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Category: Indirect Taxes

(2012) 25 STR 514 (Kar.) — Bharti Airtel Ltd. v. State of Karnataka.

(2012) 25 STR 514 (Kar.) — Bharti Airtel Ltd. v. State of Karnataka.

Facts:

The appellants were providing services related to telecommunication wherein electromagnetic waves were used for transmission of data generated by the subscriber to the desired destination. The case was whether sales tax or service tax should be levied.

Appellant’s contention:

The appellant contended that in their terms of contract there was no mention of the words ‘sale of goods’. The contract was one for rendering telecommunication services and that the consideration was paid for the services rendered to subscribers. Also they were of the view that Artificially Created Light Energy (ACLE) which was the form of energy used by the telecom service provider as carrier of data or information in optical fiber cable (OFC) broadband line without which data or energy could not be transmitted, came into existence when electrical energy was converted into light energy. The question was whether such a conversion was liable to sales tax or service tax. A technical report stated that telecommunication service providers were using optical fiber cables for transmitting messages or data using light energy which could be transmitted by a service provider either through copper wire, OFC, etc. The Department called it ACLE which had the characteristics of goods, whereas the experts did not agree to the same.

Department’s contention:

The Sales Tax Department (Department) contended that in case of contract in which the appellant claimed that it had no mention of the words ‘sale of goods’ were in fact sales and hence liable to sales tax. For imposition of tax on ACLE the Department contended that it was sale of goods which was liable to sales tax. In case of technical report, the Department was of the view transmission of message with the use of light energy from one network to another had the characteristics of goods.

Held:

The ACLE was a form of electromagnetic wave which was not marketable or abstracted or consumed or delivered or processed or stored and it was not something available in abundance of which service provider abstracted a portion. Hence these were services and liable to service tax. Also it was a contract of rendering services and the state was not empowered to levy sales tax. For the contract in question, it was a contract of service simpliciter and there was no element of sales involved in it.

(2012) 28 Taxmann.com 238 (New Delhi – CESTAT), Interocean Shipping Company vs. CST, Delhi.

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Whether Broker can be considered as a commission agent and thus be brought to tax net under Business Auxiliary Services? Broker distinguished from Commission Agent.

Facts:
The Appellant, a ship broker, was acting as intermediary between the ship owner and the charterer. Appellant also assisted the ship owner (a) in negotiating the price, (b) in drawing the documents/agreements of charter, (c) in follow up of the ship’s movements (d) any correspondence in following of freight payment, (e) compliance of the terms of charter and (f) settlement of dues in case of dispute involving the vessel in litigation, etc. The Appellant also contended, notwithstanding the fact, that they were not commission agents, even if the department contended so, no service tax is leviable if either of the parties (i.e. ship owner or charter is located outside India) and the receipt of consideration is in foreign exchange and therefore, it qualifies to be export of services under the Export of Service Rules, 2005. Further, they also contended that longer period is not applicable as audit was conducted and the department was aware of the facts and thus there is no case of suppression on the part of the Appellant.

The department contended that the activities of the Appellant are that of commission agent and taxable under the category of “business auxiliary services”. The Appellant contended that it cannot be considered as a “commission agent” as it does not act on behalf of nor it is an agent of the ship owner but it is a broker and he only brings the ship owner and the charterer together and assists in negotiating the terms of agreement of the ship charter. The department contended that the services would be qualified as export of services only if both the parties (i.e. charter and ship owner) are located outside India and the receipt is in foreign exchange.

Held:
The word “commission agent” was defined u/s. 65(19) with effect from 16-05-2005 and prior to that the definition as provided under Notification No.13/2003-ST dated 20-06-2003 means “any person acting on behalf of another person”. The words “on behalf of” itself implies that there is an agent-principal relationship and one person acts on behalf of another. The word ‘broker’ merely brings the vendor and the vendee together and settles the price. Broker does not purchase/ sell goods on behalf of the principal and none has the authority to sell the goods belonging to the vendor. Broker is rewarded consideration only for soliciting the prospective purchaser and may also assist in negotiating the price/terms of the goods to be sold. Broker neither represents the ship owner nor the charterer. The Appellant also maintained a database wherein the details of the ship owner, the class of ships owned them, location of the ships, so as to provide its specialise services of bringing the shipper and the charterer together in accordance to their own requirements. The Hon’ble Tribunal held that, as the essential element of commission agent “acting on behalf of the principal” is absent; the Appellant could not be treated as commission agent and thus not covered under “business auxiliary services”.

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2013 (30) STR 27 (A.P.) Tirumala Tirupati Devastthanams vs. Supdt. Of Customs, Central Excise, S.T., Tirupati.

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Whether a Temple Trust operating guest house for pilgrims was liable to service tax under “accommodation service”?

Facts:
The Appellant – Tirumala Tirupati Devasthanams (TTD) is constituted as a Charitable Trust under the relevant Act and running some guest houses for pilgrims with declared tariff of Rs. 1,000/- per day or above. A notice was issued to the Appellant asking them to registere under “accommodation service” and pay service tax with effect from 01-05-2011 and the demand was confirmed accordingly. Therefore, a writ petition was filed contending that the petitioner was not a club or an association but a religious and charitable institution running the guest houses without any profit motive.

Held:
The Hon. High Court observed that Clause 65(105) (zzzw) of the Finance Act dealt with service tax on short term accommodation. The taxable service is defined as “services provided to any person by a hotel, inn, guest house, club or camp-site, by whatever name called, for providing of accommodation for a continuous period of less than three months.” The Appellant could not place on record any exemption granted to religious and charitable institutions which ran guest houses without any profit motive. It was held that, there was no doubt that the petitioner was running guest house, whether it may be called a shelter for pilgrims or by any other name. There is no dispute that it has been running this guest house for a considerable time. They were liable to be registered for payment of service tax and finding no error in the view taken by the respondents, the petition was dismissed.

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2013 (30) STR. 3 (Guj.) Commissioner Of Central Excise, Ahmedabad – II vs. Cadila Healthcare Ltd.

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Whether technical testing, commission paid to foreign agent, courier service, clearing & forwarding service etc. are “input services” as per CENVAT Credit Rules?

Facts:
The Respondent was engaged in the manufacture of P. & P. Medicines and availing CENVAT credit under CENVAT Credit Rules, 2004 (CCR). During the audit, it was noticed that the assessee availed CENVAT credit in respect of various input services. The department contended that the said services were not eligible as input services under Rule 2(l) of the said Rules and disallowed the credit and the demand was confirmed. However, the Tribunal held in favour of Respondent. The Revenue filed appeal before the High Court contending that various services used by the company were not input services for Rule 2(l) of CCR. The Respondent Company submitted that the manufactured drugs were subjected to the technical testing before entering commercial production and even on this, excise duty was paid. Similarly, CENVAT credit of Rs. 39,45,791/- was availed on commission paid to foreign agents and this was available according to the inclusive part of the definition of input service, which includes services in relation to sales promotion. They also availed credit of Rs. 36,54,709/- paid on courier service provided by M/s. Fedex Ltd. for export of goods and service tax paid on various other services, viz. repair and maintenance of copier machine, air conditioner, water cooler, management consultancy, interior decorator, commercial or industrial construction service were covered under the Rule 6(5) of the Rules and thus were allowable fully. CENVAT Credit on technical inspection and certification service with regards to inspection and checking of instruments was also contended as input service.

Held:
Since production of medicaments was subject to approval by the regulatory authorities of various countries, the assessee company was required to undergo technical testing and analysis. Therefore, the activity of testing and analysis for the trial batches was held in relation to the manufacture. Similarly, courier services whereby the courier agency collected the parcel from the factory gate for further transportation was considered eligible input service in terms of Rule 2(l) of CCR. Also, the services rendered by C & F agents were held as input services. Further, Rule 6(5) of the Rules specifically provided for allowance of credit in respect of the services mentioned therein unless such service was used in the manufacture of exempted goods. All the above mentioned miscellaneous services availed by the Respondent were specifically covered under Rule 6(5) of the Rules and therefore the service tax paid thereon is available. Lastly, technical inspection and certification services availed in respect of inspection and checking of instruments was used for the purpose of measuring size, weight etc. to ensure quality of the instruments and equipments. Therefore, this service was also clearly an input service. The Court however held that, none of the illustrative activities in the definition of input services viz. accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry and security is in any manner similar to the services rendered by commission agents nor is the same in any manner related to such services. Under the circumstances, though the business activities mentioned in the definition are not exhaustive, the service rendered by the commission agent not being analogous to the activities mentioned in the definition, would not fall within the expression “activities relating to business.” Consequently, CENVAT credit will not be admissible in respect of the commission paid to the foreign agents.

Note: In the context of credit of service tax paid on commission to foreign agents, the Hon. High Court departed from decision in CCE Ludhiana vs. Ambika Overseas 2012 (25) STR 348 (P&H). The court in this regard appears to have taken a narrow view as compared to the decision of CCE, Bangalore vs. ECOF industries P. Ltd. 2011 (23) STR 337 (Kar.) allowing credit in respect of advertisement expenses and also the benchmark decision in the case of Coca-Cola India P. Ltd. vs. CCE 2009 (242) ELT 168 (Bom.)

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Input Tax Credit vis-à-vis Retrospective Cancellation of Registration Certificate

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Introduction
Input Tax Credit (ITC) or Set Off, is the backbone of the VAT system. The selling dealer is entitled to take the credit of the tax paid on his purchases, while calculating the output tax. In other words, he is required to pay differential tax on the value addition. In fact, he determines the sale price of goods based on the understanding that he will get ITC of the taxes paid on his purchases. If this ITC is not allowed, the selling dealer will be required to bear the said burden, which may cause him unexpected financial loss.

It is also a fact that the relevant statute provides for a scheme of Input Tax Credit including a requirement of obtaining supporting documents. Normally, the requirement is ‘tax invoice’ from the vendor with a certificate on the same about doing genuine transaction which is reflected in his books and returns filed under the VAT Act. It is also a fact that no separate machinery about cross verification of the vendor’s position is made available under the Act and invariably the buyer has to depend upon the tax invoice issued by the vendor.

Vendor should be a registered dealer
Generally, one of the conditions for availing ITC is that the purchase should be from a registered vendor. Whether the vendor is registered or not can be seen from the invoice, wherein the particulars about registration like number, date of effect etc., are mentioned. The revenue side is also safe that since the vendor is registered, he will be filing returns and discharging the liability as per the returns. Therefore, registration of the vendor is the most important factor for the grant of set off.

Retrospective cancellation of Registration Certificate
There are provisions for cancellation of registration certificate including with retrospective effect. The buyer may have made purchases when the seller’s certificate was valid but subsequently the sales tax department may cancel the registration with retrospective effect. One view may be that the purchase becomes a purchase from unregistered vendor, thus automatically disentitling the buyer to take set off. However, this will not be the correct position.

Recently, the Hon’ble Madras High Court had an occasion to deal with such a situation. Reference is to the judgment in the case of Jinsasan Distributors vs. The Commercial Tax Officer (CT) Chintadripet Assessment Circle (W.P.No.12305 of 2012 dated 22.11.2012). In this case, the facts were similar. When the buyers made the purchases, the registrations of respective vendors were valid. Subsequently, the registrations were cancelled for various reasons with retrospective effect. Department sought to disallow the set off to the buyers. This action was challenged before Hon’ble Madras High Court. After recording the arguments and relevant provisions, the Hon’ble Madras High Court observed and held as under;

“12. Insofar as the cancellation of the registration certificates of the selling dealers is concerned, it is for those selling dealers to canvas the plea as to when it will take effect either on the date of the order or with retrospective effect. Insofar as the petitioners are concerned, they have purchased the taxable goods from registered dealers who had valid registration certificates; paid the tax payable thereon; availed input tax credit; and the assessing officers have passed orders granting such benefit. Therefore, the assessment orders granting input tax credit were validly passed. There was no cancellation of the registration certificates of the selling dealers at that point of time. The petitioners/assessees have paid input tax based on the invoices issued by registered selling dealers and availed input tax credit. The retrospective cancellation of the registration certificates issued to the sellingdealers cannot affect the right of the petitioners/ assessees, who have paid the tax on the basis of the invoices and thereafter claimed the benefit u/s. 19 of the TNVAT Act, 2006. They have utilised the goods either for own use or for further sale. At the time when the sale was made, the selling dealers had valid registration certificates and the subsequent cancellation cannot nullify the benefit that the petitioners/assessees availed based on valid documents.

13. An almost identical issue was considered by the Supreme Court in State of Maharashtra vs. Suresh Trading Company, (1998) 109 STC 439. In that case, the respondents, who were registered dealers under the Bombay Sales Tax Act, 1959, purchased goods during the period from 01-01-1967 to 31-01-1967 from one Sulekha Enterprises Corporation, who is also a registered dealer under the Bombay Sales Tax Act, 1959. The respondents, before the Supreme Court, resold the goods and claimed certain benefits. That was disallowed by the Sales Tax Officer on the ground that the registration certificate of M/s. Sulekha Enterprises Corporation was cancelled on 20-08-1967, with effect from 01-01-1967. The claim of the respondents, therein the assessees, for deduction of the turnover of sales, as above, was declined and penalty was also imposed. The assessees failed before the appellate authority as well as the Maharashtra Sales Tax Tribunal. The High Court however reversed the decision and upheld the claims of the assessees, holding that disallowing the deductions claimed by the respondents would amount to tax on transactions which were otherwise not taxable. The Supreme Court, while dismissing the appeals filed by the Revenue, held as follows:

‘4. The High Court answered the question in the negative and in favour of the respondents. The High Court noted that the effect of disallowing the deductions claimed by the respondents was, in substance, to tax transactions which were otherwise not taxable. The condition precedent for becoming entitled to make a tax-free resale was the purchase of the goods which were resold from a registered dealer and the obtaining from that registered dealer of a certificate in this behalf. This condition having been fulfilled, the right of the purchasing dealer to make a tax-free sale accrued to him. Thereafter to hold, by reason of something that had happened subsequent to the date of the purchase, namely, the cancellation of the selling dealer’s registration with retrospective effect, that the tax-free resales had become liable to tax, would be tantamount to levying tax on the resales with retrospective effect.

5. In our view, the High Court was right. A purchasing dealer is entitled by law to rely upon the certificate of registration of the selling dealer and to act upon it. Whatever may be the effect of a retrospective cancellation upon the selling dealer, it can have no effect upon any person who has acted upon the strength of a registration certificate when the registration was current. The argument on behalf of the department that it was the duty of persons dealing with registered dealers to find out whether a state of facts exists which would justify the cancellation of registration must be rejected. To accept it would be to nullify the provisions of the statute which entitle persons dealing with registered dealers to act upon the strength of registration certificates.’”

Observing as above, the Hon’ble Madras High Court held that retrospective cancellation cannot affect the claim of ITC of the buyer.

Fall out
The legal position, emerging from above judgment, is that the buyer cannot be affected by retrospective cancellation of registration, even if it is relating to ITC.

Applicability to MVAT Act, 2002
Under MVAT Act, 2002, by way of section 48(2) and rules, it is similarly provided that for claim of ITC ‘tax invoice’ issued by registered dealer is required. The above judgment will squarely apply to MVAT Act also.

However, the further situation under MVAT Act, 2002 is that section 48(5) provides that set off will not be allowed to buyer unless the tax is received in the Government treasury. If vendor has not paid tax, Department can disallow set off. Constitutional Validity of Section 48(5) is upheld by Hon. Bombay High Court in case of Mahalaxmi Cotton Ginning Pressing and Oil Industries, Kolhapur vs. The State of Maharashtra & Ors. (51 VST 1)(Bom).

But, it may be noted that section 48(5) does not provide to disallow set off merely on fact of alleged not payment of tax by the vendor. It is the duty of the Department to assess the vendor and to apply all the recovery measures before disallowing set off to the buyer.

At present, in Maharashtra, set off is disallowed on the ground of cancellation of registration certificate of vendor/s with retrospective effect. Above judgment will be certainly helpful to dealers in Maharashtra. In spite of retrospective cancellation of registration, the dealer (vendor) will be deemed to be registered in view of above judgment. Department may allege that the said vendors whose registrations are cancelled have issued bogus bills and there is a collusion. If that is the charge then the Department is under obligation to prove the same by following principles of natural justice including cross examination opportunity to the buyer.

In a nutshell, retrospective cancellation of registration certificate cannot affect the claim of the buyer.

It also appears that in spite of retrospective cancellation the Department will be under duty to assess them and follow the procedure of recovery before disallowing set off to the buyer, applying section 48(5) of the MVAT Act, 2002. It is expected that the Department will work judiciously to give justice to the purchasing dealers.

Voluntary Compliance Encouragement Scheme 2013.

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Introduction:

In the past, in 2004 and in 2008, the Government made not so successful attempts, to provide amnesty to service tax defaulters. Once more, the amnesty scheme termed as the Voluntary Compliance Encouragement Scheme, 2013 is introduced under the service tax law (‘VCES’ or “the Scheme” for short) and has come into force from 10th May, 2013 vide the Finance Act, 2013 (FA 2013). The 2004 scheme was known as Extraordinary Tax Payer Friendly Scheme for instant registration of service providers, (2004 Scheme) and the other one (towards reducing litigation) was named as Service Tax Dispute Resolution Scheme 2008 (2008 Scheme). While presenting the Budget for fiscal 2013-14, the Finance Minister stated that out of 17 lakh registered assessees, only seven lakh tax payers file their periodic returns. Thus in effect, only 41% of the registered tax payers comply with the law and hence the scheme is for such defaulters with expectation to collect a reasonable sum of money for the exchequer. The VCES is contained in sections 104 to 114 of the Finance Act, 2013. Simultaneously, with the enactment of the Budget proposals, by exercising power u/s. 114 of the Finance Act, 2013, the Government has also notified Service Tax Voluntary Compliance Encouragement Rules, 2013 (VCES Rules for short) vide Notification No.10/2013-ST dated 13th May, 2013 and has also issued Circular No.169/4/2013-ST on 13th May, 2013. For all practical purposes, the scheme is one of amnesty only.

Features of VCES:
• Any person who was required to pay service tax and for any reason missed or failed paying such tax and such tax dues remained pending as on 01-03-2013, is permitted to pay service tax under VCES for the period from 1st October, 2007 till 31st December, 2012.
• Who is eligible to declare and pay tax under VCES?

The scheme is available only to those persons who have not filed any return or stopped filing their returns for any reason and also to those persons who filed their returns in the past but did not disclose their true liability in respect of which no notice or any order for determination under sections 72, 73 or 73A of the Finance Act, 1994 (the Act) is issued on or before 28th February, 2013 i.e. the date of introduction of the Budget 2013. However, the list of disqualifications or ineligibility is more important to note, as the Scheme is not open in respect of ST-3 Returns filed declaring true liability but service tax wholly or partly was not paid or in cases where any dispute is pending or where any inquiry or investigation is being made against any person for non-payment or short payment of service tax in the form of:

– A summons issued u/s. 14 of the Central Excise Act, 1944 (as applicable vide section 83 of the Act). – Search of the premises is made.

– Communication requiring production of accounts, documents or other evidence under the law.

– An audit is initiated by the department. If any such inquiry, investigation or audit is pending on 1st March, 2013, then in such cases, the designated officer (as will be notified by the Commissioner of Central Excise for the purpose) is required to reject the declaration made by such a person by issuing an order in writing containing reasons for such rejection. The question therefore arises for a person desiring to avail amnesty under the VCES is when any communication is received from the department asking to provide any information, whether the same would render him ineligible to declare taxable service under VCES. The Government in the above referred CircularNo.169 has clarified that besides summons issued u/s. 14 of the Central Excise Act, unless an inquiry/investigation is conducted u/s. 72 of the Act or Rule 5A of the Service Tax Rules, 1994 and unless such inquiry is pending on 01-03-2013, no other communication would disqualify a person from making a declaration of taxable service under VCES.

• Service tax dues may be paid not only on provision of taxable services but also on receipt of taxable services. Therefore, if any tax liability is not discharged by a person under reverse charge and if no disclosure thereof is made in any ST-3 Return and no inquiry/investigation is pending, such person also may make declaration under VCES and pay service tax towards liability under reverse charge mechanism for any period covered by the period of October, 2007 to December, 2012.

• What is the immunity under the Scheme?

