordance with the provisions of the Customs Act. The territory of SEZ under these Rules shall be deemed to be territory outside the territory of India and thus any goods removed from SEZ to DTA are deemed to be goods imported from outside the territory of India. Section 5(2) of the Central Sales Tax Act deems sale and purchase of goods in the course of import only if the sale and purchase either occasions such import or is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India. The customs frontiers of India u/s.2(ab) of the Central Sales Tax Act means crossing the limits of the area of a customs station in which imported goods or export goods are ordinarily kept before clearance. There is no liability for payment of Central Sales Tax in respect of the sale and purchase of the goods in the course of import into the territory of India.

(iii) The customs duty is levied only on the goods imported into India, from territory outside India. Section 12 of the Customs Act, 1962 read vide Entry 83 of List-1 of 7th Schedule of the Constitution of India, and, section 53(1) and section 53(2) of the SEZ Act, the authorised operations in SEZ are deemed to be imports to SEZ as custom station, which covers port, air port, etc. The importer from SEZ to DTA is required to have import licence and to file a bill of entry. The deeming fiction in SEZ Act and Rules read with the Customs Act and Central Sales Tax Act makes the special transaction as import, exempt from Central Sales Tax.

(iv) The SEZ are deemed to be territory outside customs territory of India and thus they cannot be treated as part and parcel of any particular State in India. In the transaction of sale from SEZ to DTA there is no movement of goods from one State to another, calling for imposition of Central Sales Tax.

(v) The deeming fiction has to be given full play and affect and regulations assuming all facts on which fiction can operate.

Observations of High Court

The Allahabad High Court has held that the sale is taxable as any other sale within India. After referring to statement of objects and reasons for SEZ Act, 2005, the High Court observed as under:

20. We do not find any substance in the argument of Shri Bharatji Agrawal that the Central Sales Tax cannot be levied on the sales made by the petitioner from SEZ unit to a unit in DTA. The SEZ Unit under the SEZ Act, 2005 is deemed to be territory outside the territory of India u/s.51, 53(1) for a limited purpose; Ss.(2) provides that SEZ shall with effect from the date of Notification by the Central Government be deemed to be a port, airport, inland container port, land station and land customs station u/s.7 of the Customs Act.

21.    The SEZ Act, 2005 has taken into consideration and has provided for amendment of the various taxing statutes, or modified them, for fulfilling the object and purpose of the Act. Section 7 provides for exemption from tax, duties or cess on any goods or services exported out of or imported into or produce from DTA by unit in SEZ or a developer subject to terms and conditions as may be prescribed and be exempt from the payment of tax, duties or cess under all enactment specified in the First Schedule. Section 27 of the SEZ Act, 2005 applies to the Income-tax Act with certain modifications in relation to developers and entrepreneurs who carry out authorised operations in SEZ and modifications are specified in Second Schedule. Section 57 amends the enactment specified in the Third Schedule, which are amended by SEZ Act, 2005. The Central Sales Tax is not included in any of these Schedules.   

The High Court also observed that a deeming clause in one statute cannot apply to other unless so specified in the said statute or can be inferred. That being not the position in the above facts and circumstances of the case, the High Court held that the claim of sale in course of export/import is not tenable and confirmed levy of tax.

Conclusion:

This clarifies the position that unless there is specific scheme under the relevant sales tax laws, for sales tax purposes, the trade with or trade by SEZ will remain at par with DTA units.

2014 (33) STR 105 (Tri-Mumbai) KPIT Cummins Infosystems Ltd vs. CCE, Pune-I

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Whether services provided by foreign branches
outside India to overseas customers would be subjected to service tax
u/s. 66A of the Finance Act?

Facts:
Appellant was
engaged in providing various services such as Information Technology
Service, Business Support Service, Business Auxiliary Service, Renting
Service etc. Appellant had branches in foreign countries which are
Permanent Establishment abroad. These foreign branches provided
‘Software Development & Consultancy services’ in foreign countries
to various overseas customers. These foreign branches issued invoices
for services rendered and consideration for such services were received
from overseas customers. Excess of income over expenditure was remitted
by these foreign branches to the Appellant. Service tax was demanded on
the entire amount received by these foreign branches under ‘Business
Auxiliary Services’ alleging the

Appellant had rendered the
services. Appellant also remitted certain amounts to these foreign
branches as the Appellant’s personnel had incurred certain expenditure
such as rentals, telephone, insurance charges, conference, event
management etc., while rendering services abroad to overseas customers.
Respondent also issued SCN demanding service tax on amount remitted
overseas under reverse charge.

Held:
Since services
were rendered outside India to overseas customers and also the
consideration was received in foreign currency, these would be treated
as ‘Export of Services”’ and accordingly service tax would not be
applicable. More so, as Appellant was contending that, the said revenue
had already suffered GST/VAT in respective foreign countries. The entire
activities were carried out and consumed outside India and only
reimbursement for certain payments was made from India without receipt
of these services in India. Since the Respondent while passing the
impugned Order did not consider all aspects of the matter, appeal was
allowed by way of remand and stay application was disposed of.

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2014 (33) STR 86 (Tri-Mumbai) Bharati Tele-Ventures Ltd. vs. CCE, Pune-III

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a) Whether sale of SIM cards by mobile service provider is exigible to sales tax or service tax?
b) In a case where payment for service is received in advance and if the rate of service tax is increased at the time of provision of services, which rate will apply – old or new?
c) Whether extended period of limitation will apply where records have been audited by the department?

Facts:
Appellant was a cellular (mobile) service provider. For failure to pay service tax on the gross amount received on the issue of SIM cards to its customers during the period July, 2002 to March, 2006, the demand was confirmed against the Appellant. Appellant discharged the service tax on the value of services involved in the SIM cards and claimed deduction for the value comprising the sale component of the said SIM cards under Notification No. 12/2003 ST. Appellant relied on the Bombay High Court’s decision on identical issue in case of Vodafone India Ltd vs. Commissioner 2013 (30) STR J18 wherein the case was remanded for considering the applicability of Notification No. 12/2003-ST in case of sale of SIM cards. Appellant received certain advances against the services to be provided at a later date. Appellant have discharged the service tax at the rate prevailing at the time of receipt of advance. Later on the service tax rate was increased and at the time of provision of services the service tax rate was increased. Service tax was demanded at the increased rate.

Held:
• Tribunal observed that the issue of inclusion of SIM card value in the taxable value for telecommunication service has already been decided by the Kerala High Court in Commissioner vs. Idea Mobile Communication Ltd. 2010 (19) STR 18 (Kerala) and Andhra Pradesh High Court in State of AP vs. Bharat Sanchar Nigam Ltd. 2012 (25) STR 321 (AP) wherein High Courts held that SIM card is the device through which the customers gets connection from mobile towers. Therefore, SIM card is an integral part required to provide mobile services to customers. SIM card has no intrinsic value or purpose other than use in mobile phone for receiving mobile telephone service from service provider. SIM cards are never sold as goods independent of the services provided, SIM cards are considered part and parcel of services provided and dominant intention is to provide the services and not to sell SIM cards. In view of the observations made in these judgements, it was held that SIM cards are not goods but services and service tax alone can be levied and the Bombay High Court’s judgement in case of Vodafone should be treated as ‘per incuriam’, since the above stated judgments were not brought before its consideration.

• Combined reading of section 66 and section 65(105) of the Finance Act makes it clear that it is the provision of the service which attracts the levy at the rate prescribed in section 66. Only collection of tax is to be done as per rules prescribed. Therefore, service tax is applicable at the time of provision of services and not at the time of receipt of money. While deciding this, Tribunal relied upon the decision of the Gujarat High Court in case of CCE vs. Schott Glass India Pvt. Ltd. 2009 (14) STR 146 (Guj) and the Kerala High Court’s decision in case of Kerala Colour Lab Association vs. UOI 2006 (2) STR 554 (Ker).

• Since the audit of records of the Appellant were carried out in the past, where no allegation of suppression was being made, demand beyond the period of limitation and levy of penalties were held unsustainable.

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2014 (33) STR 81 (Tri-Mumbai) Swagat Freight Carriers Pvt. Ltd. vs. Comm. of Service Tax, Mumbai

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Whether freight forwarding activity would be classifiable under “Clearing & Forwarding Agency” service?

Facts:
The Appellant was engaged in the business of freight forwarding and collected charges for services rendered to its customers by way of documentation charges, transport charges, shipping bill charges etc. The Respondent demanded service tax on the said charges under ‘C & F agent’s services’. This resulted into an impugned order which also levied penalties. According to the Appellant, the said freight forwarding activities did not classify under ‘C & F Agent’s services’ and relied on various decisions and also further stated the period of dispute was prior to 01-07-2003 and they began paying service tax 01-07-2003 onwards under ‘Business Auxiliary Service’.

Held:
Freight forwarding activity is distinct and different from C & F agent’s activities and in the light of Gudwin Logistics vs. CCE, Vadodara 2012 (26) STR 443 (Tri-Ahmd) and other decisions, the same could not be classified as C & F agent’s services and accordingly the appeal was allowed.

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2014 (33) STR 65 (Tri-Mumbai) Suzlon Windfarm Services Ltd. vs. CCE, Pune

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Whether activity of operation, maintenance and security of a windmill would be classifiable under “Consulting Engineering Service”?

Facts:
Appellant entered into an agreement with M/s. Suzlon Energy Limited (SEL) for operation & maintenance of the windmills sold by the said SEL to its customers. As per the sale contract entered between SEL and its customers, SEL would be looking after operation, maintenance & security of the windmills free of cost for the first 5 years from the date of purchases and thereafter with charges. SEL assigned the said operation and maintenance activity to the Appellant for an agreed consideration. The agreement also required them to provide round-the-clock security, monitoring the performance of the windmills, collection & compilation of the data relating to wind speed, energy generation & liaisoning and coordination with various Government departments. Demand of service tax was confirmed under “Consulting Engineering Service” along with imposition of penalties u/s. 76, 77 & 78 of the Finance Act.

Held:
The Tribunal after observing the terms of the agreement entered between Appellant and SEL and the activities carried out by the Appellant, held that an advice, consultancy or assistance in any field of engineering would be classifiable under ‘Consulting Engineering Service’ and not activities which are in the nature of execution. Executory services do not come within the purview of ‘Consulting Engineering Service’ as decided in Rolls Royce Industrial Power (I) Ltd. vs. CCE, Visakhapatnam 2006 (3) STR 292. Further, in the case of Basti Sugar Mills Co. Ltd. vs. CCE, Allahabad 2007 (7) STR 431, the Supreme Court while rejecting department’s appeal held that, since department had not challenged Rolls Royce decision before it, the said decision had attained finality and the appeal thus was allowed.

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Right of Cross Examination – A Crystallised Right

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Synopsis
A question on sellers’ genuineness, leading to nonallowance of Input Tax Credit (ITC) to the buyers, has been frequently faced by sales tax payers. No opportunity for cross examination is afforded to the buyer to test or rebut the evidences used against him for such disallowance. Author throws light on the recent decision of Madras High court on this issue wherein it has been held that right of cross examination is the most essential right and the same cannot be denied to the buyer.

Introduction

There are a number of situations where the Revenue Departments rely upon material collected from opposite/third parties. For example, at present under Maharashtra Value Added Tax Act, 2002, the sales tax department is disallowing Input Tax Credit (ITC) to the buyers on the ground that the seller is non genuine dealer. The department for this purpose relies upon statement of the vendor, as well as his affidavit etc.

It is a common experience that no opportunity for cross examination of the adverse material used, is given to the concerned buying dealer. Further, no opportunity for personal cross examination of the vendor is given.

The issue which arises is whether such procedure is acceptable in the eyes of law?

Recent Madras High Court judgment in case of Thilagarathinam Match Works vs. Commissioner of Central Excise, Tirunelveli (295) E.L.T. 195 (Mad.)

The issue as to whether granting of opportunity for cross examination is necessary or not had arisen in above case.

The facts were that the petitioners in writ petitions challenged orders passed by the Enquiry Officer, rejecting their request for cross-examination of certain officers and persons in an enquiry, in pursuance of the show cause notices, issued u/s. 11A of the Central Excise Act, 1944. In the annexure to the show cause notices, the authorities relied upon the reports of the Energy Auditor as well as the statements of some officers and witnesses. The petitioner made a request for the cross-examination of those officers and witnesses.

Before the High Court, the Excise Authority took objection to the request of the petitioners for cross-examination on following grounds:

(i) that the petitioners prolonged the issue even without submitting an explanation to the show cause notices for more than one and half years;
(ii) that the petitioners have not adduced any reasons for cross-examination of those persons; and
(iii) that none of the witnesses have retracted from their original statements.

Based on above facts, the Hon. High Court held that even if the petitioners had never submitted any explanation to the show cause notices, the conduct of an enquiry becomes necessary and the cross-examination of the officers, who are authors of the statements, crystallises into a right for the petitioners. Thus, the first objection to the request for cross-examination was rejected.

About second objection to the request for crossexamination that the petitioners had not stated any reason for cross-examination of those persons, the Hon. High Court held that no reason need be stated by any person for requiring crossexamination. In an enquiry, a person gets two kinds of rights. The first set of right revolves around the right to peruse the documents relied upon by the department and the right to crossexamine the witnesses on whose statements the enquiry or prosecution is based. The second set of right revolves around the right to produce the witnesses and documents in defence. If a person facing an enquiry seeks to summon some persons to be examined in his defence or seeks to summon some documents to be produced in support of his defence, it is open to the enquiry officer to ask the delinquent to justify such a request by adducing reason. But, insofar as cross-examination is concerned, no justification need be provided in the form of reasons by a delinquent. The very fact that some statements of some officers are relied upon is good enough reason for permitting cross-examination. The very fact that the right of cross-examination is part of the most essential rights is sufficient to grant the request. But, the enquiry officer cannot test the request for cross-examination on the strength of the reasons. Therefore, the second ground on which the request of the petitioners is rejected, also cannot be sustained, held the Hon. High Court.

In respect of the third ground on which the request of the petitioners was rejected was that none of the witnesses had retracted from their original statements. Retraction from an early statement would normally occur only during the course of the enquiry. In the course of the enquiry, witnesses had not been examined. In other words, the respondents have presumed that the right to cross-examine would arise only in cases, where witnesses retract from their early statements. That is a wrong presumption or understanding of the law. The purpose of cross-examination is only to disprove the statements given by the witnesses. If the witnesses had already retracted from their original statements, the petitioners would have been well advised not to ask for cross-examination at all. This aspect has not been appreciated by the respondents, held the Hon. High Court. Therefore, it was held that the third objection also was not sustainable.

Conclusion
The law on the issue of right of cross examination is thus clear. The above principle duly applies to sales tax department. Assuming that the sales tax department may be correct in its investigation, still the department is under obligation to grant opportunity of cross examination as per the law laid down above, as well as to comply with the principles of natural justice. It thus transpires that disallowing ITC without above opportunity is bad in law.

There are two aspects about ITC. If transaction is non-genuine, ITC cannot be allowed even though seller might have paid tax. However, this fact requires to be established by following the above principle of law.

The truth whether transaction was genuine or not, can get established only upon providing an opportunity of cross examination.

The other aspect is that the transaction is genuine but tax is not paid by concerned vendor. In such case disallowing ITC to buyer will be incorrect. The concerned vendor should be first assessed as he is first in sequence. The recovery should be made from him. Without assessing him, jumping upon next buyer will be inappropriate and cannot withstand the legal position.

Hence ascertainment of correct position of transaction is very much necessary and for that purpose cross examination opportunity is mandatory.

Therefore, the one way process adopted today by the sales tax authorities can not be said to be correct as per law. The buyers can expect justice in due course of appeal at higher forum.

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Remuneration to Partners: Whether Payment to a Different Person is Taxable?

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Synopsis

To consider the applicability of
Service Tax on remuneration paid to partner, the authors have analysed
the definition of ‘Service’ defined in Section 65B (44) of Finance Act
2012 alongwith various provisions of Partnership Law, Income Tax law and
considered the various judicial precedents. The authors have also
referred to the relevant case laws on the subject and concluded that
services provided by partners to the firm and remuneration received
thereof from the firm cannot be subjected to Service Tax.

Preliminary
Partnership
continues to be one of the more prominent forms in which businesses are
carried out in the country. Further, it is a very common practice that,
partners are paid salary (either on a fixed basis monthly/annually or
on a basis which is linked to profits earned by the firm). Further,
under the income tax law, salary paid to partners is allowed as
deduction subject to certain specified limits.

The scope of
service tax has been substantially expanded, post introduction of
Negative List based Taxation of Services with effect from 01-07-2012.
The taxability of salary paid by the firm in the hands of partners under
service tax has been a matter of extensive deliberation since
01-07-2012. An attempt is made hereafter to discuss this issue,
considering the provisions of partnership law & income tax law, in
addition to the provisions of service tax law effective 01-07-2012.

Relevant Statutory Provisions

Extracts from Finance Act, 1994 – as amended (FA 12) effective 01/07/2012.

(A) Section 65 B (44) of FA 12

‘Service’
means any activity carried out by a person for another for
consideration, and includes a declared service, but shall not include –

(a) an activity which constitutes merely, –

i) A transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

ii)
Such transfer, delivery or supply of any goods which is deemed to be a
sale within the meaning of Clause (29A) of Article 366 of the
Constitution; or

iii) A transaction in money or actionable claim;

(b) A provision of service by an employee to the employer in the course of or in relation to his employment;

(c) Fees taken in any Court or Tribunal established under any law for the time being in force.

…………………………….

Explanation 2
– For the purpose of this Clause, transaction in money shall not
include any activity relating to the use of money or its conversion by
cash or by any other mode, from one form, currency or denomination, to
another form, currency or denomination for which a separate
consideration is charged.

Explanation 3 – for the purposes of this Chapter, –

(a)
an unincorporated association or a body of persons, as the case may be,
and a member thereof shall be treated as distinct persons;

(b)
an establishment of a person in the taxable territory and any of his
other establishment in a non – taxable territory shall be treated as
establishments of distinct persons.

Explanation 4 – A
person carrying on a business through a branch or agency or
representational office in any territory shall be treated as having an
establishment in that territory;

(B) Section 65B (37) of FA 12

“Person includes –
(i) an individual, juridical
(ii) a Hindu undivided family,
(iii) a Company,
(iv) a Society,
(v) a limited liability partnership,
(vi) a firm,
(vii) an association of persons or body of individuals, whether incorporated or not,
(viii)Government,
(ix) a local authority,
(x) every artificial juridical person, not falling within any of the preceding sub – Clauses

(C) Charge of Service tax – Section 66 B of FA 12

There
shall be levied a tax (hereinafter referred to as the service tax) at
the rate of twelve per cent on the value of all services, other than
those services specified in the negative list, provided or agreed to be
provided in the taxable territory by one person to another and collected
in such manner as may be prescribed.

Relevant extracts from TRU Circular dated 20/6/12 – “Taxation of Services – An Education Guide” issued by CBEC

Guidance Note 2 – What is Service?

‘Service’ has been defined in clause (44) of the new section 65B and means –

• any activity
• for consideration
• carried out by a person for another
• and includes a declared service.

The said definition further provides that ‘service’ does not include –

•
any activity that constitutes only a transfer in title of (i) goods or
(ii) immovable property by way of sale, gift or in any other manner

•
(iii) a transfer, delivery or supply of goods which is deemed to be a
sale of goods within the meaning of Clause (29A) of article 366 of the
Constitution

• a transaction only in (iv) money or (v) actionable claim

• a service provided by an employee to an employer in the course of the employment.

• fees payable to a Court or a Tribunal set up under a law for the time being in force
………….

Activity

What does the word ‘activity’ signify?

‘Activity’
is not defined in the Act. In terms of the common understanding of the
word activity would include an act done, a work done, a deed done, an
operation carried out, execution of an act, provision of a facility etc.
It is a term with very wide connotation.

Activity could be
active or passive and would also include forbearance to act. Agreeing to
an obligation to refrain from an act or to tolerate an act or a
situation has been specifically listed as a declared service u/s. 66E of
the Act.

………………….

Activity for a consideration

The
concept ‘activity for a consideration’ involves an element of
contractual relationship wherein the person doing an activity does so at
the desire of the person for whom the activity is done in exchange for a
consideration. An activity done without such a relationship i.e.
without the express or implied contractual reciprocity of a
consideration would not be an “activity for consideration” even though
such an activity may lead to accrual of gains to the person carrying out
the activity.

Thus, an award received in consideration for
contribution over a life time or even a singular achievement carried out
independently or without reciprocity to the amount to be received will
not comprise an activity for consideration.

There can be many
activities without consideration. An artist performing on a street does
an activity without consideration even though passersby may drop some
coins in his bowl kept after feeling either rejoiced or merely out of
compassion. They are, however, under no obligation to pay any amount for
listening to him nor have they engaged him for his services. On the
other hand, if the same person is called to perform on payment of an
amount of money then the performance becomes an activity for a
consideration

Provision of free tourism information, access to
free channels on TV and a large number of governmental activities for
citizens are some of the examples of activities without consideration.

Similarly,
there could be cases of payments without an activity though they cannot
be put in words as being ‘onsideration without an activity’
Consideration itself presupposes a certain level of reciprocity. Thus
grant of pocket money, a gift or reward (which has not been given in
terms of reciprocity), amount paid as alimony for divorce would be
examples in this category.

However, a reward given for an activity performed explicitly on the understanding that the winner will receive the specified amount in reciprocity for a service to be rendered by the winner would be   a consideration for such service. Thus, amount paid in cases where people at large are invited to contribute to open software development (e.g. Linux) and getting an amount if their contribution is finally accepted will be examples of activities for consideration.

By a person for another

What is the significance of the phrase ‘carried out by a person for another’?

The phrase ‘provided by one person to another’ signifies that services provided by a person to self are outside the ambit of taxable service. Example of such service would include a service provided by one branch of a company to another or to its head office or vice-versa.

Are there any exceptions wherein services provided by a person to oneself are taxable?

Yes.  Two  exceptions  have  been  carved  out  to the  general  rule  that  only  services  provided  by a  person  to  another  are  taxable.  These  exceptions,  contained  in  Explanation  3  of  Clause  (44) of  section  65B,  are:

  • an establishment of a person located in taxable territory and another establishment of such person located in non-taxable territory are treated as  establishments  of  distinct  persons.  [Similar provision  exists  presently  in  section  66A  (2)]

  •  an  unincorporated  association  or  body  of  per- sons and members thereof, are also treated as distinct  persons.  [Also  exists  presently  in  part as  explanation  to  section  65].

Implications of these deeming provisions are that inter-se provision of services between such persons, deemed to be separate persons, would be taxable. For example, services provided by a club to its members and services provided by the branch office of a multinational company to the headquarters of the multinational company located outside India would be taxable provided other conditions relating to taxability of service are satisfied.

a)Brief analysis of provisions of the Indian Partnership Act, 1932

Some relevant provisions are as under:

  •  the ‘partnership’ is the relation between persons who have agreed to share the profits of  a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually ‘partners’ and collectively a ‘firm’ and the name under which their business is carried on is called ‘the firm’s name.” [section 4].

  •  a partner is not entitled to receive remuneration for taking part in the conduct of business of the firm subject to a contract between the partners. [section 13(a)]

a partner is the agent of the firm for the purposes of business of the firm. [section 18]

  •  any act of the partner which is done to carry on, in the usual way, business of the kind carried on by the firm, binds the firm. [section  19]

  • every partner is liable, jointly with all the other partners  and  also  severally,  for  all  the  acts  of the firm done while he is a partner. [section 25]

b)    Some judicial considerations

  •  under  partnership  law,  a  partnership  firm  is not  a  legal  entity,  but  only  consists  of  the  individual  partners  for  the  time  being.  It  is  not a  distinct  legal  entity  apart  from  the  partners constituting it and equally, in law, the firm, as such,  has  no  separate  rights  of  its  own  in  the partnership assets. When one talks of the firm’s property or the firm’s assets, all that is meant is property or assets in which all partners have a  joint  or  common  interest.  [Malabar  Fisheries Co.  vs.  CIT  [1979]  120  ITR  49   (SC);  in  CIT  vs. Dalmia Magnesite Corpn. [1999] 236 ITR 46 (SC).]

  •  a partnership concern is not a legal entity like a company. It is a group of individual partners [Comptroller  &  Auditor  General  vs.  Kamlesh Vadilal  Mehta  [2003]  126  Taxman  619  (SC   –  3 Member  Bench).]

  •  law has extended only a limited personality to a  partnership  firm.  A  firm  is  not  an  entity  or a  ‘person’  but  is  an  association  of  individuals, and a firm’s name is only a collective name of those  individuals  who  constitute  the  firm.  A partnership  firm  cannot  enter  into  partnership with another partnership firm. HUF or individual [Dulichand Laxminarayan vs. CIT (1936) 29 ITR 535 (SC  –  3  member  Bench); Mahabir Cold Storage vs. CIT  [1991]  188  ITR  91  (SC).]

  •  a partnership is not a legal entity. Partners are the  real  owners  of  assets  of  the  partnership firm. Firm is only a compendious name given to partnership  for  the  sake  of  convenience.  Each partner is owner of assets to the extent of his partnership  [N.  Khadervali  Saheb  vs.  N.  Gudu Sahib  [2003]  129  Taxman  597  (SC  –  3  Member Bench).]

c)    Other important & relevant Judicial Views

  •  The  Honorable  Supreme  Court  in  the  case of  Champaran  Cane  Concern  vs.  State  of  Bihar [1964]  2  SCR  921,  has  pointed  out  that  in  a partnership  each  partner  acts  as  an  agent  of the  other.  The  position  of  a  partner  qua  the firm  is,  thus,  not  that  of  a  master  and  a  servant  or  an  employer  and  an  employee,  which concept  involves  an  element  of  subordination but  that  of  equality.  The  partnership  business belongs to the partners and each one of them is an owner, thereof. In common parlance the status  of  a  partner  qua  the  firm  is,  thus,  different from employees working under the firm. It  may  be  that  a  partner  is  being  paid  some remuneration for any special attention which he gives  but  that  would  not  involve  any  change of  status  and  bring  him  within  the  definition of  an  employee.

  •  The  Honorable  Supreme  Court  in  the  case  of CIT vs. R. M. Chidambaram Pillai  [1977]  106  ITR 292  has  held  as  under  :

“Here the first thing that we must grasp is that a firm is not a legal person even though it has some attributes of personality. Partnership is a certain relation between persons, the product of agreement to share the profits of a business. “Firm” is a collective noun, a compendious ex- pression to designate an entity, not a person. In Income-tax law a firm is a unit of assessment, by special provisions, but is not a full person which leads to the next step that since a contract of employment requires two distinct persons, viz. the employer and the employee, there cannot be a contract of service, in strict law, between a firm and one of its partners. So that any agreement for remuneration of a partner for taking part in the conduct of the business must be regarded as portion of the profits being made over as a reward for the human capital brought in. Section 13 of the Partnership Act brings into focus this basis of partnership business.”

“…It is implicit that the share income of the partner takes in his salary. This telling test is that where a firm suffers loss, that salaried partner’s share in it goes to depress his share of income. Surely, therefore, salary is a different label for profits, in the context of a partner’s
remuneration.”

“…The matter may be looked at another way too. In law, a partner cannot be employed by his firm, for a man cannot be his own employer. A contract can only be bilateral and the person cannot be a party on both sides, particularly in a contract of personal employment. A supposition that a partner is employed by the firm would involve that the employee must be looked upon as occupying the position of one of his own employers, which is legally impossible. Consequently, when an arrangement is made by which a partner works and receive sums as wages for services rendered, the agreement should in truth be regarded as a mode  of adjusting the amount that must be taken to have been contributed to the partnership’s assets by a partner who has made what is really a contribution in kind, instead of contribution in money.”

  • The  Honorable  Supreme  Court  in  the  case  of Regional  Director,  Employees  State  Insurance Corpn.  vs.  Ramanuja  Match  Industries  [1985]  1 SCC 218 while dealing with the question, wheth- er there could be a relationship of master and servant  between  a  firm  on  the  one  hand  and its partners on the other, indicated that under the  law  of  partnership  there  can  be  no  such relationship as it would lead to the anomalous position  of  the  same  person  being  both,  the master  and  the  servant.

Brief analysis of provisions under income tax law

Under the Income-tax Act, 1961, some relevant provisions which need to be noted, are as under:

  •  A partnership firm (registered or unregistered) is taxed as a separate entity. Share of income of the partner in income of the firm is not included in computing total income of the partner (as it has already been taxed in the hands of partnership firm).

  • In addition to share of income of the firm, working partners can draw salary commission or remuneration from the partnership firm as per provisions of section 184, read with section 40(b). This is allowed as deduction from income of the firm (subject to certain limits) and is treated as an income of the partner for income-tax purposes.

  • According to section 2(23), a firm, partner and partnership  have  the  same  meaning  as  in  the Partnership  Act,  1932.

  •  Explanation   2   to   section   15   specifically states  that  any  salary,  bonus,  commission  or remuneration,  by  whatever  name  called,  due to or received by a partner of a firm from the firm  shall  not  be  regarded  as  ‘salary’.

  • Section 28(V) specifically states that any interest, salary, bonus, commission or remuneration, by  whatever  name  called,  due  to  or  received by a partner of a firm from such firm shall be treated as income chargeable to tax under the head ‘Profits and Gains of Business or Profession.’

  • Provisions  of  TDS  (Section  192)  are  not  applicable to salary paid by the firm to its partners.

Partnership is a “person” by legal fiction for taxation

Though  partnership  is  not  a  legal  person,  yet  a firm  has  been  defined  as  a  ‘person’  u/s.  2(31) of  the  Income-tax  Act,  1961  and  section  65B(37) of  FA  12  effective  01-07-2012,  by  creating  a  legal fiction.  Hence,  once  a  legal  fiction  is  created  by law,  it  has  to  be  taken  to  its  logical  end.  Accordingly, partnership firm and the partners have to  be  ‘deemed’  as  two  different  persons  and  a partner should be deemed to be employee of the partnership  firm.