In terms of the Scheme, when a person eligible for making a declaration under VCES makes a declaration and also makes service tax payment in accordance with the Scheme, he would be entitled to get immunity from interest leviable u/s. 75 or u/s. 73B as the case may be, waiver of penalties leviable and prosecution under the law. Generally penalties are imposed u/s. 76, 77 and 78 of the Act and/or similar other provisions. For instance, when a person who was liable for obtaining registration earlier did not register at all and now seeks registration for the first time under VCES would get immunity from penalty for non-registration also. This is also clarified in the above referred Circular No.169 of 13th May, 2013. The distinct feature of VCES is that waiver of interest is provided. The current rate of interest @ 18% is an extremely heavy burden on any assessee. For those who did not have the intention of evasion but did not pay either on account of genuine error or were uncertain about taxability, have a good opportunity to put an end to the liability in case of disputable area of taxability as outcome of litigation is uncertain and long-drawn litigation process may result into manifold liability in case of adverse outcome after a long wait.

• What is the time limit for filing declaration and in what manner is it to be made? VCES requires an eligible person desiring to declare any taxable service to file such declaration in a prescribed format viz. Form VCES-1 on or before 31st December, 2013. The said form prescribed under VCES Rules is to be submitted to the designated authority (Assistant/Deputy Commissioner or any officer above him prescribed for the purpose). The said designated authority would issue an acknowledgement within 7 working days of the receipt of declaration in Form VCES-2 prescribed for the purpose.

Important points while making declaration:

— The declaration should be truthful leaving no scope for the Commissioner of Central Excise to issue Show Cause Notice for false declaration resulting in short payment or nonpayment of tax dues.

— At the time of filing the declaration and before the due date of 31-12-2013, declarant has to ascertain, declare and calculate the exact sum of tax dues he is going to pay and therefore a separate calculation sheet is required to be attached with the declaration in Form VCES- 1 showing separately computation for each category of service if service tax dues relate to more than one service for the period under declaration.

 — Calculation of the dues should be furnished in the manner prescribed at Sr.No. 3F(1) of the old form of ST-3 Return or Part B of the new form of ST-3 Return as the case may be, as existing during the relevant period. The said calculation must be submitted per Return period i.e. half yearly period of April- September and/or October-March of the respective financial year depending upon the period for which the declaration is made.

• Payment of service tax under VCES:

A minimum of 50% of service tax due on the value of declared taxable service has to be paid on or before 31st December, 2013 and the balance is required to be paid on or before 30th June, 2014. If any amount remains unpaid as on 1st July 2014, it would be payable before 31st December, 2014 along with interest for the delayed period beginning from 1st July, 2014 till the date of payment. However this would in any case be prior to 31st December, 2014. The applicable rate of interest would be in accordance with section 75 (currently prescribed at 18%) or section 73B of the Act, as the case may be. On making the payment of service tax dues, the declarant is required to furnish full details of payment and interest if any payable for any delayed payment. Service tax is to be paid in the same manner as ordinarily paid through GAR-7 challan as prescribed under the Service Tax Rules. However, two important points should be noted here:

(i)    No payment is permissible to be made through CENVAT credit as per Rule 6(2) of the VCES Rules.

(ii)    Amount once paid in pursuance of declaration will not be refunded by the Government under any circumstances as provided in section 109 of the FA 2013.

•    When does the declaration become conclusive?

When the declarant has truthfully made a declaration by the due date of 31st December, 2013 and has made the payment of service tax dues by the due dates discussed above and has also paid interest in accordance with the law if the payment is made after 30th June, 2014 but before 31st December, 2014 and the details of the payment are furnished to the designated authority as and when the payment of tax is made along with the copy of acknowledgement i.e. Form VCES-2, the designated authority will issue an acknowledgement of discharge in the prescribed Form VCES-3. On receipt of the acknowledgement of discharge in VCES-3, the declaration made under the scheme stands concluded according to section 108 of the FA 2013.

•    What is the consequence if declaration is not true?

No case would be reopened for the period covered under the declaration, unless the Commissioner of Central Excise finds that the declaration made is substantially false. In such cases, after recording reasons in writing, the Commissioner may issue a Show Cause Notice. Such Show Cause Notice would be considered as issued u/s. 73 or 73A of the Act as if issued under the law in ordinary course. However, no action is permissible to be initiated beyond a period of one year from the date of declaration. This provision of the scheme is likely to prove to be a deterrent for many persons coming forward to declare. Further, the use of the term “substantially false” is extremely subjective and therefore it could be hard to interpret as to what constitutes “substantially false” declaration. Skepticism prevails on account of such vague term and consequently the area would remain vulnerable to litigation.

Other Provisions:

•    Service tax obligations in respect of period from 1st January, 2013 are to be complied with in the normal course and therefore immunity from interest and other consequences will not be available.

•    Declarants who fail to pay at least 50% of their tax dues as declared on or before 31st December, 2013 would not remain eligible for the Scheme. Similarly, those who fail to declare by 31st December, 2013 also will be disqualified to avail benefit under VCES.

•    Declarants who pay 50% of their tax dues after making declaration before 31st December, 2013 but fail to pay the balance amount or interest before 31st December, 2014 would be visited with provisions of section 87 of the Act whereunder the liability can be recovered by attaching movable or immovable property of the declarant and all other consequences under the law would follow.

–    Is the Scheme fair to honest taxpayers?

Interest is essentially compensatory in nature. Total waiver of interest for five years and thereafter for a further period of 01-0102013 to 30-06-2014 is most unprecedented and totally unfair vis-à-vis honest taxpaying fraternity. In no tax amnesty scheme announced by the government, interest was totally waived. In this context, the question may arise as to what would happen to assessees who availed penalty waiver facility announced in the Finance Act, 2012 and paid tax on renting of immoveable property with interest? Are they entitled to claim refund of interest? Thus the Scheme is certainly discriminatory against all regular taxpayers.

Legal Validity of the scheme:

There are two landmark Supreme Court judgments on amnesty schemes:

•    R. K. Garg vs. UOI (1982) 133 ITR 239 (SC) (Bearer Bond Scheme).

In this case, the constitutional validity of special bearer bonds was challenged mainly on the grounds of inequality under Article 14 of the Constitution. Although as per the majority view of the 5 member bench, the PILs filed were dismissed rejecting the challenge, the extract from the observation made by the dissenting Judge Justice Gupta in the context of bearer bonds in E P Ruyappa vs. State of Tamil Nadu & Anr, is worth looking at. He observed “In fact, equality and arbitrariness are sworn enemies; one belongs to the rule of law in a republic while the other, to the whim and caprice of an absolute monarch. Where an act is arbitrary it is implicit in it that it is unequal both according to political logic and constitutional law and is therefore violative of Article 14.”

•    AIFTP vs. UOI (1998) 231 ITR 24 (SC) 98 Taxmann 446 (SC) (97 Amnesty)

In AIFTP (supra) Honourable Supreme Court had insisted on an affidavit from the Finance Minister that in future there will be no amnesty schemes. The immunity of interest and penalty granted being against the principles of natural justice and discriminatory against regular tax payers, (who are not eligible under the scheme) and in terms of the observations made by the Honourable Supreme Court in AIFTP (supra), it is possible that Courts could strike down the Scheme, if challenged.

Some other issues and shortcomings of VCES:

•    The VCES Rule 6(2) does not allow CENVAT credit utilisation. This appears unfair, as under the Excise law, even in cases of clandestine clearances of excisable goods when duty liability is accepted and paid, CENVAT credit is allowed.

•    As regards CENVAT credit, it is also a matter of concern, whether receiver of the services provided by the declarant would be entitled and allowed to take credit of service tax paid by the persons under VCES by application or otherwise of Rule 9 of CCR. Similarly, when a person has paid service tax under reverse charge u/s. 66A and if such service is otherwise “input service” as per Rule 2(1) of the CENVAT Credit Rules, 2004, whether a provider of service or a manufacturer declaring under VCES would be allowed CENVAT credit of service tax paid under VCES or would it be disputed by the department. This requires clarity from the Government.

•    The most unfair and unfortunate point as regards the Scheme is that it is not open to the persons having pending disputes with the department at different levels. There is a kind of discrimination against such persons who could be visited with consequences of interest, penalty etc. Similarly even when inquiry or investigation is initiated, one fails to appreciate the decision of the Government not to allow such persons the benefit of VCES and select only a class of persons which has not been accessed by the department for the interest free amnesty scheme. One fails to understand how such persons are on a better footing than those who are registered and also tax payers but have disputes on account of interpretation of issues or any other genuine reason. During the entire period of 18 years of existence of service tax, the net of tax gradually included different taxing entries on selective basis and disputes based on interpretation issue were quite incidental to the selective approach of taxation of services and therefore propriety of such discriminatory approach undoubtedly remains questionable.

•    Further, when the Scheme has become operational on 10th May, 2013, the first half-year period viz. 1st October, 2007 to 31st March, 2008 has already become time-barred. Therefore, why would a person who has not received any notice or inquiry etc. declare value of taxable service for the period October, 2007 – March, 2008 under limitation period, no demand would sustain for the said period.

Similarly, if a person has not been visited with any inquiry/investigation etc. till 1st March, 2013, he is eligible per se to opt for VCES for his defaults. Since he is required to file declaration and pay 50% tax dues on or before 31st December, 2013 and if he files declaration on say 10th November, well before the last date, even the period April, 2008 – September, 2008 gets time barred. It appears therefore that the scheme could rather cover the period at least till 31st March, 2013 instead of 31st December, 2012.

•    No provision in VCES relates to maintaining confidentiality of information furnished by a person under VCES. Thus risk of misuse/use by other tax authorities appears to exist. To encourage persons to come forward to declare, it is desired that the scheme is modified whereby assurance is provided to accept declaration as voluntarily done by the declarant or else the persons otherwise wanting to declare may be reluctant to do so as the risk of getting and/or receiving Show Cause Notice would persist in terms of specific provisions in this regard.

•    There is a large number of pending cases wherein penalties are proposed although the entire amount of service tax is paid, however either NIL returns were filed or no returns were filed at all. At least such cases ought to have been covered under the scheme.

Caution Note:

Considering the intricate terms and conditions relating to eligibility & otherwise under the Scheme, professional fraternity is advised to exercise caution and appropriate due diligence before advising on matters relating to the scheme.

2013-TIOL-1550-CESTAT-MUM Varun Shipping Co. Ltd. vs. Commissioner of Service Tax, Mumbai

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Payment of tax before receipt of consideration is an advance and not an excess payment and thus can rightly be adjusted suo motu against the actual liability.

Facts:
The appellant paid service tax in December 2008 and reflected the same as advance payment of tax in the return for the period October 2008 to March 2009 without intimating the range superintendent. On receiving the consideration in April 2009, appellant adjusted the said advance and reflected the same in the return for the period April- September 2009. The department contended that the said payment was not an advance payment but excess payment and thus the appellant could not adjust it suo motu in terms of Rule 6(4B) of Service Tax Rules, 1994 and demanded the tax thereon with interest and penalty.

Held:
Observing that the appellant had reflected the payment of advance payment of tax particulars in both the returns, it was evident that what the appellant made was advance payment of tax and not excess payment of tax. Since the liability to pay tax arose only in April 2009, the Hon. Tribunal held that the payment made prior to such date can be contemplated only as an advance and thus no service tax was liable to be paid.

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2013 (32) STR 179 (Tri.-Delhi) Delhi Public School Society vs. Commissioner of Service Tax.

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Whether agreement to provide expertise, guidance etc. for setting up an enterprise for running an educational institution along with provision of brand name without sharing any profit or loss arising from said enterprises amounts to Joint Venture Agreement and not subjected to service tax?

Facts:
The appellant having a brand image and reputation for establishing and managing schools entered into an agreement termed as “Education Joint Venture Agreement” with other parties for setting up schools for the use of their brand name and to continue to provide managerial and operational techniques and standards of imparting education against receipt of annual fees. The appellant neither had any obligation for sharing any losses arising out of this activity nor enjoyed the benefits arising out of successful running of the other party’s institutions.

The Respondent issued various show cause notices for demanding service tax on the fees received in pursuance of the said Joint Venture Agreement under the category of “Franchise Fees” and confirmed the demand along with penalties.

Held:
It was held that the financial burden of establishing and maintaining the school was solely on the other party which signalled the absence of any partnership or joint venture and that the appellant was neither supposed to contribute towards capital nor liable for any loss or profit,
the appellant provided service not to itself but to other parties to the agreement. The Hon. Tribunal held that the scope of the Appellant clearly got covered within the category of ‘Franchise’ service as the ingredients of ‘franchise’ being satisfied, however quashed the show cause notices which were beyond the normal period of limitation, as there was no case of suppression.

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2013-TIOL-1518-CESTAT-MUM TCS e-serve Ltd. vs. Commissioner of Service Tax, Mumbai-II

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Data processing services provided to banks cannot be treated as “business auxiliary service” as it is not customer care, it is excluded from its scope.

Facts:
The appellant provided collection and sales service, call centre services and computerised data processing services and discharged service tax liability on the same with effect from 01-07-2003, 01-05-2006 and 01-05-2010 respectively under the categories of business auxiliary service and business support service.

On the activity of data processing, service tax was demanded with effect from 01-07-2003 under “Business Auxiliary Services” alleging that the customers of the bank submitted physical documents at the bank’s branches and the appellant performed computerised processes on the input submitted to the bank using the bank’s systems and saved the output on the bank’s system, which amounted to services incidental or auxiliary to the customer care services rendered by the bank. However, the reasoning recorded in the impugned order was that the appellant collected data from the clients’ customers, and the banks during the course of providing banking services also provided customer care services, and the services rendered by the appellant to the bank were incidental or auxiliary to the customer care services provided by the bank. It was also contended that the services provided by the appellant were not customer care services but banking and financial services as provided by the bank to its customers. The services of computerised data processing as specifically excluded under business auxiliary service cannot be taxed under the said category. Moreover the majority of the clients were located outside India and since the consideration was received in foreign  exchange, the services were to be treatedas exports and thus there would be no liability of service tax.

Held:
Observing that the order-in-original deviated from the charges made in the show cause notice, the Hon. Tribunal held that since there was a complete variation between the grounds alleged in the show cause notice and the grounds on which the demands were confirmed, the impugned order was liable to be set aside on that ground alone. The Hon. Tribunal also considered the other submissions of the appellant and held that no service tax was liable to be paid under business auxiliary service.

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2013-TIOL-1568-CESTAT-MUM Kpit Cummins Infosystems Ltd. vs. Commissioner of Central Excise, Pune-I

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Service tax being destination based consumption tax, services received outside India by branches of an Indian company outside India not liable for service tax u/s. 66A of the Finance Act, 1994.

Facts:
The overseas branches of the appellant provided services abroad and remitted the consideration for the bills raised by them to its Indian head office after deducting the expenditure incurred. Further, the appellant also had permanent establishments abroad by way of personnel located in the offices of their various clients and so remitted certain amount for the expenditure incurred by them for providing various services. The department contended to levy tax on the above said activities of the appellant. The appellant contended that the branches and the Indian head office were not independent entities and so there cannot be selfservice and assuming that they were independent entities, since the services were rendered abroad and consideration received in foreign exchange, it amounted to export of service. The case was of providing services abroad by the branches and not receiving of services from abroad by the Indian company to attract provisions of section 66A of the Act. Further, for the services provided by permanent establishments abroad, it was already subjected to the local tax laws and hence there was no jurisdiction with the Indian authorities to levy tax on the same.

Held:
Referring to the provisions of section 66A and affirming to the contentions of the  appellant, the Hon. Tribunal remanded the appeal with regards to the only question whether the adjudicating authority had any jurisdiction for the services completely rendered outside India and on which tax liability was already discharged under the local laws where the activity took place.

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2013 (30) STR 96 (Tri- Del.) Commissioner of Central Excise, Ludhiana vs. Singh Travels .

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Whether providing vehicle on call basis amounts to renting of cab service?

Facts:
Revenue’s contention was that vehicle let out by Respondent to National Fertilizer Limited (NFL) during the period from October, 2001 to March, 2006 resulted in providing of rent-a-cab service. The fact that the vehicle was given to NFL, does not diminish the liability. According to the assessee, the vehicles were not altogether given on rental basis by the respondent to NFL but the service was of hiring of taxi as per Clause (3) of the contract with NFL which also reflected that service of taxi was provided under a scheduled rate contract without the taxi being in exclusive control of NFL.

Held:
The Tribunal observed that there was no condition of providing of vehicles on a term basis, but was on call basis i.e. one hour from booking time in regard to local travel and with suitable notice time for outside journey. Thus, it was evident that there was an arrangement of providing transport service without renting the vehicles. NFL paid the consideration as per the agreed rate schedule on transportation services provided. In the case of no call or no demand or no transportation provided to NFL, no consideration was demanded. Thus, it cannot be held that the respondent rented any cab to NFL and therefore, did not invite any service tax liability.
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I High Court – 2013 (31) STR 515 (Mad) Chitra Builders P. Ltd. vs. Addl. Commr. Of C., C. E. & S. T., Coimbatore

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Recovery during search cannot be held valid in absence of a proper assessment order and due procedures established under service tax laws.

Facts:

The Revenue conducted search and collected a sum of Rs. 2 Crore from the petitioner. The petitioner contested that since they were not registered with the department and were not carrying out any activities within their jurisdiction, the search and collection of Rs. 2 Crore was arbitrary and illegal and thus they were entitled for the refund of amount paid.

The respondents argued that the petitioners collected Rs. 17 Crore which was further claimed as CENVAT by the service recipients and that the amount so paid voluntarily should not be returned and should be adjusted against service tax liability to mitigate the offence committed u/s. 73(3) of the Finance Act, 1994.

Held:

Directing the respondents to return the amount paid, the Hon. High Court held that the collection of Rs. 2 crore during the search was not valid in the eyes of law. Although the collection was voluntary, the respondents did not prove that the petitioners were liable to pay service tax and that the tax cannot be collected without appropriate assessment order and without following the procedures established by the Law.

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2013 (30) STR 347 (Del) Delhi Chit Fund Association vs. Union of India

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Whether services provided in relation to conducting a chit business is a taxable service u/s. 65B(44) of the Finance Act, 1994 inserted with effect from 1st July, 2012 ?

Facts:
The appellant, an association of chit fund companies based in Delhi operating under the Chit Funds Act, 1982. Notification No.26/2012-ST dated 20-06-2012 issued by the Government exempted services provided in relation to chit to the extent of 70% subject to the conditions as specified.

The appellant pleaded to quash the said notification in so far as it sought to subject the activities of business of chit fund companies to the levy of service tax to the extent of 30% of the consideration received for the services when the law itself provides that such services were not taxable at all in the first place and they contented that vide Explanation 2 to section 65B(44), the consideration charged for services of foreman in chit business, are also excluded from the charge of service tax. Further, the explanation provided in the Education Guide issued by the CBEC at para 2.8.2. also was not correct having regards to the proper interpretation of the statutory provisions.

Held:
Allowing the appeal, it was held that the function of an Explanation was to explain the meaning and effect of the main provision and to clear up any doubt or ambiguity in it. It’s the intention of the legislature which was paramount and a mere use of a label cannot control or deflect such a function. Any ambiguity or doubt in the interpretation of the exclusionary part of the definition of the “service” gets cleared up on a careful examination of the implications of Explanation 2. This Explanation was enacted only “for the purposes of this clause” and since it was placed below clause (c), strictly speaking it was relevant only for the purpose of the aforesaid clause. Further, the answer given at para 2.8.2. of the Education guide was also not correct having regards to the proper interpretation of the statutory provision. Hence, no service tax was chargeable on the service rendered by the foreman in a business of chit fund.

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Board Instruction No.137/132/2010-ST dated 11-05- 2011 quashed

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Board Instruction No.137/132/2010-ST dated 11-05- 2011 quashed

Facts
The
appellant was an Aircraft maintenance engineering training school
approved by Director General of Civil Aviation (DGCA) for providing
Aircraft maintenance engineering (AME) training and conducting
examination wherein the course was approved by the DGCA under relevant
statutory provisions of Civil Aviation Requirement (CAR). Based on the
Board’s Instruction No. 137/132/2010- ST dated 11-05-2011, the
department raised demand. The appellant contended that they issued a
certificate approved by DGCA which fully controlled such training
institutes by prescribing syllabus, regulating number of seats per
session, manner of conduct of exam etc. and that the instruction (supra)
was in contravention of section 65(105) (zzc) read with section 65(27)
of the Act and Notification dated 25-04-2011. The respondents contended
that the appellant did not issue any certificate, degree or diploma
recognised by law but only issued a certificate of course completion
that the AME course was not approved by DGCA but they only issued a
Certificate of Approval to impart training but not to issue any degree,
diploma or certificate recognised by law. In view thereof, the exclusion
provided in the definition of Commercial Training & Coaching was
not applicable to the appellant as their role was limited to train
candidates to appear for the examination conducted by the DGCA and that
DGCA itself did not qualify as an institute recognised by law. Revenue
also contended that the instructions were not binding on quasi-judicial
authorities and thus the writ remedy was not available to the appellant.

The DGCA in its counter affidavit stated that being a
subordinate office of Ministry of Civil Aviation, Government of India it
is a regulatory body in the field of civil aviation primarily dealing
with safety issues with respect to air transport services, enforcement
of civil air regulations, air safety and air worthiness standards. They
further stated that in accordance of the CAR, AME institutes were
required to issue course completion certificates to the students who had
successfully passed, the format of which was approved by DGCA and that
DGCA was not empowered to grant/recognise degree or diploma course
offered by any institute/organisation.

Held
After
perusal of the Act and Rules along with CAR, it was held that not every
institute could offer such course and impart training without the
approval as per the Act, Rules and CAR. The DGCA regulated the course
content offered by such institute and gave relaxation to the successful
candidates by way of grant of authority/license to render services of
aircraft repair and maintenance and to certify the aircraft’s
airworthiness. The Hon. High Court interpreted the expression
“recognised by law” to have a wide meaning and thus held that even if
the certificate/degree/diploma/qualification was not the product of a
statute but had approval of some kind in ‘law’, it would be considered
as exempt. The reasoning in the impugned instruction mixes up and
confuses ‘qualification’ with “a license to practice on the basis of the
qualification”. An educational qualification recognised by law would
not cease to be recognised by law merely because for practicing in the
field, a further examination held by a body is required to be taken. In
view thereof, the instruction, being contrary to section 65(27) and
notification dated 25/04/2011, was quashed.

[Note: Earlier, on
the above issue, an advance ruling was decided against the assessee in
CAE Flight Training (India) Pvt. Ltd. vs. Commission of Service Tax,
Bangalore 2010 (18) STR 785 (AAR). Similarly, the CESTAT Mumbai also
decided against the assessee in Bombay Flying Club vs. CST, Mumbai-II
2013 (29) STR 156 (Tri.-Mumbai). These decisions appear to have been
overruled by the above.]

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2013 (30) STR 337 (SC) M/s. Tata Sky Ltd. vs. State of M.P And Others

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Whether entertainment duty can be levied on the services of Direct to Home (DTH) Broadcasting on the basis of a notification? Held, No.

Facts:
The appellant provided services of DTH broadcasting under the Indian Telegraph Act, 1885 and the Indian Telegraphy Act, 1933 and discharged service tax thereon. In exercise of their powers, the State Government issued a notification dated 05-05-2008 fixing 20 percent entertainment duty in respect of every payment made for admission to an entertainment other than cinemas, videos cassette recorders and cable service and thus proceeded to demand entertainment duty from the appellant. The appellant filed a writ petition before the Hon. Madhya Pradesh High Court which dismissed the petition and upheld the said levy and demand thereof. The appellant therefore filed a petition before the Hon. Supreme Court against the said levy.

Held:
The Hon. Supreme Court held in favour of the appellant in view of the following observations:

The provisions of the Act were applicable only to place-related entertainment. In other words, the Act covered an entertainment which takes place in a specified physical location to which persons are admitted on payment of some charge. The legislative history and the amendments introduced by the state in the said Act further substantiated the above fact.

The activity of DTH Broadcasting was not covered by the provisions of section 3 read with section 2(a), 2(b) and 2(d) read with section 4 of the said Act and thus, the provisions of the Act cannot be extended to cover DTH operations carried out by the appellant. Further, it was elementary that a notification issued in exercise of powers under the Act should not amend the Act. Moreover, the notification merely prescribed the rate of entertainment duty at 20 percent in respect of every payment for admission to an entertainment other than cinema, video cassette recorder and cable service. The notification could not enlarge either the charging section or amend the provision of collection under section 4 of the Act read with the Rules. It was, therefore, clear that the notification in no way improved the case of the State. Lastly, if no duty could be levied on DTH operation under the Act prior to the issuance of the notification, then duty cannot also be levied under the said Act after the issuance of the notification.

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Retrospective Amendment in MVAT Act – Validity

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Introduction

There are a number of cases wherein the issue about validity of retrospective amendment in Fiscal Statues has been dealt with. One such situation arose under the Maharashtra Value Added Tax Act, 2002 (MVAT Act).

The background is that the State of Maharashtra has notified incentive schemes, popularly known as Package Scheme of Incentives (PSI). The schemes were notified from time to time in about 5 years interval.

A similar scheme was announced in the year 1993. Normally, the original unit coming up in the notified backward area is eligible for the benefits of such scheme/s. However, the Government also granted such benefits for expansion of units subject to compliance of certain requirements about minimum capital investment/increase in productions etc.

These units were issued Eligibility Certificate by the Implementing Agency like District Industries Centre and for sales tax purpose the Entitlement Certificate was issued by the Sales Tax Department. Based on such Entitlement Certificate, the eligible units were entitled to enjoy sales tax benefits by way of exemption from payment of tax or were given an option to have deferment facility, whereby they could collect the tax and pay the same to the Government after certain number of years as per the Scheme. The units had the option to choose the method, i.e. either exemption or deferment, for enjoying the benefits.

Pro-rata Method for Expansion
The issue arose where the unit was already holding Entitlement Certificate as an Original Unit (Existing Unit) and it was also granted further Entitlement Certificate for Expansion. The understanding of the Expansion Unit was that they were entitled to avail the benefit of Scheme for all the production of the unit, i.e. production relating to the Existing Unit as well as the Expansion.

However, the approach of the Sales Tax Department was that the Expansion unit can enjoy the benefit to the extent of ratio of Expansion. In other words, it was contemplated by theDepartment that out of the full production, only pro-rata production relating to the Expansion could enjoy PSI benefit. They clarified pro -rata method to work out such turnover by way of a circular. As per the said circular, unit can take benefit in proportion of capital increase to the total capital or production increase to the total production.

The issue was contested by the dealers since 2001 and in case of Pee Vee Textiles (App. No. 48 and others of 2000 dated 17.3.2001) MST Tribunal held that even in case of Expansion, the unit is entitled to enjoy benefit for the full production and the monetary limits should be adjusted accordingly. The issue was further contested before the Hon. Bombay High Court. The Hon. Bombay High Court in the case of Commissioner of Sales Tax vs. Pee Vee Textile (26 VST 281)(Bom) confirmed the decision of the Tribunal. The said judgment of the Hon. Bombay High Court was further confirmed by the Hon. Supreme Court in July 2009.

Retrospective Amendment
On this background, certain amendments were brought in the MVAT Act, in August 2009, by way of an Ordinance. Section 93 of the MVAT Act, 2002 was amended and other amendments were made providing the ratio method for pro-rata working in case of Expansion. Impliedly, the said amendment was effective from 01-04-2005. The period under BST Act was not touched and it remained governed by the above judgments of the High Court and Supreme Court. However, under VAT period effect was given from 01-04-2005.

Since the operation of the amendment was retrospective, it was challenged before the Hon. High Court on the ground of Constitutional Validity. Amongst others, following were the main contentions of the petitioners:

– There was no amendment in the original PSI and the changes are only in the Act which is not permissible.
– The retrospective amendment can be justified only when it is meant for removing the defect shown by the judiciary.
– The retrospective amendment will affect units harshly, since they have already enjoyed the benefits and now have no opportunity to pass on the burden to the buyers and the ultimate customers.
– There was conscious decision by the government from time to time not to implement the pro-rata method. The non-implimentation of section 41BB under BST Act and section 93 in the MVAT Act by not prescribing Rules for pro-rata method was stressed upon. It was shown that even the Rule for pro-rata method proposed in the draft Rules was withdrawn while publishing the Final Rules in 2005.

On behalf of government the submissions were as under:

– That there was intention to provide benefits on pro-rata method.
– There is no vested right to enjoy windfall benefits.
– In Pee Vee Textiles, the Hon. High Court confirmed the judgment of the Tribunal on the ground that inspite of having powers u/s. 41BB to provide pro -rata method, the same is not implemented by prescribing Rules. The legislature has now corrected the said position by the above retrospective amendment. Thus it is for curing the lacuna.

Judgment of the High Court in the case of Jindal Poly Films and Others (W.P.No.313 of 2010 and others dt. 10-10-2013).

After considering the arguments of both the sides, the Hon. High Court referred to a number of judgments about retrospective amendment in the Act. And the Hon. High Court observed that there is ample power for retrospective provision except that it should be reasonable. Like, if the levy is a surprise then it can be considered as invalid.

In particular facts of the above case, Hon. High Court felt that the amendment is not a surprise amendment, but it is to cure the basis of the judgment in the case of Pee Vee Textile. In a nutshell, the Hon. High Court has observed as under:

“32. Essentially, the issue before the Court is as to whether the validating legislation has cured the vice that was noted in the judgment of this Court. Alternately, whether the same judgment could have been rendered despite the amended provisions of the law. The judgment of the Division Bench in Pee Vee Textiles noted that the legislative intent embodied in Section 41BB of the Bombay Sales Tax Act, 1959 could not be effectuated in the absence of rules framed by the State Government prescribing the ratio for the grant of proportionate incentives. This anomaly has been corrected by the state legislature by the enactment of the Maharashtra Act 22 of 2009. The fact that a draft rule which had been formulated at an anterior point in time had not been converted into an operative piece of subordinate legislation cannot possibly override the power of the state legislature to enact legislation which falls within its legislative competence. There can be no estoppel against the legislature. It is legitimately open to the legislature to enact validating legislation with retrospective effect to cure a deficiency which was noted in the judgment of the Court as a result of which the legislative intent of granting incentives pro-rata could not be effectuated. The legislature has stepped in to cure the deficiency. The validating legislation and the amendment lay down the manner in which proportionate incentives would be computed. Such a course of action is legitimately open and cannot be regarded as being arbitrary or as violative of Articles 14 or 19(1)(g) of the Constitution. The principle of allowing pro-rata incentives subserves the object of the legislation. If the legislature has, as in the present case, determined that the purpose of the Package Schemes of Incentives should or would be achieved by allowing incentives to be computed on a proportional basis, that legislative assessment cannot be regarded as unconstitutional.”

The Hon. High Court accordingly upheld the retrospective validity and also justified levy of interest. However, the levy of penalty was held to be invalid for the period prior to the amendment. Accordingly, the Hon. High Court disposed of the petitions.

Penalties, Prosecution, Power to Arrest – Recent Amendments

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Introduction:

Significant amendments have been made by the Finance Act, 2013 through introduction of provisions for imposing penalties on directors/ managers/etc. of a company and making certain offences cognisable thereby empowering tax authorities to arrest a person without warrant. These amendments which have far reaching implications, are discussed hereafter.

Penalty for failure to register:

Presently, u/s. 77 of the Finance Act, 1994 (‘Act’), penalty for failure to register within the due date, is the higher of the following:

? Rs. 10,000/- or

? Rs. 200/- per day during which the default continues.

Section 77 of the Act is amended with effect from 10-05-2013, to restrict the maximum amount of penalty for failure to register to Rs. 10,000/-. Though the penalty is still on the higher side, the amendment is a welcome one.

Penalty on directors, managers, secretary or other officers for certain contraventions by a company:

The Finance Act, 2011, with effect from 08-04-2011, made section 9AA of the Central Excise Act 1944 (‘CEA’) applicable to service tax. This section provides that if an offence is committed by a company (which includes a firm), the persons liable to be proceeded against and punished are:

• the company;

• every person, who at the time the offence was committed was in charge of and was responsible to the company for the conduct of the business except where he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence; and

• any director (who in relation to a firm means a partner), manager, secretary or other officer of the company with whose consent or connivance or because of neglect attributable to whom the offence has been committed.

In addition to the above, a new section 78A is introduced with effect from 10-05-2013, for imposing a financial penalty upto Rs. 1,00,000/- on directors, managers, secretary or other officers in charge of the company for specified contraventions committed by a company namely :

• evasion of service tax; or

• issuance of invoice, bill or challan without provision of taxable services contravening the provisions of the Rules prescribed under the Act;

• availment and utilisation of credit of taxes/ duty without actual receipt of taxable service or excisable goods either fully or partially in violation of the Credit Rules;

• failure to pay to the Government any amount collected as service tax beyond a period of six months from the date on which such payment became due.

The aforesaid persons would be liable to penalty only if:

• at the time of such contravention they were in charge of and responsible to the company for the conduct of business; and

• they were knowingly concerned with such contravention.

The terminology “in charge of and responsible to the company for the conduct of the business of the company” has been a subject of interpretation by the Supreme Court as well as High Courts from time to time. Some judicial considerations are given hereafter:

In Girdhari Lal Gupta vs. D N Menta, Collector of Customs (1971) 3 SCR 748, it was held that, the words “in charge of” must mean in overall control of the day to day business of the company or the firm;

In State of Karnataka vs. Pratap Chand 1981 (1) FAC 374, it was observed that, a partner who was not in overall control of the day to day business of the firm could not be proceeded against merely because he had a right to participate in the business of the partnership firm under the terms of the partnership deed.

In light of the foregoing, it would appear that, whether or not a director/manager/etc. of a company was “in charge/responsible”, would depend upon the facts and circumstances of a given case. Hence, it would be very difficult to lay down specific parameters as to the precise situations under which penalty would be imposable.

In this regard, it may be noted that for the contraventions mentioned in case of evasion, issuance of bogus invoices and non-payment amount collected as service tax, such persons may also be liable to be prosecuted in terms of section 89 of the Act read with section 9AA of CEA in addition to suffering a financial penalty u/s. 78A of the Act.

Further, in the absence of a corresponding amendment in section 80 of the Act, the defense of “reasonable cause” available under the said section would not be available against imposition of penalty u/s. 78A of the Act.

Failure to pay tax collected beyond 6 months – maximum imprisonment increased from 3 years to 7 years:

Presently, failure to pay to the Government any amount collected as service tax beyond a period of six months from the date on which such payment became due is a punishable offence. The quantum of punishment for this offence is increased with effect from 10-05-2013. Section 89 of the Act, as amended, prescribes the quantum of punishment separately in respect of first offence and second offence and also in cases where amount exceeds Rs. 50 lakh and other cases. The quantum of punishment for various offences as applicable from 10-05-2013 is summarised in the Table at the end:

Cognizance of offences and power to arrest:

 Amendments in brief:

Significant amendments are made with effect from 10-05-2013 by introducing provisions relating to arrest of persons for offences under the Act. These provisions are summarised hereafter :

Offences are divided into two categories viz:

• Cognisable offences i.e. where the person can be arrested without ‘warrant’; and

• Non-cognisable offences [i.e. offences other than the above].

Failure to pay tax collected beyond 6 months from the due date where the ‘amount’ exceeds Rs. 50 lakh is the only cognisable offence. All other punishable offences (viz. knowingly evading service tax, availing bogus credits, supplying false information, etc.) are non-cognisable offences.

If the Commissioner of Central Excise (‘CCE’) has reason to believe that any person has committed an offence u/s. 89 of the Act where the ‘amount’ exceeds Rs. 50 lakh he may by general or special order authorise any officer of Central Excise not below the rank of Superintendent of Central Excise to arrest such person.

Where a person is arrested for any cognisable offence, every officer authorised to arrest a person shall inform such person of the grounds of arrest and produce him before a magistrate within 24 hours.

• In the case of a non-cognisable and bailable offence, the Assistant/Deputy Commissioner, shall for the purpose of releasing an arrested person on bail or otherwise have the same powers and be subject to the same provisions as an officer in charge of a police station has, and is subject to u/s. 436 of the Code of Criminal Procedure Code, 1973 (‘CrPC”).

• All arrests shall be carried out in accordance with the provisions of the CrPC.

Some considerations under Central Excise:

Provisions relating to power to arrest have been existing under Central Excise/Customs laws. Some considerations under the said laws are set out hereafter. The same could serve as a useful guide for the purpose of the service tax.

Powers to arrest:

U/s. 13 of CEA, an Excise Officer (EO) not below the rank of Inspector, is empowered to arrest a person whom they have “reason to believe” to be liable to be punished under provisions of CEA. Such arrest can be only with prior approval of the Commissioner.

EO can arrest and inform the concerned person as to the ground of arrest. The person arrested has to be forwarded to the Magistrate and must be produced before a Magistrate within 24 hours. The Magistrate may grant the bail on bond or refuse the bail and remand him to custody. Bail is at the total discretion of Court.

As per Section 50 of CrPC, a person arrested should be informed full particulars of the offence and his rights about the bail.

In Sunil Gupta vs. UOI (2000) 118 ELT8 (P&H), it was held that, even if offences under Central Excise are not cognisable, EO duly empowered u/s. 13 of CEA can arrest a person without a warrant.

In Rajni vs. UOI (2003) 156 ELT 28 (All), it was observed that, powers and duties of EO are not parallel to power of Station House Officer of the police station. As per section 155 of CrPC, investigation can be made only with order of Magistrate. EO has to follow provisions of CrPC as well as regards the arrest, or filing of complaint.
 
As per section 155 of CrPC, a police officer cannot investigate a non – cognisable case without the order of a Magistrate, A police officer cannot arrest a person who has committed a non-cognisable offence, without a warrant, as per section 2(1) of CrPC.

However, these restrictions are only to police officers. Section 13 of CEA confers substantive powers of arrest. These powers can be exercised by a duly authorised EO without a warrant of arrest. [Refer Sunil Gupta vs. UOI (2000) 118 ELT 8 (P&H)].

Arrest can be made only as per the provisions of section 46 of CrPC. Under this section, the person making arrest shall actually touch or confine the body of person to be arrested, unless the persons submit to the custody. If he resists the arrest, all necessary means may be applied to effect the arrest. However, this does not give right to cause death of a person, unless the accused of the offence is punishable to death or with imprisonment for life.

Arresting authority should make all efforts to keep a lady constable present. But in circumstances if a lady constable is not available or delay in ar-rest would impede the course of investigation, arresting officer, for reasons to be recorded in writing, can arrest a lady for lawful reasons at any time of day or night, even in absence of a lady constable [State of Maharashtra vs. Christian Community Welfare Council 2003 AIR SCW 5524.]

EO can make enquiry even after the arrest. In Badaku Joti Savani vs. State of Mysore – AIR 1966 SC 1746, it has been held by the Supreme Court that, though EO has the powers of a police officer, he is not a “police officer” unless he has powers to lodge a report u/s. 173 of CrPC. Statements made before EO even after arrest are not hit by section 25 of the Indian Evidence Act and these statements can be used as evidence against the accused.

Procedure after arrest:

The person arrested has to be forwarded to the EO who is empowered to send the arrested per-son to a Magistrate. If such empowered EO is not available within reasonable distance, the person may be sent to officer-in-charge of the nearest police station. Superintendent of CE has been empowered for this purpose. [Section 19 of CEA].

EO of the rank of Superintendent or above will make enquiry into the charges against the person arrested. While making enquiry, he has the same powers as an officer–in–charge of a police station [Section 21(1)(b) of CEA]. If he is of the opinion that there is sufficient evidence or reasonable ground of suspicion against the accused person, he can forward the person to Magistrate for bail or custody, [Proviso (a) to Section 21(2) of CEA].

EO making arrest has powers to release a person on executing a bond with or without sureties, and make a report to his superior officer. He can do so if it appears to him that there is no sufficient evidence or reasonable ground of sus-picion against the accused person [Proviso (b) to section 21(2) of CEA]. Superintendent of CE and officers above him have been empowered for this purpose vide Notification No. 9/99-CE(NT) dated 10-02- 1999. However, if he is of the opinion that there is sufficient evidence or reasonable ground of suspicion, he shall either admit him to bail to appear before a Magistrate having jurisdiction in the case or forward him in the custody of such Magistrate [Proviso (a) to section 21(2) of CEA].

Section 20 of CEA prescribes that the police officer shall either admit him to bail to appear before a Magistrate having jurisdiction, or in default of bail, forward him in the custody of such Magistrate. The arrested person must be produced before a Magistrate within 24 hours of the arrest.

Granting ‘Bail’:

‘Bail’ means a “security for prisoner’s appearance, on giving which he is released pending trial”. If offence is ‘bailable’, grant of bail is automatic and can be given by a police officer in charge of a police station or by a Court, on bond or with-out bond. Court has no discretion in the matter. In case of non–bailable offence, accused can be released on bail, unless the offence is punishable with death or imprisonment for life, Court has discretion whether to release on bail or not in respect of non–bailable offences.