Conclusion
Based on the foregoing, the following proposi- tions emerge :

  • there is a specific exclusion in the definition of ‘service’ for services provided by an employee to an employer in course of or in relation to his employment. However, there is no relationship of an employee and an employer between the partners and the partnership firm;

  • any agreement for remuneration of a partner for taking part in the conduct of the business is nothing but an additional share of profit remuneration is a different label for profits, in the context of a partner’s remuneration paid by firm to its partners. For services rendered by the partners, to the firm, would have oth- erwise got additional share of profit instead of remuneration.

  •  the partners act as agents of their firm and render the services to themselves,

  • the partnership business belongs to the partners and each of them is an owner thereof, and, hence, the services are rendered by partners to themselves.

Based on the above, it can be reasonably concluded that, since the services are rendered by the partners to themselves and not by one person to another and since services provided by partners to the firm is not covered by the two specific exceptions  in  Explanation  3  to  section  65  B(44)  of  FA 12,  services  provided  by  the  partners  to  the  firm would not constitute “any activity carried out by a person for another” in terms of the definition of ‘service’ u/s. 65B(44) of FA 12, Hence, service tax would not be applicable to remuneration received by  a  partner  from  the  partnership  firm.  Alterna- tively, by deeming fiction if a partner is treated as a different ‘person’ under tax laws overriding the provisions of the partnership law, then a partner would be deemed to be an employee of the firm. If that be the case, services provided by partners to  the  Partnership  firm  would  be  excluded  from the  definition  of  ‘service’  in  terms  of  clause  (b) of section 65 B(44) of FA 12. Hence, the question of  any  liability  to  service  tax,  on  remuneration received  by  partners  from  the  partnership  firm, would  not  survive.

CBEC’s confusing clarification regarding Form VCES-3 and CENVAT credit

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Background
During the nascent period of the commencement of the Voluntary Compliance Encouragement Scheme, 2013 (‘VCES’), the industry and taxpayers were doubtful as regards their eligibility to avail CENVAT credit in respect of the tax dues paid under the VCES, i.e., paid under the reverse charge mechanism and against supplementary invoices raised by their service providers. The CBEC sought to put this uncertainty to rest by issuing clarification in the form of a Circular [No. 170/5/2013-ST dated 08-08-2013] (on issues pertaining to the VCES). In the aforesaid Circular Q. No. 18 (or FAQ No. 22 of the CBEC’s booklet on Frequently Asked Questions relating to VCES issued on 08-08-2013) dealt with the issue of eligibility of CENVAT credit to the recipient of service in respect of the tax dues paid under a supplementary invoice or under reverse charge.

At that time, it was clarified that apart from the restriction imposed by rule 6(2) of the Service Tax Voluntary Compliance Encouragement Rules, 2013 (hereinafter referred to as ‘VCES Rules’), relating to utilisation of CENVAT credit for payment of tax dues under the VCES, all issues relating to admissibility of CENVAT credit shall be determined in terms of the provisions of the CENVAT Credit Rules, 2004 (‘CCR’). It was also clarified that the admissibility of CENVAT credit of; (i) service tax paid by a service recipient under an invoice or a supplementary invoice issued by a service provider for the amount of tax dues paid under VCES, and (ii) tax dues paid by a service recipient under reverse charge mechanism under VCES; shall be determined in terms of rule 9(1)(bb) and 9(1)(e) respectively of the CCR.

Recent clarification
Despite the above, a large section of the tax payers (and declarants under the VCES) felt that the issue was needed more clarity was needed on this issue. Accordingly, clarifications were pursued by trade and industry mainly related to the timing for availment of such CENVAT credit, i.e., whether the credit would be available immediately upon payment of first installment of tax dues or only after payment of tax dues in full and receipt of acknowledgement of discharge in Form VCES-3. In response, recently, the CBEC, vide its Circular No. 176/2/2014-ST dated 20-01-2014 has indicated that CENVAT credit shall be available only upon full payment of tax dues and receipt of Form VCES-3, stated as under:

“3. It would be in the interest of VCES declarants to make payment of the entire service tax dues at the earliest and obtain the discharge certificate within 7 days of furnishing the details of payment. As already clarified in the answer to question No.22 of FAQ issued by CBEC dated 08-08-2013, eligibility of CENVAT credit would be governed by the CENVAT Credit Rules, 2004.

4. Chief Commissioners are also advised that upon payment of the tax dues in full, along with interest, if any, they should ensure that discharge certificate is issued promptly and not later than the stipulated period of seven days.”

Through the above clarification, the CBEC has briefly, professed that, (i) the eligibility for availment of CENVAT credit shall be determined in terms of the CCR and (ii) CENVAT credit shall be available only after full payment of tax dues and receipt of acknowledgement of discharge in Form VCES-3.

Brief Analysis
While the prescribed time permitted under the VCES for payment of tax dues is 30th June, 2014 and 31st December, 2014 with interest, the CBEC has entreated the declarants to earnestly deposit the balance tax dues in order to avail CENVAT credit. Further, the CBEC has maintained that the eligibility of CENVAT credit would be governed by the CCR. In this regard, the CBEC has also urged the Chief Commissioners to ensure that the issuance of acknowledgement of discharge in Form VCES-3 is concluded within the stipulated period of seven days of receipt of information regarding full payment of declared tax dues.

Confusing clarification
Generally, a circular or clarification is issued to put to rest any doubts that may exits on a particular issue. However, it appears that the aforesaid Circular has created more doubts instead of clarifying the existing ones. Here’s why this Circular has created more confusion than clarification.

The CCR allow availment of CENVAT credit on the basis of either (i) an invoice, a bill or challan issued by a provider of input service or (ii) a supplementary invoice, bill or challan issued by a provider of output service, in terms of the provisions of Service Tax Rules, 1994 subject to certain exceptions or (iii) a challan evidencing payment of service tax, by the service recipient as the person liable to pay service tax.

A thorough reading of the relevant Rules in CCR with the aforesaid clarification from a service recipient’s perspective, the following fact situations emerge:

1. Where a supplementary invoice is raised by the service provider for collection of service tax – In terms of the Clarifications stated above, the eligibility to CENVAT credit in such a case shall be determined in terms of rule 9(1)(bb) of the CENVAT Credit Rules, 2004 which permits CENVAT credit availment except where the additional amount of tax became recoverable from the provider of service on account of non-levy or non-payment or short-levy or short-payment by reason of fraud or collusion or willful misstatement or suppression of facts or contravention of any of the provisions of the Finance Act or of the rules made thereunder with the intent to evade payment of service tax. Hence, where fraud, suppression etc., with intent to evade payment of tax does not exist, CENVAT credit may be availed on the basis of receipt of a supplementary invoice.

The question, whether the department can allege fraud, suppression etc., with intent to evade payment of tax in respect of VCES declarations, where the declarants have voluntarily disclosed their tax dues, it is still unclear and open for deliberation as this has specifically not been clarified by the department till date.

2. Where an invoice has not been issued by the service provider at the time of rendering service and an invoice is issued for the first time – The present Circular No. 176/2/2014-ST dated 20-01- 2014 as also the Circular No. 170/5/2013-ST dated 08-08-2013 (hereinafter referred to as ‘Clarifications’) clarify that the eligibility to CENVAT credit shall be determined in terms of the CENVAT Credit Rules, 2004; specifically rule 9(1)(bb) or rule 9(1) (e). Where an invoice is issued for the first time, CENVAT credit can be taken on the basis of the invoice, challan or bill issued in terms of rule 4A of the Service Tax Rules, 1994 and the provisions under the CENVAT Credit Rules, 2004 do not impose any restriction similar to that under rule 9(1)(bb) of CENVAT Credit Rules, 2004 for such availment.

Under normal circumstances, the service recipient is eligible to take CENVAT credit immediately upon receipt of the invoice (subject to the condition that the service provider is paid within the specified period). The case of a service recipient would be no different is the service provider has issued an invoice with the service tax component for the first time. In this scenario, can the service provider be restricted from availing CENVAT on the basis of such invoice? The circular is conspicuously silent on this aspect.

3. Where tax dues have been partially paid under reverse charge – In such a situation, rule 9(1) (e) of the CENVAT Credit Rules, 2004 provides that CENVAT credit may be availed immediately on the basis of a challan evidencing payment of service tax by the service recipient as the person liable to pay service tax without laying down any additional conditions.

This situation is similar to (2) above. Generally, the service recipient becomes eligible to claim CENVAT as soon as he deposits the service tax, on the basis of the tax paid challan.

The circular seems to suggest that even in case of a service recipient having deposited 50% of tax, would not be permitted to avail CENVAT credit unless and until the entire liability declared under the VCES is cleared. Whether such a restriction can be imposed by way of a clarification is open issue.

The CBEC has by virtue of the clarification, put the service recipients into an irrational situation, i.e., they would be entitled to CENVAT credit only after the issuance of acknowledgement of discharge to the declarants, which has till date been at the mercy of the department; more so in the case where the entire amount of tax dues have been paid by the declarant (service provider/recipient, as the case be) but acknowledgement of discharge has not been is- sued within 7 days of intimation to the department. Such a condition for postponement of availment of CENVAT credit is unwarranted on the part of CBEC.

The CBEC has also failed to consider the fact that, except in case of payment of tax dues arising out of reverse charge, the declarants and person entitled to CENVAT credit are different. The payments made by declarants under the VCES, continue to be ‘tax dues’ irrespective of the conclusiveness of the declaration made. The documentary trail showing the collection of service tax by the service provider should meet the requirement of law and the service recipients are not expected to produce any evidence to show that the service provider is actually deposited the dues with the Government.

It is quite likely that to this extent, the aforesaid Circular may be challenged as being ultra vires the provisions of the CENVAT Credit Rules, 2004, VCES and VCES Rules. It is doubtful that this confusing and overstepping clarification by CBEC, will help the declarants in away in getting swift receipt of the acknowledgement of discharge.

Business auxiliary services of production of goods on behalf of client — Activity of applying fusion-bonded epoxy coating on reinforced steel bars supplied by customers — Liability arose only w.e.f. 10-9-2004 when clause (v) of section 65(19) of Finance Act, 1994 inserted — Period prior to 10-9-2004 excluded as services prior to 10-9-2004 excluded — Assessee eligible for CENVAT credit of duty paid on coating material and on input services. Penalty — Non-payment of tax — Revenue never advised as<

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(2011) 23 STR 116 (Guj.) — C.C.E., & Cus., Daman  v. PSL Corrosion Control Services Ltd.

Facts:

The respondent was engaged in the activity of applying fusion bonded epoxy coating (FBE Coating) on reinforced steel bars supplied by its customers. The respondent failed to register themselves with the Department under the head ‘Business Auxiliary Service’ and service tax was demanded for the activity. Penalty also was imposed along with the interest on the demand of service tax. Tribunal set aside the penalty. On appeal before the High Court, the Revenue inter alia submitted that the Tribunal was not justified in setting aside the penalties inasmuch as the assessee failed to prove the presence of a reasonable cause for not paying the service tax. Also, the respondent failed to get registered with the Department.

Held:

The Court observed that though according to the Revenue the said activities were taxable as ‘Business Auxiliary Service’, they never advised the respondent to pay service tax on the said activity. Further, the Tribunal was justified in setting aside the penalties imposed u/s.80 of Finance Act, 1994 keeping in consideration the bona fide litigation going on as regards the nature of the activity carried on by the respondent. Accordingly, it was held that the order of the Tribunal does not suffer from any legal infirmity so as to warrant interference.

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Clarification reg. service tax on fees charged for Issuance of Country of Origin Certificate (COOC) — Circular No. 145/14/ 2011-ST dated 19-8-2011.

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By this Circular it has been clarified that services provided by Chamber of Commerce and any other authorised agencies for issuance of COOC with reference to national character of export goods upon examination of the origin of their composition, service tax as applicable on fees charged by such organisation shall be categorised under ‘Technical Inspection and Certification Agency Service’. It has been further clarified that service tax paid on ‘Technical Inspection and Certification’ of export goods is eligible for refund under Notification 17/2009-ST, dated 7th July, 2009.
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E-filing of service tax returns made mandatory for all service providers — Notification No. 43/2011-Service Tax, dated 25-8-2011.

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With this Notification now all assessees who are registered under the service tax law will have to file all half-yearly service tax returns electronically from October 1, 2011.
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Administrative relief to unregistered dealers — Trade Circular No. 13T of 2011, dated 30-8-2011.

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As per earlier Circular No. 33T of 2007, dated 18th April, 2007, delay in obtaining certificate of 4 registration beyond 5 years shall not be entitled to get any administrative relief. Now subject to the terms and conditions specified in this Circular, a dealer can get administrative relief even if delay in getting certificate of registration exceeds 5 years.
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(2011) 39 VST 302 (Bom.) Commissioner of Sales Tax, Maharashtra State, Mumbai v. Cadila Healthcare Limited

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Rate of tax — Table margarine — Not hydrogenated vegetable oil or vegetable oil — Taxable at 12.5% under residual Entry E-1 — Schedule Entry C-100, 102 and E-1 of Maharashtra Value Added Tax Act, 2002.

Facts:
The Commissioner of Sales Tax filed appeal against the decision of the Tribunal, dated August 2, 2008, holding that Nutralite table margarine sold by the dealer is covered by Schedule C-Entry 102 of the MVAT Act and taxable at 4%. Entry 100 of Schedule C covers vanaspati (hydrogenated vegetable oil), whereas Entry 102 of Schedule C covers vegetable oil. It was argued before the Tribunal by the dealer that Nutralite table margarine is vanaspati and if it is not vanaspati, then it is vegetable oil covered by Schedule Entry C-102 taxable at 4%. The Tribunal held that Nutralite table margarine is vegetable oil taxable at 4% under Entry 102 of Schedule C of the MVAT Act. The High Court allowed the appeal filed by the Commissioner of Sales Tax and held against the dealer that Nutralite table margarine is not vanaspati and not a vegetable oil and taxable at 12.5%.

Held:
(i) Margarine is used for baking, cooking and Nutralite table margarine sold by the dealer is used for cooking and as a spread. Palm oil is subjected to process of emulsification and the resultant product that emerges is Nutralite table margarine. Admittedly, table margarine is considered to be a distinct marketable commodity under the Central Excise Act.

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(2011) 39 VST 257 (SC) Hyderabad Engineering Industries v. State of Andhra Pradesh

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Inter-State sale/stock transfer — Dispatch of goods to branch outside the State — Against the ‘Forecasts’ for delivery of goods to the buyer — Under sale agreement — Is inter-state sale — Liable to tax u/s.3(a) and 6A of the CST Act, 1956.

Facts:
The assessee claimed inter-State Stock transfers to its various depots situated outside the State as per ‘Forecasts’ to be delivered to M/s. Usha International Ltd. (UIL), under an agreement for sale entered with it. The sales tax authorities disallowed the claim of inter-State stock transfer and levied tax @10% under the CST Act. The Company filed appeal before SC against the judgment of the High Court confirming levy of CST on disputed inter-State stock transfers treated as inter-State sales by the assessing authorities.

Held:
(1) The consistent view of this Court appears to be that even if there is no specific stipulation or direction in the agreement, for an inter-State movement of goods, if such movement is an incident of that agreement or if the facts and circumstances of the case denote it, the conditions of section 3(a) would be satisfied.

(2) In the instant case, the movement of goods from the assessee’s factory to its various godowns situated in different parts of country was pursuant to ‘Sales agreements’ coupled with ‘Forecasts’ which are nothing but ‘indents’ or firm orders. It does not matter how much goods were delivered to the branch office, which just acted as a conduit pipe before it ultimately reached the purchasers’ hands. All that matters is that the movement of the goods is in pursuance of the contract of sale or as of necessary incident to the sell itself.

(3) After considering the facts of the case, finding of fact by the assessing authorities duly confirmed by the Tribunal, SC held that impugned delivery of goods by the dealer’s factory to its various depots situated outside the State for delivery of goods to UIL against ‘Forecasts’ and ultimate delivery of goods to UIL by its depots to UIL is an inter-State sale liable to tax under the CST Act in the State of AP.

Accordingly the appeal filed by the dealer was dismissed.

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(2011) 23 STR 276 (Tri.-Chennai) — UCAL Fuel System Ltd. v. Commissioner of Central Excise, Chennai.

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Cenvat Credit of Service Tax — Services in respect of preparation of documents for pre-shipment and post-shipment of export goods — Eligible claim of CENVAT credit.

Facts:
The appellants, M/s. UCAL Fuel System Ltd. were availing services in respect of preparation of documents for pre-shipment and post-shipment of export goods and were claiming credit of services paid on the same. The appellants were denied Cenvat credit of service tax of Rs.1,28,914 as the service provider did not mention the nature of the taxable services in any of the documents, on the basis of which appellants claimed the credit. The appellants argued that the services rendered had direct nexus with the business of the manufacture of the assessee’s final product and hence were in the nature of business auxiliary service.

Held:
After observing bills and other documents of the appellants, the Tribunal held that services availed by the appellants were business auxiliary services in nature and they were entitled to avail Cenvat credit of service tax paid on such services as per Rule 2(1) of Cenvat Credit Rules, 2004.

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Registration charges and handling charges vis-à-vis ‘sale price’

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Under any Sales Tax Law the tax is leviable on the valuable consideration received from buyer for sale of goods. This is referred to as ‘sale price’. This term is normally defined in the Sales Tax Laws. Under the Maharashtra Value Added Tax Act, 2002, the said term is defined in section 2(25) as under:

“(25) ‘sale price’ means the amount of valuable consideration paid or payable to a dealer for any sale made including any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof, other than the cost of insurance for transit or of installation, when such cost is separately charged . . . .”

Thus the definition speaks about consideration received till the delivery given as ‘sale price’. Sometime the contentious issue arises while interpreting the above definition. Particularly when selling dealer collects certain amounts separately on ground of separate subject-matter, the issue arises whether such charges are part of sale price or not.

Similar issue arose in relation to registration charges and handling charges recovered separately by the motor vehicle dealer from its customers. The dealer issues sale invoice for price of the motor vehicle. He also prepares separate debit note for recovering insurance charges, road tax, incidental and handling charges, registration fees etc. The charges recovered towards specific taxes etc. are paid to respective authorities. The handling charges are retained by the motor vehicle dealer for himself as his service charges. The Sales Tax Department sought to consider the above charges as part of sale price and levied tax on the same. The periods involved were 2005-2006 to 2007-08 under the MVAT Act, 2002.

Tribunal judgment

When the issue came before the Tribunal, the position was scrutinised as to when the sale is complete, when the delivery is given and the nature of separate charges collected through debit notes, i.e., whether post delivery or prior to delivery, etc. The Tribunal came to the conclusion that the separate charges are post-delivery charges and cannot be included in ‘sale price’.

Bombay High Court judgment

Additional Commissioner of Sales Tax v. Sehgal Autoriders Pvt. Ltd., (Sales Tax App. No. 5 of 2011 dated 11-7-2011)

The issue was taken by the Department to the Bombay High Court by way of appeal under the MVAT Act, 2002. The High Court has now decided the issue.

Before the High Court the main argument of the Department was that the delivery is to be seen in light of effective delivery. It was contended that as per Motor Vehicle Act/Rules the motor vehicle cannot be plied on road unless registered. It was argued that the customer can drive away the vehicle from the dealer’s place when it is registered in his name and since the charges mentioned above are prior to the above event they are taxable.

On behalf of the dealer it was contended that the registration is the responsibility of the buyer who becomes owner of the vehicle. It is only the owner who gets it registered. The sale note is issued for the said purpose which completes sale and delivery. The further activities of registration, etc. are on behalf of the buyer as agent and the handling charges are towards such services, a separate transaction and it is a post-sale transaction. It was also contended that the provisions of the Motor Vehicles Act are for separate purpose and cannot be brought in for interpretation of the MVAT Act. The provisions of sale of the Goods Act, 1930 were also relied upon.

The High Court referred to Rule 47 of the Mo-tor Vehicle Rules and observed that as per the said rule the dealer has to issue a certificate of giving delivery to the buyer, so as to enable the registration of the vehicle under the Motor Vehicle Act. The High Court on the above facts observed as under:

“15 The contention of the Revenue, however, is that delivery cannot be granted to the owner by the holder of a trade certificate under Rule 42 unless the motor vehicle has been registered. Rule 42 however does not as it cannot override the obligation which section 39 imposes on the owner of obtaining registration. Moreover, Rule 42 cannot be construed in isolation from the other provisions which have been made in Chapter III of the Central Motor Vehicles Rules, 1989.

Rule 41, for instance, specifies the purposes for which the holder of a trade certificate may use a vehicle in a public place. Among the purposes is for proceeding to and from any place for the registration of the vehicle. Similarly, under clause (d) of Rule 41, the holder of a trade certificate may use a vehicle in a public place for proceeding to or returning from the premises of the dealer or of the purchaser for the purpose of delivery. Rule 42 provides that no holder of a trade certificate shall deliver a motor vehicle to a purchaser without regis-tration, whether temporary or permanent. It is evident that an application for registration is required to be made in accordance with Rule 47. Rule 47, as a matter of fact, stipulates that an application for registration has to be made within a period of seven days from the date of taking delivery of the vehicle. The application has to be accompanied by a sale certificate. The statutory form for the sale certificate stipulates that delivery has been handed over to the purchaser. The Tribunal, in the present case, has found, as a matter of fact, that upon receipt of the price of the goods, the respondent issues a gate pass in the name of the purchaser and issues a sale certificate in the prescribed form showing delivery of the motor cycle. The sale is complete and transfer of property in the motor cycle takes place to the purchaser coupled with the delivery thereof. The obligation to obtain registration is that of the purchaser. When a dealer facilitates the obtaining of a registration certificate, he acts for and on behalf of the purchaser, because the obligation under the law to obtain a registration certificate is cast upon the owner of the vehicle. The application for the issuance of a registration certificate and the grant of a registration certificate are both post-sale events. The charges that are levied by the appellant and recovered as handling charges are in respect of a service rendered to the purchaser upon the completion of the sale of the motor cycle. Handling charges cannot be regarded as forming part of ‘the valuable consideration paid or payable to a dealer for any sale made.’ The handling charges cannot be regarded as ‘any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof.’

Observing as above the High Court held that the holding of the Tribunal that registration/handling charges is not part of sale price was correct and did not not require any interference.

Conclusion

The judgment, amongst others, will be a guiding judgment in understanding the nature of charges before delivery, which can be part of sale price and also nature of charges post delivery, which cannot be part of sale price.

(2011) 39 VST 102 (All.) Shiv Nath Singh Yadav v. Assistant Controller (Grade I)/Sub-Divisional Magistrate, Bharatana and Ors. Trade tax — Recovery of tax — Limitation — When no time limit prescribed, recovery to be within reasonable time — Recovery proceedings taken twenty years after date of recovery certificate unreasonable.

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Interest — Not to be charged after twelve years — UP Trade Tax Act.

The petitioner, represented by his widow, was in arrears of sales tax dues for assessment years 1972- 1973 to 1975-1976 for which recovery certificate was issued on 16th February, 1985. After 20 years, the Sales Tax Officer wrote a letter dated August 20, 2004 to The Deputy Post Master, for payment of balance dues of Rs.755498, which includes interest payable till 26th August, 2004, from the petitioner’s P. O. Monthly Scheme Accounts,. The asseessee filed writ petition before the High Court against issue of recovery certificate.

Held:

(1) When no time limit is prescribed for recovery of dues, the State is also expected to be vigilant and to make the recovery of its dues from whatever means or manner within the time-frame. Considering the limitation of 12 years for instituting of suit relating to immovable property, a period of 12 years from the date of issuance of recovery certificate can be constructed to be a reasonable period for recovery of dues, though not as an absolute rule. But, the period of 19 years is certainly not a fair and reasonable time.

(2) Considering facts of the case, the High Court issued direction to the sales tax authority to prepare statement of account showing the principal amount of tax due with interest and payment thereof, etc. In preparing statement of account no interest on interest accrued shall be charged and further no interest even on the principal amount, if any, after 12 years of issuance of recovery certificate shall be levied. Any excess amount recovered shall be refunded with interest at the same rate at which it has been charged. The deficient amount, if any, as per the statement shall be recovered from the petitioner only after affording opportunity of hearing to her subject to the satisfaction that she has inherited property in excess of the amount now sought to be recovered as the balance.

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Inter-state stock transfer — Production of F Form — Goods returned or goods transferred on jobwork — Decision of SC that where F Form not produced by dealer without his fault, transactions to be assessed on merit — Direction by High Court — Section 6A of the Central Sales Tax Act, 1956.

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The petitioners had challenged the assessment order, reassessment orders and notices u/s.21(2) of the U. P. Trade Tax Act, 1948 for levy of CST on the transactions of job work and goods — returned transactions by treating as inter-State sales for non-production of ‘F’ forms.

Following the judgment in case of Ambica Steels Limited v. State of U.P., (2009) 24 VST 356 (SC), the Commissioner of Trade Tax issued Circular dated June 26, 2009 to the effect that where the trader/dealer of the State of U.P. had not received ‘F’ form the transferee in the other State, or where form F is not issued without any fault on the part of trader/dealer in the State of UP, the Assessment Authority shall examine the transactions between the parties, and will complete the assessment on merits. In view of the later development, the issue was raised before the High Court to consider applicability of section 6A, for production of F form, only with regard to transactions involving job work and goods return. The High Court without deciding on merit of the case issued directions.

Held:

(1) In all cases of assessment and reassessment in which the transactions of job work and goods returned are involved, the assessment/ re-assessment orders are set aside only to the extent that the tax was imposed on such transactions for want of form F.

(2) The petitioners were directed to appear before the authorities to decide the case on its merits after examining the transactions between parties, keeping in mind findings recorded earlier in assessment on such transactions and also that the asseessee is not in a position to obtain form F, for no fault of his.

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Rate of tax — Entries in Schedule — Battery chargers supplied with cell phone — Attracts same rate of tax applicable to cell phone — Punjab Value Added Tax Act, 2005.

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Facts:

The Company sold cell phone in a composite package, without any extra charge for supply of battery charger, which is a part of cell phone. The entry 60(6)(g) of Schedule B to the Punjab VAT Act, 2005 covers parts of the products mentioned therein. The Assessing Authority levied tax @12.5% on differential amount for supply of battery charger and not at concessional rate applicable to cell phone. This view of Assessing Authority was upheld by the Tribunal also. The company filled appeal to the Punjab and Haryana High Court against the decision of the Tribunal.

Held:

(1) When a cell phone is sold in a composite package, without any extra charge for the battery charger, the battery charger is a part of cell phone. Mere fact that the battery charger was not affixed to the cell phone will not mean that it is a different item. The entry in question cannot be read as excluding the battery charger which is necessary for use of the cell phone.

(2) Compared to the value of the cell phone, value of the charger is insignificant. Cell phone cannot be used without charger. On these undisputed facts the charger cannot be excluded from the entry for concessional rate of tax which applies to cell phones and parts thereto. Accordingly the appeal was allowed.

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(2011) 38 VST 142 (P&H) M/s. Jaibharat Gum and Chemicals Ltd. v. State of Haryana and Others

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VAT — Quantification of refund as per appeal order — No power to consider merit of case.

Facts:
The petitioner, the manufacturer of ‘guar gum’, exported ‘guar gum’. The petitioner claimed refund of tax paid on purchase of raw material ‘guar’ which was disallowed in assessment but in appeal it was granted. Thereafter, while quantifying refund as per appeal order, the revisional authority disallowed the refund on merit. The Tribunal confirmed the order of revisional authority disallowing refund. The petitioner filed petition before the Punjab and Haryana High Court against the order passed by the Haryana Tax Tribunal.

Held:
The High Court, following its earlier order in case of Raghbar Dass Hukam Chand & Co v. State of Haryana, (2009) 25 VST 574, allowed the petition. The relevant observations of the Court in the said case are as under:

“Therefore, we are of the view that on principle as well as on precedent, it stands established that an officer exercising power of determining the amount of refund cannot exercise the power of review or appeal or revision. Such an officer has to respect the order of assessment and then is required to proceed to determine the amount of refund. The provisions of section 43 read with Rule 36 postulates limits of their power as already noticed and, therefore, the orders passed by the Deputy Excise and Taxation Commissioner are liable to be set aside.”

However, the Court made clear that this will not affect the merits of liability of the petitioner in pending appeal.

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(2011) 22 STR 56 (Tri.-Chennai) — SMP Steel Corporation v. CCE, Madurai.

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Power of revision not exercisable when an appeal is pending before the Commissioner (Appeals).

Facts:
The penalties were set aside by the Commissioner (Appeals) vide his order dated 25-2-2010. Since, a revised order was passed by the adjudicating authority in June 2010, subsequent to the order of the Commissioner (Appeals); the appellants were in appeal against the revised order.

Held:
Power of revision cannot be exercised in respect of any issue which is appealed before the Commissioner (Appeals). In the present case, the order was revised after the appeal before the Commissioner (Appeals) was decided. The revision was bad in law and appeal was allowed in favour of the appellants.

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(2011) 22 STR 20 (Tri.-Chennai) — Anil Kumar Yadav v. CCEx., Pondicherry.

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Section 80 of the Finance Act cannot be invoked to waive penalty under some sections and to impose penalty under some other sections.

Facts:
The original authority had imposed penalty u/s. 78 of the Finance Act, but had not imposed any penalty u/s. 76 and 77 of the Finance Act invoking section 80 of the Finance Act. On appeal against the order of the original authority for waiver of penalty u/s. 78, penalty amount was reduced to 25%. However, the appellant appealed that full penalty shall be waived as he had paid the entire Service tax amount along with interest, proving bona fide interest. The respondents appealed that since the penalty amount of 25% was not paid within one month, full penalty shall be imposable.

Held:
Section 80 is applicable in respect of penalties imposable u/s.s 76, 77 and 78 of the Finance Act. Once it is accepted that there was a reasonable cause for such failure to pay Service tax, penalties u/s.s 76, 77 and 78 all are to be waived. More so since the Department had not appealed against waiver of penalty u/s.s 76 and 77 r.w.s 80 of the Finance Act. Section 80 does not authorise authorities to waive the penalty under some sections and impose penalty under some other sections. Therefore, penalty imposed u/s. 78 could not be sustained.

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(2011) 22 STR 215 (Tri.-Bang.) — KPIT Cummins Infosystems Ltd. v. CCEx., Bangalore.

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Enhancement of penalty by the same authority cannot be permitted when adjudication order is already passed.

Facts:
The Commissioner issued a show-cause notice dated 18-6-2008 and after following the principle of natural justice, passed an order for enhancement of penalty. The appellants argued that the order being issued by the Commissioner, it cannot be reviewed by the Commissioner himself and the same is in violation of Appellate processes under the Finance Act. 

Held:
The Tribunal held that once an adjudication order is passed, show-cause notice issued by the same authority cannot hold good for the same issue and the Revenue should exercise other available alternative options in the statute.

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(2011) 22 STR 513 (P & H) — Commissioner of Central Excise v. Shiva Builders.

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Revision by Commissioner — Whether the Commissioner can pass order-in-revision when issue is pending in appeal.

Facts:
The assessee, who were builders, preferred an appeal against the suo motu revision order passed by the Commissioner u/s. 35G after passing of the order by the Commissioner (Appeals). The same was allowed by the Appellate Tribunal. On appeal to High Court, the Revenue contended that issue in appeal before the Commissioner (Appeals) was different from the issue which was considered during revisionary proceedings and therefore the revision order by the Commissioner was to be considered valid.

Held:
In view of the provisions as laid out u/s. 84(4) of the Finance Act, 1994, the Court held that even if the issue before the Commissioner (Appeals) was different than the one raised by the Commissioner in revision jurisdiction, exercise of revisional jurisdiction u/s. 84(4) of the Finance Act, 1994 on another issue also was not permissible. Revenue’s appeal was dismissed.

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SERVICES OF AIR-CONDITIONED RESTAURANTS

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Introduction and background Service tax is introduced on services provided by air-conditioned restaurants having a licence to serve liquor with effect from 1st May, 2011. The restaurants predominately serve food and as such, the dominant nature of the transaction is that of sale and the service is built-in or an integral part thereof and it is already subject to the levy of VAT. Whether a transaction is a sale or a service is determined with reference to facts of each case. At times, there may be a composite transaction consisting of both sale and service. The debate over this issue is ongoing and often a transaction is looked upon as ‘sale’ as well as ‘service’ under different statutes in India. There has been ongoing debate in relation to taxation of software, intellectual property rights or goods of incorporeal nature, telecommunication service, etc. as to whether these should be taxed as goods or services. Mutual exclusivity of service tax and VAT was recognised and a composite contract was distinguished from an indivisible contract in the case of Imagic Creative Pvt. Ltd., 2008 (9) STR 337 by the Supreme Court and accordingly held to the effect that the element of sale would attract VAT and element of service would attract service tax. In the context of provision of broadband connectivity, in the case of Bharti Airtel Ltd. v. State of Karnataka, 2009 TIOL 99 HC Kar-VAT, the High Court upheld the order of the Assessing Authority that activity of providing connectivity to the subscribers amounted to sale of light energy and taxable under the Karnataka VAT Act, whereas the company had paid due service tax. On filing SLP however, the Supreme Court set aside the order and directed the company to file statutory appeal and further passed an order to dispose of the appeal on merits. The controversy thus is not closed. It is however relevant to note that in the context of supply of food and beverages on board trains in the case of Indian Railways C&T Corporation Ltd. v. Govt. of NCT of Delhi 2010 (20) STR 437 (Del.), the Delhi High Court held that the said transaction did not amount to service of outdoor catering as passengers have no choice of articles served or time and place of service of food. The element of service is incidental and bare minimum of heating food and serving it. The state was empowered to levy VAT on the transaction and incidental element of service was not relevant and the petitioner was at liberty to challenge the levy of service tax. Further citing the case of Bharat Sanchar Nigam Ltd., 2006 (2) STR 161 (80), it was observed that in respect of composite transactions other than those covered by Article 366(29A) of the Constitution, if no intention is found to segregate the element involving sale of goods from the element involving providing of service or if the transaction does not involve two distinct contracts, one for sale of goods and the other for providing of service, it is not permissible to disintegrate such composite contract so as to levy VAT/sales tax and service tax. In the context of outdoor catering service, distinguishing it from food served in a restaurant, the Supreme Court in Tamil Nadu Kalyana Mandap Assn. v. UOI, 2006 (3) STR 260 (SC) noted, “In the case of an outdoor caterer, the customer negotiates each element of catering service including the price to be paid to the caterer. Outdoor catering has an element of personalised service provided to a customer. Clearly the service element is more weighty, visible and predominant in the case of outdoor catering, it cannot be considered a case of sale of food and drink as in restaurant”. Amidst the controversy as to whether food served in a restaurant is an indivisible contract where dominant objective is sale of food or a composite contract of sale of food and providing services of ambience of air-conditioning, furniture, etc. and other personalised services, service tax is introduced on the service provided by restaurants.

Services provided by restaurants Statutory provisions in relation to the new levy, as contained in the Finance Act, 1994 (the Act) are reproduced below: Section 65(105)(zzzzv) of the Act “ ‘Taxable service’ means any service provided or to be provided to any person, by a restaurant, by whatever name called, having the facility of air-conditioning in any part of the establishment, at any time during the financial year, which has licence to serve alcoholic beverages, in relation to serving of food or beverage, including alcoholic beverages or both, in its premises.”

Criteria for taxability The definition in relation to a restaurant indicates the following criteria for taxability:

  •  Services provided by a restaurant or any establishment providing such services and known by any name such as a fast-food centre, a lunch home, a dhaba, a coffee-shop, a club, etc. The term ‘restaurant’ is not defined in the Act, therefore only the common parlance meaning of the term is to be applied. Any establishment or an eating house serving food and/or beverages whether in a hotel or otherwise to public or a class of public for consumption on the premises is known as a restaurant and is covered in the scope.

  •  Air-conditioning facility may be available for the whole or partial premises of the restaurant or the establishment and at any time during a financial year.

  •  The other concurrent requirement is having a licence to serve alcoholic beverages. However, there is no requirement as to the actual servicing of alcohol using the said licence. The existence of licence to serve is the requirement and any kind of alcoholic beverage such as beer, rum, gin, vodka, whisky, wine, etc. if licensed to serve is covered in the scope.

  •  Service is to be provided to any person in relation to food or beverages including any alcoholic beverages.

  •  The food and/or beverages are served on the premises of the restaurant.

The Government Instruction vide DOF No. 334/3/2011-TRU, dated 28-2-2011 has clarified as follows:

“1. Services provided by a restaurant 1.1 Restaurants provide a number of services normally in combination with the meal and/ or beverage for a consolidated charge. These services relate to the use of restaurant space and furniture, air-conditioning, well-trained waiters, linen, cutlery and crockery, music, live or otherwise, or a dance floor. The customer also has the benefit of personalised service by indicating his preference for certain ingredients, e.g., salt, chilies, onion, garlic or oil. The extent and quality of services available in a restaurant is directly reflected in the margin charged over the direct costs. It is thus not uncommon to notice even packaged products being sold at prices far in excess of the MRP. 1.2 In certain restaurants the owners get into revenue-sharing arrangements with another person who takes the responsibility of preparation of food, with his own materials and ingredients, while the owner takes responsibility for making the space available, its decoration, furniture, cutlery, crockery and music, etc. The total bill, which is composite, is shared between the two parties in terms of the contract. Here the consideration for services provided by the restaurants is more clearly demarcated.

1.3 Another arrangement is whereby the restaurant separates a certain portion of the bill as service charge. This amount is meant to be shared amongst the staff who attend the customers. Though this amount is exclusively for the services, it does not represent the full value of all services rendered by the restaurants.

1.4    The new levy is directed at services provided by high-end restaurants that are air-conditioned and have licence to serve liquor. Such restaurants provide conditions and ambience in a manner that service provided may assume predominance over the food in many situations. It should not be confused with mere sale of food at any eating house, where such services are materially absent or so minimal that it will be difficult to establish that any service in any meaningful way is being provided.

1.5    It is not necessary that the facility of air-conditioning is available round the year. If the facility is available at any time during the financial year, the conditions for the levy shall be met.

1.6    The levy is intended to be confined to the value of services contained in the composite contract and shall not cover either the meal portion in the composite contract or mere sale of food by way of pick -up or home delivery, as also goods sold at MRP. The Finance Minister has announced in his budget speech 70% abatement on this service, which is, inter alia, meant to separate such portion of the bill as relates to the deemed sale of meals and beverages. The relevant Notification will be issued when the levy is operationalised after the enactment of the Finance Bill.”

Further to the above, the Circular No. 139/8/2011-TRU, dated 10-5-2011, clarified the following issues as summarised below:

  •     When there are more than one restaurant belonging to a common entity in a complex and if they are demarcated by separate names, service tax would be levied on the restaurant which is air-conditioned in any part of the establishment and has a licence to serve alcohol and as such, satisfies both the conditions for its coverage.

  •    Taxable services provided by a restaurant in other parts of the hotel such as swimming pool or an open area attached to the restaurant also attract service tax as they are extension of the restaurant.

  •     When food is served as a part of ‘room service’ of a hotel, no service tax is leviable as service is not provided in the premises of air-conditioned restaurant with a licence to serve liquor. It is not chargeable even under short-term accommodation service if the bill for the food is raised separately and does not form part of the declared tariff.

  •     For the levy of service tax, State Value Added Tax (VAT) charged in the invoice would be excluded from the taxable value.

Food picked up at counter or delivered at home

Many a time, food is picked up at the counter of the restaurant and not consumed while sitting in the restaurant or is delivered at home as most food chain outlets or even speciality restaurants provide home delivery service. In these situations, only food is sold and the facility of restaurant not enjoyed. DOF letter dated 28-2-2011 reproduced above has clarified this point.

Valuation of restaurant service

In the context of catering service provided by outdoor caterers and/or mandap-keepers, the Hon. Supreme Court in the case of Tamil Nadu Kalyana Mandapam Association (supra) observed “it is well settled that the measure of taxation cannot affect the nature of taxation and therefore the fact that service tax is levied as a percentage of gross charges for catering cannot alter or affect the legislative competence of the Parliament in the matter”. In the said backdrop, exemption Notification No. 34/2011-ST of 25-4-2011 has amended Notification 1/2006-ST and granted abatement of 70% on the gross value of taxable service provided by a restaurant. The Ministry vide its Circular dated 25-4-2011 has also clarified that the exemption is available on the gross price charged by the restaurant for the taxable service including any portion shown separately, for instance some restaurants recover service charge separately. This would also form part of the value for determining service tax. However, any amount paid ex-gratia e.g., tip to any staff does not amount to consideration paid for the service of the restaurant and therefore would not be included in the value.

Some issues

(i)    A non-air-conditioned restaurant having a licence to sell alcoholic beverage is partly being made air-conditioned and will be functional from 1st January, 2012. Whether and when would service tax be attracted? Whether the entire sale i.e., even the non-air-conditioned part sale would attract tax liability?

Ans. (i) Service tax would be attracted from 1st January, 2012 and on the entire value of billing including billing for serving meals and/or drinks in the non-a/c part of the restaurant. The use of the words ‘at any time during the financial year’ makes it clear. However, prior to 1st January, 2011, the food was served without the facility of air-conditioning, therefore service tax would not be attracted. It may also be noted that service tax is introduced for the first time on the restaurant service from 1st May, 2011 and therefore threshold exemption would be available to the restaurant, subject to other conditions of threshold exemption of rupees ten lakh under Notification 6/2005-ST, dated 1-4-2005.

(ii)    Mr. A went to Restaurant M, a state-of-the art air-conditioned restaurant which would also service alcoholic beverages, but Mr. A does not have alcohol. Whether Mr. A can insist on not charging service tax in the invoice as he did not consume alcohol?

Ans. (ii) Consumption of alcohol is not envisaged in the definition of restaurant service. So long as the restaurant is air-conditioned and has a licence to servce alcoholic beverages, the restaurant is liable to pay service tax.

(iii)    Whether air-conditioned liquor shops having a licence to sell alcohol would be covered by the above provisions?

Ans. (iii) Liquor shops are not restaurants. They sell alcohol but do not serve the same in their premises. It is the service of restaurant facility i.e., having tables, chairs and other furniture along with a bar and/or waiters, etc. along with food and/or beverages including non-alcoholic beverages or both, is covered by the service tax provisions and not the shops selling alcohol.

(iv)    Are coffee-shop chain of restaurants with state-of-the art ambience in air-conditioned halls liable for service tax?

Ans. (iv) If the coffee-shop does not have licence to serve alcoholic beverages, it is not covered by the service tax provisions.

(v)    Whether a restaurant having a mere beer bar where only that part is air-conditioned would be liable for service tax?

Ans. (v) The part of the restaurant is air-conditioned and beer is an alcoholic beverage. Therefore, the value of the food and all beverages served in any part of the restaurant is liable for service tax.

(vi)    An air-conditioned restaurant in Mahabaleshwar uses air-conditioning facility only during the months of March – May. Rest of the year being very cool, air-conditioning is not operated. If the restaurant’s value of taxable sale during May, 2011 was well below the threshold limit of 10 lakh, would it be out of the scope of the levy till March 2012 or so.

Ans. (vi) No. The restaurant would be liable for service tax when it crosses the limit of Rs.10 lakh, even if it does not operate air-conditioning as it has used it for some part of the year. The condition is to have a facility of air-conditioning at anytime during the financial year is satisfied.

(2011) 22 STR 177 (Tri.-Mumbai) — Affinity Express India Pvt. Ltd. v. CCEx., Pune-I.

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Refund of Cenvat credit — Export of business auxiliary service — Service was taxable after May 2006 — Assessee entitled to take credit at the time of availment — Even prior to May 2006. Refund of Cenvat credit — Export of business auxiliary service — Service tax paid on local travel and medical insurance services, outdoor catering and meal coupons — Credit admissible.

Facts:
The appellants had filed a refund claim of Cenvat credit availed on input services used for export of business auxiliary service, for the period starting from April 2006. However, the claim for local travel and medical insurance was rejected by the lower authorities and the claim for outdoor canteen/meal coupons was allowed. Thereby, the appellants and the Revenue both were in appeal for disallowance and allowance of refund claim by the lower authorities.

The Revenue submitted that the services exported by the appellants had come under Service tax net with effect from 01-05-2006, therefore, any input service availed before 1-5-2006 is not eligible for credit.

However, as per the Cenvat Credit Rules, the appellants were entitled to take credit at the time of availment and not at the time of provision of service. This means that the appellants were entitled to avail the input service credit of services availed in the month of April 2006.

In support of availment of credit on local travel and medical insurance, reliance was placed on the Bombay High Court’s decision in case of Ultratech Cement, 2010 (20) STR 577 (Bom.) wherein it was held that the input service availed by the assessee in the course of business is entitled for Cenvat credit.

Apart from this, with regard to outdoor catering and meal service, the appellants stated that credit on outdoor catering service is available if the cost of food is borne by the employer. However, the appellants were denied credit on the amount recovered from employees against subsidised food.

Held:
The appeal was allowed to the appellants in respect of availment of credit for the month of April 2006 and for availment of credit of Service tax paid on local travel and medical insurance. On the other hand, the Revenue’s appeal was partly allowed by denying credit of Service tax paid on outdoor catering and meal service, for the amount which was recovered by the assessee from the employees.

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Exemption of R&D Cess to Consulting Engineer & Holder of the Intellectual Property right — Notification Nos. 46/2011-ST & 47/2011-ST both, dated 19-9-2011.

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As per existing Notification No. 18/2002, dated 16-12-2002 service tax on ‘Consulting Engineer Service’ and as per existing Notification No. 17/2004, dated 10-9-2004 service tax on ‘Intellectual Property Service’ are exempted to the extent of R&D Cess payable under Research & Development Cess Act, 1986.

These existing Notifications are now amended by the Notification No. 46/2011 & 47/2011, respectively to reduce service tax to the extent of R & D Cess subject to the fulfilment of the following cumulative conditions :

(a) R&D Cess is paid within 6 months of booking of invoice;
(b) R&D Cess is paid within 6 months of date of credit in books in case of associated companies;
(c) In any case R&D Cess should be paid before payment for the service.

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CONTROVERSY: WHETHER RENTING OF IMMOVABLE PROPERTY A SERVICE?

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Issue for consideration:

Section 65(105)(zzzz) read with section 65(90a) of the Finance Act, 1994 (the Act or the service tax law) contains provisions relating to taxable service of renting of immovable property for use in the course of or for furtherance of, business or commerce. The service was introduced with effect from 1-6-2007 in the service tax law. The activity of renting an immovable property per se was not perceived as a transaction of service. When airport services were introduced, the Government vide its Circular No. 80/10/2004-ST, dated 17-9-2004 (para 5) also clarified to such effect:

“However, in case a part of airport/civil enclave premises is rented/leased out, the rental/lease charges would not be subjected to service tax, as the activity of letting out premises is not rendering a service.”

The introduction of the category gave rise to resistance to pay service tax chiefly by various retail outlets selling goods and occupying licensed/ leased premises and some other licensees/lessees, engaged in business activity as they do not have the potential to claim CENVAT credit of service tax on licence fees payable for the use of commercial premises. Consequently, writ petitions were filed in various High Courts across the country challenging the levy and constitutional validity thereof. The Delhi High Court first took a position in the case of Home Solution Retail India Ltd. v. Union of India, 2009 (14) STR 433 (Del.) and held a view that in terms of section 65(105)(zzzz) of the Finance Act, 1994 (the Act), renting out of immovable property for use in the course or furtherance of business or commerce would not constitute a taxable service and as a result, the Notification dated 22-5-2007 and Circular dated 4-1-2008 were held ultra vires the Act.

In service tax law, the term ‘service’ is not defined but every taxable service introduced in the tax net is separately defined. Therefore, the issue has been that while an immovable property is rented or licensed or leased, whether there is any value addition or whether there exists any element of service?

Background of Home Solutions’ writ petition:
In this writ, the petitioner challenged the legality, validity and vires of Notification No. 24/2007, dated 22-5-2007 and Circular No. 98/1/2008-ST, dated 4-1- 2008 issued by the Government.

It was further alleged that because of the incorrect interpretation of law by the said Notification and the Circular, service tax was sought to be levied on renting of immovable property as opposed to service tax on a service provided in relation to the renting of immovable property.

The petitioners also took an alternative plea that in case it is held that such a tax is envisaged, then the provisions of section 65(90a), section 65(105) (zzzz) and section 66 insofar as they relate to the levy of service tax on renting of immovable property would amount to a tax on land and would therefore fall outside the legislative competence of the Parliament as the subject was covered under Entry 49 of List II of the Constitution of India and would fall within the exclusive domain of the State Legislatures and therefore the same be declared unconstitutional.

It was, inter alia, submitted that the impugned Notification and the Circular which proceeded on the assumption that the renting of immovable property was itself a service, were contrary to and inconsistent with the charging provision and therefore ultra vires the Act. Since service tax is a value-added tax and can only be levied on the value addition, the words ‘in relation to’ in section 65(105)(zzzz) of the said Act are of great significance. The value addition of service in the present context could be an improvement or the betterment of the property provided by the owner to the lessee or licensee. It is that betterment alone which could qualify as a service. The act of renting of the immovable property by itself does not provide any value addition to any person and therefore cannot be treated as a service. To support this contention reference was made to the various entries falling within the scope of ‘taxable service’, which would reveal that it is only the value addition which is taxable.

The Court held that in terms of section 65(105) (zzzz) of the Finance Act, 1994, renting out of immovable property for use in the course or furtherance of business or commerce would not constitute a taxable service and as a result, Notification dated 22-5-2007 and Circular dated 4-1-2008 were ultra vires the Act. The Court distinguished the observations made by the SC in the case of Tamil Nadu Kalyana Mandapam’s case [2004 (167) ELT 3 (SC)], on which the respondent had placed reliance to the effect that “making available a premises for a period of a few hours for the specific purpose of being utilised as a mandap whether with or without other services would itself be a service and cannot be classified as any other kind of legal concept”. The Court also referred to the observations made by the SC in the case of All India Federation of Tax Practitioners [2007 (7) STR 625 (SC)] wherein the SC, inter alia, had observed that “service tax is a value added tax and that just as excise duty is a tax on value addition on goods, services tax is on value addition by rendition of services. A distinction was also sought to be made between property-based services and performance-based services. The property-based services cover service providers, such as architects, interior designers, real estate agents, construction services, mandap keepers, etc. Whereas the performance-based services are those provided by persons, such as stock-brokers, practising chartered accountants, practising cost accountants, security agencies, tour operators, event managers, travel agents, etc.” Applying the same to renting of immovable property service, the High Court observed “There is no dispute that any service connected with the renting of such immovable property would fall within the ambit of section 65(105)(zzzz) and would be exigible to service tax. The question is whether renting of such immovable property by itself constitutes a service and, thereby, a taxable service. Service tax is a value added tax. It is a tax on the value addition provided by some service providers. Insofar as renting of immovable property for use in the course or furtherance of business or commerce is concerned, any value addition could not be discerned. Consequently, the renting of immovable property for use in the course or furtherance of business or commerce by itself does not entail any value addition and, therefore, cannot be regarded as a service.” (emphasis supplied). The Delhi High Court however did not examine alternative plea of constitutional validity. The Government filed an SLP against the said ruling which is admitted, but no stay has been granted against the Delhi HC Ruling. The same is pending for disposal.

The amendment by the Finance Act, 2010:
To overcome the above ruling, the Finance Act, 2010 redefined ‘taxable service’ with retrospective effect from 1-6-2007 as under :

“(105) ‘taxable service’ means any service provided or to be provided –

(zzzz) to any person, by any other person, (*by renting of immovable property or any other service in relation to such renting) for use in the course of or, for furtherance of business or commerce.”

* Words substituted for (in relation to renting of immovable property).

As a result, a service provided by renting of immovable property or a service ‘in relation to’ such renting of immovable property, is brought within the tax net. TRU, Circular No. 334/1/2010 — TRU dated 26-2-2010 clarified the amendment as under:

Para 9.2:

“In order to clarify the legislative intent and also bring in certainty in tax liability the relevant definition of taxable service is being amended to clarify that the activity of renting of immovable property per se would also constitute a taxable service under the relevant clause. This amendment is being given retrospective effect from 1-6-2007.”

Thus, renting of immovable property by itself is considered to be a taxable service. In the Finance Act 2010, it has been declared:
“No act or omission on the part of any person shall be punishable as an offence which would not have been so punishable had this amendment not come into force.”

Recently, the Bombay High Court and Gujarat High Court have delivered their judgments on this burning issue and have decided the scope of powers of the Parliament to enact the activity of renting of premises for the use of or for furtherance of business or commerce, as service. Earlier, during F.Y. 2010-11 the other High Courts viz. Orissa High Court, in Utkal Builders Limited v. UOI, [2011 (22) STR 257 (Ori)] and P&H High Court in Shubh Timb Steels Ltd. v. UOI, [2010 (20) STR 737 (P&H)] have also held to the effect that renting of property for commercial purpose was certainly a service and had a value for the service receiver. While the Bombay High Court has extended the interim order to remain in force till September 30, 2011 and some of the petitioners have decided to knock the door of the Supreme Court, hopes of getting a decision in favour of retailers in the special leave petition filed before the Supreme Court against UOI v. Home Solutions Retail India Ltd., [2009 (15) STR J23 (SC)] appears to have dimmed. Both the decisions are briefly analysed below:

Retailers Association of India & Other v. UOI’s case, 2011 (23) STR 561 (Bom.):

The petitioners had in their petition, inter alia, challenged the legislative competence of the Parliament in the context of Entry 49 of List II of the Constitution of India. The constitutional challenge to the legislative competence of the Parliament was premised on the submission that:

  •     The tax which has been imposed on a taxable service which is defined to mean renting of immovable property is a tax on lands and buildings within the meaning of Entry 49 of List II of the Seventh Schedule.

  •    All four judgments of the Supreme Court, referred to later herein, did not deal with a situation where the legislation would fall within the purview of a specific entry in List II.

  •     Article 246 of the Constitution empowers the State Legislature to make laws “with respect to any of the matters enumerated in List II”.

  •     In consequence, the power of the State Legislature is not only to make laws imposing taxes on lands and buildings, but to enact legislation with respect to taxes on lands and buildings;

  •     Entry 49 of List II must receive the broadest possible interpretation and amplitude.

  •     Especially when read in the context of Entry 97 of List I, the width and ambit of Entry 49 of List II cannot be curtailed with reference to the residuary power of the Parliament; and

  •     A tax whether levied on the basis of rent, annual value, or capital value would constitute a tax on lands having regard to the ambit of Entry 49 of List II. A tax based on leasing of a land and computed by rental value cannot be rested on Entry 97 of List I, because it is in substance, a tax on a transaction of letting of land and Entry 49 of List II would preclude a levy by the Parliament of a service tax on letting.

Relevant legal provisions:

Article 246 of the Constitution of India:

“246. Subject-matter of laws made by the Parliament and by the Legislatures of States.

(1)    Notwithstanding anything in clauses (2) and (3), the Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule (in this Constitution referred to as the Union List).

(2)    Notwithstanding anything in clause (3), the Parliament, and, subject to clause (1), the Legislature of any State also, have power to make laws with respect to any of the matters enumerated in List III in the Seventh Schedule (in this Constitution referred to as the Concurrent List).

(3)    Subject to clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II in the Seventh Schedule (in this Constitution referred to as the ‘State List’).

(4)    The Parliament has power to make laws with respect to any matter for any part of the territory of India not included (in a State) notwithstanding that such matter is a matter enumerated in the State List.”


Seventh Schedule of the Constitution of India:

List I — Union List — Entry 97 — Residuary power:

97.    Any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists.

List II — State List — Entry 49:

49.    Taxes on lands and buildings.

In order to address the constitutional challenge in the above petitions, the Court briefly traced the evolution of judicial thought on the issue of imposition of service tax (paras 5 to 10) by referring to the following four Supreme Court decisions in which the controversy was analysed:

(i)    Tamil Nadu Kalayana Mandapam Association v. UOI, 2004 (167) ELT 3 (SC)

(ii)    Gujarat Ambuja Cements Ltd. v. UOI, 2005 (182) ELT 33 (SC)

(iii)    All India Federation of Tax Practitioners Associa-tion v. UOI, 2007 (7) STR 625 (SC) and

(iv)    Association of Leasing and Financial Service Companies v. UOI, 2010 (20) STR 417 (SC).

The Court, based on the analysis of the legislative provisions contained in (i) Article 246 of the Constitution of India read with respect to any of the matters enumerated in List II read with Entry 49, and (ii) residuary powers under Entry 97 of List I, noted that “If the subject on which the Parliament has enacted legislation is found, upon determining its true nature and character not to fall within the purview of a field reserved to the States, the Parliament would have legislative competence in any event under Entry 97 of List I read with Article 248. The essential question that falls for determination in the present case is whether the levy of a service tax on a taxable
service which the Parliament defined to be the renting of immovable property falls within the exclusive province of the State Legislatures under Entry 49 of List II.”

The Court referred to the following judgments of the Supreme Court where the scope and ambit of Entry 49 of List II has been interpreted:

  •    Ralla Ram — AIR 1949 FC 81:

In this case, the Federal Court held that merely because the Income- tax Act adopted annual value as the standard for determining income, it would not necessarily follow that if the same standard were to be employed as a measure for any other tax (in the given case — an annual tax on buildings and lands situated in the rating areas as stipulated in the Schedule at a particular rate), that tax also became a tax on income. The Court distinguished between the nature of tax and nature of machinery quantifying the tax and the Bombay High Court averred that Ralla Ram’s case is an authority for the proposition that it is the essential nature of the tax and not the nature of the machinery, which must be looked at in determining the validity of the impost.

  •    Sudhir Chandra v. Wealth Tax Officer

— AIR 1969 SC 59:

This case dealt with a challenge to the constitutional validity of the Wealth Tax Act of 1957 on the ground that it transgressed upon a field reserved to the State Legislature under Entry 49 of List II. The Bombay High Court noted that while explaining the scope of Entry 49, the Supreme Court held:

“But the legislative authority of the Parliament is not determined by visualising the possibility of exceptional cases of taxes under two different heads operating similarly on taxpayers. Again Entry 49, List II of the Seventh Schedule con-templates the levy of tax on lands and buildings or both as units. It is normally not concerned with the division of interest or ownership in the units of lands or buildings which are brought to tax. Tax on lands and buildings is directly imposed on lands and buildings, and bears a definite relation to it. Tax on the capital value of assets bears no definable relation to lands and buildings which may form a component of the total assets of the assessee.”
(emphasis supplied).

  •     Second Gift Tax Officer, Mangalore v. D. H. Hazareth — AIR 1970 SC 999:

In this case, the constitutional validity of the Gift Tax Act, 1958 was considered. The Court ruled that however wide a taxing entry in the State List may be, it would still not authorise a tax which is not expressly mentioned. If the pith and substance of the law did not fall within the purview of Entry 49 of the State List, the Parliament, it was held, would undoubtedly possess that power under Article 248 and Entry 97 of the Union List. While holding that the Gift Tax Act, 1958 was not a tax on lands and buildings, the Constitution Bench came to the conclusion that Entry 49 postulates a tax resting upon the general ownership of lands and buildings and a tax which is imposed directly upon lands and buildings.

  •    D. G. Gose & Co. v. State of Kerala — 1980 2 SCC 410:

The Bombay High Court noted that in this case the above principle was reiterated by the Constitution Bench of the Supreme Court holding that a tax on buildings is “a direct tax on the assessee’s buildings as such, and is not a personal tax without reference to any particular property”.

  •     India Cement Ltd. — AIR 1990 SC 85:

Referring to the observation by the Supreme Court in this case to the effect that “there is a clear distinction between tax directly on land and tax on income arising from land” and held that the tax levied under the Income-tax Act, 1961 on income “though computed in an artificial way from house property” was levied on the income and not house property and therefore, did not fall within the purview of Entry 49 of List II. The Bombay High Court also noted that a principle was enunciated (in a judgment of two learned Judges of the Supreme Court in Bhagwan Dass Jain v. Union of India) that a tax on lands and buildings would not comprehend within its purview a tax on income arising from land or building.