The considerations which normally weigh with the Court in granting bail in non–bailable offences are basically – (a) nature and seriousness of offence (b) character of the evidence (c) circumstances which are peculiar to the accused (d) a reasonable possibility of the presence of the accused not being secured in the trial (e) reasonable apprehension of witnesses being tampered with (f) larger interest of public or State and (g) other similar factors which may be relevant in the facts and circumstances of the case [Jayendra Saraswathi Swamigal vs. State of Tamil Nadu AIR 2005 SC 716 (SC 3 Member Bench)].

The basic rule is in favour of granting a bail ex-cept where the course of justice being affected, gravity or heinous nature of the crime, risk of non appearance at the trial, influencing or intimidation of witnesses and similar other possibilities exist [State of Rajasthan vs. Balchand AIR 1977 SC 2447].

In Chaman Lal vs. State of UP 2004 AIR SCW 4705, it was considered that Court dealing with the bail application should be satisfied as to whether there is a prima facie case, but exhaustive exploration of the merits of case is not necessary. It is necessary for the Court dealing with application for bail to consider among other circumstances, the following factors before granting bail – (a) Nature of accusation and severity of punishment in case of conviction and nature of supporting evidence (b) Reasonable apprehension of tampering the witness or apprehension of threat to the complainant (c) Prima facie satisfaction of the Court in support of the charge.

Since the words used in section 20 of CEA are “shall admit the arrested person to bail”, it was argued that the Magistrate must release the person on bail. He has no power to keep the person in judicial custody, if he gives necessary bail bond. There were divergent opinions about whether Magistrate can detain him or he must release the arrested person on bail. Finally, in Director of Enforcement vs. Deepak Mahajan (1994) 70 ELT 12 (SC) Supreme Court has held that the Magistrate has jurisdiction u/s. 167(2) of CrPC to authorise detention of a person arrested under Customs Act etc. as provisions are identical. Thus the Magistrate may grant the bail on bond or refuse the bail and remand him to custody. Bail is at the total discretion of the Court.

In Sankarlal Saraf vs. State of West Bengal (1993) 67 ELT 477 (Cal), a division bench has held that power to grant bail, by necessary implication, includes power to refuse bail, Thus, Magistrate can refuse bail and order custody, police, jail or otherwise.

As per section 167 (2) of CrPC, a person can be kept in judicial custody for 60 days. If investigations are not completed within 60 days, the person arrested should be released on bail. The period is 90 days when offence is punishable with death, imprisonment for life or imprisonment of 10 years or more.

Section 438 of CrPC makes provision for “anticipatory bail”. Court should grant or refuse bail after exercising its judicial discretion wisely [Director of Enforcement vs. PV Prabhakar Rao (1997) AIR 1997 SC 3868 (3 Member Bench) – quoting Gurbaksh Singh vs. State of Punjab (1980) AIR 1980 SC 1632 (SC Constitution Bench).]

Conclusion

The amendments relating to penalties, prosecution & powers of arrest discussed above have been a subject of widespread expression of concerns by the trade & industry and the tax paying fraternity inasmuch as the provisions could be misused to cause undue harassment by the tax authorities.

In para 3 of TRU Circular No DOF No. 334/3/2013 TRU dated 28 -02-2013, it is clarified that policy wing of CBEC will issue detailed instructions in due course of time. It is felt that CBEC should issue a draft circular and seek views of trade & industry and all affected persons before finalising such instructions.
 

Table —Summary of Punishment for various offences

   

2013 (31) STR 270 (Bom) Welspun Syntex Ltd vs. Commissioner of Central Excise and Customs

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Stay – conducting Agreement – Business Support Service vs. Renting of immovable property service – serious triable issue – complete waiver of pre-deposit.

Facts:
The Appellant entered into a conducting agreement for use of its plant, machinery & equipments by the other company for consideration. The department contended that tax was leviable on the same under “support services of business or commerce”.

The Appellant contended that the said activity became taxable with effect from 01-06-2007 under the category of “Renting of Immovable Property Service” and discharged service tax accordingly. It further relied on Fine Switchgear vs. CCE, 2012 (25) STR 443 wherein it was held that when a new entry was carved out subsequently for the purpose of service tax, it had to be held that the same was not covered by any prior existing category of service.

Held:
The Hon. High Court allowing the appeal held that the appellant made out a prima facie case on merits raising a serious triable issue and hence it is eligible for complete waiver of pre-deposit.

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2013-TIOL-03-ARA-ST M/s. Tandus Flooring India Pvt. Ltd. vs. the Commissioner of Service Tax, Bangalore

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Place of Provision of Service Rules, 2012-marketing and sales in India to a firm in China ans USA – place of provision is location of service receiver – Rule 3 applicable – Export.

Facts:
The applicant, an Indian company (wholly-owned subsidiary of a Singapore company) with the objective of strengthening and enhancing sales of the products of Tandus USA and Tandus China to its Indian customers against consideration receivable in freely convertible foreign exchange, agreed to provide services of marketing and promotion of products to Indian service recipients. The services also included demonstration of products, communication with customers, management of dealer accounts, coordination with representatives of customers, etc. The applicant sought advance ruling on the following questions:

• What would be the place of provision of the marketing and support services provided in India by the company to Tandus US and Tandus China in terms of the Place of Provision of Service Rules 2012 (introduced vide Notification No. 28/2012–S.T. dated 20-06-2012)?

• Whether the said services would also qualify as export of taxable services under Rule 6A of the Service Tax Rules, 1994?

Held:
Considering the case of service proposed to be provided from Indian territory to a business entity located outside India and referring to Circular No.111/5/2009 dated 24-02-2009, it was observed that the benefit of service accrued outside India. Accordingly, in terms of the applicable Place of Provision of Services Rules, 2012, the Hon. Authority held that the service so provided by Tandus India was covered under the default Rule 3 which stipulated that the place of provision shall be the location of the service recipient i.e., Tandus USA and Tandus China and thus service was deemed to be provided in a non-taxable territory. Further, referring to Rule 6A of the Service Tax Rules, 1994, the Hon. Authority held that since the applicant satisfied all the conditions of the said Rule, the services so provided would tantamount to export.

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INPUT TAX CREDIT under VAT: Whether Ascertainment of Tax on Transaction is Required?

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Introduction
After introduction of VAT in Maharashtra, getting input tax credit (ITC) has become a herculean task for dealers. A number of objections are raised while granting ITC (set off of tax paid on purchases). The basic objection is that it is the claimant buyer dealer who has to obtain confirmation of tax payment from the vendor. Thus, an impossible task is required to be accomplished by the buying dealers.

The difficulties are much more with the issue of ‘hawala’ dealers having surfaced. Everyone is now well aware that the Sales Tax Department has put up a list of more than 2,000 dealers as suspicious dealers, commonly described as ‘hawala’ dealers, on the website. In respect of ‘hawala’ dealers, no set-off is allowed irrespective of producing confirmation or any other supporting document. Neither assessment orders of the said vendors (so-called havala dealers) are passed nor crossexamination, to rebut the charge of non-genuine transactions etc., is allowed. Such actions of disallowing setoff, in the hands of purchasers, are against the principles of natural justice and invalid in the eyes of law.

Judgment in case of Mahalaxmi Cotton Ginning Pressing and Oil Industries, Kolhapur vs. The State of Maharashtra & Ors. (51 VST 1)(Bom)

In almost all such cases, the Department is relying on the judgment of the Hon’ble Bombay High Court in the above case. No doubt, in the above judgment, the Hon’ble High Court has upheld the Constitutional validity of section 48(5) of the MVAT Act, which provides that the ITC should not exceed the amount of tax paid on the said goods into the State Treasury. However, the Sales Tax Department is taking a stand that after above judgment the Department has nothing to do with vendors. Once the Department’s records show that there is no payment by the vendor, set-off can be disallowed without complying with any other process. For this purpose, the Department is verifying tax payment of vendors by their own means like non-filing of returns, non-availability of vendor or listed suspicious (hawala) dealer, etc.

We understand that if the Government has not received money on the same goods in its treasury than the set-off can be disallowed to the buyer as per the above judgment. But the disallowance cannot be a unilateral action. The Department has to follow the principles of natural justice.

It may be worthwhile to note that in above judgment Hon’ble High Court has not directed disallowance of set-off in the hands of all the buyers without assessment of vendor/s or without giving other opportunities as per law to the claimant buyer/s.

Ascertainment of tax payment on transactions is required

Therefore, the present procedure adopted by the Sales Tax Department is grossly erroneous. As per law, no set-off can be disallowed without ascertainment of tax payment on the given transaction and more particularly on the ‘goods’ involved.

The above position is reiterated as per the recent judgment of the Hon’ble Maharashtra Sales Tax Tribunal.

Gallery 7 vs. State of Maharashtra (VAT S.A. No.120 of 2011 dated 17-12-2012)

This is the judgment in which, amongst others, the issue of disallowance of set-off in relation to ‘hawala’ dealer is discussed and considered by the Hon’ble Tribunal. There were different reasons due to which set-off was disallowed on various purchase transactions. One of the purchases, on which set-off was disallowed, was from a declared ‘hawala’ dealer namely, M/s. Venkatesh Mercantile Pvt. Ltd. In the first appeal the set-off disallowance was confirmed. Therefore, this second appeal was filed before the Hon’ble Tribunal. After discussing the facts, the Hon’ble Tribunal has remanded the matter back to the first appellate authority with following directions:-

“14. We have considered the rival submissions. We have gone through the record underlying the assessment and the audit done by the assessing officer. We have also gone through the record underlying the appeal order.

i) The main issue in this appeal is about the claim of set-off. The levy of interest u/s. 30(3) is consequent to the dues of taxes which have arisen from disallowance of the claim of set-off. Quantum of penalty u/s. 29(3) is also dependant on the quantum of dues of tax and also the amount of set-off claimed in excess. It would therefore, be necessary to deal with the issue of claim of set-off. It is seen from the perusal of both the assessment order and the appeal order that this issue was not handled seriously by both the assessing officer and the appellate officer. While, in certain instances, the claim of set-off was disallowed by the assessing officer on the ground of non-production of tax invoice, it was allowed by the appellate officer on the ground that the seller was not traceable as reported by the sales tax inspector, the claim was allowed by the appellate officer just by observing that it could not be said that the seller was not doing business in the financial year 2006-2007 and there was no report of the sales tax inspector stating that no returns were filed and no tax was paid by the supplier. Without actually examining whether tax collected from the appellant was in fact paid by the supplier into the government treasury, set-off of an amount of Rs. 78,0375/- which was disallowed by the assessing officer was granted by the appellate officer. We are of the view that, it was necessary for the appellate officer to examine the claim and decide the admissibility of the claim not only on the basis of production or non-production of tax invoice but also after examining whether tax charged in the invoice by the supplier were paid into the government treasury or not. We are of the view that for proper appreciation of the issue, it would be necessary to remand the matter to the appellate officer with direction to him to examine the entire claim of set-off afresh in the light of the provision of section 48(5) of the MVAT Act. It would also be necessary to remand the matter to the appellate officer with the view to examine the appellants claim made in the written submission to grant further set-off in respect of the transactions of purchases allegedly effected by the appellant from M/s. Akshila Trade Ltd. and M/s. Bahubali Trading Pvt. Ltd. and M/s. Venkatesh Mercantile Pvt. Ltd. who were found to have defaulted in paying taxes allegedly collected from the appellant.” (Emphasis supplied)

This judgment lays down the correct position in respect of disallowance of set-off including where there is allegation of ‘hawala’ purchases. Unless there is ascertainment of tax payment on the transaction, the set-off cannot be disallowed. It clearly shows that merely on an allegation of the dealer being a hawala dealer set-off cannot be disallowed. It is expected that the lower authorities will follow the above decision and avoid disallowing set-off on a mere allegation of hawala purchase.

Assessment of hawala dealer
It is surprising that the Sales Tax Department is not taking any interest in the assessment of so called ‘hawala’ dealers or just avoiding the assessment of the suspicious vendors on the ground that they are declared ‘hawala’ dealers by them.

Devyani Trading Company vs. The State of Maharashtra (S.A.No.684 to 687 of 2010 dated 15-09- 2012)

In this judgment, the Hon’ble Tribunal has dealt with a similar situation where the vendor has submitted that his transactions are not of sale/ purchase, but financial transaction. In fact the registration of the vendor was cancelled on account of not doing genuine business.

In spite of the above, the dealer was assessed by the Enforcement Officer. In the second appeal, the stand was repeated that there was no genuine business and no tax should be levied. The Tribunal observed that there are transactions with other dealers and therefore, the stand of the appellant that he has not done genuine business cannot be accepted. The Hon’ble Tribunal observed as under:-

“6. The appellant has routed huge transactions through these banks and the State has definitely lost huge tax. The appellant were provided number of opportunities by the appellate Assistant Commissioner to prove that the transactions on financial transactions not involving sales. The transactions entered into or through the bank account of the appellant and the appellant cannot plead that he is not aware about the nature of these transactions. Crores of rupees transactions have been routed through these bank accounts and the appellant cannot say that these are financial transactions not liable to tax. In fact, the existence of these accounts and concealment of the information about their existence gives rise to mens rea.

The appellants have randomly taken various inspections of accounts and not cooperated with the department in explaining the matter in payment of tax and is squarely liable to pay the tax. Accordingly, we confirm the order passed by the Assistant Commissioner of Sales Tax (Appeals) and reject the Second Appeal petitions. Hence, the order.”

The legal position that emerges is that, under the name of ‘hawala’ no dealer can escape the legal liability. The Sales Tax Department not assessing the vendors under the name of ‘hawala’ is really illegal and it is causing great loss to the Government Treasury. It is expected that the Department will follow the above dictum of the Hon’ble Tribunal and avoid big loss of revenue to the Government. This will also save innocent buyers from illegal disallowance of set-off.

Conclusion

ITC is the lifeline of the VAT system. It has to have a sound, strong and logical apparatus. The dealer, while selling his goods considers the availability of set-off of taxes paid on his purchases. Any disallowance of set-off will be a direct loss to him. Therefore, before disallowing set-off u/s 48(5), due legal process is required to be followed by the Department. The above two judgments in relation to the issue, should certainly be taken as guidance by the Sales Tax Department.

Changes in Mega Exemption List Notification No. 3/2013-ST dated 1st March, 2013

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This Notification gives effect to the changes proposed in the union budget which has the effect of amending the mega exemption list in the following manner.

 i) Exemption by way of auxiliary educational services and renting of immovable property is restricted only to services provided by any person to specified educational institutions and thus auxiliary education service or renting of immovable property provided by educational institution will not be exempted.

 ii) Temporary transfer or permitting the use or enjoyment of a copyright relating to original literary, dramatic, musical, artistic works or cinematograph films had, were exempted by the notification No. 25/2012; this benefit of exemption is now restricted to films exhibited in cinema halls only.

 iii) Services provided by all the restaurants, eating joints or mess having the facility of air condition during any time of the previous year is now under the service tax net.

iv) The exemptions available to transportation of goods by railway or a vessel under Sl. No. 20 and services provided by a goods transportation agency (GTA) under Sl. No. 21 are being amended. Accordingly, exemption to transportation of petroleum and petroleum products, postal mails or mail bags and household effects by railways and vessels will not be available, while the benefit of transportation of agricultural produce, foodstuffs, relief materials for specified purposes, chemical fertilisers and oilcakes, registered newspapers or magazines, relief 4 materials meant for victims of natural or manmade disasters, calamities, accidents or mishap and defense equipments will be available to GTAs. v) The exemptions in respect of Vehicle Parking Service to general public is being withdrawn. vi) The exemption of services provided to Government, a local authority or a governmental authority for repair or maintenance of an Aircraft is being withdrawn. vii) Definition of Charitable Activities as given in Clause (k) in Paragraph 2 of Mega Notification No. 25/2012-ST dated 20-06-2012 is being amended so that there will be no separate threshold limit for granting the exemption from payment of service tax to activities relating to advancement of any other object of general public utility. MVAT UPDATE Notification No VAT.1512/CR-149/Taxation-1 dated 02.02.2013 It is notified that w.e.f. 15-02-2013 government will collect tax at source from dealer who has been awarded the rights for excavation of sand. Prescribed tax collection authority is District Collector or Cantonment Board or any other authority under the State government or Central government having jurisdiction over the area. Rate of tax collection is 10% of the auction amount to be collected in addition to the amount fixed for the auction of sand. Maharashtra Ordinance No . V of 2013 MVAT Act, 2002 has been amended by extending the period of limitation for the order of assessment for the years 2005-06 and 2008-09 from 31st March, 2013 to 30th June, 2013.

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Abatement reduced in certain cases in respect of builders & developers of complex, building or civil structure

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Notification No. 2/2013-ST dated 1st March, 2013 By this Notification, abatement available to developers of complex, buildings or civil structures is being reduced from the existing 75% to 70% in following cases:-

• Residential properties having a carpet area above 2000 sq. ft. and where the amount charged is equal to or more than Rs. 1 crore,

• Commercial properties. This notification is applicable from 1st March, 2013.

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Service Tax Return ST-3 for July to September 2012 & due date notified Notification No. 1/2013-ST dated 22-02-2013 & Order No. 01/2013 dated 6th March, 2013

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By this Notification, has been released, Form No.ST-3 for filing of Service Tax return alongwith instructions to fill up the Form for the period July 2012 to September 2012. Due date for filing of ST-3 was notified as 25th March, 2013 which was then extended to 15th April 2013 by promulgating Order no. 01/2013.

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Sales Tax – Best Judgment Assessment – Addition of Sales – Based on Quotations Against Which No Sale Bills Raised-Not Justified, Tamil Nadu General Sales Tax Act,1959.

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Facts

The dealer was assessed for the period 1991-92 under The Tamil Nadu General Sales Tax Act, 1959. The assessing authority levied tax on estimation of turnover of sales based on quotations raised against which no sale bills were issued. The Tribunal in appeal, observing that there was no material to prove that the assesse had sold any goods to any individual or contractor, passed the order deleting the levy of tax on estimated turnover of sales. The Department filed appeal petition before the Madras high Court against the impugned order of the Tribunal.

Held

As observed by the Tribunal, there was no material for treating the quotations as sale bills and estimating turnover on the basis of the quotation. As rightly held by the Tribunal, the assessing authority had not probed the matter beyond treating quotation book as sale bill. Accordingly, the High Court confirmed the order of the Tribunal and dismissed the appeal filed by the Department.

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Central Sales Tax – C Forms – Failure to produce at the time of assessment – Forms obtained subsequently – Can be produced before the Authority, Rule 12 (7) of The Central Sales Tax ( Registration and Turnover) Rules, 1957

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Facts

 In the assessment for the period 2004-05, the claim of the dealer for concessional rate of tax against form C was disallowed for want of required C forms, but the Tribunal permitted production of C forms received subsequently and the matter was remanded back to the assessing authority for verification of the forms. Subsequently, the dealer received four more C forms and produced before the assessing authority with a request to consider those forms also. This prayer was rejected by the assessing authority on the ground that there was no evidence of those forms having been produced before the Tribunal at the time of hearing of the appeal. The dealer filed writ petition before the Punjab and Haryana High Court, against the refusal by the assessing authority to consider the claim of concessional rate of tax for production of additional C Forms before him on the ground that forms can be produced at any stage.

Held

The explanation of the dealer was that the forms were issued by the purchasing dealers in question after the decision of the appellate authority and on that ground, the same could not be produced earlier. During the hearing before the Tribunal, the forms were sought to be produced, but this was not allowed. In view of explanation given by the petitioner that the forms were received late, it could be held that there was sufficient cause for the petitioner for not producing the same before the assessing and appellate authority. This was no bar to the same being produced before the Tribunal. Accordingly, the writ petition filed by the dealer was allowed by the High Court to permit the petitioner to produce the Forms in accordance with law.

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Value Added Tax – Sale Price – Sale of Motor Cycles – Separate Collection of Handling Charges For Registration – Not Forming Part of Sale Price, Section 2 (25) of The Maharashtra Value Added Tax Act, 2002

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Facts

Dealer engaged in selling motor cycles collected service charges or handling charges from customer for registration of motor cycles under Motor Vehicles Act, 1988. The VAT authorities levied VAT on such amount which was contested before The Maharashtra Sales Tax Tribunal. The Tribunal held that such charges did not constitute a part of ‘sale price’ within the meaning of ‘sale price’ defined in section 2 (25) of the MVAT Act, 2002. The Department filed an appeal before the Bombay High Court against the decision of the Tribunal, setting aside the levy of VAT on such handling charges collected by the dealer from the customer at the time of sale of motor cycles.