The Bombay High Court observed that the above judgments of the Supreme Court clearly indicate that the settled principle of law is that a tax on lands and buildings is a tax on the general ownership of lands and buildings. In order that a tax must fall under Entry 49 of List II, the tax must be one directly on lands and buildings. A tax which is levied on the income which is received from lands or buildings is not a tax on lands or buildings.

The petitioners’ submission was that a tax on land within the meaning of Entry 49 of List II can take into account the use to which the land is put. The service tax imposed by the Parliament on renting of immovable property takes account of the user of the land or building and, hence, the service tax on renting of immovable property is a tax which the State Legislatures could conceivably impose under Entry 49 of List II. In support of the contention, it was urged that the judgment of the Supreme Court in Ajoy Kumar Mukherjee v. Local Board of Barpeta, (AIR 1965 SC 1561) is an authority for the proposition that in order to be a tax on land, the charge under the legislation must be on the land as a unit. In that case, a tax was imposed u/s.62 of the Assam Local Self Government Act, 1953. Section 62(1) stipulated that the local Board may order that no land shall be used as a market otherwise than under a licence to be granted by the Board. U/ss.(2) which was the charging provision, it was stipulated that on the issue of an order u/ss.(1), the Board may grant a licence for the use of any land as a market and impose an annual tax thereon. While upholding the validity of the tax, the Supreme Court noted that the tax was, in substance, a tax on the land but the charge only arises on land which was used for a market.

Reliance was also placed on the decision of the Supreme Court in Goodricke Group Ltd. v. State of W.B., [1995 Supp (1) SCC 707] which dealt with a challenge to the validity of a cess imposed under the West Bengal Rural Employment and Production Act, 1976. The levy was challenged in Goodricke on the ground that it was not a tax on lands and buildings. The Supreme Court held that the subject -matter of the tax and the levy was land on the premise that the entire land covered in the tea estate was treated as a separate category of land as a unit for the purposes of the levy of tax. Merely because a tax on lands or buildings is imposed with reference to the income or yield of lands or buildings, it would not cease to be a tax on lands or buildings.


Residuary power of the Parliament to legislate: Referring to observations made by the SC in the cases of:

  •     UoI v. H. S. Dhillon — AIR 1972 SC 106,
  •     Assistant Commissioner of Urban Land Tax — AIR 1970 SC 169,
  •     Sat Pal & Co. — AIR 1979 SC 1550,
  •     International Tourist Corp. — 1981 2 SCC 318, and few of the above-referred judgments, the Bombay High Court noted that “while the Court must give a broad and liberal interpretation to Entry 49 of List II, the interpretation to be placed on that entry must nevertheless be meaningful. In each case, the Court must have regard to the true nature and character of the levy in determining as to whether in pith and substance, the tax is a tax on land and buildings. If the essential nature of the levy is the imposition of a tax on land and buildings, it would fall within Entry 49 of List II. If on the other hand, the essential nature and character of the levy is not a tax on land and buildings, then the exercise of interpretation would not bring within its purview a tax which is not one on land and buildings.”

To determine the character of the levy under challenge, analysis of section 66 (charging section), section 65(105)(zzzz), section 65(90a) and section 67 of the Finance Act, 1994 was made and it was held that:

(a)    The charge of tax is not on lands or buildings.
(b)    The charge of tax is on a taxable service.
(c)    The measure of tax is the gross amount charged by the service provider.
(d)    The charge of tax is not on lands or buildings as a unit nor is the tax on lands or buildings.
(e)    To be a tax on lands and buildings under Entry 49 of List II, the tax must be directly a tax on lands and buildings. That is not the true character of an impost on taxable services.

On behalf of the petitioners reliance was placed on the judgment of the Supreme Court in the State of West Bengal v. Kesoram Industries Limited, [(2004) 10 SCC 201] in support of the submission that the law in the present case is a law which imposes a tax on land and buildings. It was urged that in paragraph 129 of the judgment the Supreme Court, inter alia, has laid down the following principles regarding:

“(6) ‘Land’, the term as occurring in Entry 49 of List II, has a wide, connotation. Land remains land though it may be subjected to different user. The nature of user of the land would not enable a piece of land being taken out of the meaning of land itself. Different uses to which the land is subjected or is capable of being subjected provide the basis for classifying land into different identifiable groups for the purpose of taxation. The nature of user of one piece of land would enable that piece of land being classified separately from another piece of land which is being subjected to another kind of user, though the two pieces of land are identically situated except for the difference in nature of user. The tax would remain a tax on land and would not become a tax on the nature of its user.

(7)    To be a tax on land, the levy must have some direct and definite relationship with the land. So long as the tax is a tax on land by bearing such relationship with the land, it is open for the Legislature for the purpose of levying tax to adopt any one of the well-known modes of determining the value of the land such as annual or capital value of the land or its productivity. The methodology adopted, having an indirect relationship with the land, would not alter the nature of the tax as being one on land.”

In this frame of reference, the Bombay High Court noted that though as per this decision the expression ‘land’ in Entry 49 of List II has a wide connotation, the judgment in Kesoram Industries (supra) does not mark a departure from the ambit and content of Entry 49 of List II which has been laid down in the previous decisions of the Court including the judgments of the Constitution Bench in Nawn’s case and in Hazareth’s case (supra) or for that matter the decision of the Bench of seven learned Judges in Dhillon’s case (supra) and held that service tax that has been legislated upon by the Parliament is not a tax on land. The true nature and character of the levy is not a tax on land or buildings. The charge of tax is a taxable service which the Parliament regards as being rendered. The renting of immovable property is an activity which in the legislative wisdom of the Parliament involves a conferment of service and it is in that legislative exercise that the Parliament has proceeded to impose a levy of service tax. The measure of tax u/s.67 is the gross amount charged by the service provider for the service which is provided or which is to be provided by him. In the case of renting of immovable property, the measure is the rental. The measure of the tax does by no means indicate that the tax is a tax imposed on land or buildings.

The Bombay High Court noted that the decision in Godfrey Philips [(2005) 2 SCC 515] is not a decision which elucidates the scope of Entry 49 of List II to the Seventh Schedule. Whereas, the ambit of Entry 49 has been explained in several judgments of the Constitution Bench of the Supreme Court as well as in the judgment of the Bench consisting of seven Judges in Dhillon (supra).

The Bombay High Court reiterated that since properly construed a tax which has been imposed by the Parliament is not in essence and in its true character a tax on land and buildings, the tax cannot nonetheless be held as a tax within the meaning of Entry 49 of List II in spite of the true nature and character of the levy. The essential nature and character of the levy is one which is referable to the residuary power of the Parliament under Article 248 of the Constitution read with Entry 97. The Parliament, it may be noted, introduced Entry 92C into List I by the Constitution (Eighty Eighth Amendment) Act, 2003 to specifically deal with taxes on services. That provision has still not been enforced. In the circumstances, the true nature and character of the levy of service tax in the present case is a levy under the residuary power which has been conferred upon the Parliament.

Whether renting of immovable property has an element of ‘service’?

The Court did not accept the submission of the petitioners that there is no service involved in letting out of the immovable property and, there-fore, it was not open to the Parliament to impose service tax on the supposition that taxable service is involved on the premise that “The submission cannot be accepted for more than one reason. As a matter of constitutional doctrine, the Parliament when it legislates upon a matter is entitled to make an assessment of fact on the basis of which the legislation is designed and drafted. An underlying assessment of fact by the Parliament on the basis of which a law has been enacted cannot be amenable to judicial review absent a case of manifest arbitrariness. That apart, it is equally well settled that the Legislature in enacting a law is entitled to provide for a deeming fiction …….. The fact that the service which is provided may not, to the petitioners, accord with what is commonly regarded as a service would not militate against the validity of the legislation…….. In the affidavit in reply that has been filed in these proceedings it has been stated that renting of property is considered to add value to the activity of the person who has rented the property. When a person has a property at a particular location, he is able to charge a higher sum for the merchandise sold therefrom than he would be able to charge if he were to sell the same merchandise from a place which does not have the same locational advantage. Renting of a property, it has been submitted, adds value to the activities of a person renting the property.” The Court also referred to the judgment of the SC in the case of Navnitlal C. Jhaveri v. K. K. Sen, Assistant Comm. of I. Tax AIR 1965 SC 1375. [refer paras 28 to 31].

The Court finally decided “Therefore in our view, looked at from either standpoint, the legislative basis that has been adopted by the Parliament in subjecting taxable services involved in the renting of property to the charge of service tax cannot be questioned. The assumption by a legislative body that an element of service is involved in the renting of immovable property is certainly not an assumption which can be regarded by the Court as being so manifestly absurd or perverse as to lead to an inference that the Parliament had treated as a service, an item which in no rational sense could be regarded as involving service. But more significantly, even if the Court were to proceed on the basis, suggested by the petitioners that no element of service is involved, that would not make the legislation beyond the legislative competence of the Parliament. So long as the legislation does not trench upon a field which has been reserved to the State Legislatures, the only conclusion that can be drawn is that the law must be treated as valid and within the purview of the field set apart for the Parliament. There is, it must be emphasised, no violation set up of any provision in Part III of the Constitution, (save and except on the issue of retrospectivity which would be considered subsequently).”

Retrospectivity:

The Court did not accept the challenge to the legislation on the ground that it is retrospective is lacking in substance by referring to (i) the plenary power of the Parliament to enact legislation, (ii) the Delhi High Court’s judgment in the case of Home Solutions and further observing that: “The provision was given retrospective effect so as to cure the deficiency which was found upon interpretation by the Delhi High Court”, (iii) the affidavit in reply by the UOI, (iv) the SC’s judgment in the case of Bakhtawar Trust v. M. D. Narayan, 2003 5 SCC 298, and (v) to the judgments in the cases of Shubh Timb Steels Limited v. Union of India, 2010 (20) STR 737 (P&H) and Utkal Builders Limited v. Union of India, 2011 (22) STR 257 (Ori.) wherein the constitutional validity of the provision has been upheld.

Cinemax India Limited’s case — 2010 TIOL 535 HC AHM-ST:

Petitioners in these petitions challenged the levy of service tax on renting of immovable property on the grounds that:

(i)    The amendment is unconstitutional being beyond legislative competence of the Parliament.
(ii)    The Delhi High Court having held that renting of immovable property is not a service in absence of any value addition, the Union of India can never change the nature of tax by changing the event of transaction.
(iii)    The amendment not being clarificatory cannot be retrospectively enforced.

The Union of India, on the other hand took the ground that renting of immovable property is taxable service if such renting is for use in the course of or for furtherance of business or commerce.

The petitioners inter alia contended that renting of immovable property does not amount to service as it is a transaction whereby rights in or in relation to immovable property is transferred for a certain period for consideration based on market value of the property. It is not an activity involving performance, skill or knowledge on behalf of petitioners, it was also contented that end- use i.e., the use which the licensee/lessee puts the property to cannot be determinative of the nature of transaction or can create a taxable event. At the most, it can bring about valid classification for taxation. The act of the consumer is not value addition for considering an activity a ‘service’. The value addition must be done by the service provider and in this context reliance was placed on All India Federation of Tax Practitioners & Others v. UOI & Others, 2007 (7) STR 625 (SC) and Association of Leasing and Financial Service Companies v. UOI, 2010 (20) STR 417 (SC). Further, with reference to an example it was discussed that when a landlord/licensor has property capable of being used both for residence and/or for commercial purpose, it is an irrational proposal to contend that if it is licensed for commercial use, there is value addition and therefore taxable ‘event’ occurs and no taxable event occurs when provided for residential use. There is no difference per se in the activity.

Whereas, the Revenue inter alia contended that the Legislature defined immovable property for the purpose of taxing event and only when it is used for furtherance of business or commerce, it is taxed and thus it made a class different from what is defined under other enactment like Transfer of Property Act. There is always a value addition when an immovable property is provided for furtherance of business and commerce to the recipient of service. Relying on Tamil Nadu Kalyan Mandap Association v. UOI, 2004 (167) ELT 3 (SC), it was contended that definition of taxable service includes renting in the course of furtherance of business. Like in the case of catering contracts, for the fact that tax on sale of goods is involved does not mean that service tax cannot be levied on the aspect of catering which is a service. The event of making available business premises is rendition of service though it may be an event of leasing or licensing under the Transfer of Property Act and/or Easement Act. Reliance was placed on the case of Shubh Timb Steels Ltd., 2010 (20) STR 737 (P&H). For the purpose of validation of the Act for retrospective amendment relying on Gujarat Ambuja Cement v. UOI, 2005 TIOL 53 SC-ST, it was contended that the amendment cured defect and which was within legislative competence. Relying on All India Federation of Tax Practitioners, 2007

(7)    STR 625 (SC), it was contended that service tax is on value addition by rendition of services. Relying on similar view expressed in Moti Laminates P. Ltd. v. CCE, 1995 (76) ELT 241 (SC) wherein it was held that there is no difference between production and manufacture of saleable goods and production of marketable/saleable services in the form of an activity undertaken by the service provider for consideration.

The Gujarat High Court observed that in normal course of renting of immovable property, service tax is not attracted in absence of any activity in-volving performance, skill, expertise or knowledge. Renting of immovable property for use in the course of or for furtherance of business or commerce is an activity which amounts to rendition of service in the course of or for furtherance of business or commerce. Relying on the decisions of Association of Leasing and Financial Services v. UOI (supra), the Court observed that service tax is a tax on activity, whereas sales tax is a tax on sale of thing or goods. Taxable event under the service tax is each exercise/activity undertaken by the service provider and it is imposed every time service is rendered to customer/client, it is a value added tax. Citing Tamil Nadu Kalyan Mandapam (supra)’s case, it was held that service could not be struck down on the ground that it does not conform to a common understanding of the word, ‘service’ so long as it does not transgress any specific restriction contained in the constitution.

Thus, when a service recipient uses an immovable property in the course of or for furtherance of business or commerce, it can safely be stated that the service provider has rendered service enabling the service recipient in value addition. Meaning thereby that such activity undertaken by service provider for value addition in the course of or for furtherance of business or commerce i.e., to carry on the activity or business or commerce of the service recipient amounts to rendition of service and will fall within the meaning of the definition of ‘service tax’ and there was no case made out to declare section 65(105)(zzzz) as unconstitutional or ultra-vires any provision of the constitution.

Conclusion:

In summation, various petitions before both the Courts viz. the Bombay High Court and the Gujarat High Court, respectively, have been dismissed upholding the activity of renting/leasing/licensing of immovable property for use in the course of or for furtherance of business as service. In addition thereto, the constitution validity is also upheld as service tax on the activity of renting is not considered a tax on land or buildings. Also the Courts have concluded to the effect that there exists value addition for the recipient or consumer of service when premises are provided for the use of business. The grounds of rejection of petitions by the P&H High Court in Shubh Timb (supra) and the Orissa High Court in Utkal Builders (supra) are not discussed hereinabove. While the Orissa High Court has not dealt with whether or not value addition exists in renting of immovable property or whether it is a necessary ingredient for a transaction to be held as ‘taxable service’, the P&H High Court has observed that even if there is no value addition, the impugned provision cannot be held void. Whereas, all the four High Courts have upheld legislative competence of the Parliament and retrospectivity with a focus on different aspects, it appears that litigation at the level of the Apex Court may mainly revolve around the aspect of value addition and whether or not the tax levied as service tax could be considered a tax on land and buildings.

Exemption to Arbitration services under Legal Consultancy — Notification No. 45/2011 — Service Tax, dated 12-9-2011.

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With effect from 12th September, 2011 services provided by an arbitral Tribunal, in respect of arbitration, falling under item (iii) of sub-clause (zzzzm) of clause (105) of section 65 of the Finance Act, 1994 have been exempted by this Notification.
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Exemption to services provided to stockbrokers extended — Notification No. 44/2011 — Service Tax, dated 9-9-2011.

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Notification No. 31/20009-ST is amended to entitle ‘authorised persons’ to claim exemption in relation to services provided to stock-brokers in relation to sale or purchase of securities listed on registered stock exchange as presently available to the sub-brokers.
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Periodicity of Returns — Powers with Commissioner — Notification No. VAT 1511/CR 84/Taxation-1, dated 13-9-2011.

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By this Notification, Rule 17 for Submission of VAT Returns has been amended conferring powers upon the Commissioner inter alia to decide periodicity of filing of returns that is monthly, quarterly or half-yearly for every year and in respect of every dealer which will be final and will be displayed on the website. To determine the same the Commissioner may apply principles laid down in Rule 17(4).
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Levy of service tax on service providers engaged/associated with infrastructure projects — Circular No. 147/16/2011 — Service Tax, dated 21-10-2011.

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This Circular clarifies as to whether the exemption available to the works contract service providers in respect of projects involving construction of roads, airports, railways, transport terminals, bridges, tunnels, dams, etc., is also available to the sub-contractors who provide works contract service to these main contractors in relation to those very projects.

By Circular No. 138/07/2011 — Service Tax, dated 6-5-2011 it was clarified that the services provided by the sub-contractors/consultants and other service providers to the works contract service (WCS) provider in respect of construction of dams, tunnels, road, bridges, etc. are classifiable as per section 65A of the Finance Act, 1994 under respective sub-clauses (105) of section 65 of the Finance Act and are chargeable to service tax accordingly.

It is thus apparent that just because the main contractor is providing the WCS service in respect of projects involving construction of roads, airports, railways, transport terminals, bridges, tunnels, dams, etc., it would not automatically lead to the classification of services being provided by the sub-contractor to the contractor as WCS. Rather, the classification would have to be independently done as per the rules and the taxability would get decided accordingly.

However, it is also apparent that in case the services provided by the sub-contractors to the main contractor are independently classifiable under WCS, then they too will get the benefit of exemption so long as they are in relation to the infrastructure projects mentioned above. Thus, it may happen that the main infrastructure projects of execution of works contract in respect of roads, airports, railways, transport terminals, bridges tunnels and dams, is sub-divided into several subprojects and each such sub-project is assigned by the main contractor to the various sub-contractors. In such cases, if the sub-contractors are providing works contract service to the main contractor for completion of the main contract, then service tax is obviously not leviable on the works contract service provided by such sub-contractors.

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Due date for filing return extended — F. No. 137/99/2011 — Service Tax, dated 20-10-2011.

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In view of e-filing of service tax returns having been made mandatory for all classes of service tax assessees for the first time vide Notification No. 43/2011 — Service Tax, dated 25-8-2011, by this order date of submission of half-yearly return for the period April 2011 to September 2011 has been extended from 25th October 2011 to 26th December 2011.
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Filing of MVAT Audit Report in Form 704 — Trade Circular 16T of 2011, dated 11-11-2011.

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It will not be necessary to submit balance sheet and profit & loss account/income and expenditure account, statutory audit report and trial balance along with statement of submission of MVAT Audit Report in prescribed format for financial year 2010-2011. Only the statement of submission of audit report in format specified in Trade Circular No. 27T of 2009 along with duly signed acknowledgement of uploading of audit report and Part-1 of Form e-704 certification duly signed by auditor would have to be submitted.

SERVICE TAX UPDATE

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Time limit for MVAT refund extended — Trade Circular 15T of 2011, dated 2-11-2011.

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Time for MVAT refund application in Form No. 501 for the financial year 2009-10 has been extended from 30-9-2011 to 31-12-2011.

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Waiver of interest and penalty to homemade soap manufacturer — Trade Circular 14T of 2011, dated 19-10-2011.

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By this Circular a waiver has been provided for in respect of interest and penalty levied on the turnover of sales of soap, except detergent, not exceeding Rs.20 lacs made by handmade soap manufacturing units certified by KVIC or KVIB as the case may be, for the period of 1st April, 2005 to 31st March, 2010. The Circular contains format of application for seeking administrative relief.
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Works Contract — Treatment of effluent water — Property in chemical used immediately becomes property of customer — Consumption in process is after sale — Taxable — Section 5 of Kerala Sales Tax Act.

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Facts:

The dealer undertook works contract for effluent treatment at the place of employer by using certain chemicals. The chemical mixture used by the dealer is named as ‘enviroflock’. The waste water is subjected to chemical treatment by using such chemical at the place of the employer. Due to this chemical treatment, coagulation of suspended particles and precipitation of dissolved organics take place. The solid particles settled at the bottom and the clear liquid overflows. The overflow water is subjected to activated sludge process and oxygen is supplied by means of surface aerators. The treated water is discharged to the river without containing any chemicals or pollutant. The sales tax authorities levied tax on supply of chemicals used in effluent treatment holding it as a sale whereas the dealer contested that there is no sale as chemicals are consumed in the process. The Division Bench referred matter to the Full Bench in view of later decisions of SC. The Full Bench of the High Court by majority, after considering judgment of various High Courts and SC, confirmed the levy of tax.

Held:

(1) It is undoubtedly true that even after the 46th amendment to the Constitution, sales tax cannot be levied merely because there is a works contract. There must be a transfer of property in goods whether in the same form or in any other form.

(2) It is also undoubtedly true that in view of the decision of SC in Gannon Dunkerley & Co. v. State of Rajasthan, (1993) 88 STC 204, the cost of consumables involved in works contract cannot be taxed.

(3) The issue is when property in goods passes? When the dealer has used it, will it remain the owner of the chemical any longer? Will not the property in the goods pass to the awarder? The effluent and the treated effluent both belonged to the awarder. It is therefore, into the property of the awarder, namely, the effluent, that the dealer supplies the chemical. Just like the toner and developer having been put into Xerox machine becoming the property of the customer in the case before the Apex Court in Xerox Modicorp Ltd. case and the sale taking place before the goods are consumed, in the same way, the property in the chemical passed to the awarder the moment they are put into the effluent by the dealer and its subsequent consumption is the consumption after sale and it does not detract from the factum of sale and consequently the exigibility to tax becomes unquestionable.

(4) There was indeed a sale of chemical involved in the execution of the works contract, in view of the Judgment of the Apex Court in Xerox Modicorp Ltd. v. State of Karnataka, (2005) 142 STC 209), as there is delivery of the same to the awarder by virtue of the chemical being poured into the effluent. Per Shri A. K. Basheer J. (Dissenting view):

(1) The short question is whether or not the combination of chemicals known as ‘Envirofloc’ used by the petitioner for effluent treatment is a consumable as envisaged u/s.5(C)(1)(c)(iii) of the Act.

 (2) In case of Xerox ModiCorp Ltd., under the Standards and Service Maintenance Agreement (SSMA), the appellant-company was bound to maintain the xerox machines and supply the spare part including toners, developers, etc. as and when required. Obviously the cost of tonersand developers to be supplied by the appellant company were to be borne by the customers. The short question that arose for consideration was whether the appellant-assessee would be liable to be assessed to sales tax for the sale of toners, developers, spare parts, etc. Their Lordships held that transfer of property took place the moment the goods viz., toners, developers, spare parts, etc. were put into the machine. In other words, tangible goods in toners, developers, etc. were transferred as and when they were used by the customer.

(3) The dictum laid down in Xerox Modicorp has absolutely no relevance, particularly to the facts of this case. There is no transfer of any goods in property whether as goods or in some other form attracting levy of sales tax. Still further, by virtue of the provisions contained in section 5C(1)(c)(iii), the cost of the chemicals used by the petitioner for the purpose of effluent treatment is liable to be deducted, they being consumables.

The Full Bench of the High Court by majority held in favour of the Department holding sale of goods attracting sales tax.

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Rate of tax — Notification — Jaljira — Packed masala — Rajasthan Sales Tax Act, 1994, Notification Entry 184, dated 29-3-2001.

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Facts:

The Sales Tax Department filed SLP Nos. 113581 of 2008 and 15883 of 2008 before the SC against the judgment of the Rajasthan High Court holding sale of Jaljira by the dealer taxable @10% under residual Entry 199 being not a masala. The State Government issued Notification from time to time classifying packed masala attracting higher rate of tax. The Deputy Secretary, Finance Department, Government of Rajasthan clarified vide letter dated November 12, 2001 that the term ‘Packed Masala’ used in Entry 184 of Notification dated 29-3-2001, means a masala where two or more ingredients are mixed and sold in packed conditions. Spices sold singly will continue to be taxed as per Entry 82 (at the rate of 4% tax).

Held:

It is settled law that when a particular item is covered by one specified entry, then the revenue is not permitted to travel to the residual entry. There is no doubt that ‘Jaljira’ is a drink. The contents of ‘Jaljira’ are put into water and taken as digestive drink, but when we look into the manner and method of preparation we find that it is a mixture of different spices after grinding and mixing. Therefore, it is nothing but a ‘masala’ packed into packets of different nature and quantity. Accordingly it was held that for all practical purposes, it would come within the Entry 184 being a ‘masala’ and it cannot be said that it would come under the residuary entry as held by the High Court. The judgment of the High Court was set aside and assessment order was restored.

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Mandap-keeper — Segregation of food charges from banquet hall charges — Exemption on food claimed under Notification No. 12/2003 — Catering service incidental to mandap-keeping therefore deduction of food charges cannot be considered to be sale of goods and therefore not deductible under Notification 12/03.

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Facts:

The appellant is a company engaged in running a hotel in Indore and provided services of lodging and boarding as also rent-a-cab service, mandap- keeper service, etc. Service provided in relation to the use of the mandap was taxable service u/s.65(105)(m) of the Finance Act, 1994. However exemption Notification No. 1/06-ST entitled the assessee for abatement of 66% when catering services were also provided by the mandap-keeper, subject to certain conditions. No CENVAT credit of inputs or capital goods had been taken under the Cenvat Credit Rules, 2004. The appellant availed the benefit of Notification No. 12/03-ST by splitting the bill of charges of the mandap and charges for food and beverages. The Department was of the view that exemption under Notification No. 12/03-ST was not applicable to the appellant. The appellant contended that they paid service tax on the total amount collected towards banquet hall charges, other information and service charges for serving food and beverages, on which no abatement or exemption was claimed. This represented the value of mandap-keeper services. They were paying sales tax/VAT and were availing service tax exemption under the Notification No. 12/03-ST with respect to sale value of food and beverages and thus correctly availed exemption under Notification No. 12/03-ST. The availment of abatement applies under the Notification 1/2006-ST was always optional. The appellant raised invoice for sale of food and beverages and showed only the value of goods provided and did not include the value of service provided along with the sale of food. The charges for serving the food and drinks were already included in the charges in relation to the use of the mandap on which service tax was paid and thus the supply of food and beverages to their guest was a sale within the meaning of the Sale of Goods Act, 1930. It was also submitted that the Supreme Court had held that VAT and service tax were mutually exclusive and both could not be levied simultaneously on the same value and thus the mandap-keeper providing food and beverages also must have the option to avail of the Notification No. 1/06-ST or Notification No. 12/03-ST and contended that there was no suppression of facts or willful misstatements or fraud and therefore penalty u/s.78 of the Finance Act, 1994 was not leviable. The Revenue contended that serving of food and beverages to the guests in course of mandap is an activity ancillary to and part of the main activity of providing service in relation to the use of the mandap and thus the same cannot be split up into value of supplying food and beverages and the value of services in relation to the use of mandap and denied the benefit of the Notification No. 12/2003-ST. The Revenue submitted that through the appellant claimed that the charges for food and drink did not include the charges for service and the same were included in the charges of mandapkeeper, the invoices did not show the same and there was no evidence in this regard. Therefore in this case, serving of food and beverages by the mandap-keeper to their client’s guests in course of mandap was a pure service and the same could not be split up into catering service element and cost of food and beverages and further alleged suppression, etc.

Held:

Supply of food i.e., catering service is incidental to main service of mandap-keeping. Supply of food cannot be considered as sale of goods even if separately charged and therefore deduction under the Notification No. 12/03 is not available. It was further held that the matter was remanded to the Commissioner for re-quantifying the service tax demand after permitting abatement under the Notification No. 1/06-ST, subject to the condition that the appellant reversed the CENVAT credit availed by them and imposed penalty u/s.76 and set aside penalty u/s.78.

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CENVAT credit — The insurance policy taken with regard to compensation to be given to workmen taken for workers involved in the manufacturing process of final products — Assessee was entitled to claim input service credit.

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Facts:

The Revenue filed an appeal against the order wherein the input service credit on insurance policy for workmen’s compensation was allowed by the first Appellate Authority. The Revenue appealed on the ground that insurance policy taken for workmen’s compensation was no way related to manufacturing activity and hence sought for denial of input service tax credit. According to the assessee insurance policy for workmen’s compensation was taken for the workers who were involved in the manufacturing process and to cover the risk of those workers and hence it was directly related to the manufacturing process as per the CENVAT Credit Rules, 2004.

Held:

Appeal of the Revenue was rejected on the grounds that insurance policy for workmen’s compensation was taken by the respondent to cover the risk of the of the workers who were involved in the manufacturing process of the final product and hence entitled for Input Service Credit as per Cenvat Credit Rules.

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Exemption was claimed at a later stage and not initially — The benefit of any Notification cannot be denied.

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Facts:

The Appellate Authority extended the benefit of Notification No. 76/86-C.E. to the respondent. The Revenue appealed that the benefit of Notification No. 76/86-C.E. was never claimed by the respondents at the time of investigation. It also drew the attention to the provision of Notification No. 36/2001-C.E. (N.T.), dated 26-6-2001, which stated that it was mandatory for any manufacturer to claim the benefit of exemption and to file a declaration to the Department. It appealed that no declaration was filed and no claim of exemption was made and thus the Commissioner was not justified in excluding the benefit. The assessee claimed that Exemption Notification can be claimed anytime if the same is otherwise available. The case of Share Medical Care v. UOI, 2007 (209) ELT 321 (SC) was referred to. It was held in the case that even if the applicant does not claim benefit under a particular Notification at the initial stage, he is not prohibited from claiming such benefit at a later stage.

Held:

In view of the Supreme Court judgment, the benefit of any Notification if otherwise available cannot be denied on the sole ground that the same is claimed belatedly.

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Assessee availed credit relating to capital goods used in provision of service — Revenue claimed that the credit was availed in excess of 20% of the tax paid every month — Application of restriction held erroneous — Credit allowed by way of a remand.

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Facts:

The appellant availed credit of duty on capital goods for which a demand was raised to the tune of over twelve crore including penalty u/s.78. The demand was raised on the grounds that the appellant availed credit in excess of 20% of the tax paid every month.

Held:

It was clear that the Commissioner erroneously applied the restrictions mentioned under Rule 6(3) to the credit used towards capital goods. The restriction under the said Rule is in respect of credit utilised on inputs and input services. Credit utilised by the assesse pertained to capital goods. The claim of the appellant was therefore held valid and the order was remanded to the Commissioner for fresh proceedings.

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Assessee provided space at their authorised service station to financial institutions — Qualified as Business Auxiliary Services — Assessee did not approach Revenue seeking clarification — Held assessee cannot be charged with willful intent to evade duty on the basis of non-approaching for clarification, longer period of limitation inapplicable.

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Facts:

The assessee provided space at their authorised service station to financial institutions. The service provided by the assessee to the financial institutions amounted to Business Auxiliary Services according to the Revenue. The Revenue contended that the assessee did not pay service tax at the required time and thus was liable to be charged with willful intent to evade duty as they did not approach the Revenue seeking clarification and the Department discovered only during investigation by the Department.

Held:

It was established that mere non-approaching the Revenue seeking clarifications cannot be a valid reason for applying extended period of limitation unless the same is done, with a willful intent to evade payment of duty. The demand was held as barred by limitation.

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(2011) 39 VST 213 (Bom.) Addl. Commissioner of Sales Tax v. Bunge India P. Ltd.

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Rate of tax — Margarine — Hydrogenated oil — Vanaspati — Taxable at 4% — Schedule Entry C-100 of Maharashtra Value Added Tax Act, 2002.

Facts:
The Additional Commissioner of Sales Tax, Maharashtra, filed an appeal to the Bombay High Court, against the decision of the Maharashtra Sales Tax Tribunal, dated July, 9 2010, holding that margarine sold under the brand name ‘Lotus Margarine’ is vanaspati within the meaning of Schedule Entry C-100 of the MVAT Act, 2002 and is taxable at 4%. The High Court dismissed the appeal and confirmed the decision of the Tribunal.

Held:
(i) As per the opinion of the expert, margarine is a food in plastic form or liquid emulsion containing not less than 80% fat oil, vanaspati and margarine, all are essentially mixed triglycerides of the fatty acid. Oil and vanaspati contained moisture only in trace quantities, whereas margarine being formulated product contained about 12 to 16% moisture and other additives. Margarine is formulated using hydrogenated vegetable oil.

(ii) The High Court took in to account the fact that the margarine produced by other manufacturers viz., Kamani or Godrej is taxable at 4%, so under the principle of parity margarine which is produced by the respondent is rightly made taxable at 4% by the Tribunal.

(iii) Further, during the period from 2006 to 2008 the margarine produced by the respondent was classified in Schedule C, Entry 100 as vanaspati and was taxable at 4% till the decision of the AO, so there is no need to change the view.

(iv) Accordingly, the High Court affirmed the view taken by the Tribunal holding that margarine is vanaspati to be classified under Schedule C, Entry 100 of the MVAT Act, 2002 and taxable at 4%.

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(2011) 39 VST 191 (WBTT) Shri Rameshkumar Mehta and Another v. Commercial Tax Officer

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Sales tax — Refund — Dealer entitled to refund as per returns filed where assessment is set aside as time-barred — Sections 30, 45(1) and 60 of West Bengal Sales Tax Act, 1994.

Facts:
The dealer applied for refund of excess payment as per returns filed and amount paid after assessment under compulsion, where assessment order was set aside by the Tribunal being barred by limitation. The Department rejected his application against which dealer filed an application before the West Bengal Taxation Tribunal. Since there was difference in opinion between technical and judicial members, the matter was referred to the Full Bench for decision.

Held:
(1) Absence of an assessment order does not and cannot mean that the assessee’s tax liability under the Act remains uncertified or un-quantified. If the assessment is not made, then the assessee’s tax liability gets quantified as per the amount of tax payable on the basis of the return figures. If the assessment is made, tax liability is quantified as determined/ assessed amount.

(2) Setting aside of an assessment order on the ground that it was time-barred and failure to pass an assessment order have the same legal impact.

(3) Section 60 of the Act providing for grant of refund did not confine refund only to excess payments made after an assessment order.

(4) Accordingly, the dealer is entitled to get refund of tax paid in excess, if the tax payable under the Act, even if excess payment is made voluntarily, if there is no unjust enrichment thereby. Accordingly, the application was allowed with direction to grant refund of TDS as well as paid after the assessment.

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(2011) 23 STR 399 (Tri.-Chennai) — Perambalur Sugar Mills Ltd. v. Commissioner of Central Excise, Trichy.

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Demand raised under Cargo handling agency
services — Cenvat credit on GTA services denied for want of proper
documents — CBEC’s Circular F.No. B-11/1/2002-TRU, dated 1-8-2002 — Once
activity not leviable and service tax paid, credit eligible — Demand
set aside.

Facts:
The appellants were engaged in the
activity of loading or unloading of cargo and were paying service tax
under the category of GTA services. The demand of service tax was raised
on the ground that the services rendered by the appellants were in fact
‘Cargo handling services’ and the Cenvat credit was inadmissible as the
same was taken without any prescribed documents. The appellants
submitted that in light of the CBEC’s Circular F.No. B-11/1/2002-TRU,
dated 1-8-2002, individuals undertaking the activity of loading or
unloading cargo would not be liable to service tax as ‘Cargo handling
agency’.

Held:
The Tribunal observed that once the
activity itself was held not to be leviable to service tax and the
service tax was paid at the insistence of the Department, the assessees
were entitled to claim Cenvat credit. Accordingly, the demand together
with interest and penalty was set aside.

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(2011) 23 STR 392 (Tri.-Del.) — Small Industries & Development Bank of India v. Commissioner of Central Excise, Chandigarh.

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Banking and other financial services — Whether foreclosure of loan is towards rendering of service or is ending of service and whether the same can be treated as lending of service.

Facts:
The appellants were engaged in providing banking and financial services. The dispute arose in relation to the amount of Rs.8,06,059 collected on account of premium on pre-payment of direct loans from their customers 1-9-2004 to 31-3-2006. The demand of Rs.82,215 was confirmed against the appellants treating the amount collected as service charges received for services rendered under the category of banking and financial services. The appellants inter alia submitted that the amount received towards re-scheduling of loan and foreclosure of loan is not towards rendering any services and is in fact a case of ending the services.

Held:
Reflecting on the definition of ‘Banking and financial services’ as provided in section 65(10) of the Finance Act, 1994 during the relevant period, the Tribunal observed that the authorities did not indicate as to which sub-clause of the definition of the activity foreclosure falls under. Foreclosure premium was kind of a compensation for possible loss of interest revenue on the loan amount returned by the customers. Setting aside the appeal, it was held that the activity of foreclosure could not be treated as ‘Banking and financial services’.

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(2011) 23 STR 385 (Tri.-Del.) — Rajasthan State Warehousing Corp. v. Commissioner of Central Excise, Jaipur.

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Demand — Amount collected by assessee in relation to handling, transportation and supervision charges while providing storage and warehousing charges — Service tax paid when pointed out by Department.

Held: No intention to evade tax — Extended period not invocable — Demand, interest and penalty be consequently reduced — Penalty u/s.78 of the Finance Act, 1994 set aside.

Facts:
The appellants were a public sector undertaking engaged in the business of warehousing fertilisers and other items and were registered with the service tax authorities for payment of service tax on ‘Storage and warehousing charges’. During the audit conducted by the service tax authorities, it was observed that the appellants were recovering supervising charges from their customers which was being paid to the handling and transportation contractors appointed by them. The appellant started paying service tax on handling and transportation charges as also supervision charges under the ‘Cargo handling services’. A show-cause notice was issued against the appellants demanding tax as ‘Cargo handling services’ rendered during the past and sevice tax demand of Rs. 79,43,447 was confirmed against the appellants along with interest and penalty. The appellants inter alia contended that there was no intention to evade service tax and failure to pay service tax was due to the non-understanding of the appellants regarding the term ‘Cargo handling agency’ services provided by them. Therefore, the demand for period beyond 12 months be dropped.

Held:
The Tribunal considering the status of the appellants as a public sector undertaking and their conduct after the matter was pointed out to them held that there was no intention to evade payment of tax. Demand, interest and penalty u/s.75 was to be paid in respect of normal period and the penalty u/s.78 was held as not maintainable.

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(2011) 23 STR 375 (Tri.-Del.) — Commissioner of Central Excise, Jaipur v. Galaxy Data Processing Centre.

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Business Auxiliary service — Computerisation of energy billing for Rajasthan State Electricity Board — Assessee feeding data provided by clients in computer network system with the software created specially for the client — No service undertaken on behalf of client as having no contact with customers — Work using custom-made software classifiable as Information Technology service.

Facts:
The appellants were ordered by Rajasthan State Electricity Board (RSEB) for computerisation of energy billing and related MIS, relevant formats, performas and information, for which the appellant developed a software only for RSEB. SCN was issued alleging that the services rendered by them amounted to BAS and thus service tax was payable and penalties were leviable. On appeal by the party, the Commissioner concluded that service rendered were in the nature of information technology service which is not included under the category of business service. Relying on the decision in the case of Dataware Computers & Ors. v. CCE & CST (Appeals), Guntur 2008 (87) RLT 325 (CESTAT-Bang.), the appellants contended that they have merely undertaken computer-enabled service of data processing and generation of reports and bills which came under Information Technologies service and not under BAS.

Held:
It was observed that the assessee had not undertaken any service on behalf of their clients as they did not have contract with the customer of their clients and were not issuing bills directly to the customers of their clients. The work of data processing using custom-made software deserves to be considered as Information Technology services. Accordingly, the appeal was allowed and penalty set aside.

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Cargo handling service — Whether the definition of ‘cargo handling service’ in section 65(23) of the Finance Act, 1994 covers handling of goods within factory premises.

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(2011) 23 STR 6 (Jhar) — Commissioner of C. Ex., Ranchi  v. Modi Construction Company.

Facts:
The respondent company handled goods in the premises of the factory of M/s. Bihar Sponge Iron Ltd. The Revenue contended that the act of handling the unfinished and finished goods within the factory premises of a manufacturer by the respondent was covered under the category of ‘cargo handling service’ u/s.65(23) of the Finance Act, 1994.

Held:

The Court held that the activity of shifting the finished and unfinished goods within the factory premises could not come within the definition of ‘cargo handling service’ and accordingly the appeal was dismissed.

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Outward transportation from place of removal — Covered under the scope of definition of input service prior to 1-4-2008 — Cenvat credit available. Intention of Legislature manifest — Definition of input service amended on 1-3-2008 to include only the charges incurred up to the place of removal.

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(2011) 23 STR 97 (Kar.) — Commissioner of Central Excise & S.T  v.  ABB Limited.

Facts:

The Revenue was in appeal against the order passed by the Tribunal allowing the manufacturerassessee to take CENVAT credit on services availed for outward transportation of final products from the place of removal. Prior to 1-3-2008, definition of input service [Rule 2(l) of the CENVAT Credit Rules, 2004] covered all services used by manufacturer in the manufacture of final products and clearance from place of removal. The definition of ‘input service’ contains both the word ‘means’ and ‘includes’ but it does not use the phrase ‘means and includes’. The portion of the definition to which the word ‘means’ applies has to be construed restrictively as it is exhaustive part of the definition. The Tribunal observed that the words ‘from place of removal’ is covered in the ‘means’ portion of definition. Since the particular service of outward transportation is included in the exhaustive portion of the definition, it is not necessary to interpret inclusive portion of the same rule to include the said service again. Finding on coverage of service under ‘inclusive’ portion of definition was needless. The definition, however, was amended on 1-3-2008 to cover only services used by the manufacturer in relation to the manufacture of final products and clearance of final products, up to the place of removal. Therefore, the intention of the Legislature was clear. Till such amendment, the words ‘clearance from the place of removal’ included transportation charges from the place of removal till it reached the final destination.

Held:

After observing the contentions of the assessee, contentions of the Revenue, CESTAT observations, various provisions and judicial pronouncements, the High Court dismissed the appeal filed by the Revenue and allowed CENVAT credit of service tax paid by the assessee on outward transportation from place of removal.

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Penalty — Misdeclaration of value of taxable service with intent to evade — Short payment due to assessee’s understanding of non-liability — Finding that assessee not having requisite mens rea — Tax paid with interest — Revenue’s appeal for levying penalty u/s.78 dismissed.

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(2011) 23 STR 3 (P & H) — Commissioner of Central Excise  v. Ess Ess Engineers.

Facts:

The assessee was inter alia engaged in providing of taxable service of ‘Erection, Commissioning and Installation’. The assessee failed to pay service tax for the services rendered during 1-7-2003 to 30-9-2006, in respect of which a show-cause notice was issued against them. The Tribunal set aside the levy of penalty holding that the failure of the assessee to pay the service tax was on account of the bona fide belief that it was not payable. The Revenue contended before the High Court that the penalty imposed u/s.78 of the Finance Act, 1994 should not have been interfered with as the assessee was guilty of misdeclaration of value of taxable service with intent to evade the service tax. Questions of law related to whether CESTAT order was proper and legal and whether or not there was a positive evidence of deliberate misdeclaration.

Held:

The Court dismissing the appeal for penalty held that the finding of the Tribunal was not shown to be perverse in any manner as the circumstances of the case of bona fide belief that there was no service tax applicable on fabrication and dismantling did not warrant invoking of section 78.

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Sale of SIM card has no intrinsic value — Hence it is a part of value of taxable service — Service tax leviable even if sales tax is wrongly paid.

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(2011) TIOL 71 SC-ST — Idea Mobile Communications Ltd.  v. CCE&C, Cochin.

Facts:

The issue involved in the case related to whether sale price of SIM cards sold by the company was to be included in the value of taxable service of telecommunication, or was it exigible to sales tax as sale of goods. The appellant during A.Ys. 1997-1999 sold SIM cards to its franchisees and paid sales tax on activation charges charged to the subscriber paid service tax. The Sales Tax Department of the State of Kerala, demanded sales tax on activation charges considering it value addition of goods. Simultaneously, in terms of proceeding initiated by the Service Tax Department, the appellant was liable to pay service tax on the value of SIM card on which sales tax was paid. In both the cases, interest and penalty were levied. The company was in appeal for both. The final appeal before the Supreme Court was heard along with other telecom operators including BSNL, BPL, etc. and reported as BSNL v. Union of India, (2006) 3 SCC 1, 2006 (2) STR 161 (SC) was remanded to sales tax authorities on the issue relating to sales tax on SIM cards. In the pending appeal before the Tribunal for levying service tax on SIM cards, the Tribunal vide order dated 25-5-2006 (2006 TIOL 857 CESTAT-Bang.) held that service tax on SIM card value was not sustainable. Against this order, the Revenue filed appeal in the High Court of Kerala and the High Court allowed the Revenue’s appeal holding to the effect that since SIM card has no intrinsic value and it is supplied to the customers for providing mobile services to them, therefore service tax is payable on it. Against this order of the Kerala High Court appeal was filed by the appellant. In the interim, on the other hand, it is to be noted that the remand of the matter by the Supreme Court to the sales tax authorities in BSNL decision (supra), the sales tax authorities conceded to the position that SIM card has no intrinsic value and concluded the matter by dropping the proceeding. In the present appeal, the Supreme Court found the reasons advanced by the High Court cogent. It noted that Subscriber Identity Module (SIM) card is a portable memory chip used in cellular phones. It is a tiny encoded board fitted into cell phones and it contains details of subscriber, security data and memory to store personal numbers and it stores information which help network service provider to recognise the caller. Apart from this, SIM card on its own, but without any service, would hardly have any value.

Held:

The activation service was undisputably taxable under the service tax law and amount received by the cellular telephone company towards SIM card would form part of the taxable value for levy of service tax as SIM cards are never sold as goods, independent of the service provided. The dominant position of the transaction is to provide service and not to sell material. It was also held that erroneous payment of sales tax would not absolve the appellant from the responsibility of payment of service tax if otherwise the same is payable.

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SERVICES OF SHORT-TERM ACCOMMODATION

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Introduction

Service tax has been introduced on services provided by hotels and other similar establishments providing short-term accommodation for less than three months’ time with effect from 1-5-2011. Amidst the controversy, as discussed in August, 2011 issue of BCAJ, as to whether food served in a restaurant is an indivisible contract where dominant objective is sale of food or a composite contract of sale of food and providing services of ambience of airconditioning, furniture, etc. and other personalised services, Service tax has been introduced on the service provided by restaurants and so also the service provided by hotels, club, inns, etc. for providing short-term accommodation. Renting of immovable property is already taxed since 1-6-2007. However, the scope of the said service does not include residential accommodation, whereas short-term accommodation which is already subject to luxury tax by the States is brought in the net of Service tax. Implications of the new levy vis-à-vis renting of immovable property and Luxury tax imposed by States are discussed separately.

Statutory provisions contained in the Finance Act, 1994 (Act)

Section 65(105)(zzzzw) of the Act:

‘Taxable service’ means ‘any service provided or to be provided to any person by a hotel, inn, guest house, club or campsite, by whatever name called for providing of accommodation for a continuous period of less than three months.’

Scope of Service

On an analysis of the definition of providing shortterm accommodation reproduced above, the following emerges in regard to scope of service liable to Service tax:

  •  The subject-matter of this service is provision of accommodation. The term ‘accommodation’ is not defined in the Act. However, applying the principle of ‘ejusdem generis’ it can be observed that all the terms used viz. inn, guest house, club or campsite along with the term ‘hotel’ in generic terms indicate lodging facility or stay.
Such an accommodation should be provided by any hotel, club, inn, guest house or a campsite by whatever name called. Thus the accommodation provided by establishments also known as resort, service apartment, motel, sanatorium, dharamshala, accommodation attached to any temple, gymkhana, etc., would be covered subject to satisfying other conditions.
It is pertinent to note that the scope of taxable service does not provide for exclusion in regard to similar services that may be provided by Govt.-owned establishments (e.g., hotels owned by ITDC, MTDC, etc.)

  •  The period of stay should not continuously be more than three months. Thus the stay could vary from one day to 89 days (assuming 30 days in a month).

  •  The accommodation can be provided to any person and service must relate to accommodation of persons.

  •  The declared tariff of such accommodation should be Rs.1,000 or more per day. CBEC’s Circular DOF No. 334/3/2011-TRU, dated 28-2-2011 clarifies as under:

“Actual levy will be restricted to accommodation with declared tariff of Rs.1,000 per day or higher by an exemption Notification. Once this requirement is met, tax will be chargeable irrespective of the fact that actually the amount charged from a particular customer is less than Rs.1,000 The tax will also be charged on the gross amount paid or payable for the value of the service.”

Further to the above, the following clarification was issued vide Circular DOF 334/3/2011-ST, dated 25-4-2011:

“3. In accordance with the budget announcement, the levy will be applicable on short-term accommodation with a declared tariff of Rs. 1000 per day or above. A suitable exemption has been given below this amount vide Notification No. 31/2011-ST, dated 25th April, 2011. Declared tariff has been defined within the Notification as charges for all amenities provided in the unit of accommodation. Thus it will include cost of all electronic gadgets installed in the room and any other facility normally provided by a hotel as part of the stay. Cost of extra bed will not form a part of the declared tariff. No further exclusions are provided from the declared tariff e.g., on account of breakfast or any other meal whose cost is included in the declared tariff including any discount given to the customer.”

The explanation in Notification No. 31/2011-ST of 25-4-2011 defines ‘declared tariff’ as under:

“For the purpose of this Notification, ‘declared tariff’ include charges for all amenities provided in the unit of accommodation like furniture, air-conditioner, refrigerators, etc. but does not include any discount offered on the published charges for such unit.”
Further, the Circular No. 139/8/2011-TRU, dated 10- 5-2011 clarifies to the following effect:

  •  The relevance of ‘declared tariff’ is in determining the liability to pay Service tax as far as shortterm accommodation is concerned. However, the actual amount charged e.g., if declared tariff is Rs.1,100 but actual room rent charged is Rs.800, tax would be paid @5% on Rs.800.

  •   It is possible to levy separate tariff for the same accommodation in respect of a class of customers which can be recognised as distinct class on an intelligible criterion. However, it would apply to the class of customers and not a single or a few corporate entities only. For instance, there could be corporate customers or privileged customers and walk-in customers, special tariffs can be offered to corporate and/or privileged customers.
  •  When the declared tariff is revised as per the tourist season, the liability of Service tax would be on the declared tariff where the published/ printed tariff is above Rs.1,000. However, the revision should be uniformly applicable to all customers and such off-season rate charges should be declared.

Valuation aspects

  •  Luxury tax is imposed by the States on the accommodations provided by hotels and similar establishments. The value of service in this case would be the gross amount charged for the service. Through CBEC Circular No. 139, dated 10-5-2011, it has been clarified that the luxury tax is not to be included in the taxable value for determining Service tax liability.
  •  Further, the said Circular No. 139, dated 10-5-2011 has also clarified that where the declared tariff includes the cost of food or beverages, Service tax would be charged on the total value of declared tariff. This is evident in the definition of ‘declared tariff’ of the Notification cited above. However, if separate charge is recovered for food or beverages in the bill, such amount is not considered part of declared tariff.

  •  Similarly, DOF letter No. 334/3/2011-TRU, dated 25-4-2011 has clarified that amount charged towards extra bed will not be included in the value of declared tariff.

  •  In terms of Notification No. 34/2011-Service tax dated 25-4-2011, Notification No. 1/2006-ST of 1-3-2000 is amended to provide abatement of 50% on the short-term accommodation service and accordingly effective rate of Service tax for this service is 5% of the gross value of service. This is subject to the conditions that no CENVAT credit of excise duty on inputs, capital goods or Service tax on input service is taken or that the benefit of Notification No. 12/2003 has not been availed.
Short-term accommodation vis-à-vis Renting of immovable property
It is pertinent to note that Renting of Immovable Property was brought under the Service tax net w.e.f. 1-6-2007 and the validity of the said levy has been recently confirmed by the Bombay High Court. There appears to be a overlap of this levy vis-à-vis the new levy of short-term accommodation. The relevant provisions of the Act relating to renting of immovable properly are as under:
  •     Section 65(105)(zzzz) of the Act

Taxable service means any service provided or to be provided to any person, by any person, by renting of immovable property or any other service in relation to such renting, for use in the course of or for the furtherance of business or commerce.

Explanation 1 — For the purpose of this sub- Clause, ‘immovable property’ includes —

………….

But does not include —

………….

(d)    buildings used for the purposes of accommodation, including hotels, hostels, boarding houses, holiday accommodation, tents, camping facilities.

It is interesting to note that short-term accommodation service has been introduced w.e.f. 1 -5-2011, without effecting any amendment in the exclusion clause stated above which is existing w.e.f. 1-6-2007. This is likely to result in number of issues as to services classification and applicability of short-term accommodation Service.

In this regard, attention is drawn to an important Delhi-CESTAT ruling in Dr. Lal Path Lab Pvt. Ltd. v. CCE , (2006) 4 STR 527, wherein it has been held that if a service is specifically excluded from a Service category it cannot be taxed under another category. In this case, services of blood sample collection which was specifically excluded under ‘Technical testing & analysis service’ was sought to be taxed under ‘Business auxiliary service’. The principle laid down in the ruling is very important for determination of Services Classification and the same has been followed in a large number of subsequently decided cases.

Issues could arise as to, whether the scope of short-term accommodation service, is restricted only to non-commercial accommodation services. The definition reproduced above is not indicative of the same.

In view of the foregoing, whether hotels falling within the scope of short-term accommodation service can contend that the correct services classification for accommodation services provided by them is renting of immovable property wherein the service is specifically excluded and hence there can be no liability to Service tax under the newly introduced category is matter for a larger professional debate.

Luxury tax vis-à-vis Short-term accommodation service

The relevant extracts from the Maharashtra Tax on Luxuries Act, 1987 (MLTA) are as under:

Section 2

(b)    ‘business’ includes
(i)    The activity of providing residential accommodation and any other service in connection with or incidental or ancillary to, such activity of providing residential accommodation, by a hotelier for monetary consideration

……..

(e)    ‘hotel’ includes
(i)    a residential accommodation, a club, a lodg-ing house, an inn, a public house or a building or part of a building, where a residential ac-commodation is provided by way of business; and

……..

(f)    ‘hotelier’ means the owner of the hotel and includes the person who for the time being is in charge of the management of the hotel:

(g)    ‘Luxury provided in a hotel’ means —
(i)    accommodation and other services provided in a hotel, the rate or charges for which including the charges for air -conditioning, telephone, television, radio, music, entertainment, extra beds and the like, exceeds rupees two hundred or more per residential accommodation per day; and

……..

The following needs to be noted:

  •     The charge under MLTA is on the hotelier and tax is to be computed as a percent of turnover of receipts. The rate of tax varies vis-à-vis charge per day/per residential accommodation.

  •     In order to be liable to luxury tax, accommodation need to be provided by way of business.
  •     The scope includes providing of facilities/amenities relating and incidental to accommodation
  •     In order to be liable to luxury tax, accommodation services need to be provided for a monetary consideration.

It would appear that there is a very clear over-lap of Service tax on short-term accommodation vis-à-vis Luxury tax under MLTA. On lines with some other services like intellectual property rights, franchise, etc. this levy is also likely to be challenged in Courts on the ground of dual taxation. In this regard, the exclusion under renting of immovable property discussed above assumes increased significance inasmuch as the same was possibly done taking into account the fact that Luxury tax is being imposed on hotel accommodation by the States.

Some issues
(i)    A small hotel in Bhavnagar has a tariff card for single occupancy for a small room is Rs.950. The hotel also provided airport pick-up facility to its customer for a charge of Rs.100. Would the transaction be liable for Service tax?

Ans. (i) The additional facility of pick-up from airport is charged separately. Therefore the declared tariff would not cover the additional service charge and it being less than Rs.1,000 would not attract Service tax.

(ii)    A hotel has declared tariff of Rs.1,200 for a class of rooms in regular season. However, during off-season of monsoon for four months, the tariff is declared @ Rs.900. In terms of the instructions provided in the Government Circulars above, although Service tax is payable when tariff is Rs.1,200, whether no Service tax is payable during off-season?

Ans. (ii) Yes. If the declared tariff is less than Rs.1,000, no Service tax is payable in terms of the Board’s Circular.

(iii)    A company X is constructing a factory premises and erecting a plant near a small village in a district in Maharashtra. Since there is ongoing construction/erection, the company X has made a special arrangement with a small hotel in the village and booked two rooms in the said hotel for a continuous period of six months at tariff of Rs.1,500 per room for its regularly visiting engineers, executives, etc. Whether Service tax is attracted on this transaction?

Ans. (iii) If the same room is in occupation continuously for three months or more, Service tax would not be attracted as the short-term accommodation is defined as a period of less than three months. However, if the hotel has promised any two rooms as and when required and a specific room is occupied for less than a period of three months, it appears that Service tax would be attracted.

(iv)    A retired executive from a MNC owns several flats in Mumbai. In order to generate revenue some flats are rented out to corporates under contracts for use by their visiting guests. The said flats have usual accommodation facilities. Such contracts could be monthly/quarterly/ yearly depending upon the requirement of a corporate. The charge of accommodation under the contract is periodic (Monthly/Quarterly/ Yearly) irrespective of the actual occupation. In all cases, per day/per room charge would work out in excess of exceed Rs.1000/per room/per day. Would the provision of short-term accommodation service be applicable to the retired executive?

Ans. (iv) It would appear that residential accommodation services provided in the given case are contractual (for a flat for a specified period), as distinct from accommodation services provided by hotels and similar establishments which essentially provide accommodation to walk-in-customers for a declared tariff which is usually displayed. Such establishments also do enter into period contracts with companies. Considering the scope of short-term accommodation services as discussed in Para 3 earlier, it appears that the accommodation services provided by the retired executive would not get covered under short-term accommodation service.

(v)    All India Chartered Accountants Society (AICAS) is a reputed body of CAs and regularly holds conferences for the benefit of its members AICAS is planning to host a three day conference on ‘DTC & GST’ in a seven star hotel in Mumbai wherein expert faculty from abroad and India would be invited. As a good gesture, the said hotel has agreed to offer complimentary accommodation to the visiting faculties, subject to a condition that Service tax (if applicable) would have to be borne by AICAS. Whether complimentary accommodation provided to visiting faculty of AICAS by the hotel would attract Service tax.

Ans. (v) It appears to be reasonably established that complimentary accommodation to visiting faculty of AICAS has been offered, considering the fact the hosting of three day conference would result in substantial business for the hotel and promotion of its facilities to the delegates as well.

Considering the provisions of the following, in particular:

  •     Section 67 of the Act,
  •   Service tax (Determination of Value) Rules, 2006,
  •     Point of Taxation Rules, 2011 and
  •     Consequent amendments in Service tax Rules, 1994

it would reasonably appear that complimentary accommodation provided to the visiting faculty of AICAS by the seven star hotel may attract Service tax under short-term accommodation service.

Consulting engineers included in the list of service taxpayers on receipt basis.

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Notification No. 41/2011-ST, dated 27th June, 2011 has been issued amending the Point of Taxation Rules, 2011 to include the taxable service provided by consulting engineers into the category of services in respect whereof tax payment will continue to be on cash basis.
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Implementation of service tax levy on transportation of goods by rail deferred once again — Notification No. 38/2011, 39/2011 and 40/2011-Service Tax, all dated 14-6-2011.