Held

 The High Court held that transfer of property in the goods, in pursuance of the sale contract, took place against the payment of price of the goods. Delivery of the goods was affected by the seller to the buyer. The obligation under the law to obtain registration of the motor vehicle was cast upon the buyer. The service of facilitating the registration of the vehicles rendered by the selling-dealer was to the buyer and in rendering that service, the seller acted as an agent of the buyer. The handling charges which were recovered by the respondent could not, therefore, be regarded as forming part of the consideration paid or payable to the dealer for sale of goods. Those charges cannot fall within the extended meaning of the expression “ sale price”, since they did not constitute sum charged for anything done by the seller in respect of the goods at the time of or before the delivery thereof. The High Court accordingly dismissed the appeal filed by the department and confirmed the order of the Tribunal.

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Service tax refund in relation to services used for authorised operations and those wholly consumed within SEZ allowed applying refund provisions with a broader view.

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Facts:

The appellant, a developer of SEZ Special Economic (SEZ) Zone having operations from units in SEZ filed refund claims towards the service tax paid on services consumed within the SEZ and services used for the authorised operations of the SEZ units. The refund claims were considered and partly sanctioned. The appellant appealed against the order and again the refund was partly allowed. Appellant filed an appeal before Tribunal for balance of Rs.19,80,569/-. It involved two components, viz. Rs.6,66,794/-, rejected on the ground that various services did not bear a direct nexus with the authorised operations undertaken by the appellant and Rs.13,13,775/- related to services wholly consumed within the SEZ during July to September, 2009.

Held:

As regards the claim rejected on the ground that the services did not have direct nexus with the authorised operations, the Tribunal held that the Approval Committee issued a specific certificate indicating various services received by the appellant and justification for use of such services in relation to the authorised operations. The jurisdictional Commissioner of Central Excise was also a member of such Approval Committee. In view thereof, it was unwarranted for the adjudicating and appellate authority to go into the question and come to their own findings in the matter. Thus, this rejection was set aside.

As regards the latter claim, the question was whether the appellants could be granted refund under Notification No. 09/2009-ST as amended by Notification No.15/2009-ST dated 20-05-2009 through which one condition was inserted stating that the refund procedure prescribed under the said Notification shall apply only in the case of services used in relation to the authorised operations in the SEZ; except for services consumed wholly within the SEZ.

Tribunal held that Notification No. 09/2009-ST exempted the taxable services specified in Clause (105) of section 65 of the Finance Act, 1994 which were provided in relation to the authorised operations in a SEZ and received by a developer or units of a SEZ, whether or not the said taxable services are provided inside the SEZ, from the whole of the service tax leviable thereon u/s. 66 of the Finance Act, 1994.

In the case of services which were wholly consumed within the SEZ, there was no necessity to discharge the service tax liability ab initio. That did not mean that where service tax liability had been discharged, the appellant was not entitled for refund. If the appellant was eligible otherwise for refund u/s. 11B, then it cannot be denied because the claim was made under Notification No.09/2009- ST and there was no dispute about the services being in relation to authorised operations of the appellant within the SEZ. The records showed that the refund claim was lodged within the time prescribed u/s. 11B and the appellant had borne the incidence of taxation.

Services provided to a SEZ or unit in the SEZ were deemed as export in terms of the SEZ Act, 2005 and entitled for exemption from payment of service tax on the services used or provided to a unit in the SEZ. Further, vide section 51 of the said Act, SEZ provisions prevail over the provisions of any other law. Accordingly, a broader view of the provisions relating to refund had to be taken.

Accordingly, the orders were set aside with consequential relief.

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2013 (31) STR 747 (Tribunal – Delhi) – Shiv Narayan Bansal vs. CCE, Indore

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Whether contract for manufacturing on job work covered under ‘Manpower Supply Service’? Held, No.

Facts: The Appellant entered into an agreement for engaging 3 persons to carry out manufacturing on job work basis. The respondent argued that the object of the agreement was to provide skilled labourers for carrying out the activity and statutory liability under labour laws was of the Appellant and hence such act comes under the purview of manpower supply.

Held: Observing the agreement, the Hon. Tribunal allowed the appeal holding that the persons employed remained under the control of job worker and not of the service receiver and that there was no objective to provide supply of manpower, without carrying out manufacturing activity. 2013-TIOL-1441-CESTAT-DEL Commissioner of Service Tax, Delhi vs. Pentagon Financial Consultants Pvt. Ltd. Where even a part amount of interest was not paid before the issue of Show Cause Notice, penalty u/s. 76 upheld.

Facts: The Assessee short-paid Rs. 2,36,479/- for which the department issued a Show Cause Notice dated 04-03-2008 along with interest and equal penalty and confirmed the demand thereon. The assessee appealed to the Commissioner (Appeals) and contended that since the whole amount of service tax was paid on 23-04-2007, much before the issue of Show Cause Notice, no penalty u/s. 76 ought to have been levied which the Commissioner (Appeals) ordered in favour. The department, being aggrieved by the order contended that for the waiver of entire penalty, the assessee should have paid the entire service tax along with entire interest. In the instant case, the assessee failed to deposit part amount of interest of Rs. 771/- before the issue of Show Cause Notice and deposited the same on 04-04-2008. Thus, no waiver of penalty should have been allowed.

Held: The Hon. Tribunal observed that full payment of interest was an integral part for waiver of penalty which the assessee did not fulfil. Further, perusing the provisions of section 73 and CBEC Circular No. 137/167/2006-CX4 dated 03-10-2007, the Tribunal set aside the order of the Commissioner (Appeals) and held that the benefit of exemption of penalty could not be given.

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2013 (31) STR 730 Tribunal – Delhi Comm. of ST vs. Lufthansa Technik Service India P. Ltd

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Whether operating lease was covered under the category of “Banking & Financial Services”, prior to 01-06-2007 and chargeable to service tax? Held, No.

Facts:

The assessee engaged in providing aircraft parts/ equipments to various airlines on lease for a fixed period against monthly lease charges entered into agreements which did not provide any option to own or entitlement to own the aircraft parts at the end of leasing period. The department, considering it as financial lease demanded tax under “Banking & Financial Services” and contended that prior to 01-06-2007 there was no provision that financial lease must have a clause giving option to the lessee to own the asset at the end of lease period and that the amendment made w.e.f. 01/06/2007 was retrospective in nature.

The assessee contended that there was no service tax on operating lease for the period prior to 01- 06-2007 as after 01-06-2007, an explanation was inserted in the definition of “Banking & Financial service” whereby an operating lease was included along with financial lease in the purview of the definition of B & F services.

Held:

Observing that the leasing agreements did not contain any provision entitling the customer to own the goods leased or an option to own the goods leased, the Hon. Tribunal relying on Association of Leasing and Financial Services Companies vs. UOI 2010-TIOL-87-SC-ST-CB held that when the lease agreements were not financial lease agreements, the same would not be exigible to service tax under the Finance Act prior to 01-06-2007.

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2013 (31) STR 578 (Tri.-Del) R. F. Properties & Trading Ltd. vs. Commissioner of C. Ex., Jaipur

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Prior to introduction of explanation with respect to levy of service tax on builders, the services provided in relation to commercial or industrial construction services provided by a builder were in nature of self-service not leviable to service tax.

Facts: The appellants received application money/advances from prospective buyers of space/shop/ office in a commercial complex to be constructed by them which the department contended to tax under the category of “commercial and industrial construction services”.

The department concluded that although the title to property in space/shop/office had not been passed to the prospective buyers, since advances were received and the appellants were constructing the complex, they were liable to pay service tax.

Held:

Relying on the decision of the Hon. High Court in Maharashtra Chamber of Housing Industry vs. UOI 2012 (25) STR 205 (Bom) and Hon. Tribunal in C.C.E., Chandigarh vs. Skynets Builders, Developers, Colonizer 2012 (27) STR 388 (Tri.-Del), wherein it was observed that the explanation introduced to section 65(105)(zzq) of the Finance Act, 1994 with effect from 01-07-2010 was to expand the scope of levy and therefore, prior to its introduction, a mere agreement to sell would not create any interest in the property in favour of the prospective buyer and the title of property was with the builder which constituted self-service. Since the issue was prior to the introduction of explanation, no services were provided to another person and thus, not liable to service tax.

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2013 (31) STR 563 (Tri.-Del) Commissioner of C. Ex., Indore vs. International Logistics

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Expenses incurred to provide services shall form 24 25 72 Bombay Chartered Acountant Journal, november 2013 BCAJ INDIRECT TAXES 208 (2013) 45-B BCAJ part of assessable value if such expenses are inseparable and are integrally connected with the performance of taxable services. Mere filing of Balance Sheets and returns does not amount to disclosure of facts yet, if the issue was debatable, penalty should not be levied.

Facts:

The respondents engaged in providing clearing and forwarding services, claimed certain reimbursement of expenses which were rejected by the revenue. The respondents contended that even if the case is adjudicated in favour of department, the respondents be allowed CENVAT credit of service tax paid on procurement of such services and since the respondents had filed Balance Sheets and returns, there was no suppression of facts by the respondents. Further, since the law was in a debatable stage levy of penalty was not justified.

Relying on Larger Bench’s decision in case of Sri Bhagavathy Traders 2011 (24) STR 209 (Tri.-LB), the revenue contested that the expenses, which are essentially required and are integrally connected to the services, cannot be excluded while determining value of taxable services.

Held:

The Hon. Tribunal, partly allowing the appeal, held that expenses incurred to provide services shall form part of assessable value if such expenses were inseparable and integrally connected with the performance of taxable services and thus tax was required to be paid on the same. However, CENVAT credit would be allowed subject to verification of records and evidences presented by the assessee. Mere filing of Balance Sheets and Returns would not amount to disclosure of facts. However, since the issue was litigative as the same travelled till Larger Bench to attain finality, penalty would not be levied.

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[2013] 36 taxmann.com 57 (Madras) Mediaone Global Entertainment Ltd. vs. Chief Commissioner of Central Excise, Chennai

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Validity of Circular No.148/17/2011 vis-à-vis concept of new entity in revenue sharing arrangement, violation of section 37B of Central Excise Act, – Scope of section 66D(j) and Exemption Notification.

Facts:

The petitioner challenged the validity of Circular No.148/17/2011–ST dated 13-12-2011 on the following issues:

• It seeks to create a new entity and has made the transaction between the new entity, theatre owner, distributor or producer liable to service tax. The Finance Act does not contemplate any such joint venture and the circular attempts to create an artificial person, when the nature of arrangement between a distributor and an exhibitor is on a principal-to-principal basis wherein revenue sharing arrangement exists.

• The circular directs and binds the assessing authority in effect to hold all transactions in which there is revenue sharing to be a joint venture liable to service tax.

• In the light of section 66D(j) and Notification No.25.2012-ST dated 20-06-2012, Circular No.148/17/2011-ST alone becomes otiose and liable to be quashed.

Held:
• The Circular contemplated a situation where an exhibitor not only provided theatre to distributor (in his capacity as owner), but also provided other services for the purpose of exhibiting film by entering into revenue sharing agreements. In such arrangements, there was a possibility of the existence of new entity. Once the conclusion was arrived that there was a new entity, it was to be seen independently as to whether such services rendered by the new entity would fall within any of the entries for levy of service tax.

• Considering the second contention as baseless, the High Court observed that the arrangements referred to in the impugned circular can at best be taken as an illustration and cannot be termed as an exhaustive or a comprehensive list of arrangements. Further, the circular itself clearly spells out that the nature of transaction is a question of fact, which the exhibitor/ distributor/producer has to place before the department and such arrangement was to be examined on its merits. The circular does not restrict the powers of the officials to decide a particular dispute in a particular manner and the impugned circular is not violative of section 37B.

• As regards the third contention, the High Court held that, by a combined reading of section 66D(j), Notification Nos.25/2012-ST dated 20- 06-2012 and 03/2013-ST dated 01-03-2013, it was clear that what is exempted is only an admission to entertainment events or access to amusement facilities or exhibition of cinema in a theatre. The variant modes of transaction between the distributor/sub-distributors of films and exhibitors of movie and the revenue sharing arrangement between them are neither in the “Negative List Services” nor exempted.

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[2013] 37 taxmann.com 226 (Madras) CCE, Chennai-II vs. Electro Steel Castings Ltd.

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Where service tax was paid for one period under protest, any amount paid for later period on identical issue was deemed “under protest” and limitation period was held inapplicable.

Facts:

The department disputed assessee’s valuation method and passed an adjudication order confirming the demand. The assessee filed a protest letter under Rule 233B during the course of adjudication. Preferring an appeal before the Commissioner (Appeals), the matter was decided in assessee’s favour.

During the pendency of Appellate proceedings, the assessee paid the duty for subsequent period based on the valuation method adopted by the 21 adjudicating authority for the period under dispute. Later, the assessee applied for refund covering period under dispute as well as subsequent period which was rejected by the department on the ground of limitation. Relying on Mafatlal Industries Ltd. vs. Union of India 1997 (89) ELT 247 (SC), the assessee appealed against the order rejecting refund and was decided in its favour.

Held:

Dismissing the department’s appeal and relying on the Hon. Supreme Court’s decision in Mafatlal Industries (supra), the Hon. High Court observed that the payment made when the assessee was challenging the earlier levy of duty was deemed to be made under protest and not otherwise and that no limitation period was applicable to the payment made under protest.

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[2013] 37 taxmann.com 41 (Jharkhand) Akshay Steel Works (P.) Ltd vs. Union of India.

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CENVAT credit can be used for pre-deposit of duties demanded under Adjudication Order appealed against.

Facts:

The Commissioner (Appeals) rejected the Appellant’s Appeal on the ground that it failed to deposit the amount as required under the provisions of the Central Excise Act.

The Appellant contended that since it reversed the appropriate amount from unutilised CENVAT credit and gave this information along with the copy of Form-RG 23A Part II to Commissioner Appeals, it has complied with the conditions of pre-deposit.

Held:

Analysing Rule 3 of the CENVAT Credit Rules, 2004 (CCR), the Hon. High Court held that since the law allows the assessee to take the benefit of the credit under any category as mentioned under Sub-Rule(1) of Rule 3 of the CCR and that it does not prohibit the assessee to adjust the said credit against its liability created by an order which was sought to be challenged in appeal requiring the deposit of the amount u/s. 35F of the Central Excise Act, the petition was allowed.

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2013-TIOL-741-HC-ALL-ST M/s. K Anand Caterers vs. Union of India

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Whether recovery proceedings be initiated where the assessee has applied under the Voluntary Compliance Encouragement Scheme, 2013 (VCES)? Held, No.

Facts:

The department conducted a search in the applicant’s premise on 31-05-2013 and detected payment of Rs. 60 lakh against service tax dues and thus issued a notice for recovery dated 07-06-2013. The applicant did not deny the liability but applied under VCES on 20-06-2013. The department contended that it was within its rights to initiate recovery proceedings and to issue a notice for the same and further stated that unless the application was found to be valid the petitioner was not entitled to any relief against the said dues. Held: Observing that the applicant had fulfilled the conditions as prescribed for application under VCES, the Hon. High Court held that unless the application was considered and decided by the Competent Authority, no recovery proceedings would be allowed to continue. They further stated that if the recovery was allowed to proceed, the object behind VCES would be defeated.

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2013 (31) STR 642 (Rajasthan) – CIT (TDS), Jaipur vs. Rajasthan Urban Infrastructure

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Whether TDS is to be deducted u/s. 194J of the Income Tax Act on service tax applicable on fees to be paid to consultants? Held, No.

Facts:

The Appellant preferred an appeal against the order of ITAT confirming first appellate authority’s order which held that TDS u/s. 194J of the Income Tax Act, 1961 (I T Act) would not be applicable on service tax component paid separately in respect of professional fees. They further argued that the ITAT had illegally relied on the CBDT Circular dated 28-04-2008 while deciding the present appeal.

Held:

Referring to section 194J of the I. T. Act and the Circular dated 28-04-2008, the Hon. High Court held that section 194J of the I. T. Act used the words “Any sum paid” which related to the fees for professional or technical fees and would not include the service tax which was to be paid separately. As per the terms of the agreement, service tax was to be paid separately and was not included in the fees payable. Since the ITAT and lower authority had considered the wordings of section 194J of the I. T. Act while deciding the appeal, even if the Circular dated 28-04-2008 was held to be not applicable in the present case, then also the order passed was in accordance with the law and needed no intervention. Further, since no substantial question of law was involved, the appeal was dismissed.

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2013 (31) STR 535 (Guj) Commissioner of Service Tax vs. Manan Motors Pvt. Ltd. If service tax with interest is paid in full before issuance of SCN, penalty cannot be levied : CBEC Circular dated 03-10-2007.

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Facts:

The assessee discharged its service tax liability along with full interest before the issue of SCN. The department issued a Show Cause Notice and passed an order confirming tax along with interest and penalty u/s. 76 and 78 of the Finance Act, 1994.

The department argued that since the assessee paid service tax and interest, the penalty was also quantifiable and that it should have deposited 25% penalty within 30 days of the issue of SCN.

Held:

Ordering levy of penalty of not more than 25% (Note: appears contradictory to the circular dated 03-10-2007), the Hon. High Court relying on Circular No.137/167/2006-CX dated 03-10-2007 and referring to section 73(1A) held that since the service tax and interest was deposited before issuance of SCN and at that time, neither any penalty was levied nor quantum of penalty was fixed, the respondents were not required to deposit penalty amount.

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Sale in course of Import vis-à-vis Works Contract

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VAT

As per Article 286 of the Constitution of India, the
transactions taking place in the course of import and export are made immune
from levy of sales tax. In pursuance of the said article, the transactions of
sale/purchase in course of import/export are defined in S. 5 of the CST Act,
1956. The transaction of sale in course of import is defined in S. 5(2) of the
CST Act, 1956. The said Section is reproduced below.

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


(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.”

It can be seen that there are two limbs. As per the first
limb, the sale/purchase occasioning the movement of goods from foreign country
is considered to be in course of import. Therefore, the transaction of direct
import is covered by this category. In addition to the above, there is scope to
cover further transaction also as in course of import under this limb. For
example, after import of goods, they may be required to be delivered to local
party by way of sale. If inextricable link between import and such local sale is
established, then such local sale will also be deemed to be in the course of
import covered by the above first limb and it will be exempt.

The second limb covers transactions which are effected by
transfer of documents of title to goods before the goods crosses Customs
frontiers of India. However, discussion herein is about first limb and hence
this limb is not discussed further.

In relation to the first limb, there are a number of
judgments. However, in spite of the above, it is always a debatable issue. More,
there was no direct judgment of the Supreme Court in relation to first limb
vis-à-vis works contract transactions. Therefore, there were different views
in favour and against. However, now the Supreme Court had an occasion to deal
with the said controversy. The Supreme Court has given its judgment in the case
of Indure Ltd. & Another v. Commercial Tax Officer & Others, (34 VST 509)
(SC).

The facts of this case are that N.T.P.C. invited global bids
for its ash handling plant, Farakka Super Thermal Power Project. The contract
was termed as ‘on turnkey basis’. Indure Ltd. was one of the bidders. After
submission of the bid, there were personal meetings and Indure Ltd. was the
successful bidder. The contract was divided into two separate contracts, (i)
supply contract, and (ii) erection contract. However, even if the two contracts
were stated to be separate, the Supreme Court has observed that it was only one
contract, as N.T.P.C. kept right with it, with regard to cross-fall breach
clause, meaning thereby that default in one contract would tantamount to default
in another. Therefore the issue was decided considering the transaction as works
contract. Amongst others, there were terms about imported material. The said
clauses are reproduced in the judgment as under :

“4.5.1 . . . . . . . . . For equipment of non-Indian
origin, you shall submit the details of the indices and co-efficient in line
with the provisions of bid documents within three months of the date of this
award letter.

4.5.2 The list of components/material/equipment to be
imported by you, for which the adjustment on exchange rate variation is to be
made under US$, DM and J yen will be furnished by you within three months of
the date of this award letter. The items as declared as per these lists shall
only be eligible for exchange rate variation claims.”