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The Central Government has issued the above three Notifications to further defer the levy of service tax on transportation of goods by rail to January, 2012 by amending the earlier Notification Nos. 7/2010, 8/2010 & 9/2010-Service Tax, all dated 27th February, 2010. However, even after the levy becomes effective rail transportation of defence and military equipments, postal mail bags, luggage of train passengers, food grains, pulses, petroleum products for the public distribution system, organic and chemical manure, motor vehicles, etc. would be exempted from levy. Further 70% abatement norms too would now come into force from 1st January, 2012.
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‘Consumables’ vis-à-vis taxable Works Contracts

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Introduction After works contract transactions were brought under sales tax laws by deeming fiction inserted by clause (29A) in Article 366 of the Constitution of India, the controversy has still continued about the nature of taxable works contract. The transaction becomes taxable works contract transaction, if there is transfer of property in goods, in the execution of works contract, from the contractor to the contractee. The issues are not very much debatable if the transfer of property in goods is apparent. Like, a building contractor may use cement and other building material for construction of a building for which a contract is awarded to him by the contractee. In this case, there is no debate as there is transfer of property in cement and other building material from the contractor to the contractee. It is very apparent and hence it becomes a taxable works contract. The issue arises when the fact towards transfer of property is not apparent and it has to be ascertained on peculiar facts of the case.

Nature of charges allowable as deduction for deciding taxable value of the contract The works contract, being a composite contract, the labour portion also referred to as ‘Service Component’, is required to be deducted from the total value of the contract to arrive at value of the goods transferred. The tax is leviable on such reduced portion. In Gannon Dunkerley & Co. v. State of Rajasthan, (88 STC 204), the Supreme Court, for deciding the value of goods involved in the execution of works contract on which sales tax can be levied, laid down as under:

“The value of the goods involved in the execution of a works contract will, therefore, have to be determined by taking into account the value of the entire works contract and deducting therefrom the charges towards labour and services which would cover:

(a) labour charges for execution of the works;
(b) amount paid to a sub-contractor for labour and services;
(c) charges for planning, designing and architect’s fees;
(d) charges for obtaining on hire or otherwise machinery and tools used for the execution of the works contract;
(e) cost of consumables such as water, electricity, fuel, etc., used in the execution of the works contract the property in which is not transferred in the course of execution of a works contract;
(f) cost of establishment of the contractor to the extent it is relatable to supply of labour and services;
(g) other similar expenses relatable to supply of labour and services; and
(h) profit earned by the contractor to the extent it is relatable to supply of labour and services.

The amounts deductible under these heads will have to be determined in the light of the facts of a particular case, on the basis of the material produced by the contractor.”

One of the items deductible from the contract value is value of consumables. Therefore, if the goods used are proved to be consumable items, then it will be allowed as deduction and if that is the only material used (which is allowed as consumables), then there will not be any transfer of property from contractor to contractee and the whole transaction will be out of scope of taxable works contract under sales tax laws. The issue is about meaning to be assigned to ‘consumables’.

Meaning of consumables Recently, the Full Bench of the Kerala High Court had an occasion to decide the above issue. The reference is to the judgment in case of M/s. Enviro Chemicals v. State of Kerala, (39 VST 434).

In this case, the dealer had used his chemicals for treatment of effluent water coming out of the factory of the contractee, who had awarded this contract to him. The process of treatment is narrated in the judgment as under:

“From the collection tank, the wastewater is pumped at a uniform rate to the flash mixer and subjected to chemical treatment. The chemical is a combination of ferrous sulphate, ferrous chloride and sulphuric acid. These chemicals are obtained by the petitioner from effluents discharge from Travancore Titanium Products. An addition of required dosage of lime is also added. The chemical mixture is named by the assessee as Envirofloc. Due to this, coagulation of the suspended particles and precipitation of dissolved organics take place. The solid particles settle at the bottom and the clear liquid overflows. The overflow from the Clariflocculator is taken to the aeration tank and subjected to activated sludge process. Oxygen is supplied by means of surface aerators.

The overflow from the aeration tank is sent to the hopper bottom settling tank. The outlet of the secondary settling tank is the treated effluent which is discharged to the river and it will be odourless. It will not contain chemicals or any pollutant.”

Considering that no property in the chemicals used is passed to the contractee, the plea of the appellant dealer was that there is no taxable works contract. It was argued that the chemicals used get consumed in the process and hence there is no transfer of property to the contractee so as to constitute taxable works contract under sales tax laws. As there were differing judgments, the issue was referred to the Larger Bench. The Larger Bench has decided the issue by majority.

The Larger Bench has relied upon the judgment of the Supreme Court in the case of Xerox Modicorp Ltd. v. State of Karnataka, (142 STC 209). In relation to ratio laid down by the Supreme Court in the above judgment, the High Court has observed as under:

“13. After having considered the entire case law cited before us and on a conspectus of the provisions, we would think that the learned Special Government Pleader is right in his contention based on the decision of the Apex Court in Xerox Modicorp Ltd.’s case 142 STC 209. It is no doubt true that the contract as such is not placed before us, if it is one which is reduced to writing. But we will proceed on the basis that the process involved is substantially the same as has been indicated by the assessee and which we have extracted. It is undoubtedly true that even after the 46th amendment, sales tax cannot be levied merely because there is a works contract. There must be transfer of property in the form of goods or otherwise than in the form of goods. What is taxable is the transfer of property in goods (See the definition of sale in the Act in this regard). It does not matter whether the transfer of property takes place in the form of goods or in any other form. It is undoubtedly also true that in view of the decision of the Apex Court in M/s. Gannon Dunkerley & Co. and Others v. State of Rajasthan and Others, [1993 (1) SCC 364] that the cost of consumables involved in works contract cannot be taxed.

14.    That the chemical in question is goods, is beyond doubt. It cannot be disputed that the assessee was the owner of the goods in question, namely, the chemical. It is obviously the intention of the parties that the assessee must use the chemical in the effluent treatment process. It is equally indisputable that the assessee has actually used it. No doubt, in the judgment of the Apex Court in Xerox Modicorp Ltd. v. State of Karnataka, [(2005) 142 STC 209], the Apex Court found that the toners and developers are liquids put into the xerox machine and they perform essentially the same function as ink in the printers and the Court also relied on the provision in the contract that the assessees in the said case would charge for the unaccounted stock at prevailing prices. By using the chemical, the petitioner/assessee rendered the effluent compliant with the standards. It could probably be said that in the case of the toner and developers as the function is that of ink in printers, it shows up in the final product of the xerox machines. But, the decision of the Apex Court is not based on there being any requirement that the items which are used should exist in any form in the resultant product, which is the principle laid down by this Court in Teaktex Processing Complex Limited v. State of Kerala, [(2004) 136 STC 435] and also in Microtrol Sterilisation Services Pvt. Ltd. v. State of Kerala, [(2009) 26 VST 213 (Ker.)].”

After referring to the above ratio, in relation to the facts of the dealer in this case, the High Court has observed as under:

“16. When the assessee has used it, will it remain the owner of the chemical any longer? Will not the property in the goods pass to the awarder? We would think that the moment the assessee pours the chemicals into the effluent, he will cease to be the owner and at that point of time the awarder must be deemed to have taken delivery of the same. In our view the fact that upon it being poured into the effluent, it loses its identity and that it is consumed will not detract from the fact that there is delivery of the same to the awarder. The assessee does not have a case that the effluent belongs to the assessee. We do not think that it can be their case that the effluent does not belong to the awarder. Let us pose a question, if a complaint by a third party is raised about the treated effluent, can the awarder absolve itself of the ownership of the same? We would think, it may not be possible. Therefore we would be justified in holding that the effluent and the treated effluent both belonged to the awarder. It is, therefore, into the property of the awarder, namely, the effluent that the assessee supplies the chemical. The Apex Court in its decision in Gannon Dunkerley & Co. v. State of Rajasthan & Others, [(1993) 1 SCC 364] had, inter alia, held that cost of consumables, such as water, electricity, fuel, etc. used in the execution of the works contract, the property in which is not transferred in the course of execution of a works contract, is to be deducted. In section 5C also, the words “not involving any transfer of property in goods” have been incorporated. Just like the toner and developer having been put into xerox machine becoming the property of the customer in the case before the Apex Court in Xerox Modicorp Ltd. case and the sale taking place before the goods are consumed, in the same way, the property in the chemical passed to the awarder the moment they are put into the effluent by the assessee and its subsequent consumption is the consumption after sale and it does not detract from the factum of sale and consequently the exigibility to tax becomes unquestionable.”

Conclusion
The above judgment throws new dimension to the concept of consumables. It appears that if the goods used are consumed without involving into the actual execution, then it will be deductible as consumable. Like, fuel, which is used for running the machinery with which contract may be executed. The fuel is not getting directly involved in the works contract. However, if the goods used directly take part in the contract and which directly or indirectly interact with the materials of the party, then even if they ultimately get consumed, it will be consumable for the contractee, but for the contractor it may amount to transfer of property to the contractee, whereby he will be considered as liable to works contract. It may however be noted that the dissenting Judge has accepted the argument of the dealer that since there is no transfer of property to contractee, there is no taxable works contract. However by majority the transaction is held as taxable. The judgment will have a very substantial impact in the matter of interpretation of nature of taxable works contract.

(2011) 38 VST 392 (Gauhati) Bharat Press v. State of Assam and Others

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VAT-TDS — Exemption — Clarification by Commissioner prevails unless set aside by appropriate authority or Court of Law — Sections 9 and 105 of Assam Value Added Tax Act, 2003.

Facts :
The dealer filed writ petition before the Gauhati High Court against the order passed by the Deputy Secretary to the Government of Assam, Election Department denying exemption to the dealer from paying VAT on printing of compendium, handbook, manuals, etc. in connection with general elections to Lok Sabha, 2009. The dealer had done printing works and supplied it to the Government of Assam and submitted bills without charging tax, being exempt from payment of tax under Schedule Entry 5 of the First Schedule of the Assam VAT Act. Under the said Entry, no tax is payable on sale of ‘Books, Periodicals and Journals.’ The Govt. of Assam informed the dealer that the payment of bills to him will be subject to deduction of VAT. The dealer then sought clarification from the Commissioner of Sales Tax for rate of tax on items supplied, who on physical verification of samples, held that goods supplied by the petitioner to the Govt of Assam are books and exempt from payment of tax, being covered by Schedule Entry 5 of the First Schedule. Despite this the Deputy Secretary to the Government of Assam turned down the request of the petitioner for no deduction of tax from the payment of bills of the petitioner. The dealer filed writ petition before the Gauhati High Court. The High Court allowed the writ.

Held :
The Commissioner of Sales Tax in his order came to the conclusion that the materials supplied by the petitioner are bound books with cover as per Entry at serial No. 5 of the First Schedule, those are exempt from payment of VAT. When the taxing authority exercising his statutory power u/s.105 of the Act is of the opinion that the supplied materials are not taxable, then whoever may be the authority higher in position is not entitled to set at naught the said order, unless the same is quashed by the appropriate Appellate Authority or by a Court of law. The High Court allowed the writ petition.

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Bell Ceramics Ltd. v. Deputy Commissioner of Commercial Taxes (Transaction-3) Bangalore, (2011) 38 VST 388 (Kar.).

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Inter-State sale — Claim of sale against Form C — Cancellation of registration from 1-7-2002 — Rejection of claim not valid for sale subsequent to the date of cancellation where the assessee had no knowledge of it — Section 8 of the CST Act, 1956.

Facts :
The dealer claimed inter-State sale of goods taxable at concessional rate of 4% against form C during the period of assessment for the year 2002-2003. The registration of the purchasing dealer was cancelled from 1-7-2002, therefore, the Department disallowed the inter-State sales against form C effected after 1-7-2002 i.e. after the date of cancellation of registration certificate of the purchasing dealer. In appeal filed before the Tribunal, the disallowance of such claim was confirmed. The dealer filed revision petition before the High Court. The High Court held in favour of the dealer.

Held :
When the purchasing dealer had issued C form for the subsequent period after the date of cancellation of registration and the selling dealer had claimed concessional rate of tax without knowledge as to whether the purchasing dealer has ceased to exist from July 1, 2002, then it cannot be held that the C forms issued by the purchasing dealer are invalid.

It is not for the assessee to actually find out as the registered dealer was in existence as on the date, when the sales were effected when in fact, the registered dealer who is the purchaser has issued C forms to the assessee.

If at all there has been any violation committed by the purchaser, the selling dealer cannot be found fault with, since it was the duty of the purchaser to have informed the petitioner about its ceasing to be in existence and thereby not issuing C forms. The High Court allowed the petition accordingly in favour of the dealer.

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(2011) 38 VST 336 (All) CTT v. Advance Spectra Tec (P) Ltd.

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Works contract — Receipt of goods dispatched from branch outside the State and used in works contract — Inter-state sale — Not liable to tax in the state where used in works contract — Section 3 of the CST Act 1956, section 3F(2)(b)(i) of UP Trade Tax Act, 1948.

Facts :
The dealer was a contractor registered in UP having its office outside the State of UP. For the purpose of execution of works contract in UP the dealer procured material within the State of UP as well as received material from its office outside the State of UP. The Department levied tax under UP Trade Tax Act on value of material received from its office outside the State of UP, which was successfully challenged before the Tribunal. The Tribunal held that the value of goods used in the execution of works contract received from a place outside the State of UP as stock transfer is exempt from payment of tax u/s.3F(2)(b)(i) of the UP Trade Tax Act, 1948. The Department filed revision appeal before the Allahabad High Court against the judgment of the Tribunal.

Held :
Under section 3F of the UP Act, every dealer is liable to pay tax on the net turnover of the transfer of goods involved in execution of works contract, but the amounts representing the sales value of the goods which are covered by sections 3, 4 and 5 of the CST Act, 1956 are deductible from the said turnover in determining the tax liability.

In Santosh and Company v. Commissioner of Trade Tax, (1999) UPTC 823, it was held that the value of the goods brought from outside UP and consumed in UP in works contract is deductible u/s.3F(2)(b) (i) of the UP Act. Following this judgment, the Court held that goods received by the dealer as stock transfer from his office situated outside UP and consumed for execution of pre-existing works contract amounts to sale or purchase of goods in the course of inter-State trade or commerce which is covered u/s.3 of the CST Act. The value of such goods is therefore liable to be deducted u/s.3(F)(2)(b)(i) of the UP Act from net turnover of the assessee. Accordingly the judgment of the Tribunal was confirmed.

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(2011) 38 VST 275 (Bom.) Deepmani v. State of Maharashtra

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Export or goods — Sale of goods to foreigngoing person — Not exempt — Section 5(1) of the CST Act.

Penalty without detailed reasons — Penalty not leviable — Section 9 of the CST Act read with section 36(2)(c) of the BST Act.

Facts :
The dealer claimed exemption from payment of tax on sale of goods to foreign-going person, where delivery of goods is given before the custom area, but payment is received in foreign currency, u/s.5(1) of the CST Act being sale of goods in the course of export, which was disallowed and confirmed by the Tribunal. The Bombay High Court, in reference application filed by the dealer u/s.61 of the BST Act, confirmed the order of the Tribunal.

Held :
The sale of goods is complete, the movement goods were segregated for sale and amount of sale consideration was paid in shop. The delivery of goods was to be given just before the custom area. Therefore, the sale was complete with the factum of delivery of goods. There was no compulsion on the purchaser to export it. Absence of export was not to nullify the transaction of sale.

In order to claim sale of goods as exempt being sale in the course of export, the crucial fact is the sending of goods to a foreign destination where they would be received as imports. In absence of proof of export of goods and no material to prove that it was impossible to divert goods, the claim of export was held as properly disallowed by the Tribunal.

As regards levy of penalty u/s.36(2)(c) of the BST Act for concealment of particulars of sale and purchases liable to tax, the High Court held that the Revenue has to establish that the assessee has knowingly furnished inaccurate particulars of any transaction as such liable to tax. The assessee has relied on interpretation of the provisions which involved complexity of principals of interpretation. The Court while deciding the first issue was required to go into the details of the constitutional provisions followed by various judgments of the Apex Court as well as of this Court. Therefore levy of penalty u/s.36(2)(c) of the BST Act retained by the Tribunal was not confirmed.

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Telephone installed at the residence of the partners — Bills paid by the firm — CENVAT credit on such telephone service availed — Claimed that the telephone is used for business purpose — Credit held admissible.

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Facts:

The Commissioner (Appeals) denied the availment of credit on telephone installed at the premises of one of the partners of the firm and ordered imposition of interest and penalty thereon. The telephone was installed for business purposes and was used to contact overseas customers since the appellants exported the goods produced by them. The appellants claimed that the Income-tax Department had also allowed such telephone expenses. The Revenue claimed that the appellants failed to declare the premises where the telephone was installed as their office, to the Department.

Held:

The contention of the appellant that the service tax was used by the assessee for the purposes of business was held to be valid and thus, the CENVAT credit claimed on such telephone expenses was not objectionable. The Department could not produce any contrary evidence that the telephone was not used for business purpose or that they had undertaken any investigation to prove that the phone was used for purposes other than business. The credit was allowed.

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Even though the scope of penalties levied u/s.73 and u/s.78 are different, penalties should not be levied under both the sections.

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Facts:

The respondent was a property dealer and a service provider of taxable service. An SCN was issued for failure to file returns and pay service tax on taxable services. The adjudicating authority imposed penalty u/s.76 for non-payment of service tax, u/s.77 for not filing the return and u/s.78 for suppressing the taxable value. However on appeal, penalty u/s.76 and u/s.77 was deleted, but the penalty u/s.78 was upheld. The Revenue argued that the concept of penalty u/s.78 is different from those u/s.76 and u/s.77 by referring to the case of Assistant Commissioner of Central Excise v. Krishna Poduval, 2006 (1) STR 185 which stated that even without suppression there could be failure to pay service tax. The respondent argued that there had been an amendment to section 78 by the Finance Act, 2008 stating that if penalty was payable u/s. 78, provision of section 76 would not apply.

Held:

The Tribunal held that even though the reasoning given by the Appellate Authority that if penalty was imposed u/s.78, penalty could not be levied u/s.76 of the Act was incorrect, the Appellate Authority was within its jurisdiction to drop penalty u/s.76 as the penalty was imposed u/s.78. The amount was relatively small and this contention was in consonance with the amendment by the Finance Act, 2008 prescribing non-levy of penalties under both the penal sections simultaneously.

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Service tax paid in anticipation of services to be received from India, permission sought from RBI was rejected. Claim for refund along with interest filed. The Revenue rejected the refund for want of adequate documents, interest also was denied. Held that if requisite conditions fulfilled, assessee was entitled to interest in addition to refund of tax.

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Facts:

The assessee paid service tax of Rs.1.02 crore in anticipation of receipt of permission from RBI for import of intellectual property service. Since permission was not granted, the assessee filed a claim of refund for the service tax paid since no services were actually imported. The refund claim was rejected by the Revenue on the ground of inadequate documentary evidences. However, the Commissioner (Appeals) decided that the assessee actually furnished all the requisite documents and directed the assessee to refurnish all the relevant documents and directed the Adjudicating Authority to decide the refund claim in a month’s time along with interest u/s.11BB. The refund claim was sanctioned but interest on such refund was denied on the grounds that documents were submitted only during the hearing. The appellant contended that once the refund claim is allowed, the entitlement of interest is statutory and that he had filed the relevant documents with the Adjudicating Authority within the specified time limit.

Held:

It was held that the order passed by the Commissioner (Appeals) specifically mentioned ‘interest payable u/s.11BB’. As per section 11BB, if any duty is ordered to be refunded, and if it is not refunded within three months from the date of receipt of application, the applicant shall be entitled to interest on such duty immediately after the date of expiry of three months till the date of such refund. It was held that the entitlement of the assessee to interest, once all the requisite conditions are fulfilled, follows as a matter of law and is a mandate of the statute. It was established that the assessee had furnished all the relevant documents along with the application. The furnishing of the documents once again at the personal hearing does not change the fact that the documents were already submitted at the time of making the application.

Held that interest u/s.11BB was payable by the Revenue.

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Sale to Bombay High Area, Whether Inter-state sale?

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Introduction

Under Sales Tax Laws, transactions of sale are liable to tax. The Constitution of India has provided adequate safeguards against unauthorised taxation of any transaction. Section 4 of the Central Sales Tax Act, 1956, provides for situs of sale. In other words, the State in which sale is taking place is to be determined by way of section 4 of the CST Act, 1956, which reads as under: “4. When is a sale or purchase of goods said to take place outside a State

(1) Subject to the provisions contained in section 3, when a sale or purchase of goods is determined in accordance with sub-section (2) to take place inside a State, such sale or purchase shall be deemed to have taken place outside all other States.

(2) A sale or purchase of goods shall be deemed to take place inside a State, if the goods are within the State —

(a) in the case of specific or ascertained goods, at the time of the contract of sale is made; and

(b) in the case of unascertained or future goods, at the time of their appropriation to the contract of sale by the seller or by the buyer, whether assent of the other party is prior or subsequent to such appropriation.

Explanation :

Where there is a single contract of sale or purchase of goods situated at more places than one, the provisions of this sub-section shall apply as if there were separate contracts in respect of the goods at each of such places.”

Therefore, a sale takes place in the State where the goods are ascertained to the contract of sale.

Normally there are three kinds of sale: One, local sale i.e., within the same State, second, inter-State sale i.e., when the sale occasions movement of goods from one State to another State and the third type of sale is export sale where the goods moves to a destination out of India.

Sale to Bombay High — a fourth kind of sale

An interesting issue that is being debated is whether sale made to ONGC for its oil platforms (known as Bombay High region) are liable to tax as inter-State sale? The judicial history of above issue can be briefly tracked as under:

In case of Pure Helium (India) P. Ltd. (A. No. 48 of 90, dated 30-4-1994), M.S.T. Tribunal held that sale to ONGC for Bombay High region is inter-State sale.

In Pure Helium India P. Ltd. S.A. Nos. 1472 to 1477 of 1994, dated 7-12-1996. M.S.T. Tribunal held that sale to ONGC for Bombay High Region is export sale.

Looking to the conflicting judgments referred above, the Division Bench referred the matter in case of Industrial Oxygen Company Ltd (S.A.No. 45 of 1990) and Pure Helium Ltd (S.A. No. 592 of 2007) to the Larger Bench of the M.S.T. Tribunal. The Larger Bench by its judgment dated 9-7-2010 held that the sale to ONGC for Bombay High is inter-State sale and not export.

Recent judgment of the Gujarat High Court in the case of Larsen and Toubro Ltd. v. Union of India, (2011 VIL 46 Guj. dated 2-9-2011). This is the latest judgment on the issue from a High Court.

The transactions effected by Larsen & Toubro Ltd. to ONGC for the above Bombay High Region were held as inter-State sale and taxed accordingly under the CST Act. Hence writ petition was filed before the Gujarat High Court.

The facts in this case are noted in para 6 of the judgment as under:

“6. It is the case of the petitioners and with respect to which no dispute has been raised by the respondents that all the above four contracts were indivisible turnkey projects consisting both of supply of goods and rendition of service including labour. To execute such turnkey contracts, the petitioners had arranged for supply of certain parts, equipments and machineries from its Hazira plant at Surat to ONGC at Bombay High, which is situated around 180 kms off the baseline of coast of India and forms part of ‘Exclusive Economic Zone’. It is also an undisputed position that such goods were used in execution of turnkey project of erection, installation and commissioning of the platforms located in Exclusive Economic Zone and only on commissioning that the petitioners’ obligation under the contract would stand discharged. It is thus the case of the petitioners that the title of goods supplied by the petitioner to ONGC, during the course of and in furtherance of execution of the turnkey project, passed at Bombay High and not at Hazira. Even the respondents, in particular, the State authorities, under the CST Act, have accepted this factual stand of the petitioners and the entire order under challenge is founded on such admitted facts. We have, therefore, proceeded to examine the grievances of the petitioners on the basis of this conceded factual position, namely, that the title of the goods sold by the petitioners to ONGC passed at ONGC site at Bombay High and not at Hazira.”

The Gujarat High Court examined the issue in light of Articles 1 and 297 of the Constitution of India and the provisions of the Territorial Waters, Continental Shelf, Exclusive Zone and other Maritime Zones Act, 1976 (Maritime Zone Act).

After elaborately examining the issue the Gujarat High Court has held as under:

“34. From the above provisions it can clearly be seen that though the Union of India has certain rights over the Exclusive Economic Zone, the Indian Union does not have sovereignty over such a region. Clause (a) to s.s (7) of section 7, for example, provides that the Union has, over the Exclusive Economic Zone, sovereign rights for the purpose of exploration, exploitation, conservation and management of the natural resources. Sovereign rights are thus for the limited purposes provided therein.

S.s (4) of section 7 does not speak of unlimited sovereign rights, much less sovereignty of the Union of India over the exclusive economic zone. It is only by virtue of the Notification in Official Gazette that the Central Government may declare any area of exclusive economic zone to be a designated area and make such provision as it may deem necessary with respect to such area for different purposes including for the purpose of customs and other fiscal matters in relation to such designated area. Further s.s (7) of section 7 empowers the Central Government to issue Notification to extend certain laws to any part of the exclusive economic zone and to make such provisions as are necessary for enforcement of such enactments. It is further provided that thereupon the enactments so extended shall have effect as if the exclusive economic zone or the part thereof to which it has been extended is a part of the territory of India. The language used in clause (b) of s.s (7) of section 7 to the Maritime Zones Act is significant as it does not provide that the designated area upon Notification by the Union of India, shall be part of the territory of India. It provides that law so notified shall be extended as if the exclusive economic zone or the part thereof is a part of the territory of India. The language is clear and gives rise to a deeming fiction for the limited purpose of extension and application of laws notified and for that limited purpose the Exclusive Economic Zone shall be deemed to be a part of the territory of India. It is not the same thing as to suggest that the Exclusive Economic Zone becomes part of the territory of India. It is not even the case of the respondents that the Exclusive Economic Zone is part of the territory of India as provided in Article 1 of the Constitution of India. There is no claim of sovereignty over such an area, it is sovereign rights which are extended to such area by virtue of formation of the Exclusive Economic Zone for the limited purposes envisaged under the statute. By virtue of clause (b) of s.s (7) of section 7 of the Maritime Zones Act it becomes further clear that as and when the Union of India issues Notification extending any enactment over the Exclusive Economic Zone or part thereof such enactment extended is applicable as if the Exclusive Economic Zone or part thereof to which it has been extended is a part of the territory of India.

“35. In view of the above discussion, it clearly emerges that when the sale of goods took place at Bombay High, for which the goods moved from Hazira to Bombay High, such movement does not get covered within the expression ‘movement of goods from one State to another’ contained in clause (a) of section 3 of the CST Act. It is clear that the goods had not been moved from one State to another since, in our opinion, Bombay High does not form part of any State of the Union of India.”

Accordingly the Gujarat High Court held that the taxing of given transaction under the CST Act is unauthorised and set aside the assessment. The Gujarat High Court has made it clear that it is not examining the issue whether it is export sale or not and also there can be possibility of local sale, as those are not the issues involved here. However, the Court held that since it was not an inter-State sale, tax under the CST Act was not chargeable, held the Gujarat High Court. Thus now there is a possibility of one more kind of sale which is neither local, inter-State nor export, but at the same time not liable to Indian Sales Tax Laws.

The judgment will go a long way in solving the issues in various States, including Maharashtra.

CONTROVERSY: WHETHER GOODS USED IN A PHOTOGRAPHY SERVICE NOT EXCLUDIBLE FROM THE VALUE LIABLE FOR SERVICE TAX?

Dilemma: Sale and/or service?

Given the fact, that in India we have a separate legislation each for taxing a ‘sale’ by the States and taxing a ‘service’ under the Union law, tug of war between the two taxing laws victimises many law-compliant business outfits for many complex transactions or even apparently simple transactions like purchase or sale of software, providing telecommunication services, serving food or processing and developing photographs. Despite paying tax on the whole of the transaction under one or both the tax legislations, considering it either sale or service or a composite transaction having both the elements, a business entity is forced into litigation process under one or both the tax legislations on account of conflicting or different views of administrators of different tax legislations. For a simpliciter transaction of a pure sale like a retailer/ wholesaler selling simple goods across the counter or a stand-alone service transaction like a chartered accountant providing tax advisory or a stock-broker buying or selling securities for its client and charging brokerage does not generally cause any issue in determining applicable tax law. However, a very large number of transactions are more complex than this where constantly issues occur over the parentage of the tax law for the transaction and whether or not the transaction can be split into two and have refuge under both taxing statutes. If at all there appears apparent finality on any issue, it is only subjective. The underlying cause of this controversy is separate taxing statute and separate taxing authorities for sale of goods and services and the two administrating bodies never seem to have a meeting point and therefore the least important factor is the assessee in the scenario, who suffers uncertainty and cost of long-drawn litigation.

In the State of Uttar Pradesh v. UOI, 2004 (170) ELT 385 (SC), the Supreme Court observed:

“By calling sale as service or vice versa, the substance of the transaction will not get altered. This has to be determined by discerning the substance of the transaction in the context of the contract between the parties or in a case of statutory contract in the light of relevant provisions of the Act and the Rules. If an activity or activities are comprehensively termed as ‘service’, but they answer the description of ‘sale’ within the meaning of statute, they can nonetheless be regarded as sale for the purpose of that statute. In other words, it is possible that an activity may be service for the purpose of one Act and sale for the purpose of another Act. It may also be that in a given case, on the facts of that case, a particular activity can be treated as ‘service’, but in a different fact situation the same could be ‘sale’ under the same statute”.

The above decision however was overruled by the Supreme Court in the landmark case of Bharat Sanchar Nigam Ltd. & Anr. v. UOI & Ors., 2006 (2) STR-161 (SC) and in respect to a specific question formulated by the Court that “would the aspect theory be applicable to the transaction enabling the States to levy sales tax on the same transaction in respect of which the Union Government levies service tax?” The Court held that “the aspect theory would not apply to enable the value of the services to be included in the sale of goods or price of goods in the value of service”. The law enunciated by BSNL (supra) is a settled position. Whereas in the case of Imagic Creative Pvt. Ltd. v. COL, 2008 (9) STR 337 (SC), the Supreme Court held “the payment of service tax as also the VAT are mutually exclusive. Therefore, they should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged in a composite contract as contradistinguished from an indivisible contract.