In light of further deliberations with N.T.P.C., Indure Ltd.
was to import MS pipes from South Korea. The company thereafter submitted
application before the DGTD, Import Export Directorate, for Special Imprest
Import Licence against the above turnkey contract. The licence was granted
mentioning in it that all components to be imported were to be exclusively used
by Indure Ltd. for the above project. On the MS pipes so imported, special
markings mentioning the name of the project were made.

The above sale by Indure Ltd., to N.T.P.C. was claimed as
sale in course of import and hence exempt. The West Bengal Sales Tax authority
held that it was not obligatory for Indure Ltd. to import the goods. It was
contended that the only obligation of the company was to complete the project
and the components should meet the required specification, irrespective of fact
whether they are imported or otherwise. Therefore, the contention was that there
is no inextricable link and S. 5(2) of the CST Act, 1956 will not apply. The
above position was confirmed up to the High Court.

The Supreme Court dealt with the issue elaborately. It also
made reference to earlier decided cases. Citing judgment in the case of K.G.
Khosla & Co. (P) Ltd. v. Deputy Commissioner of Commercial Taxes, (17 STC
473) (SC), the Supreme Court reproduced the following para from the said
judgment :

“The next question that arises is whether the movement of
axle-box bodies from Belgium into Madras was the result of covenant in the
contract of sale or an incident of such contract. It seems to us that it is
quite clear from the contract that it was incidental to the contract that the
axle-box bodies would be manufactured in Belgium, inspected there and imported
into India for the consignee. Movement of goods from Belgium to India was in
pursuance of the conditions of the contract between the assessee and the
Director-General of Supplies. There was no possibility of these goods being
diverted by the assessee for any other purpose. Consequently we hold that the
sales took place in the course of import of goods within S. 5(2) of the Act,
and are, therefore, exempt from taxation.”

The Supreme Court also referred to the judgment in the case
of State of Maharashtra v. Embee Corporation, (107 STC 196) (SC). Further, the
Supreme Court also referred to the judgment in the case of Deputy
Commissioner of Agricultural Income-tax and Sales Tax, Ernakulam v. Indian
Explosives Ltd., (60 STC 310) (SC). The Supreme Court reproduced
observations from the above judgment and the following portion from the said
reproduced part is reproduced below :


“A sale in the course of export predicates a connection between the sale and export, the two activities being so integrated that the connection between the two cannot be voluntarily interrupted without a breach of the contract or the compulsion arising from the nature of the transaction. In this sense to constitute a sale in the course of export it may be said that there must be an intention on the part of both the buyer and the seller to export, there must be an obligation to export, and there must be an actual export. The obligation may arise by reason of statute, contract between the parties, or from mutual understanding or agreement between them, or even from the nature of the transac-tion which links the sale to export. A transaction of sale which is a preliminary to export of the commodity sold may be regarded as a sale for export, but is not necessarily to be regarded as one in the course of export, unless the sale occasions export. And to occasion export, there must exist such a bond between the contract of sale and the actual exportation, that each link is inextricably connected with the one immediately preceding it. Without such a bond, a transaction of sale cannot be called a sale in the course of export of goods out of the territory of India.

Conversely, in order that the sale should be one in the course of import, it must occasion the import and to occasion the import, there must be integral connection or inextricable link between the first sale following the import and the actual import provided by an obligation to import arising from statute, contract or mutual understanding or nature of the transaction which links the sale to import which cannot, without committing a breach of statute or con-tract or mutual understanding, be snapped.”

The Revenue sought to rely upon the judgment in the case of Binani Bros. (P) Ltd. v. Union of India, (33 STC 254) (SC). However the Supreme Court distinguished the same on facts.

In conclusion the Supreme Court allowed claim as in course of import in relation to the above works contract transaction. The judgment will certainly be a guiding one to resolve issue of sale in course of import vis-à-vis works contract transactions.

Nature of Lease Transaction – Update in Light of Recent Judgments

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VAT

Nature of Lease Transaction – Update in Light of Recent
Judgments


The issue whether a transaction is taxable lease transaction
under Sales Tax Law or not, is a very debatable one. It is a judgment based
issue as the term ‘Lease Transaction’ (transfer of right to use goods) is not
defined in sales tax laws. From judgments delivered so far, it can be seen that
if there is delivery of possession to client, then taxable lease transaction
takes place. On the other hand, if there is no delivery of possession, i.e., if
effective control is not transferred to client, then there is no lease
transaction. Landmark judgments on the issue are as hereunder:

Rashtriya Ispat Nigam Ltd. 126 STC 114 (SC)

In this case amongst others, the Supreme Court has held that
in order to be a lease transaction, there should be delivery of possession to
the lessee. Unless effective control is given to the party, no lease transaction
takes place. The facts in this case were that Rashtriya Ispat Nigam Limited
allowed its contractor to use its machinery for the contract being executed for
it. One of the conditions of the contract was that the contractor was not free
to use the said machinery for any other work except for the contract executed
for Rashtriya Ispat Nigam Limited. The contractor was not allowed to move the
machinery outside the project area. Under above circumstances, the Supreme Court
held that there was no delivery of possession to amount as ‘transfer of right to
use goods’. Therefore, if the use is allowed under specified circumstances,
without freedom to the user, it cannot amount to taxable lease transaction.

Bharat Sanchar Nigam Ltd. 145 STC 91 (SC)

This is the latest case from the Supreme Court in the given
series. The issue in this case was about levy of lease tax on services provided
by telephone companies. The Supreme Court held that no sales tax was applicable
as the transaction pertained to service. While holding so, one of the learned
judges on the Bench observed the following (Para 98 below) about taxable lease
transaction:

“98. To constitute a transaction for the transfer of the
right to use the goods the transaction must have the following attributes:

  1. There must be
    goods available for delivery;

  2. There must be a
    consensus ad idem as to the identity of the goods;

  3. The transferee
    should have a legal right to use the goods – consequently all legal
    consequences of such use including any permissions or licenses required
    therefore should be available to the transferee;

  4. For the period
    during which the transferee has such legal right, it has to be the exclusion
    to the transferor – this is the necessary concomitant of the plain language of
    the statute – viz. a “transfer of the right to use” and not merely a licence
    to use the goods;

  5. Having
    transferred the right to use the goods during the period for which it is to be
    transferred, the owner cannot again transfer the same rights to others.”

At present, reliance is placed on above paragraph to decide
on the nature of the lease transaction. Subsequent judgments, relying and
analyzing on above judgments, are also now available. Reference can be made as
hereunder:

Alpha Clays 135 STC 107 (Ker)

In this judgment, the Hon. Kerala High Court has considered
the above judgment in case of Rashtirya Ispat Nigam Ltd. (Supra).

The Kerala High Court, amongst others, observed the
hereunder:

“From all the aforesaid decisions, it is clear that in order
to attract the provisions of section 5(1)(iii) of the Act, particularly the
expressions “transfer of the right to use goods”, there must be a parting with
the possession of the goods for the limited period of its use by the assessee in
favour of the lessees. In other words, so long as effective control of the goods
is with the assessee, the rent received from the customers for use of the goods
will not attract the provisions of section 5(1)(iii) of the Act. It is in those
circumstances, it has been held by this Court in Bahulayan’s case (1992) 1 KTR
137, that the hire charges received for use of the lorry is not exigible to tax
under section 5(1)(iii) of the Act, the effective control of the lorry was
always with its owner. It is on this principle, it was held in Rohini Panicker’s
case [1997] 104 STC 498 (Ker), that lending of video cassette for use by the
customers is exigible to tax under the Act, for the possession of the video
cassette is given to the customers for their use according to their will. It is
in view of this legal position, the Supreme Court in Aggarwal Brother’s case
[1999] 113 STC 317, has held that shuttering material is exigible to tax under
law.”

Similarly, based on
BSNL, now there
are a few more judgments. Reference can be made to the following recent
judgments:


Commissioner of Sales Tax v. Rolta Computers & Industries Pvt.
Ltd. 25 VST 322 (BHC)

In this case, the transaction was that the party allotted its
computer time to certain parties on exclusive basis. The Sales Tax Department
wanted to consider the said transaction as lease transaction relating to
computers. However, the Bombay High Court rejected the above plea. The Hon.
Bombay High Court, amongst others, observed the following:

“75.In our opinion, the essence of the right under article
366(29A)(d) is that it relates to user of goods. It may be that the actual
delivery of the goods is not necessary for effecting the transfer of the right
to use the goods but the goods must be available at the time of transfer, must
be deliverable and delivered at some stage. It is assumed, at the time of
execution of any agreement to transfer the right to use, that the goods are
available and deliverable. If the goods, or what is claimed to be goods by the
respondents, are not deliverable at all by the service providers to the
subscribers, the question of the right to use those goods, would not arise.”

In light of above, the Hon. Bombay High Court has held that allowing computer time does not fall in the category of lease transaction as no delivery of computer is made to the customer at any time.

Commissioner, VAT, Trade and Taxes Department v. International Travel House Ltd. 25 VST 653 (Delhi)

In this one more recent judgment, the Hon’ble Delhi High Court has observed the following:
 

“13.Sub-paras (b) and (c) of para 97 are important with reference to the facts of the case to determine as to whether or not there is a sale by virtue of transfer of right to use goods as envisaged in article 366(29A)(d). The admitted position which emerges is that the transferee, namely, NDPL, has not been made available the legal right to use the goods, viz., the permissions and licences with respect to the goods. In the present case, the permissions and licences with respect of the cabs are not available to the transferee and remained in control and possession of the respondent. It is the driver of the vehicle, who keeps in his custody and control the permissions and licences with respect to the Maruti Omni Cabs or the said permissions and licenses remained in possession of the respondent. These are never transferred to M/s NDPL. It, therefore, cannot be said that there is a sale of goods by transfer of right to use the goods. It is absent, namely, the ingredient as stated in para 97(c) of the Bharat Sanchar Nigam Ltd.’s case (2006) 3 VST 95 (SC); (2006) 145 STC 91 (SC); (2006) 3 SCC 1.”

A further observation is as follows:

“We may note that it has been held in the Division Bench judgment of the Allahabad High Court in Ahuja Goods Agency v. State of Uttar Pradesh (1997) 106 STC 540, that unless specified vehicles are transferred pursuant to the contract, there is no sale of the goods. It was also held that when it is the duty of the transporter to abide by all the laws relating to motor vehicles and excise, the custody remains with the owners of the vehicles and not the persons who have hired the vehicles, and, which again shows that there is no sale. We respectfully agree with the reasoning in Ahuja Goods Agency’s case (1997) 106 STC 540 (All). In the case before us also there are no identified goods as intended in para 97(b) of the Bharat Sanchar Nigam Ltd.’s case (2006) 3 VST 95(SC); (2006) 145 STC 91 (SC); (2006) 3 SCC 1 and hence no sale of goods. We also agree with the reasoning of the judgment in Lakshmi Audio Visual Inc. v. Assistant Commissioner of Commercial Taxes (2001) 124 STC 426 (karn) wherein R. V. Raveendran, J. (as he then was) held that when there is only hiring of audio visual and multimedia equipment, which equipment is at the risk of the owner and possession and effective control remain with the owners then, in such circumstances, it cannot be said that the customer had got the right to use the equipment and there was, therefore, no deemed sale. We may note that there are other single Bench judgments of the Allahabad High Court which follow the view of the Division Bench in the Ahuja Goods Agency’s case (1997) 106 STC 540 and we need refer to only on such judgments reported as Mohd. Wasim Khan v. Commissioner of Trade Tax, U.P., Lucknow (2009) 20 VST 196(All); (2006) 30 NTN 233, in which the contracts were those to providing buses for transportation of the employees of the companies from one place to another and which transaction was held to be not a sale because the driver and other employees of the vehicles were employees of the owners, the road permit was in the names of the owners who had to take insurance for the vehicles and the workmen and consequently it was held that there was no case of transfer of the right to use the goods because the effective control of the vehicle remained with the owners of the buses.”

Thus, the concept of the nature of lease transaction gets clear from the above judgments. Whether effective control is with the client, so as to make the transaction a taxable lease transaction has to be decided in light of such judgments .

Lease vis-à-vis License of Trade Mark

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VAT

The State Governments are entitled to levy Sales Tax on the
transactions of ‘Transfer of right to use goods’ (also referred to as lease
transactions). This is possible as per provisions of Article 366 (29A) of the
Constitution of India. However, the nature of lease transaction is not defined
in the Constitution or in Sales Tax Laws. Therefore, whether lease transaction
has taken place or not has to be decided based on judicial interpretation
available so far. We can say that the interpretation about nature of taxable
lease transaction is still under development. However, some guidelines are
available from the recent judgment of the Supreme Court in the case of M/s.
Bharat Sanchar Nigam Ltd. (145 STC 91). Hon. Supreme Court has observed as under
for finding out taxable lease transaction :


“98. To constitute a transaction for the transfer of the
right to use the goods, the transaction must have the following attributes :

(a) There must be goods available for delivery;

(b) There must be a consensus ad idem as to the
identity of the goods;

(c) The transferee should have a legal right to use the
goods — consequently all legal consequences of such use including any
permissions or licences required therefor should be available to the
transferee;

(d) For the period during which the transferee has such
legal right, it has to be the exclusion to the transferor — this is the
necessary concomitant of the plain language of the statute — viz. a
‘transfer of the right to use’ and not merely a licence to use the goods;


Having transferred the right to use the goods during the
period for which it is to be transferred, the owner cannot again transfer the
same rights to others.”


Thus certain guidelines are available from the above
observations. However still a difficulty is experienced in relation to
intangible goods like trade mark, copy rights, etc. In relation to tangible
goods there cannot be difficulty in applying above guidelines. But in relation
to intangible goods the difficulty persists mainly due to nature of intangible
goods. Tangible goods, once delivered to lessee, cannot be further delivered to
any other person simultaneously and the above guidelines can be applied very
easily. However, intangible goods can be allowed to be used by number of persons
at a time, unless exclusive transfer of right to use is made to one lessee. In
respect of such type of transactions, i.e., where intangible goods are
involved, in Maharashtra, there is direct judgment of the Bombay High Court in
case of Dukes & Sons (112 STC 370).

In this case the issue before the Bombay High Court was about
tax on royalty amounts received for leasing of trade mark. The argument was that
since the trade mark is not given for exclusive use to one party, but is given
or is capable of being given for use to more than one party, there is no lease
transaction. The transaction was referred to as Franchise transaction. The
requirement of exclusive use or exclusive possession to transferee, for
considering transaction as lease, was given stress before the High Court.
However, the Bombay High Court held that since the nature of goods in this case
is intangible goods, the condition of exclusive use cannot apply. Accordingly,
the High Court held that even if the goods i.e., trade mark is leased to
more than one party, still the transaction is taxable as lease transaction.

Therefore, there was a situation that in relation to
intangible goods, the transactions were considered to be lease transactions in
spite of non-exclusive transfer of right. This judgment was delivered on 22nd
Sep. 1998. Therefore, after having the judgment of the Supreme Court in BSNL,
delivered on 02nd March, 2006, it was a feeling that the above judgment in case
of Dukes & Sons cannot be a good law.

A similar issue has now been decided by the Maharashtra Sales
Tax Tribunal. The reference is to the recent judgment of the Tribunal in case of
M/s. Smokin Joe’s Pizza Pvt. Ltd. (A.25 of 2004, dated 25-11-2008). In this case
the facts were that the appellant M/s. Smokin Joe’s was holding registered trade
mark for pizza i.e., “Smokin Joe’s”. The appellant has allowed this trade
mark to be used by others on franchise basis. In other words, due to franchise
agreement the franchisees were entitled to use the said trade name on their
premises as well as on the T shirts of the delivery boys, on packing materials,
etc. The appellant has entered into franchise agreement with such other parties
for above purpose. As per the franchise agreement, in addition to allowing above
use, the appellant has to provide number of other services, like helping in
layout of the premises, selection of raw materials, training to the staff,
instructions/know-how for method of manufacture of pizzas and delivery, etc. The
appellant was of the opinion that this is a licensing transaction and not a
lease transaction. In the alternative it was understood to be composite
transaction of lease and service and in absence of any authority to divide the
transaction into lease and service, it was considered as non-taxable transaction
under the then Maharashtra Lease Act. However for sake of legal order, an
application for determination was filed before the Commissioner of Sales Tax as
per the provisions of the Lease Act read with S. 52 of BST Act, 1959. In
determination order the Commissioner of Sales Tax held that the transaction is
covered by the Lease Act and hence liable to sales tax as leasing of trade mark.

In appeal before the Tribunal the appellant reiterated his
arguments. In addition, reliance was also placed on the judgment of the Supreme
Court in the case of Gujarat Bottling Co. Ltd. & Others (AIR 1995 Supreme Court
2372) where the nature of lease and licensing of trade mark has been discussed.
The appellant also relied upon judgment in the case of BSNL as referred to above
and also further fact that he is discharging liability under Service Tax
considering the transaction as of service. The clarification issued by the
Service Tax Authority, namely, vide Circular dated 28-6-2003, clarifying the
meaning of franchise was also relied upon.

The Tribunal made reference to the above position and came to the conclusion that in the given circumstances the transaction of franchise of trade mark is not lease transaction but amounts to licensing transaction. Therefore, the Tribunal held that no tax is payable on the above transaction under the Sales Tax Law.

The Tribunal in concluding Para observed as under:

“This Departmental clarification of the concerned authorities will be helpful to us to some extent to know the nature of the franchise agreement. It may be noted that in the franchise agreement as commonly understood the use of trade mark may not be involved. The basic equipment of franchisee agreement is that the franchisee has to follow the concept to business operation, managerial expertise, market techniques, etc. of the franchisor and to maintain standard and quality of such production as required by the franchisor. Thus only because the permission to use the trade mark has also been granted while entering into the franchise agreement, the said item of the agreement cannot be carved out from the main agreement of franchisee to hold that it as a transfer of right to use.

As such, after giving anxious consideration to all pros and cons of the matter, we are of the view that the impugned transaction does not involve the transfer of right to use the trade mark. It is a licence granted to use the trade mark simultaneously to various persons. It is a composite agreement of providing various services to ensure the standard and quality of the product in order to maintain the reputation of the franchisor and permission to use the trade mark is incidental. It is therefore, not covered under the Lease Act and the levy is not justified.”

In the light of above judgment of the Tribunal it can also be said that the judgment of Dukes & Sons is indirectly overruled by the judgment in the case of BSNL.The ratio of the above Tribunal judgment will also apply to many other intangible goods, like copyright, technical know-how, etc., if in relation to such transactions it can be shown that there is no exclusive right given to the lessee. It will not be a lease transaction, but it will be a licensing transaction not covered by Sales Tax Laws. In other words, the law explained by the Supreme Court in para 98 reproduced above will apply to all goods, whether tangible or intangible. The taxability as a lease transaction is to be decided in the light of above judgment of BSNL. This judgment will also clarify the position as to when a transaction will be other than lease, where Service Tax can be attracted.

Placement service charges and recruitment fees collected for facilitation of campus recruitment whether exigible to service tax under manpower recruitment or supply agency service?

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Facts

It was contended by the Appellant that the entire function of facilitating campus recruitments was carried out by “Students Placement Committee” headed by a professor of the institute and the institute per se did not have any role in the process other than collecting the charges and fees. The Appellant relied on the Board Circular and its own case 2011 (23) STR 132 (Tri-Bang) for the period 1st May 2006 to 30th September 2009.

Held

The definition of management and manpower supply and recruitment services has been amended w.e.f. 1st May 2006. The circular and the case law relied on by the Appellant were in relation to the period prior to amendment and therefore could not be considered. Pre-deposit of Rs. 16 lakh was ordered.

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Service tax under Tour Operators category when appellant neither held tourist permits nor had tourist buses. When service tax paid was by other tour operator, can it be demanded second time on same activity?

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Facts:

Appellant was providing following services against consideration:
• Bus Reservation agreement (BRA) – wherein Appellant supplied ordinary buses (other than tourist vehicles) to other tour operators and non-commercial concerns on rent.
• Seat Reservation agreement (SRA).
• Nashik Darshan (ND).
• Tour extension (TE).

 Respondent issued SCN demanding service tax of Rs. 1,03,65,342/- on BRA from 01-04-2001 to 31-03- 2006 and on other services from 01-04-2001 to 09-09-2004 under the category of “tour operator” and equal amount of penalty u/s. 78 was imposed. Appellant contended that they provided buses on rent to IDTC who was a tour operator and IDTC discharged the service tax under the category of “tour operator” and hence service tax cannot be demanded twice on the same activity.