It may consist of different elements providing for attracting different nature of levy. It is therefore difficult to hold that in a case of this nature, sales tax would be payable on the value of the entire contract, irrespective of the element of service provided” (emphasis supplied). Does the problem get solved at this point or does it give rise to another issue viz. which contracts are composite contracts and which are indivisible? Or, the seemingly composite contract is held a contract of pure sale or of pure service! The overlap if any in a transaction is not always visible and it can be interpreted as either or both by different administrations giving rise to litigation.

In a few recent decisions, it is noticed that apparently settled position is unsettled. Keeping aside the question of correctness of the same for the time being, the controversy is discussed with reference to photography service.

Issue for consideration
Photography service was introduced in the service tax net with effect from July 16, 2001. Clauses (78) and (79) of section 65 of the Finance Act, 1994 (the Act) r.w.s. 65(105)(zb) of the Act contain the provisions relating to this service. The scope of the service also includes jobs carried out by processing laboratories. This position as of date is not controversial. The Madhya Pradesh High Court in a writ filed by Colourway Photo Lab v. UOI, 2009 (15) STR 17 (MP) held that “colour laboratories would be a part of photography studio or agency involved in providing the service to the consumer and are amenable to service tax”. The controversial issue relates to whether or not paper, chemicals and other consumables used in the creation of photographs is excludible from the value of service chargeable to service tax in terms of Notification No. 12/2003-ST of 20-6-2003, whereby the value of goods sold during provision of service is excluded, provided no CENVAT credit of duty paid on such goods is claimed by the service provider. Before discussing this aspect, it may be noted that Explanation 1(iii) to section 67 as it stood till 17-4-2006 provided that the cost of unexposed photography film if sold to the receiver of service during the course of providing photography service will not be included in the value of service. Section 67 with effect from 18-4-2006 was amended. Rule 6 of the Valuation Rule does not contain any express provision in this regard. However, for the separate supply of unexposed film, the exclusion under Notification 12/2003-ST is not an issue. The issue only centres around excludability of value of paper chemicals and other consumable under the same Notification.

Rainbow Colour Lab’s case
[2001 (134) ELT 332 (SC)]

This case came up before the Supreme Court as the Madhya Pradesh High Court decided in favour of levying sales tax on business turnover of photographs considering jobs rendered by photographer in taking photographs, developing and printing films amounted to works contract and exigible to sales tax. The Supreme Court categorically distinguished the decision in Builders’ Association of India v. UOI, 1989 (73) STC 370 relied upon by Madhya Pradesh High Court while holding that to the extent of the photo-paper used in the printing of positive prints, there is a transfer of property in goods and therefore the job done becomes a ‘works contract’ as contemplated under the Article 366(2A)(b) of the Constitution. However, this reliance was expressly referred to as ‘misplaced’ and relying inter alia on Hindustan Aeronautics Ltd. v. State of Karnataka, 1984 (55) STC 314 and Everest Copiers v. State of Tamil Nadu, 1996 (103) STC 360, the Supreme Court held that mere passing of property in an article or commodity during the course of performance of the transaction in question does not render the transaction to be one of sale. In every case, one is necessitated to find out the primary object of the transaction. The Court further held that “unless there is a sale and purchase of goods either in fact or deemed and which sale is primarily intended and not incidental to the contract, the State cannot impose sales tax on a works contract simplicita in the guise of expanded definition of Article read with the relevant provisions in the State Act,” and quoted observation in Builders’ Association’s case (supra) which read, “as the Constitution exists today, the power of the States to levy taxes on sales and purchases of goods including ‘deemed’ ‘sales’ and purchases of goods under clause 29(A) of Article 366 is to be found only in entry 54 and not outside it.” The Court held that the work done by the photographer is only in the nature of a service contract not involving any sale of goods. The contract is for use of skill and labour by the photographer to bring about a desired result. The occupation of photographer, except insofar as he sells the goods purchased by him is essentially one of skill and labour.

[Note: It is interesting to note that in the case of Associated Cement Companies Ltd., 2001 (128) ELT 21 (SC), the Larger Bench of three Judges pointed out that the principle laid down in Rainbow Colour Lab (supra) runs counter to the express provision contained in Article 366(29A), since after the 46th Amendment to the Constitution, the States now would be empowered to levy sale tax on material used in a works contract. It also pointed out that the principle in Rainbow Colour Lab (supra) runs counter to the decision of the constitutional Bench in Builders’ Association’s case (supra) and thus doubted the judgment.]


C. K. Jidheesh v. Union of India’s case [2006 (1) STR 3 (SC)]

In this case, the Supreme Court distinguished Associated Cement’s case (supra) when it was pointed out by the appellant that correctness of decision in Rainbow Colour Lab’s case (supra) was doubted by the Bench of three judges in Associated Cement Companies Ltd. (supra) and thus stood overruled. The Court observed that in Associated Cement Companies Ltd.’s case (supra) the question was whether or not customs duty could be levied on drawings, designs, diskettes, manuals, etc. as they were contended to be intangible properties and not goods as defined in section 2(22) of the Customs Act and the question of levy of service tax did not arise there. The Court further observed that the observations relied upon were mere passing observations and did not overrule Rainbow Colour Lab’s case (supra). While examining the plea of the petitioner for bifurcation of gross receipts of processing of photographs into the portion attributable to goods and that attributable to services, and tax only the portion attributable to services followed the decision in Rainbow Colour Lab’s case and held that “contracts of photography are service contracts pure and simple. In such contracts there is no element of sale of goods and in view of Rainbow Colour Lab’s judgment, the question of directing the respondent to bifurcate the receipts into an element of goods and the element of service cannot and does not arise.”

During about past five years however, several decisions were given by the Tribunals on this issue. Beginning with the decision in the case of Adlabs v. Commissioner, 2006 (2) STR 121, the Tribunal relied on the Board’s letter dated 7-4-2004 to Punjab Colour Association (later superseded by Circular dated 3-3-2006) clarifying that exemption under Notification No. 12/2003-ST for excluding input material consumed/sold was available. Based on the letter, the Tribunal held that the appellant was eligible for the benefit of deduction of cost of material used during provision of service. This stand was dissented to by the Delhi Tribunal in the case of Laxmi Colour Pvt. Ltd., 2006 (3) STR 363 (Tri.-Del.) which followed the Supreme Court’s decision of C. K. Jidheesh (supra). Between then and now, Tribu-nals in Agarwal Colour Lab v. CCE, Raipur 2006 (1) STR 41 (Tri.-Del.) and Panchsheel Colour Lab v. CCE, Raipur 2006 (4) STR 320 (Del.) decided in favour of the Revenue i.e., not allowing exclusion of inputs in photography service whereas in umpteen number of cases, the decision was against the Revenue. C. K. Jidheesh (supra) was considered overruled in the case of Bharat Sanchar Nigam Ltd.’s case (supra) and cited by the Tribunal in the case of Shilpa Colour Lab v. CCE, Calicut 2007 (5) STR 423 (Tri.-Bang.) and it followed the decision in the case of Adlabs (supra). The list of decisions against the Revenue included Delux Colour Lab & Others, 2009 (13) STR 605 (Tri.), Technical Colour Lab v. CCE, 2009 (13) STR 589 (Tri.-Del.), Jyoti Art Studio v. CCE, 2008 (10) STR 158 (Tri.-Bang.), M/s. Edman Imaging v. CCE, 2008 (9) STR 91 (Tri.-Bang.), Roopchhaya Colour Studio v. CCE, 2008 (11) STR 125 (Tri.-Bang.), Digi Photo Laser Imaging P. Ltd. v. CCE, 2007 TIOL 1169 (CESTAT-Bang.), Ajanta Colour Lab (2009) 20 STT 395 (New Delhi CESTAT). Savitri Digital Lab v. CCE, (2009) 23 STT 82 (Chennai-CESTAT) and a few others as well. Further, following the views of the Delhi CESTAT in Sood Studios v. CCE, (2009) 19 STT 453 (New Delhi), the Punjab and Haryana High Court in CCE v. Vahoo Colour Lab, 2010 (18) STR 548 (P&H) following BSNL (supra) held that “the components of sale of photography, developing and printing, etc. are clearly distinct and discernible than that of photography service. Therefore as the photography is in the nature of works contract and it involves the elements of both sale and service, the service tax is not leviable on the sale portion in obtaining circumstances of the case”. We summarise below the case of Shilpa Colour Lab (supra) as it contained a number of appellants and it has also been relied upon in a number of later decisions holding that value of goods and consumables was excludible under Notification No. 12/2003-ST while providing photography service.

Shilpa Colour Lab v. CCE, Calicut’s case 2007 (5) STR 423 (Tri.-Bang.)

In this case, a bunch of appeals related to the issue of levying service tax on the amount charged in the case of printing photograph for other than service component. This case had followed earlier decision of the same Bench in the case of Adlabs v. Commissioner, 2006 (2) STR 121 (Tri.). The Tribunal in this case observed that goods sold while providing service are not liable to service tax as that would amount to sales tax which constitutionally is State subject and not that of Union. Decisions in Rainbow Colour Lab (supra) and C. K. Jidheesh (supra) were examined. It was pointed out by the appellants that the Apex Court in Bharat Sanchar Nigam Ltd., 2006 (2) STR 161 (SC) had overruled the decisions in the cases of C. K. Jidheesh and Rainbow Colour Lab. Para 47 of the BSNL decision (supra) was specifically cited to read as follows. “47. We agree. After the 46th Amendment, the sale element of those contracts which are covered by the six sub-clauses of Clause (29A) of Article 366 are separable and may be subjected to sales tax by the States under Entry 54 of List II and there is no question of the dominant nature test applying. Therefore when in 2005, C. K. Jidheesh v. Union of India, (2005) 8 SCALE 784 held that the aforesaid observations in Associated Cement (supra) were merely obiter and that Rainbow Colour Lab (supra) was still good law, it was not correct. It is necessary to note that Associated Cement did not say that in all cases of composite transactions the 46th Amendment would apply.”

Based on this, the Tribunal held that the Apex Court had overruled the decisions in Rainbow Colour Lab and C. K. Jidheesh in BSNL’s (supra) case and further observing BSNL’s ruling that “aspect theory would not apply to enable the value of services to be included in the sale of goods the price of goods in the value of service”, the Tribunal held that the implication of BSNL’s case is that in photography service, if value of goods and material are consumed, then such value cannot be included in the value of service for the levy of service tax.

[Note — The Supreme Court dismissed the Departmental appeal filed against this decision].

In the midst of the above, the case of Agarwal Colour Advance photo System v. CCE, Bhopal reported at 2010 (19) STR 181 (Tri.-Del.) came up before the Delhi CESTAT wherein detailed analysis of the various decisions including the above deci-sions (both for and against the Revenue) and the decisions referred to in these decisions viz. BSNL (supra ), Imagic Creative (supra), Associated Cements (supra), Rainbow Colour Lab (supra), Everest Photocopier (1996) 163 STC 360 (SC) inter alia were discussed alongside the discussion on sale, deemed sale, etc. On account of there being several judgments against the Revenue and a number of them in its favour, to maintain judicial propriety wherever the Bench differs with the decision of a co-ordinate Bench, the matter was referred to the Larger Bench of the Delhi Tribunal.

The recently reported Aggarwal Colour Advance Photo System’s case
[2011 (23) STR 608 (Tri.-LB)]

In an attempt to end the controversy and conflicting decisions in Aggarwal Colour Advance Photo System, 2011 (23) STR 608 (Tri.-LB), only two questions were decided (agreed by both the parties) to be dealt with by the Larger Bench in the appeal out of 5 questions of law referred to it [as reported in 2010 (19) STR 181 (Tri.-Del.)] are as follows :

  •     Whether for the purpose of section 67 of the Finance Act, 1994 the gross amount chargeable for photography service should include the cost of material and goods used/consumed and deduct the cost of unexposed films?

  •     Whether the term ‘sale’ appearing in Notification No. 12/103-ST of 20-6-2003 is to be given the same meaning as given by section 2(h) of the Central Excise Act, 1944 read with section 65(121) of the Finance Act, 1994 or this term would also include deemed sale as defined by Article 366(29A)(b) of the Constitution?

Answering the first question cited above, the Bench expressed its view that in case of services in relation to photography, service tax has to be levied on the gross amount charged for providing such service which would include value of all material or goods used/consumed or becoming medium, it being inseparable and integrally connected and enabling performance of service. The only permissible deduction will be for the value of unexposed film, if any sold. This view was expressed by following C. K. Jidheesh (supra), a direct judgment of the Supreme Court on the valuation of photography service. According to the Bench, decisions of the Tribunal in cases of Shilpa Colour Lab (supra), Adlab v. CCE (supra) and Delux Colour Lab & Others v. CCE, Jaipur (supra) were impediments and appeared contrary to law laid down by C. K. Jidheesh (supra).

The appellant’s key contention inter alia on merits was that on the basis of the settled law, various Benches of Tribunal rightly excluded the value of goods used in providing photography service to determine assessable value of such service. The Finance Act, 1994 could not attempt to tax goods as there did not exist provision in that law to do so and that benefit of excluding sale of goods under Notification 12/2003-ST was not deniable. Among others, and relying on the decision of the High Court of Punjab & Haryana in the case of Vahoo Colour Lab, 2010 (18) STR 548 (P&H), it was contended that processing of photography being a works contract involved both sale and service and therefore service tax was not leviable on the sale portion. Whereas the Revenue contended that providing photography is a pure and simple service contract and there is no contract for sale of goods unless a distinct sale is available, the consideration received for photography service becomes measure of value of taxation. The Revenue inter alia further contended that the word ‘sale’ in Notification 12/2003-ST has to be interpreted on the basis of its meaning as per section 2(h) of the Central Excise Act, 1944 as applicable to service tax by virtue of section 65(121) of the Act. When there is no primary intention of the parties to sell paper or consumables in providing photography service, there is no room for applicability of ‘deemed sale’ concept in absence of any such sale of commodities as goods.

Valuation of taxable service

The Larger Bench of the Tribunal observed that service tax is leviable on the gross value of taxable service and this being a measure of tax, determination thereof was crucial. Service tax being destination-based consumption tax, all cost additions till the service reaches consumer form part of the value of the service. Citing the judgment of Association of Leasing & Financial Service Companies v. UOI, 2010 (20) STR 417 (SC), it was opined by the Bench that the principle of equivalence was applicable and there was a thin line of divide between sale and service and such principle was in-built into the concept of the Finance Act, 1994. It is a value added tax and the value addition is on account of the activity which provides value addition.


Notification No. 12/2003, dated 20-6-2003 granting exemption to value of goods sold to the recipient of service

While answering the second question, the Bench observed that to satisfy the said condition of the Notification and claim the part of value as exempt, the assessee was to discharge the burden to show the value of goods and material actually sold. The term ‘sold’ cannot include ‘deemed sale’ of goods and material consumed by the service provider while generating and providing service. Whether any goods or material are sold while providing photography service, there should be documentary proof specifically indicating the value of goods and material in question sold while providing service and this is further subject to condition of non-availment of credit of duty on such goods. Granting an exemption always depends on factual evidence and differs from case to case depending on facts and circumstances of each case which is left to the domain of the Tax Administration for determining whether such burden was discharged by the assessee.

The Bench noted that there was no doubt that papers, consumables and chemicals are used and consumed to bring photographs into existence and it is also true that no person goes to buy paper and chemicals from the photography service provider. Service recipient expects delivery of photograph. Consumables and chemicals disappear when the photograph emerges. Relying on C. K. Jidheesh (supra), it was observed that photography contract was not a composite contract of sale of goods and service. It was also noted by the Bench that since the Supreme Court rendered decision of Surabhi Colour Lab (supra) by remanding the matter to verify whether the assessee maintained records of inputs used in photography and no report was produced as to how the matter was concluded, it could not be relied upon. Further, the decision in Technical Colour Lab (supra) was rendered purely by following Surabhi’s case (supra), they were bound to follow the ratio of C. K. Jidheesh (supra). While accepting the Revenue’s contention, the Bench observed that in terms of the rulings of several High Courts (included inter alia V. V. Jha v. State of Meghalaya, Gauhati High Court etc.), there was ‘no sale’ or ‘deemed sale’ of goods and material in photography service. The obiter reference in the case of BSNL (supra) being a different question of law and fact. (In the case of BSNL, the Supreme Court had to examine whether any right to use any goods involved in telephone connection provided by BSNL to its subscribers could be subject to sales tax), it did not stand to overrule either C. K. Jidheesh (supra) or Rainbow Colour Lab (supra). The Bench accordingly answered the questions as follows:

  •     For the purpose of section 67 of the Finance Act, 1994, the value of service of photography would be the gross amount charged including cost of goods and material used and consumed during provision of service. The cost of unexposed films, etc. would stand excluded in terms of Explanation to section 67 if sold to the client.

  •     The value of goods and material if sold separately would be excluded under Notification 12/2003-ST and the term ‘sold’ appearing thereunder has to be interpreted using the definition of ‘sale’ in the Central Excise Act, 1944 and not as per the meaning of deemed sale under Article 366(29A) (b) of the Constitution. The Court further ob-served that based on the above, it can be said that value would be determined based on facts and circumstances of each case as the Finance Act, 1944 does not intend taxation of goods and material sold in the course of providing all taxable services.


Conclusion
From the aforesaid discussion, it appears that generally if the cost of paper and other material appears separately in an invoice during the course of providing service, the issue prima facie of non-allowance of benefit under Exemption Notification 12/2003-ST may not arise. However, appreciating that this practice more often than not, is not followed and also considering the recent controversial decision in the case of Sayaji Hotels Ltd. v. UOI, (24)    STR 177 (Del.-Trib.) (Refer Recent Decisions – Indirect Taxes, Part A of this issue) if the facts of a specific case demand examination of applicable provisions of law, the following questions whether can be answered with finality or the controversy may continue on account of conflicting views and interpretations, time alone would decide it:

  •     Whether contract of photography is indivisible or a composite contract of sale and service or a standalone contract of service?
  •     If the contract is composite or an indivisible one, whether the value of ‘sale’ is discernible?
  •     If the value is discernible, whether it amounts to ‘sale’ as defined in 2(h) of the Central Excise Act, 1944 or whether fiction of ‘deemed sale’ under Article 366(29A)(b) of the Constitution would be available considering the contract a works contract?
  •     As a matter of fact, whether there exists an intention of ‘sale’ in the contract of photography or put in other words, whether there are two distinct or subtle contracts, one of ‘sale’ and another of ‘service’ present?
  •     Given the fact that paper used for photograph can be bought and sold and the photograph itself can be utilised, stored, possessed, transferred, transmitted and delivered, [and thus the necessary ingredients of existence of ‘goods’ and their delivery are satisfied in terms of the view adopted in Tata Consultancy Services v. State of Andhra Pradesh, 2004 (178) ELT 22 (SC)] should the benefit under Notification 12/2003-ST be not available without examining the intention to purchase and/or sale?
  •     In a simple contract of providing five copies of passport-sized photograph of an individual, Rs.150 is charged and for providing ten copies, Rs.175 is charged. Isn’t the value addition only on account of ‘value’ of goods? Is ‘deemed sale’ still not applicable?

(2011) 23 STR 625 (Tri-Chennai) Commissioner Central Excise, Trichy v. IOC Ltd.

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Case of amalgamation — The amalgamating company has paid service tax on the services rendered by the amalgamated company — During the period from the date of making an application till the date of order of amalgamation — Amalgamated Company claimed refund for the same — Held, such claim of refund valid.

Facts
In the given case, an amalgamation involving IOCL (holding company) and IBP (subsidiary company) took place as per order of the Petroleum Ministry dated 30-4-2007 with retrospective effect from 1-4-2004. IOCL claimed refund of service tax which IBP had paid in respect of storage and warehouse charges rendered by IOCL during 1-4-2004 to 30-4- 2007 considering that during the said period services were rendered to oneself in terms of amalgamation with retrospective effect. The rejected claim was allowed by the Commissioner (Appeals).

Held
IBP ceased to exist as a separate legal entity w.e.f. 1-4-2004 even though the order was dated 30-4-2007. The transaction between IOCL and IBP could not be treated as one between a service provider and service recipient. IOCL was held entitled to refund of service tax paid by IBP.

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(2011) 23 STR 608 (Tri.-LB) Aggarwal Colour Advance Photo System v. CCEx., Bhopal.

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Valuation — Cost of paper, chemical, etc. — All such costs incurred for which payment is received is includible for levy of service tax — Agreement between parties cannot affect tax incidence — Only goods sold separately are excludible as per Notification No. 12/2003.

Facts
The main questions to be considered by the Tribunal were:

Whether value of photography service was to include cost of goods, materials used/consumed?

Whether the exemption mentioned as per Notification No. 12/2003, dated 20-6-2003 was applicable in this case?

The appellant claimed that if the value of the goods used for providing photography service was ascertainable, the same should be excluded while determining service tax liability, since the Finance Act, 1994 taxes only taxable services. The Revenue claimed that the demand of service tax raised against the assessee was based on the amount as shown in the invoices. Unless there was documentary evidence in respect of goods sold while providing such service, the appellant cannot allege that tax is levied on such goods as well. Photography service being a pure service contract, there would be no contract for sale of goods unless an agreement brought such provisions to the notice of the Department about distinct sale, the consideration received in exchange for providing photo-graphy service would be the value chargeable to tax. The value of all goods and materials consumed for providing such service being inseparably and integrally connected to such service making the provision of such service possible, must form part of value of taxable service. The only deduction can be the value of unexposed film, if any, sold.

Held
Service tax being a destination-based tax, all elements of cost making the service consumable up to the destination contribute to the value of such tax. In case of photography service, it was held that the cost of materials and goods used are integral and indispensable to the provision of service and thus are to be included for the purpose of valuation of such service. Notification No. 12/2003 S.T. exempts goods which are separately sold by the service provider while providing such service and the same does not include deemed sale.

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(2011) 23 STR 593 (Tri.-Kolkata) National Building Construction Corp. Ltd. v. CCEx. & ST, Patna.

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Sub-contracting — Business auxiliary services — Margins retained by main contractor cannot be considered to be consideration towards supervisory services rendered to sub contractors — Sub-contractors cannot be said to be rendering services to the principal on behalf of the main contractor. Facts National Building Construction Corp. Ltd. (‘NBCC’) entered into a contract with M/s. NTPC to undertake site preparation, site levelling works. NBCC in turn entered into a contract with M/s. APR Constructions Ltd. (‘APR’) and M/s. Sri Avantika Constructions (SAC). NBCC supervised the work done by APR and SAC as per the specifications given by NTPC. The Department demanded service tax along with interest and penalty from sub-contactors — APR as well as SAC holding that they had rendered business auxiliary services to NTPC on behalf of NBCC. The Department also demanded tax from NBCC on the ground that the margins earned by them were towards business auxiliary services (supervision) rendered to sub-contractors. The sub-contractors claimed that as per the Circular dated 14-7-1997, sub-contractors were not liable to pay service tax. APR and SAC had not rendered any services to NTPC and they did not receive any payments from NTPC directly. They were undertaking site formation activities and to treat that as business auxiliary service was absurd. It was also claimed by NBCC that just because they supervised the work, it could not be said that they rendered any services to the sub-contractors. The Revenue claimed that the Circular dated 14-7-1997 was over-ruled by another Circular dated 23-8-2007, which clearly stated that both the main contractor and the sub-contractor were liable to pay service tax. Held The supervision work was to ensure that the work was carried out as per the instructions of NTPC and thus, it cannot be said that NBCC rendered any services to the sub-contractors. The sub-contractors were rendering site formation service to NBCC and not business auxiliary services. Demands were set aside.
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(2011) 23 STR 467 (Tri.-Delhi) Kanoria Sugar & General Mfg. Co. Ltd. v. CCEx., Allahabad.

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Appeal for waiver of penalty on the sole ground of financial problems held invalid.

Facts Penalty u/s.76 was levied against the appellants in respect of the delay in payment of service tax on GTA services. The appellants claimed that the delay in payment of service tax was on account of financial problems. The respondents claimed that the penalty can be waived only if the delay is caused on account of the reasons mentioned u/s. 80 which are not present in the case.

Held
Except financial problems, no other reason was offered by the appellants. The reason of financial difficulty is not a valid reason for waiver of penalty u/s.80.

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(2011) 23 STR 444 (Kar.) — CCEx. Bangalore- III v. Stanzen Toyotetsu India (P) Ltd.

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CENVAT credit — Services used by employees — Allowable if used for the business.

Facts
The appellant provided to the employees working in their factory canteen service (outdoor catering service), rent-a-cab service, group insurance health policy (insurance service) and claimed service tax paid thereon as CENVAT credit.

The Revenue disputed this claim and treated it as wrong utilisation of credit on the ground that the facilities provided were no way related to the manufacture of goods. According to the party, all the 3 services provided were within the definition of input services as per Rule 2(I) of CCR, 2004 and the services were used indirectly in relation to the manufacture of final products.

Held
Only by reason that the above-mentioned services are not contained in the definition of input service, the assessee could not be denied credit. Rent-a-cab service was used to bring the employees to the place of work to carry out manufacturing activities and thus could be treated as input service. Service tax was paid on canteen service irrespective of the fact that whether the food provided was subsidised or not. The cost of the food would thus form part of the cost of production and thus credit on such amount could be claimed. The group health insurance policy was taken to protect the interest of the employees either during the course of journey to the factory or while working in the factory. In such a case, the amount of premium was also to be considered by the manufacturer while fixing the price of the goods manufactured. The assessee was thus entitled to CENVAT credit.

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(2011) 23 STR 582 (All.) Triveni Glass Ltd. v. CCEx., Allahabad.

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Improper service of summons/decisions/orders — The provisions to be construed strictly in relation to the rights of the remedy.

Facts
The appellant claimed that the order was not served on them. The only proof of service available with the respondent was a noting made by an employee of the Department. The Commissioner (Appeals) as well as the Tribunal did not notice the discrepancy in the number of the order which had been served, nor did they provide any clarification regarding the same. The Department failed to prove that they had served the order as per the provisions of section 37C of the Central Excise Act, 1944.

Held
The respondent failed to serve the order as per the provisions of the law. As a result, the claim of the appellant was held valid and thus, the Commissioner (Appeals) was directed to hear the appeal on merits. When the matter arises as to the right of a party in the form of extinguishment of remedy of an appeal, then such provision has to be interpreted strictly even if the same is procedural.

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Penalty u/s.61(2) for late filing of VAT Audit Report vis-à-vis discretion of the authorities

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Introduction
Under the Maharashtra Value Added Tax Act, 2002, one of the distinguishing features is that the dealers, having turnover more than prescribed limit, are required to get VAT Audit report from a Chartered/ Cost Accountant. This report is in Form 704 and is required to be filed within the stipulated time. The normal time is 10 months from the end of the relevant financial year, though, in the past, extensions were given on administrative ground. In any case, if there is delay after the due date, penalty is provided u/s.61(2), for such delayed filing of report. The said section is reproduced below for ready reference.

“(2) If any dealer liable to get his accounts audited under subsection (1) fails to furnish a copy of such report within the time as aforesaid. The Commissioner may, after giving the dealer a reasonable opportunity of being heard, impose on him, in addition to any tax payable, a sum by way of penalty equal to one-tenth per cent, of the total sales.

Provided that, if the dealer fails to furnish a copy or such report within the period prescribed under sub-section (1), but files it within one month of the end of the said period, and the dealer proves to the satisfaction of the Commissioner that the delay was on account of factors beyond his control, then no penalty under this sub-section shall be imposed on him.”

Thus, the law provides for a steep penalty for delayed filing of VAT Audit Report. As per proviso delay up to one month, with reasonable cause, can be condoned.

Case of Nitco Paints Ltd. (42 VST 71) (Bom.)

One of the issues dealt with by the Bombay High Court in this case was that the authorities have discretion as to levy or not to levy penalty even if the delay is beyond one month, if there is reasonable cause. This gave relief to the dealer in-as-much as even a delay of more than one month can be condoned.

Tribunal judgment in case of Ankit International (VAT SA No. 161 of 2010)
In this case M.S.T. Tribunal was concerned with penalty u/s.61(2) for the year 2006-07. In the original order penalty was levied at Rs.83,013 calculated at 0.1% of the turnover as per limit given in section 61(2). In the first appeal the amount was confirmed. In second appeal Tribunal considered the facts of the case and reduced the penalty by 70% and confirmed the same at 30%.

The Sales Tax Department filed appeal before the Bombay High Court challenging the above order of the Tribunal on the ground that there is no authority with the Tribunal to reduce the amount. The argument of the Department was that there is discretion to levy or not to levy penalty depending upon the facts of the case, but if the authority decides to levy penalty, then there is no discretion about amount of the penalty. In other words, the argument was that once the authority decides to levy the penalty, then the amount is fixed, it should be calculated at 0.1% of the turnover of sales. The language used for determining the amount was relied upon along with judgment of the Supreme Court in case of Union of India v. Dharmendra Textile Processors, (18 VST 180) (SC).

Judgment of Bombay High Court in case of Ankit International (STA No. 9 of 2011, dated 15-9-2011)

The High Court has decided the issue about discretion of amount, vide judgment as above. The High Court considered the judgments cited by the Department. However, the High Court observed that there is difference in the language of the provision. In section 61(2), the words used are ‘may’. If the words used are ‘shall’ it will have different connotation. The High Court also considered the harsh effect of the above provision and further observed that two views are possible from the language of section 61(2). The High Court observed as under:

“13. Having therefore, considered the submission which has been urged on behalf of the appellant, we are of the view that there is no reason to accept the contention that the discretion which is conferred by section 61(2) does not extend also to the quantum of the penalty. Under the substantive part of s.s (2) of section 61 the State Legislature has conferred discretion on the Commissioner before he imposes a penalty on the dealer for failing to furnish a copy of the audited report within the prescribed period. The proviso to s.s (2) states that if the dealer fails to furnish a copy of the said report within the prescribed period, but files it within one month of the end of the period, and the dealer proves to the satisfaction of the Commissioner that the delay was on account of factors beyond his control, then no penalty under this sub-section shall be imposed upon him. Hence, in the circumstances set out that the proviso to s.s (2), no penalty can be imposed at all if the conditions therein are fulfilled. The proviso operates when (i) the dealer fails to furnish a copy of the report within the prescribed period, but files it within one month of the end of the period; (ii) the dealer proves to the satisfaction of the Commissioner that the delay was for reasons beyond his control. Where the proviso applies, no penalty can be imposed on the dealer at all. The proviso is an exception and does not control the substantive part of section 61(2). The substantive part of s.s (2) of section 61 also confers discretion upon the Commissioner which is not diluted by the proviso to s.s (2).