Held:

Since appellant was neither holding tourist permits nor having tourist vehicles, they are not subject to service tax in respect of all activities concerned till 09-09-2004. Appellant was not liable for service tax on BRA where buses were hired to IDTC and service tax was paid by IDTC. However where buses were hired to non-commercial concerns like schools etc., appellant was liable to pay service tax from 09-09-2004. Held, penalty imposed u/s. 78 was waived as issue involved was of interpretation of law.

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No levy of penalty in absence of suppression and holding of bonafide belief as to non-taxability.

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Facts:

Appellant, a co-operative society of agriculturists lost land due to setting up of a plant by ONGC. Appellant provided renting of cab service to ONGC. Initially ONGC did not reimburse the service tax and disputed the same and hence, Appellant did not deposit the tax. This fact was intimated to the Respondent. Later on the tax was deposited. SCN was issued to demand the tax and recovery of penalties. Tribunal confirmed the penalties without paying any heed to the Appellant’s contention of bonafide belief and absence of suppression of facts.

Held:

Tribunal committed error in not accepting the plea of bonafide belief of the Appellant even though the service tax on renting of cabs was new one and there were conflicting judgments of different Tribunals. The Tribunal has not taken into consideration the correspondence between Appellant and Respondent wherein Appellant had intimated the reason for non-payment of tax. Further, there was no fraud or misrepresentation or suppression by the Appellant. Therefore, it was held that extended period was not invokable and also did not justify levying of penalty.

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Whether Rule 5A(2) of the Service Tax Rules, 1994 read with section 94(2) of the Finance Act 1994 empowers CAG (Comptroller & Auditor General of India) to conduct audit of accounts of any assessee? Matter referred to the Division Bench.

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Facts:

Appellant, a company incorporated under the Companies Act 1956 is engaged in the business of trading in stock and securities and was registered with the service tax authority under the categories of “stock broking”, “banking & other financial service” and “business auxiliary service” from the year 2004. Appellant company was not financed out of the funds or loans from the Central Government or State Government. However, they were served with the notice by the Principal Director of Audit, Central Kolkatta for audit by CERA audit team, an audit team under CAG to audit the service tax records, accounts and other related documents. Appellant challenged the said notice.

Held:

To carry out an audit of a non-governmental company which is neither financed nor run out of loan from Central/State Government by CAG, the condition precedent to such audit is request from the President of India or Governor of State u/s. 20 of the CAG Act, 1971 where it is carrying on its operation. And when such audit is on request of President/Governor, the obligation of the assessee under Rule 5A of the Service Tax Rules, 1994 and Rule 22 of the Central Excise Rules, 2002 is to provide the records to the audit party deputed by CAG. However, it does not oblige the assessee to agree to unauthorised audit of its accounts by CAG. Under Rule 5A(1) of the Service Tax Rules, 1994 an officer authorised by the Commissioner shall have access to the premises for the purpose of carrying out any scrutiny, verification and checks as may be necessary for safeguarding the interest of revenue. Rule 5A(2) of the said Rules requires assessee to make available records to the officer authorised by the Commissioner or CAG on demand for scrutiny of the said officer.

Therefore, the said Rule read with section 94(2) of the Finance Act, 1994 does not empower the CAG to audit the accounts of non-Government assessee, but it casts an obligation to make records and documents as specified therein available to the officer deputed by CAG. However, on being pointed out by the Counself for the Respondent to an unreported judgement and order passed by a Single Judge Bench of the Court in W.P.2762 of 2000 (M/s. Berger Paints India Ltd. & Others vs. Joint Commissioner Audit) Central Excise Calcutta- II where the vires of Rule 173G(6)(c) of Central Excise Rules which is pari materia with Rule 5A of the Service Tax Rules was under challenge, the court deemed it appropriate to refer the matter to a Division Bench for adjudication.

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CENVAT credit availed and utilised on exempted services in excess of prescribed limit – No disclosure made in returns filed – Held, it is a wilful suppression of facts for which extended period can be invoked and hence liable for penalties u/s. 76 and 78 of the Act.

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Facts:

Appellant was engaged in providing cellular telephone services in Jaipur circle. It was registered and paying service tax under “telephone services”. Appellant was consuming various input services and availing entire service tax credit as per Service Tax Credit Rules, 2002. Appellant was also receiving roaming charges from other telephone operators and was not paying service tax on the same during the period May, 2003 to August, 2004.

SCN was issued proposing to recover the service tax on the ground that Appellant should have restricted the utilisation of CENVAT towards payment of service tax on output service in terms of Rule 3(3)/3(5).

Tribunal upheld the demand of tax and also confirmed the invocation of extended period of limitation and upheld the penalties levied u/s. 76 and 78. Appellant contested the invocation of extended period of limitation stating absence of deliberate suppression.

Held:

When CENVAT credit was availed in excess of prescribed limits, facts ought to have been disclosed clearly by Appellant which is a professionally managed corporate. Failure to make the disclosures in returns or submitting entire facts by any letter accompanying the returns appears to be a case of wilful suppression. Extended period of limitation was rightly invoked. No substantial question of law is involved in the appeal and hence dismissed.

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Implications: Amendments in Exemptions

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The Finance Bill, 2013, unlike in the past few years, had a few proposals to amend the service tax law that underwent a major metamorphosis in this Budget in the last fiscal. However, seemingly small proposals made, could have large implications. Further, by issuing some notifications, amendments are made in some exemptions and abatements in case of construction services of builders or developers. Most of these amendments are effective from 1st April, 2013 and one relating to builders is effective from 1st March, 2013. These are discussed below.

• Air-conditioned Restaurants:

Background:

Whether a transaction for supply of food and/or beverages in a restaurant or a hotel is a contract for sale of food or a composite contract for sale and services was a subject of controversy vis-à-vis leviability of Sales Tax (now VAT) under the sales tax law in the states for many years. The Supreme Court in Northern India Caterers (India) Ltd. vs. Lt. Governor of Delhi (1978) 42 STC 386 (SC) held that service of meals whether in a hotel or restaurant does not constitute a sale of food for the purpose of levy of sales tax but must be regarded as the rendering of a service in the satisfaction of a human need or ministering to the bodily want of human beings. It would not make any difference whether the visitor to the restaurant is charged for the meal as a whole or according to each dish separately.

This led to the amendment in article 366(29A) of the Constitution, whereby the 46th amendment included within its scope “the supply, by way of or as part of any service, of food or any drink for cash, deferred payment or other valuable consideration” as a deemed sale. Subsequent to the constitutional amendment, VAT is being paid on the sale of food in hotels. However, the question that arose was on what value of the consideration should VAT be paid.

The five member Bench of the Supreme Court in the case of K. Damodarasamy Naidu & Sons Ltd. vs. State of TN (2000) 117 STC 1 (SC) interestingly held that the entire value should be deemed to be the consideration towards the sale. While delivering its judgment, the Honourable Supreme Court observed as under:

“In our view, therefore the price that the customer pays for the supply of goods in a restaurant cannot be split up as suggested by learned counsel. The supply of food by the restaurant owner to the customer though it may be a part of service that he renders by providing good furniture, furnishing and fixtures, linen, crockery and cutlery, music, a dance floor, and a floor show, is what is the subject of levy. The patron of a fancy restaurant who orders a plate of cheese sandwiches whose price is shown to be Rs. 50/- on the bill of fare knows very well that the innate cost of the bread, butter, mustard and cheese in the plate is very much less, but he orders it all the same. He pays Rs. 50/- for its supply and it is on Rs. 50/- that the restaurant owner must be taxed.”

In East India Hotels Ltd. & Another vs. UOI & Another (2001) 121 STC 46 (SC), it was held that “when all movable properties, materials, articles or commodities are goods, food in a restaurant has necessarily to be regarded as goods. …………. The moment the dish is supplied and the sale price paid, it would amount to sale”. It is also interesting to note that the Supreme Court in Tamilnadu Kalyan Mandapam Assn. vs. UOI 2006 (3) STR 260 (SC) observed, “In case of catering contracts, service element is more weighty; visible and predominant and it cannot be considered as a case of sale of food and drink in a restaurant”. Admittedly, there was no question before the Hon. Supreme Court in this case, to examine whether sale of food in a restaurant was a service or otherwise. Nevertheless, service tax on the service in relation to serving of food or beverage including alcoholic beverage was introduced with effect from 01-05-2011. However, this remained restricted to air-conditioned restaurants which also had a license to serve alcoholic beverages. To justify the levy in this regard, the TRU in its letter dated 28-02-2011, clarified that the tax is levied on the service element and it should not be confused with the sale of food. 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. Subsequently, on the onset of negative list based taxation of services with effect from 01-07-2012, the list of declared services in section 66E of the Finance Act, 1994 in sub-clause (i) included, the service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity. However, the restaurants other than fully or partially air-conditioned/centrally heated and not having license to serve alcoholic beverages remained exempted as the mega exemption Notification No. 25/2012-ST dated 20-06-2012 provided for the same at entry 19.

In many cases under the Service category of “Outdoor catering”, it has been held that it is possible to take deduction of material component in terms of Notification 12/2003. However, the Delhi CESTAT in the case of Sayaji Hotels (2011) 24 STR 177 has held that, in case of a composite contract of a “Mandap keeper” the hotel cannot artificially divide the contract and levy Service tax merely on the value of services so identified. In essence, the Delhi CESTAT rejected the theory of splitting between the value of services and goods and held that the only option the appellant had was to pay tax on the abated value as provided for in Notification 1/2006 dated 01-03-2006.

It would appear that after the rescinding of Notification 12/2003 w.e.f. 01-07-2012, the Service tax in relation to food contracts may have to be paid on the abated value as provided for or on the entire value of the contract inasmuch the new scheme of Valuation under Rule 2C does not provide for an option for claiming deduction of goods as it is provided for “Works Contract” under Rule 2A of the Valuation Rules. However, the larger issue is whether or not tax the taxing entry (i) u/s. 66E (Declared Services) which specifies service portion in an activity, can include value of goods supplied at all this is a matter that is being extensively debated. It needs to be noted that Rule 2C refers only to a “Restaurant” and does not Specify “eating joint or mess”. This appears to be inadvertent.

In addition, other valuation issues like charge of VAT on Service tax component (and vice versa), charge on other service charges (due to introduction of definition of service w.e.f. 1st July 2012) etc., are likely to be faced, which would ultimately increase the final cost to the consumer substantially.

Implication of amendment with effect from 01-04-2013:

Now, vide the Notification No. 3/2013-ST, the said entry no.19 in the Notification No. 25/2012 is amended to delete the condition for the restaurant to have a license to serve alcoholic beverages. Consequently, the amendment will have a tremendous impact, as a large number of eating places including fast food chains, coffee shops, pizza places, ice-cream parlours, cafeteria in hospitals, educational institutions or corporate offices, airports, multiplex cinema houses, book shops, auditoria, canteens in factories, food courts in shopping malls, clubs etc. are covered.

The entry 19 in the Notification No. 25/2012-ST describes a restaurant or eating joint other than those having the facility of air-conditioning or central heating in any part of the establishment, at any time during the year. This will consequentially include all the above stated illustrations including simple cafes or restaurants having a small portion or a mezzanine portion air-conditioned and will come under the service tax net. Further, even non air-conditioned portion of the café serving food would be subject to the levy. If a small ice-cream/yoghurt parlour has an air-conditioner in any part of their premises, it would be subjected to the levy. In large departmental/chain stores or book shops, small kiosks/bakeries/prepared food corners are often provided with a few tables and chairs. Since the book shop, the store or the mall has common area air-conditioned and even if the food or snacks, beverages or ice-cream are provided through “self-service” counters/desks in a tray and without the use of crockery, the exemption under entry 19 will not be available as some part of the establishment is air-conditioned. Many or most of these contracts of providing food are predominantly ‘sale’ contracts as ‘service’ element is present in a negligible proportion. In India, we have the system of ‘thali’, places serving only meals in thalis. They are known as Bhojanalayas and only lunch or dinner is served very quickly. These servings have a very little ‘service’ element. Yet, all and sundry would be subject to service tax once the turnover crosses the threshold limit of ten lakh rupees. The value of service however, in accordance with Rule 2C of the Service Tax (Determination of Value) Rules, 2006 is to be taken at 40% or in other words, after considering 60% presumptive abatement. This value is effective from 01-07-2013, as earlier 70% abatement was provided.

When the food is not consumed in the restaurant premises but packed or parcelled from the counter, there is no setup of the eating house enjoyed or used by the person collecting cooked food/meal. As referred above, the TRU circular dated 28-02-2011 clarified that on mere sale of food by way of pick-up or home delivery, no service tax would be attracted. However, there are cafes/restaurants which charge “delivery charges” for small orders or all orders as the case may be. The question therefore arises as to whether or not such “delivery charge” is a part of “sale contract” or in the negative list based taxation, it amounts to consideration for a service of providing food at the doorstep. This is because the food is supplied at home by a delivery boy which itself is a service and a separate charge is recovered for the same. It would mean a composite yet divisible contract of sale of food and service of providing home delivery of such food and thus the service components would be exigible to service tax. So far as cafeteria/canteens in corporate offices or factories are concerned, it is relevant to note the views expressed in the Draft Circular dated 25-07-2012 vide F. No. 354/127/2012-TRU issued by Tariff Research Unit of Ministry of Finance. Paras 8, 9 and 10 of the said circular read as follows:

“8.    A number of activities are carried out by the employers for the employees for a consideration. Such activities fall within the definition of “service” and are liable to be taxed unless specified in the Negative List or otherwise exempted.

9.    One of the ingredients for the taxation is that such activity should be provided for consideration. Where the employees pay for such services or where the amount is deducted from the salary, there does not seem to be any doubt. However, in certain situations, such services may be provided against a portion of the salary foregone by the employee. Such activities will also be considered as having been made for a consideration and thus liable to tax. CENVAT credit for inputs and input services used to provide such services will be eligible under extant rules. The said goods or services would now not be construed to be for personal use or consumption of an employee per se and rather shall be a constituent to the taxable service provided to an employee. The status of the employee would be as a service recipient rather than as a mere employee when consuming such output service. The valuation of the service so provided by the employer to the employee shall be determined as per the extant rules in this regard.

10.    However, any activity available to all the employees free of charge without any reduction from the emoluments shall not be considered as an activity for consideration and will thus remain outside the purview of the service tax liability (facilities like crèche, gymnasium or a health club which all employees may use without any charge or reduction from the salary will be outside the tax net). However the CENVAT credit for such inputs and input services will be guided by the extant rules.”

The above comments are a part of the Draft Circular which is yet not finalised. However, in the context of a canteen facility extended by an employer and in a case when consideration for the food served in the canteen is recovered by the employer and if the canteen is in the establishment, any part of which is air-conditioned, may need to examine service tax liability depending on the facts of each case.

Considering a mushroom growth of cafeteria, food courts, coffee shops, fast food chains and ice-cream parlours in all large and medium sized cities and towns of India, the number is alarmingly high and therefore, there would be widespread implications of the amendment, considering that eating out is a part of daily routine or a necessity of the young and middle-aged working population of the country.


•    Service of construction of complex:


Background

Service of construction of a complex, building or civil structure or any part thereof provided by a builder or a developer was notified as taxable service with effect from 01-07-2010. Although this generated tremendous controversy, the Honourable Bombay High Court in case of MCHI vs. UOI 2012 (25) STR 305 (Bom) rejected the challenge on the ground of constitution validity. Similarly, earlier the P&H High Court also dismissed the petition in GS Promoters vs. UOI 2011 (21) STR 100 (P&H) wherein the plea was made to declare the levy of service tax on builders as unconstitutional. This category, like the service portion of activity of supplying food, is included as declared service in section 66E, unless the entire consideration for the constructed unit is received post issuance of completion certificate. Vide Notification No. 26/2012-ST dated 20-06-2012 at serial no.12, the abatement of 75% subject to prescribed conditions continued.

Implication: Amendment with effect from 01-03-2013:

Alongside the budget proposals, amendment in the rate of abatement from 75% to 70% in certain cases vide Notification No. 2/2013-ST is already effective from 1st March, 2013 and plain reading of the substituted entry no. 12 in the said Notification No. 26/2012-ST reads as shown in the Table:

Table: Substituted entry no.12 in Notification No. 26/2012-ST


Reading of the aforesaid entry no. 12 indicates as follows:

a)    75% abatement subject to fulfillment of conditions will continue in two cases, viz.,

•    Construction of residential unit having car-pet area upto 2000 square feet or less OR

•    Construction of residential unit where the amount charged is less than Rs. 1 crore.

Meaning thereby that for a flat of 2500 sq. feet, if the amount charged is Rs. 80 lakh, it is entitled for abatement @ 75%. Conversely, even for a flat of 800 sq. feet, if the amount charged is Rs. 3 crore, the abatement is available @ 75%. In ef-fect, only one of the conditions mentioned above is required to be fulfilled — either the area of the residential unit is less than 2000 sq. feet or the amount charged is less than Rs. 1 crore.

b)    The abatement of 75% will no longer be available to a complex, building, civil structure or part thereof not covered by the above two categories. As such, a distinction is now made for commercial and residential construction and abatement of only 70% is available for commercial constructions irrespective of the amount charged or the area. Even if the amount charged is less than Rs. 1 crore or the area is less than 2000 sq. feet, the abatement available is 70% and the effective rate of service tax is thus 3.708% in place of 3.09%.

In this context, the words used by the Finance Minister while announcing his proposals in his Budget speech are worth taking note of:

“182. Homes and flats with a carpet area of 2,000 sq.ft. or more or of a value of `1 Crore or more are high-end constructions where the component of ‘service’ is greater. Hence, I propose to reduce the rate of abatement for this class of buildings from 75 percent to 70 percent. Existing exemptions from service tax for low cost housing and single residential units will continue.”

The above extract from the speech of the Finance Minister indicated that the reduction in abatement was to be restricted to certain residential premises. However, the language of the notification does not support that and conveys clearly that the abatement of 75% will not be available except in two cases referred above.

•    Copyright for cinematographic films:

In Notification No.25/2012-ST, entry no.15 exempted “Temporary transfer or permitting the use or enjoyment of a copyright covered under clauses (a) or (b) of s/s. (1) of section 13 of the Indian Copyright Act, 1957 relating to original literary, dramatic, musical, artistic works or cinematograph films” with effect from 01-07-2012. It is relevant to note in this context that actors, directors and various other technicians are brought under the net of service tax vide the new definition of service and the negative list based service tax regime from 1st July, 2012. Accordingly, a film producer is required to pay various actors, technicians and/ or other professionals their charges along with service tax and thus there is a cost addition of 12.36% to the producers. However, such producer of the film, the owner of copyrights of his film was not liable to pay service tax on his services of transferring or permitting use of such copyright in favour of distributors and/or theatre owners on account of the entry prior to amendment.

Implication of amendment with effect from 01-04-2013:

•    Now, this entry of exemption is restricted to “cinematograph films for exhibition in a cinema hall or cinema theatre”.

Thus, the exemption in respect of original literary, dramatic, musical or artistic work is retained without any change. However, grant of copyright is restricted only to transfers or permissions for the use of exhibition in a cinema hall or a cinema theatre.

•    The intention for the amendment is explained in CBEC letter dated 28-02-2013 as follows:

“The benefit of exemption u/s. No. 15 of the notification in relation to copyrights for cinematograph films will now be available only to films exhibited in a cinema hall or theatre. This will allow service providers to pass on input tax credits to taxable end-users”.

Now, when a film producer grants copyrights or temporarily transfers these to distributors for exhibition of the film in theatres, the producer is still not liable for service tax. However, when rights are granted for direct to home (DTH) exhibition or to broadcasting agencies viz. TV channels, satellites etc., the film producer is liable to service tax and in turn broadcasting TV channels already being under the tax net would be eligible to CENVAT credit of the service tax paid for temporary transfer of copyrights in their favour. However, film producers paying service tax to actors, technicians etc. would be eligible for only proportionate credit as they would be providing taxable service in respect of DTH or broadcasting rights whereas services of transfer of rights for exhibition in cinema continue to be exempt. The CBEC letter therefore appears to be only partially correct considering the above discussion.