14. In any event, we are of the view that if two views in regard to the interpretation of section 61(2) are possible, the Court would be justified in adopting that construction which favours the assessee. (See decisions of the Supreme Court in The Commissioner of Income Tax v. Vegetable Product Ltd. 10 and Mauri Yeast India Pvt. Ltd. v. State of U.P.)”

Accordingly the High Court confirmed order of the Tribunal reducing penalty and held that the authorities have discretion regarding the amount penalty as were.

Conclusion

Any penal provision is for creating a deterrent effect. However, if the amounts determined are very high, it creates a difficult situation for the dealers. If in case of technical delays also the amount remains fixed and even when a dealer may not be liable to pay any tax amount, he will be lailable to pay such high amount of penalty for delay in submitting VAT Audit Report. This is not the expected result of section 61(2) of the MVAT Act. Therefore, the above judgment will give much desired relief to the dealer community and now quantum of penalty will depend upon the facts and gravity of the offence.
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TAXATION OF SERVICES BASED ON A NEGATIVE LIST

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Background
Service tax was first introduced through the Union Budget for the year 1994-95. With a modest beginning, the scope and coverage has been substantially expanded and presently around 120 services are covered within the ambit of service tax, covering most of the important services which are taxed internationally.

While presenting the Union Budget for 2011-12, the Finance Minister proposed as under:

“Many experts have argued that it will be desirable to tax services based on a small negative list, so that many untapped sectors are brought into the tax net. Such an approach will be very conducive for a nationwide GST. I propose to initiate an informed public debate on the subject to help us finalise the approach to GST.”

Pursuant to the aforesaid announcement, a public debate on widening the tax base by introducing a negative list of services has been initiated by the Government, through the release of a draft concept paper inviting comments/suggestions from the affected parties.

Revenue implications

Relevant extracts from the draft concept paper are set out below for ready reference:

Para 9.1

It is well known that nearly 57% of India GDP comes from services. After including construction, the contribution from services will come to about 63%. At current prices the contribution from services during 2010-11 comes to about Rs.50 lakh crore.

Para 9.2

The national income statistics do not capture the break-up of the service sector in the manner it is being taxed or sought to be taxed. However some broad indications are available of the contribution of services from certain sectors. Based on these indications contribution from services that are proposed to be kept in the negative list e.g., trading of goods, transportation of passengers, education and health sectors as also portions of construction, real estate and financial sectors can be estimated. In addition to exclusions by way of negative list, export of services valued at about nearly US$ 130 billion at present will also remain exempt. The import of services meant for direct consumptions by individuals are at present not largely subjected to tax. Remaining services from abroad may not make any major net contribution to tax being available for credit set-off.

Para 9.3

On a rough estimate nearly 40% of the total services will come into the tax net as a result of the proposed negative list. However, a large part of the informal sector would also remain outside the tax net due to the threshold exemption. This would leave only about 60% of the sector not covered by negative list actually available for tax payment. Thus the potential for effective taxation of services may be confined to about 20-25% of the service sector contribution. This is still a sizable number and will add significant numbers to the revenue, though it may not sound astounding as some sections believe it to be.

Shortcomings in the present service tax law

Despite the fact that service tax fetches a revenue in excess of Rs.70,000 crore to the Central Government, service tax law suffers from significant shortcomings, more important of which are as under:

Unlike Central Excise law which clearly defines the basic concept of ‘manufacture’, there is no definition of ‘service’ under the Finance Act, 1994 (‘Act’). Each of the 120 services which are liable to service tax are specified and defined u/s.65(105) of the Act. Taxable services are defined employing a very wide terminology. In the absence of a detailed Tariff (like Central Excise/ Customs) with Interpretative Notes, a large number of interpretation issues have arisen as to the coverage of services liable to service tax, resulting in extensive litigations.

The definitions in regard to each taxable service u/s.65(105) of the Act have been introduced at different points of time. Further, amendments have been made in the scope of definition within a service category from time to time. This has resulted in classification issues as regards date of applicability of levy and coverage under specific exemption Notifications;

A large number of exemption Notifications have been issued over the years, resulting in interpretation issues and disputes between the Department and the taxpayers; and

Issues of overlapping vis-à-vis other indirect taxes like State VAT, Central Excise, etc. resulting in double taxation and consequent increased burden to the end consumer.

The above shortcomings need to be satisfactorily addressed in the proposed service tax policy framework.

Case being made against Negative List approach:

The draft concept paper in paras 2, 3 and 4 highlights in detail the issues surrounding the positive and negative lists. While it does accept that the currently existing positive list has certain advantages in terms of definitiveness, it seeks to justify the introduction of the negative list by citing certain limitations of the current mechanism of positive list. According to one school of thinking most of the said limitations can be either removed even in positive list approach or are so inherent that they would continue even in the negative list approach. The same is explained in Table 1

Selective Approach vis- à-vis Comprehensive Approach (Positive List v. Negative List)
The Govind Rao Committee, which was appointed by the Government to deliberate in detail on taxation of services, has observed as under:
The tax which has been imposed on a taxable service which is defined to mean renting of immovable property is a tax on lands and buildings within the meaning of Entry 49 of List II of the Seventh Schedule.

Para 2.6
“The limited experience gained in taxing the services on a selective basis has raised some important issues. The most important of them relates to the basic approach to taxing services. The selective approach to taxation, which has been followed till now, has given rise to many administrative problems arising from selectivity including inadequate coverage and increased litigation, Further, in accordance with the medium-term policy objective of the Government of evolving a manufacturing stage value added tax in respect of goods and services at central level, it is neces-sary to adopt a more general approach.”

Considering the serious shortcomings in the presently adopted selective approach (Positive List) to tax services and the prevailing international practices as regards taxation of services, according to a second school of thinking which is being supported by trade bodies/professional bodies across the country comprehensive approach (Negative List) to tax services may be desirable, more particularly in order to avoid breaking of chain and also to ensure wider coverage from the perspective of proposed GST regime.

However, a serious note of caution is advised while moving towards comprehensive approach (Negative List), keeping in mind that a substantial portion of our economy exists in the form of a large unorganised sector scattered in the different parts of the country and the possible adverse impact on the aam aadmi. Hence, it is essential that the likely con-sequences of adopting a comprehensive approach (Negative List) to tax services are appropriately dealt with.

Introduction of Comprehensive Approach (Negative List)
Introduction should be only with GST to avoid overlaps with State levies
Considering the substantive nature of the proposed legislative amendment which spells out a significant policy perspective of the Government and which is likely to have far-reaching implications, comprehensive approach (Negative List) to tax services should be introduced only as a part of GST Regime, which is being looked upon as the biggest indirect taxation reform in our country post independence.

While mutual overlaps between central levies have been resolved to a large extent, several overlaps remain due to the lack of coordination and uniformity in the approach to indirect taxation by the Centre and the States. GST, in creating a dual but uniform levy on goods and services simultaneously by the Centre and States is expected to resolve many of these issues. The definition of the term ‘service’ has been set out in such broad terms in the draft concept paper that the potential for overlap with the existing State levies (and certain central levies) is very high. Hence, until the State levies are synchronised with the Central levies (which will only happen upon the transition to GST) the introduction of a negative list may be a step in the wrong direction.

In case of introduction of Negative List prior to GST, public debate on amendments in affected legislations necessary Alternatively, if the comprehensive approach (Negative List) to tax service is to be put in place prior to the introduction of GST Regime, a Comprehensive Concept Paper along with drafts of amended legislations likely to be impacted should also be placed for public debate and response by the affected parties so as to fully understand the implications in totality.

An illustrative list of rules/regulations which could be impacted are as under:

  •     Service Tax Rules, 1994
  •     CENVAT Credit Rules, 2004
  •     Criteria-based Export of Services Rules, 2005
  •     Criteria-based Taxation of Services (Provided from Outside India and Received in India) Rules, 2006
  •     Service Tax (Determination of Value) Rules, 2006
  •     Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007

    Point of Taxation Rules, 2011

  •     Service-specific exemption Notifications issued from time to time granting exemptions/abatements either fully or partially

In relation to the aforesaid, it should be ensured that the existing substantive and established principles are continued upon in the negative list approach as well.

Time for preparation
Introduction of a comprehensive approach (Negative List) of taxing services with several consequential amendments in existing rules & regulations will undoubtedly require businesses to make innumerable changes in their current IT systems, processes, documentation, record management, etc. Therefore, businesses should be given a minimum of 6 months’ time after all the legislative amendments (including the Rules referred to above) are announced, but before they are made effective.

Important issues requiring consideration before adopting comprehensive approach (Negative List) to tax services
While moving towards comprehensive approach (Negative List) to tax services, the important and significant aspects which need to be considered are set out below.

Definition of ‘Service’
The term ‘service’ needs to be appropriately defined whereby the shortcomings of the present service tax law are taken care of and at the same time unintended transactions do not get taxed by ensuring the following, in particular:

  •     The terminology in definition employing words such as ‘anything’ should be done away with so as to minimise interpretation issues.

  •     In line with prevalent international practices, the scope of ‘service’ should explicitly cover only those transactions which are carried out with a commercial/economic objective & intent.

  •     In the absence of harmonious approach be-tween the Centre and States at present, there are already instances of various transactions like supply of software, enjoyment of IPR, franchise, recharge vouchers for telecommunication services and DTH services, etc. which are currently treated by the Centre as services liable to service tax and by States as sale of ‘goods’/ ‘deemed sale of goods’ liable to VAT. Once the term ‘service’ is defined for the purpose of taxing services based on a negative list and if there is no consensus between the Centre and States on such definition, instances of dual taxation of various transactions, both by Centre and States, will only increase. Therefore, approval of all the States governments should also be taken on the definition of the term ‘service’ to be adopted by the Centre. In order that the end beneficiary (aam aadmi) is not burdened by cascading effect of dual taxation, it should be ensured that services which are liable to service tax by the Centre do not also suffer VAT under the State VAT Laws.

  •     Transactions which are in the nature of ‘self-supply’ within a legal entity are excluded.

  •     Transactions which are per se not in the nature of ‘service’ (e.g., donations/voluntary contributions, gifts, subsidies/grants, security deposits, damages and compensations, etc.) should be kept out of service tax.

  •     Transactions arising from shifting or transfer of factory/premises on account of change in ownership or on account of sale, merger, de-merger, amalgamation, lease, conversion to LLP, transfer to joint venture or any other mode of business reorganisation with specific provision for transfer of liabilities of such factory/premises/business to the transferee should be excluded from the purview of ‘service’.

l Exclude activities that are specifically notified from time to time for exemption/exclusion from the levy of service tax.

Threshold exemption

Under the comprehensive approach (Negative List) to tax services, a large section of the country’s unorganised economy is likely to get covered under the service tax, which could have adverse impact on the aam aadmi. In order to ensure that a large number of small taxpayers are kept out and administration efforts of the Government are focussed on large taxpayers the following is suggested:

  •     A high threshold limit in the range of Rs.50 lakh (on an optional basis) should be prescribed.

  •     Alternatively, a simple composition scheme of taxation (with no CENVAT benefit), may be prescribed for small taxpayers where taxable value of services exceeds a specified amount during a financial year.

Input services eligible for CENVAT credit
It is an established cardinal principle of any VAT/ GST system prevalent worldwide that taxes paid on all services availed for the purpose of business are eligible for input tax credit. If services are to be taxed comprehensively, there cannot be any justification for breaking the input tax credit chain. Hence, simultaneously with introduction of negative list of services, definition of ‘input service’ under the Cenvat Credit Rules, 2004 must be amended, whereby all services availed for the purpose of business qualify as input services eligible for CENVAT credit.

Zero-rated services

  •     There are certain key sectors (Refer to Table 2) of our economy, which need to be specified as ‘Zero-rated Services’ (i.e., while there would be no output tax payable, benefit of input tax credit would be available, through a refund mechanism).

  •     In order to avoid issues and disputes as to classification and consequential eligibility to benefit, coverage of services should be clearly defined with detailed Interpretative Notes on lines with Central Excise/Customs Tariff.

Negative List of services

  •     The Government has identified certain services (Refer Table 3 below) to be kept out of the service tax. In case of such services, benefit of CENVAT credit would not be available to the service provider. The following services should be considered for inclusion/wider coverage in the negative list.

  •     In order to avoid issues and disputes as to classification and consequential eligibility to benefit, coverage of services should be clearly defined with detailed interpretative notes on lines with Central Excise/Customs Tariff.

IMPORTANT RECENT AMENDMENTS UNDER MVAT ACT, 2002

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While presenting the Budget for 2011-12 the Finance Minister of Maharashtra proposed certain amendments in the MVAT Act, 2002. Accordingly, L. A. Bill No. XVII of 2011, dated 8-4-2011 was introduced in the Assembly. The said Bill has become law namely, Maharashtra Tax Laws (Levy, Amendment and Validation) Act, 2011 (Mah. Act. No. XV of 2011) dated 21-4-2011. The amendments have come into operation from 1-5-2011 as Notification to that effect is issued bearing no. VAT.1511/CR-63/ Taxation 1 dated 28-4-2011. The important changes brought in by the above Amendment Act can be briefly noted as under:

1. Amendments in respect of Voluntary Registration:

As on today, the Registration under Voluntary Registration Scheme (VRS) is granted on the basis of advance payment of Rs.25,000. The said amount is adjustable against the liability which may be payable in the returns to be filed after registration.

However, now as per amendment in section 16(2) of the MVAT Act, 2002, the advance payment of Rs.25,000 will be treated as Security Deposit with the Government. It will not be allowed to be adjusted against liability. It will be refunded back after certain period, if there is no breach of any of the conditions which are laid down in this regard. As per newly inserted section 16(2A) of the MVAT Act, 2002, the Government can prescribe conditions for refund of deposit. The said conditions are prescribed by way of Rule 60A.

As per Rule 60A, it is the dealer who has to apply for refund of deposit. The application of refund can be made after 36 months from the end of month in which registration is granted but before 48 months from the said month. In case of cancellation of Registration Certificate (RC) before above period of 36 months, the application is to be made within six months from such date of cancellation. The application is to be made to registration authority and such authority should grant the refund within 90 days from receipt of application, subject to the dealer filing all returns as well as paying taxes as per the said returns.

2. Revised returns:

It is obligatory upon the dealers to file correct and complete returns by prescribed time. There are a number of events which may require correction in the original return or earlier revised returns. Therefore, the law permits dealers to file revised returns. This gives him opportunity of clearing himself of any charge of concealment or to prefer an additional claim, if any.

Up till now, there were no restrictions on the number of revised returns which can be filed by the dealers. In other words, a dealer could file more than one revised returns to correct the mistakes committed in the original returns or earlier revised returns.

However, now by the amendment a tab is put on the number of revised returns which can be filed by a dealer. As per section 20(4)(a), (b) and (c), there are three kinds of revised returns. A revised return can be filed suo motu or it can be to give the effect to VAT audit findings or it can be to give effect to findings of the business audit. The amendment seeks to allow only one revised return in each of the above categories. Though the amendment provides as above, a view can be taken that the dealer can file more than one revised returns to put up his position and in course of assessment such returns are also expected to be considered.

A dealer will now have to be very careful about filing revised return. He has to be certain that all the corrections are included in the particular one revised return. Allowing more than one revised return could not have caused any difficulty to the Department, but the curtailment will certainly cause great difficulty to the trading community.

It may be mentioned that in the category of suo motu revised return, the time limit was nine months from the end of concerned period/year. It is now enhanced to ten months.

This is an amendment about procedural law and the Department will take a view that the restriction operates from 1-5-2011. Therefore even for the returns for period prior to the above effective date, the restriction will be applied and accordingly after the above effective date the dealer may be permitted to file only one revised return relating to the said prior period.

3. No appeal against order levying interest:

The trend of amendments appears to be against the dealer community. The Government has debarred dealers from getting justice in case of levy of interest. The appeals against interest leviable u/s.30(2) and 30(4) are already prohibited by an amendment in 2010. However, appeals against interest u/s.30(1) (interest on URD) and 30(3) (differential dues) were allowed. Now section 26(5) is amended, whereby clause (c), which gave power to the Appellate Authority to deal with interest orders is deleted. Indirectly, the appeals will not be maintainable against the above interest u/s.30(1) and 30(3). Thus, one more beneficial provision is being done away with to the detriment of the dealer community. There will not be an opportunity to get justice in case of wrong levy.

It may be noted that appeals against orders levying interest u/s.30(1) and 30(3) themselves are not debarred. Therefore, it is possible to argue that the said appeals can be filed and the Appellate Authority can decide the matter under clause (d) of section 26(5) which covers appeal against any other order. Therefore, it appears that the dealers can still take an opportunity u/s.26(5)(d).

4. New taxation scheme for liquors:

Uptill now the liquors were taxed as per normal VAT chain. Every dealer was getting set-off and was liable to tax on sales.

Now from 1-5-2011 the system is changed. Wine is continued to be taxed as per the old system. Change is brought in taxation of IMFL, foreign liquors and country liquors by issue of Notification dated 30-4-2011 as per newly inserted section 41(5). The brief features of the new system can be noted as under:

(a) Manufacturer of liquors holding licence in PLL, BR-L and CL-I will be liable to tax @ 50% of sale price subject to limit of tax amount calculated as per Formula MRP x 25/125. They will be required to mention MRP on sale bills.

(b) Wholesalers holding licence in FL I, CL II will be exempt from tax if liquor is purchased from registered dealer in Maharashtra. No set-off is available to a wholesaler. If wholesaler has imported liquor from other State/country he will be required to discharge tax liability like a manufacture i.e., 50% of sale prices subject to limit of tax calculated as per formula MRP x 25/125.

(c) Retailer holding licence in FL IT, FL-BR-H, CL/ FL/TOD-III and CL-III will also be exempt from tax if liquor is purchased from registered dealers in Maharashtra. No set-off to them.

(d) Hotel, bars, restaurants and clubs (3-star and below):

Bars, restaurants and clubs holding licence in FL-III or FL-IV or E with grading of 3-star and below will be required to pay tax at 5% on the actual sale price of liquor which is purchased from registered dealers within the State and on which tax is paid or has become payable at earlier stage.

They can collect tax separately. No set-off is available on purchases.

(e) Hotels, bars, restaurants and clubs (4-star and above):

Hotels, bars and restaurants with grading of 4-star and above will be required to pay tax at 20% of their actual sale price, if the liquor is purchased from registered dealers within the State and on which tax is paid or has become payable at earlier stage.

If liquor is imported from other States or from outside the country, then in addition to 20% as above, they will be required to pay tax at Schedule rate subject to the limit of MRP x 25/125 of such liquor sold.
They can collect tax in the sale bills. No set-off is available on purchases of liquor.

(f) Taxation of stock as on 30-4-2011:

The tax on sale of liquors in stock as on 30-4-2011 will be as per the new system, discussed above i.e., at 50% of sale price limited to calculation made as per formula of MRP x 25/125. Hotels/ bars, in addition to the above, will be required to pay 5% or 20% as the case may be. In this case set-off will remain available on stock subject to submission of stock statement.

All the dealers, except manufacturers, shall furnish a statement of closing stock of goods mentioned in Entry 1, 2 and 3 of Schedule D to the MVAT Act, 2002 as on 30th April, 2011, in the Proforma appended to the Notification by 31st May, 2011.

5.    Refunds — Unwarranted and unreasonable curtailment:

Section 51 of the MVAT Act deals with refunds as per returns. Few important changes can be noted as under:

(a)    At present there is time limit on the Department to call for additional information. That could be called within one month of filing of the application.

However the time limit of one month is deleted by present amendment to section 51(2)(a). The result is that the Department will have open ground to call for additional information at any time.

(b)    Refund to newly registered dealer:

Clause 51(2)(b) provides that the newly registered dealer can apply for refund after expiry of one year from the end of first year. This provision is sought to be deleted with the effect that they will be able to claim the refund on expiry of year, as any other normal dealer. This can be said to be beneficial to the newly registered dealers.

(c)    Inter-state seller — Removal from preferred category:
With a view to give early refunds to the dealers involved in inter-state sales, they were put in preferred category by way of section 51(3)(a)(iv)    . Therefore, these dealers could file refund applications as per return period and had not to wait till the end of full year. Now this category is removed with the result that such dealers will be required to claim refunds after the end of year. This will delay refund claims for them.

(d)    Exporter — Defined:

Preferred category u/s.51(3)(a) includes exporter. They can file refund application as per the return period. However, the term ‘Exporter’ was not defined and hence a dealer having one export transaction could also file application as exporter. This liberal provision is now sought to be tight-ened. The term ‘Exporter’ is defined by inserting the following explanation.

“Explanation — For the purposes of sub-clause (i), the expression ‘Exporter’ shall mean a registered dealer whose turnover of exports during such period as may be prescribed, is not less than such percentage of the total turnover of his sales as may be prescribed in this behalf.”

The said percentage is prescribed by insertion of Rule 55A(3). According to the said Rule, if export turnover is not less then 50% in previous year or in concerned return period, then the dealer will be considered to be exporter.

(e)    Bank guarantee:

Section 51(3)(b) provides for requirement of bank guarantee for granting refund. It also gave power to call for additional information. The clause for calling additional information is deleted and calling for bank guarantee is retained.

(f)    Period for grant of refund — Extended:

Section 51(4) provides time limit for grant of refund. At present the limit is six months from the month of receipt of refund application. The said limit is extended to 18 months from the end of the month in which application is received. At present the dealer can get interest u/s.53(1) for delay in grant of refund after expiry of the above time limit of six months. Now this can take place after 18 months. Thus more time to retain the dealer’s money without interest.

The proviso to section 51(4) provides time limit for disposal of applications pending at present. It is sought to be provided that the applications filed up to 31-3-2011 for period up to 31-3-2010 will be disposed of by 30-9-2011. The applications filed up to 31-3 -2011 for period from 1-4-2010 to 31-3-2011 will be disposed of by 30-6-2012.

(g)    Time limit for filing refund application — Section 53(7):

As per section 53(7) refund application can be filed within three years from the end of concerned year. Now the time limit is reduced to 18 months. Thus one more curtailment of the dealer’s right. Whereas time for grant of refunds by the Department is enhanced to 18 months from six months, the time limit for dealer is curtailed. This cannot be said to be a fair treatment. There will be many adverse effects on dealers.

The above provision will apply from 2009-10 and the refund applications for 2009-2010 will be required to be filed before 30-9-2011.

6.    VAT Audit report — heavy ‘weight’ on dealers:

VAT Audit provision is becoming more and more stringent for dealers. Up till now there is penalty for late filing of report, to be calculated at 0.1% of turnover.

Now section 61(1) is amended to provide that the audit report should be ‘complete’ report.

By Explanation it is provided that the audit report will be deemed to be complete, if all items, certifications, tables, schedules and annexures are filed appropriately and are arithmetically self-consistent. If the report is found to be incomplete, then dealer will be subject to penalty at 0.1% of turnover, as per section 61(2A).

7.    Prosecution for false tax invoice:

Sub-sections (1A)(i) and (ii) are inserted in section 74 to provide punishment by way of imprisonment for two years for issuing/producing false tax invoice to defraud revenue. The provision is extended to person who abates aforesaid offence.

In addition to above, there are changes in rate of taxes, few changes in composition schemes, etc. The same are not referred to here for sake of brevity.

(2011) 38 VST 168 (Bom.) M/s. Zenith Computers Ltd. v. State of Maharashtra

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Sales Tax — Power of Appellate Authority — Penalty — Cannot be levied for the first time by Appellate Authorities — Section 36(2)(C), 55 and 57 of BST Act — Section 9(2A) of CST Act.

Facts:
The appellant, manufacturer of computers, was assessed for the period from 1st May, 1986 to April 30, 1987 under the CST Act, 1956. The appellant filed appeal against the assessment order before the Deputy Commissioner of Sales Tax (Appeal) who allowed the appeal partly and imposed penalty u/s.9(2A) of the CST Act r.w.s. 36(2)(C), Explanation (2) of the BST Act, after giving opportunity of hearing to the appellant, for failure to file returns in time, by passing separate order. The appellant filed appeal before the Tribunal against such penalty order. The Tribunal confirmed the order of penalty passed by the DC (Appeal). The Tribunal, at the instance of the appellant and as per direction of the Court, referred substantial question of law before the Bombay High Court.

Held:
The High Court, considering provisions of section 36(2)(C) and section 55 of the Act, held that as per section 55(6)(a) and (b) of the Act, the Appellate Authority concerned did not have any power of imposing penalty for the first time and expression ‘confer or cancel such order or very it, so as to either enhance or to reduce the penalty’ employed in section 55(6)(b), neither covered the power to impose a fresh penalty for the first time nor did it confer any power upon the Appellate Authority to pass any order of penalty while deciding the appeal. Further it held that on the correct interpretation of section 36(2)(c) of the Act the Tribunal was not justified in holding that the DC (Appeal) in exercise of Appellate power had jurisdiction to initiate action for imposing penalty for the first time.

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R. R. Donnelley India Outsource Private Limited (2011) 11 taxmann.com 94 (AAR) Article 13 of India-UK DTAA Dated: 16-5-2011

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Under India-UK DTAA, if the services are not managerial, technical or consultancy services and do not involve usage of sophisticated technology, fees are not taxable.

Facts:
The applicant is an Indian company providing solutions in commercial and financial printing, print and mail management, product customisation, logistics, call centres, transactional online services, digital photography, colour services, etc.; high-end support services to the customers identified by its associated enterprises; online data-related services for different kinds of businesses.

RRDUK is a foreign company and is a tax resident of UK (‘UKCo’). UKCo was engaged in the business of communication management. For efficient discharge of service to its customers, the applicant had entered into data processing services agreement with UKCo. As per the agreement, the applicant was to pay fees to UKCo based on the invoice of UKCo.

The applicant raised the following issues before the AAR for its ruling:

(1) Whether amount receivable by UKCo is taxable as FTS under the Income-tax Act and DTAA?

(2) If the amount receivable by UKCo is not taxable in India, whether the applicant is required to withhold tax u/s. 195 of the Income-tax Act?

The applicant contended that the payment made to UKCo was not for technical services and hence, was not taxable in India. Further, in terms of Article 13 of DTAA unless the services are ‘made available’, they cannot be said to be technical services. The applicant also relied on rulings of the AAR in Invensys System Inc. (2009) 317 ITR 438 (AAR) and Intertek Testing Services India P. Ltd. (2008) 307 ITR 418 (AAR)1.

The Revenue contended that the personnel of UKCo periodically visiting India did not stay for more than 30 days and hence, no PE existed in India. However in view of explanation to section 9(2) of the Incometax Act (inserted with retrospective effect by the Finance Act, 2010), the applicant would be liable to withhold tax in India.

Ruling:
The AAR ruled as follows:

(i) The AAR observed that once the knowledge or technical know-how is transferred, no further assistance is required from the services provided. The services mentioned in the agreement are not managerial, technical or consultancy services and as stated by the ap-plicant, they do not involve usage of any sophisticated technology. Hence the fees for these services are not taxable.

(ii) As the fees are not taxable, question of withholding tax u/s. 195 does not arise.

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Circular No. 143/12/2011-ST, dated 26-5-2011.

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By this Circular it has been clarified that benefit of exemption as provided by the Central Government vide Notification No. 14/2004-ST, dated 10-9-2004 is available in respect of process of

(1) threshing and drying of tobacco leaves and then after packing the same, and

(2) processing of raw cashew and recovering kernel as far as the activity is conducted by processing units for and on behalf of client as the activity doesn’t result in any change in their essential character at the output stage. In addition, this Circular also clarifies that service tax is not applicable on commission paid to agents stationed abroad who provide business auxiliary service to promote the export of rice.

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Circular No. 142/11/2011-ST, dated 18-5-2011.

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Subsequent to issuance of Notification No. 17/2011- ST, dated 1st March, 2011 regarding refund of service tax paid on services provided to units located in SEZ, the CBEC has issued this Circular in questionnaire format clarifying certain issues.
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(2011) 39 VST 387 (P & H) Excise & Taxation Officer v. M/s. T. R. Solvent Oil Pvt. Limited and Another.

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VAT — Rate of tax — Entries in Schedules — Classification — Commodity capable of only single use — User test applicable — De-oiled cake of castor, neem or mahua used only as fertiliser — Covered by entry relating to ‘Organic manure and chemical fertiliser’, Haryana Value Added Tax Act, 2003, Schedule Entry — B-27 and C-6.

Facts
The Sales Tax Officer, Haryana filed writ petition against the decision of the Haryana Sales Tax Tribunal, reversing order of the Commissioner of Sales Tax passed u/s.56(2) of the Act the Tribunal had held that sales of de-oiled cake of castor, neem and mahua is a fertilser and covered by Schedule Entry B-27 and hence as such tax-free.

Held
(1) Schedule Entry B-27 of the Act covers organic manure and chemical fertiliser, whereas Schedule Entry C-6 covers oil-cakes and de-oiled cakes including de-oiled rice bran. A de-oiled cake of castor, neem and mahua is organic manure as it is the offshoot of a living organism, namely, tree-born oil-seeds.

(2) The issue before the Court was whether an item apparently included in a specific wider entry can be held to fall in a more general entry on the ground of its use? Different commodities are classified on the basis of their use and denomination. Generally, a tariff entry is construed by applying common parlance test by considering what sense is to be attributed to an entry in the popular sense by people conversant with the subject-matter. This general principle can be departed from if the context so requires. User test though not determinative of nature of goods is not always ruled out particularly when commodity in question is capable of being put to only one use. Accordingly, the High Court approved the finding of tribunal that items in question will fall under Entry 27 of Schedule B and tax-free.

The High Court dismissed the writ petition filed by the Revenue and confirmed the order of the Tribunal.

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