•    Renting of immovable property and auxiliary education services provided by specified educational institutions:

Background:

Entry No. 9 in the Notification 25/2012-ST exempted service to or by an educational institution in re-spect of education exempted from service tax by way of renting of immovable property or education auxiliary service. The term “auxiliary educational service” is defined in the said Notification 25/12-ST itself as follows:

“(f) “auxiliary educational services” means any services relating to imparting any skill, knowledge, education or development of course content or any other knowledge – enhancement activity, whether for the students or the faculty, or any other services which educational institutions ordinarily carry out themselves but may obtain as outsourced services from any other person, including services relating to admission to such institution, conduct of examination, catering for the students under any mid-day meals scheme sponsored by Government, or transportation of students, faculty or staff of such institution”

Education which is not taxable under the negative list in section 66D appears at entry (1) and reads as follows:

“(l) services by way of-

(i)    pre-school education and education up to higher secondary school or equivalent;
(ii)    education as a part of a curriculum for obtaining a qualification recognized by any law for the time being in force;
(iii)    education as a part of an approved vocational education course”

Implication of amendment with effect from 01-04-2013:

Exemption will not continue for services provided by such institutes to other persons for the said services. However, such other persons providing auxiliary educational services or renting of immovable property services to the educational institutes would continue to be exempt. Educational institutions imparting education recognised by law such as university-affiliated colleges or any higher secondary school often provides its premises like halls, auditoria or ground on hire for any official, social, cultural or political functions. Prior to the introduction of the negative list from 01-07-2012, this service was covered under the category of mandap keeper. In the negative list taxable categories have ceased to exist and entry no.9 exempted renting of immovable property. Therefore letting off of institution’s immovable property was declared exempt. Now again, this becomes taxable. Even when the schools provide small counters/ place to banks in their premises for facilitating students/parents to pay school fees, this was taxable prior to 01-07-2012 and is noe taxable again. The definition of auxiliary educational services is such that generally services provided by others or those outsourced by the specified educational institutes would get covered. For instance, admission process outsourced by a university or the services of bus contractor etc. Nevertheless, if a school owns its transport vehicles and recovers charges from students for these facilities, it now will attract service tax. Similarly, if a place for canteen is let out to a contractor, it will attract service tax. If a training programme is conducted by a school for persons other than to specified education institutions, it will also become taxable as the scope of entry 9 is substantially narrowed. Further, educational institutions conduct a large number of extra-curricular courses (in addition to basic education) which are usually charged sepa-rately. These could get hit unless they fall under Entry No. 8 of Notification 25/2012- ST i.e., recreational activities in relation to arts, sports, etc.

•    Charitable activity of advancement of object of general public utility:

Background:

The Notification 25/2012 at entry 4 exempts services by an entity registered u/s. 12AA of the Income -tax Act, 1961 by way of charitable activities and in turn the said notification contains definition of “charitable activities” at 2(k) as follows:

“(k) “charitable activities” means activities relating to –

(i)    public health by way of –

(a)    care or counseling of (i) terminally ill persons or persons with severe physical or mental disability, (ii) persons afflicted with HIV or AIDS, or (iii) persons addicted to a dependence-forming substance such as narcotics drugs or alcohol; or

(b)    public awareness of preventive health, family planning or prevention of HIV infection;

(ii)    advancement of religion or spirituality;

(iii)    advancement of educational programmes or skill development relating to,

(a)    abandoned, orphaned or homeless children;
(b)    physically or mentally abused and traumatised persons;
(c)    prisoners; or
(d)    persons over the age of 65 years residing in a rural area;

(iv)    preservation of environment including watershed, forests and wildlife; or

(v)    advancement of any other object of general public utility up to a value of,

(a)    Rs. 18,75,000 for the year 2012-13 subject to the condition that total value of such activities had not exceeded Rs. 25,00,000 during
2011-12;

(b)    Rs. 25,00,000 in any other financial year subject to the condition that total value of such activities had not exceeded Rs. 25,00,000 during the preceding financial year;

Implication of amendment from 01-04-2013:

Now, the last sub-clause (v) is omitted. As it is, the term charitable activity is defined in a restrictive manner to include only a few specific activities. Some other activities of general nature like public awareness programmes etc., conducted by any 12AA registered organisation would not qualify to be exempt anymore.

•    Others:

  •     Transportation of goods by rail and transportation of goods by road.

Exemption in respect of transportation of goods by rail and vessel is contained at entry 20 and transportation of goods by road at entry 21 of the Notification 25/2012-ST. Amendments are made in both these entries to bring exemption in respect of all the modes of transport at par. Transportation of petroleum or petroleum products, postal mail or mail bags and household effects by rail or vessel was exempted at entry 20. This is now withdrawn. Therefore, transportation of petroleum/ petroleum products, postal mail or household effects by any mode of transport is now liable for service tax. Under entry 21 for goods transportation by road, transportation of fruits, vegetable, eggs, milk, food grain and pulses only was exempt. Now, in its place and like in the case of rail or vessel transportation, the exemption is redefined and scope is expanded to include the following products:

•    Agricultural produce

•    Foodstuff including flours, tea, coffee, jaggery, sugar, milk products, salt and edible oil, excluding alcoholic beverages

•    Chemical fertilisers and oilcakes

•    Registered newspapers or magazines, relief material for victims of natural or man-made disasters

•    Defence equipments.

The existing exemption in respect of consignment of single goods carriage for Rs. 1,500/- or less and consignment for a single consignee for Rs. 750/- or less continues to remain exempt.

•    Exemption provided at entry no.24 in Notification 25/2012-ST for vehicle parking services to general public stands withdrawn from 01-04-2013 and therefore parking charge recovered from general public now is liable for service tax.

Profession Tax – uploading of PAN/TAN etc. Trade Circular No. 6T of 2013 dated 01-10-2013

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All the PTRC and PTEC holders are requested to fill the details in “Profession Tax Information Form” and upload the form on website www.mahavat.gov. in . Detailed procedure is explained in the circular.

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Procedure for cross check of transactions of the sellers who have filed incomplete Annexure J1 for the FY 2009-10 and 2010-11

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Internal Circular No.9A of 2013 dated 19-08-2013

Commissioner has given instructions regarding cross check of transactions who have filed incomplete Annexure J1 for FY 2009-10 & 2010-11.
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2013 (30) S.T.R. 478-(Tri.-Del) Batra Motors & Travels vs. CCE, Delhi – III.

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In absence of evidence, gross receipt in bank held not taxable.

Facts:
The appellant provided “rent-a-cab” services to various organisations on which service tax was not paid. The Respondent on the basis of bank statement showing receipt of hiring charges received from various individuals as well as various units for providing “rent-a-cab” services confirmed the demand of service tax along with interest and penalty.

Held:
The entire money found in the bank’s statement cannot be considered as against “rent-a-cab” services until there was any evidence to show the same. In the absence of any evidence, it was held that the receipt cannot be considered as value subject to service tax.

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2013 (30) S.T.R. 532 (Tri.–Kolkata) Seven Star Steels Ltd. vs. Commissioner of Central Excise, Customs &S.T.- BBSR- II

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CENVAT credit on transportation of waste generated in processing of iron ore is eligible – Rule 3(5) of CCR not applicable to ‘input service’ Facts:
The appellant engaged in the manufacture of sponge iron availed CENVAT credit of GTA service in respect of iron ore fines generated in the process of screening and were in the nature of unavoidable waste which fetched some price when sold in the market. The revenue contended to reverse the said credit. The Appellant submitted that in terms of the CENVAT Credit Rules, 2004, the credit on input services, cannot be denied on the ground that some part of the input is contained in the waste. Rule 3(5) further prescribed reversal of CENVAT credit on removal of inputs or capital goods which in the present case does not apply.

Held:
The Tribunal allowed the appeal and held that input iron ores were subjected to the process of screening which was a part of the manufacturing process. After the process the same could not be called as input as such. The Tribunal further held that Rule 3(5) of the CENVAT Credit Rules,2004 directed for reversal of CENVAT credit on inputs or capital goods and the same is not applicable on input services.
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Correction of mistakes made by the dealers — Miscellaneous refunds of excess payment of taxes — Trade Circular 17T of 2011, dated 25-11-2011.

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This Circular lays down the procedure for correction of mistakes made while making e-payment of taxes by dealers due to mention of wrong TIN or wrong Act or wrong period. It also lays down procedure for miscellaneous refunds due to double payment of taxes or excess payment of taxes.
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(2011) 40 VST 72 (P&H) Swastik Pipes Ltd. v. State of Haryana

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Assessment — Dealer participated in assessment — Failure to issue Notice — Not aausing any prejudice — Not a ground for invalid assessment — Section 28(5) of Haryana General Sales Tax Act, 1973.

Facts
The assessment was finalised with co-operation of dealer upon furnishing of information by him, after giving reasonable opportunity of hearing. The dealer raised objection that without issuing statutory notice purchase tax assessment cannot be finalised. The dealer filed reference before the High Court against the decision of the Tribunal confirming the assessment to decide whether second/ separate show-cause notice is mandatory for the levy of purchase tax u/s.28(5) of the Act.

Held
U/s.28(5) of the Act, the assessing authority is obliged to serve notice to the dealer for framing assessment. In this case, the assessment was finalised with the co-operation of the dealer, who had supplied all the relevant information necessary for the quantification of purchase tax liability to the assessing authority. A reasonable opportunity of being heard was given to the dealer. The requirement of section 28(5) of the Act extends only to grant reasonable opportunity of hearing, which is satisfied in this case. Non-issue of notice or mistake in the issue of notice or defect in service of notice does not affect the jurisdiction of the assessing authority, if otherwise reasonable opportunity of being heard is granted. In this case neither any prejudice is caused, nor have the provisions of section 28(5) of the Act been violated. Therefore the High Court answered the reference in favour of the Revenue.

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(2011) 39 VST 581 (Bom.) Jay Shree Tea and Industries v. Commissioner of Sales Tax and Others

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Limitation — Reassessment — Issue of notice — Barred by limitation — Reassessment order — Set aside — Section 35 of the Bombay Sales Tax Act, 1959.

Facts
The dealers filed writ petition against issue of notice of reassessment dated February 3, 1999 on the ground of limitation and other legal grounds. The original assessment order for the period 1991- 92 was passed on 31-3-1995. The appeal order was passed on 29-10-1996. The revising authority issued notice in Form 40 for revision of appeal order on 22-1-1997, which was subsequently dropped upon submission made by the dealer on 23-4-1997. Thereafter, enforcement branch of the Sales Tax Department visited the place of business of the dealer and based upon documents found at that time, issued notice for reassessment on 3-2-1999. This notice in Form 28 issued by the enforcement branch for reassessment for the period 1991-92 was challenged by the dealer by filing writ petition before the Bombay High Court being barred by limitation.

Held
The notice for reassessment was issued on 3-2-1999 for the period 1991-92. U/s.35 of the BST Act, no notice for reassessment can be issued after expiry of five years from the end of the financial year. The period of limitation for reassessment starts from 31- 3-1992 i.e., the end of the financial year for which the reassessment is sought. If, one calculates five years from 31-3-1992, the period of limitation expires on 31-3-1997. Under the circumstances the notice for reassessment dated 3-2-1999 is clearly barred by limitation. Accordingly, the High Court quashed and set aside the impugned notice for reassessment.

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2013 (30) S.T.R. 513 (Tri.–Delhi) Ambuj Hotels & Real Estate P. Ltd. vs. Commissioner of Central Excise, Allahabad –

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Stay – ‘Outdoor Caterer’s Service’ – Service tax on value of ready confectionaries sold on MRP to railway passengers onboard – activity amounts to ‘sale’ – Stay granted. Facts:
The appellant was a caterer duly registered with service tax department as an “outdoor caterer” provided food items and served meals to the passengers onboard of Shatabdi/Rajdhani and mail/Express trains which also included sale of confectionary items such as chips, biscuits etc. The Revenue contended to levy tax on the value of sale of readymade items by adding it to the assessable value. The appellant submitted that the demand was mainly on account of tax demanded on sale of items like potato chips, biscuits, cakes etc. sold by them to the passengers and a small amount on account of value of newspaper sold to IRCTC for giving to the passengers and also contended that in respect of these activities, there is no catering involved and it is simply a case of sale of items on which they appropriate paid VAT

Held:
The Tribunal stayed the recovery and held that sale of packaged items like biscuits, cakes, potato chips etc is a distinct activity from serving meals for which no separate service charges were charged and thus activity was one of sale and service tax is not payable on the value of items sold (after allowing 50% abatement as done in the impugned order).
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2013 (30) S.T.R. 634 (Tri.-Delhi) G.R. Movers vs. CCE, Lucknow.

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No service tax is payable on commission paid by BSNL to distributors of SIM cards / recharge coupons if BSNL has already paid service tax on value of such SIM cards etc. supplied to distributor. Facts:
The Appellants were distributors of SIM-cards and marketers of re-charge coupons. BSNL supplied these cards with fixed Maximum Retail Price (MRP) to the Appellants and paid service tax thereon. The Appellants collected the value of the cards and remitted the same to BSNL. For this activity, BSNL paid commission to the Appellants on which service tax was demanded. The Appellants submitted that the service tax demanded from the distributor on a value on which service tax was already paid by BSNL amounted to double taxation and that the said question was under dispute before the Tribunal in the past in which it held that the demand was not maintainable. Appellant referred to decisions of (i) Chetan Traders vs. CCE-2009 (13) S.T.R. 419 (Tri.) (ii) Hindustan Associated Traders and others vs. CCE-2007-TIOL- 1699-CESTAT-BANG. (iii) South East Corporation vs. CCE-2007-TIOL-1374-CESTAT-BANG.

Drawing attention to some clauses of the agreement, the revenue contended that the activities of the Appellants clearly brought out that they provided service in the nature of business auxiliary service. They further pointed out that the tax paid by BSNL was for telecommunication service to the customers and the tax demanded in the present appeal was for Business Auxiliary Service provided by the distributors to BSNL and thus there was no double taxation. The Revenue also submitted that the decisions of the Tribunal relied upon by the Appellants were no longer reliable because the decisions considered the transactions to be in the nature of purchase and sale of SIM-cards which attained finality in Idea Mobile Communications Ltd. v. CCE 2011 (23) STR 433 (SC).

Held:
Although the Appellants promoted and marketed the services and received commission which was covered under business auxiliary service, it was a case where BSNL sold the cards through the distributor and collected money from customers through distributors on which service tax was first discharged by BSNL and then paid commission to the distributors out of the consideration received from their customers. Considering the special nature of the activities and the fact that it can be easily verified that full taxable value of the service provided by BSNL to customers was subjected to tax and also considering that the recent Notification No.25/2012-ST granted exemption in this regard, the appeal was allowed.

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2013 (30) S.T.R. 593 (Tri.–Kolkata) Suchak Marketing Pvt. Ltd. vs. Commissioner of Service Tax, Kolkata.

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No late fee for delay in filing ‘Nil’ Returns – Board Circular No.97/8/2007 – ST dtd.23-08-2007 relied upon. Facts:
The Appellant provided commercial or industrial construction service and got registered under the said category. They filed ‘NIL’ Returns for the period September 2005 – March 2008 on 18-11-2008. Consequently, penalty under Rule 7C of the Service Tax Rules was confirmed and the Appellant was directed to pay Rs. 12,000/- for each Return and further imposed penalty of Rs.2,000/- u/s. 77 of the Finance Act, 1994. The Commissioner (Appeals) dropped the penalty u/s. 77 but confirmed the penalty of Rs. 12,000/- against the Appellant under Rule 7C of the Rules. The Revenue contended that since the penalty u/s. 77 was already dropped, there was no reason to waive the late fees under the said Rule 7C.

Held:
Relying on Board Circular No. 97/8/2007 ST dated 23/08/2007 clarifying that, in absence of any service rendered, there is no requirement to file ST-3 Returns. Further invoking proviso to the said Rule 7C, the late fees for the NIL Returns were waived.
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2013 (30) S.T.R. 673 (Tri.-MUM) CCE, Mumbai – V vs. GTC Industries Ltd.

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CENVAT credit – Outdoor Caterers Service availed by manufacturer – Held, providing canteen is statutory requirement – direct nexus and hence ‘input service’.
Facts:

Manufacturer of cigarettes, packing materials of paper and paper board and printing inks availed CENVAT Credit on their inputs, capital goods and input services. CENVAT credit of service tax paid on outdoor caterer’s services during March 2005-06 was disallowed and upheld but the Commissioner (Appeals) allowed the same. The department’s appeal was decided by the Larger Bench in favour of the assessee. The department challenged the order before the Hon’ble Bombay High Court which remanded it back to the Tribunal to decide in accordance with the decision of the High Court in Ultratech Cement Ltd. 2010 (20) STR 577 (Bom). The Revenue contended that in the case of Ultratech Cement Ltd., the Hon’ble High Court held that once the service tax is borne by the ultimate consumer of the service, namely the worker; the manufacturer cannot take credit of that part of the service tax which is borne by the consumer. The Assessee pleaded that the cost of canteen service was borne by the worker, was not the point of proceedings of the case, at any stage.

Held:
The Hon. Tribunal relying on the decision of the Hon. High Court in Ultratech Cements Ltd. (supra) held that the services having nexus or integral connection with the manufacture/business of final products would qualify to be input service under Rule 2(I) of 2004 Rules.

Under Factories Act, 1948, providing canteen is mandatory. The canteen service had nexus or integral connection with the business of manufacture of final product and thus would qualify to be input service.

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2013 (30) S.T.R. 703 (Tri-Mumbai) ECP housing (India) Pvt. Ltd. vs. Commissioner of Central Excise, Nashik.

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Stay – “Commercial & Industrial Construction Service” – Construction of Sports Complex & Stadium – Held, construction of stadium not taxable but construction of shopping complex around stadium, taxable – Pre-deposit ordered.
Facts:

The appellant entered into a contract for construction of a stadium and a shopping complex around the stadium. The Revenue contended to levy tax on whole activity under the category of “Commercial & Industrial Construction Service”.

Held:
The levy was upheld on construction of shopping complex ordering pre-deposit of Rs. 15 lakh whereas the construction of a stadium was held as not a commercial or industrial construction service and thus not chargeable to service tax.

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2013 (30) STR 668 (Tri-Del) Dilip Construction vs. Commissioner of Central Excise, Raipur.

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Internal movement of iron ore ‘within’ mining
area – no movement of cargo outside mining area – Held, not classifiable
under “Cargo Handling Service”

Facts:
The
Appellant was engaged in the activity of movement and transportation of
iron ore within the mining area on which the revenue proposed to levy
tax under the category of “Cargo Handling Service”.

Held:
For
an activity to fall under cargo handling service, there should be
movement of cargo from one place to another and not just internal
movement within the mining area. There was no evidence to prove that
handling service was outside the mining area. When the factual evidence
demonstrated movement of the excavated iron within the mining area from
one place to another, such operation was not a cargo handling service.
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2013 (30) STR 652 (Tri-Del) Scott Wilson Kirkpatrick India Pvt. Ltd. vs. Commissioner of Central Excise, Jaipur.

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Consulting Engineer Services – Reimbursement of expenses – Held, extended period not invokable as there is bonafide belief backed by CBEC’s clarification and Tribunal decisions.
Facts:

The appellant provided services of Consulting Engineer to National Highways Authority of India (NHAI) and received certain consideration in the form of reimbursements. As per revenue, the said consideration formed part of the value of service and hence levied tax, interest and penalty. In support of their view, they relied on Mett. Macdonald Ltd. vs. CCE 2006 (2) S.T.R. 524 (Tri.- Del) and Shri Bhagavathy Traders vs. CCE, Cochin-2011- TIOL-1155-CESTAT-BANG-LB. The appellant relied on CBEC Circulars B.43/5/97-TRU dated 02-07-1997 and B11/1/98-TRU dated 07-10-1998 which clarified that reimbursed expenses incurred by Consulting Engineers did not form part of the value of service and also relied on the decision in their own case reported in 2007 (5) S.T.R. 118 to the effect that such expenses would not be construed value of service of Consulting Engineers.

Held:
Allowing the appeal, it was held that the decision of the larger Bench of the Tribunal in Shri Bhagavathy Traders was under challenge before the Apex Court. In view of the clarification issued by the CBEC and the decisions relied by the appellant, the action of the appellant was bonafide and suppression cannot be alleged for invoking extended period of time for demanding tax.

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Works Contract executed through Sub-contractor — Whether single transaction or multiple transactions ?

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VAT

A very interesting question was dealt with by Andhra Pradesh
High Court in the case of Larsen & Toubro Ltd. & Others, reported in 148 STC 616
(A.P.). The facts were that L&T received a contract from its customer (contractee).
Part of the contract was executed through subcontractors. The sub-contractors
had issued tax invoices to L&T and tax on the same was paid by the respective
sub-contractors. L&T was assessed for the period 1-4-2005 to 31-1-2006 under A.P.
VAT Act. In the returns filed for the above period, L&T had not included the
turnover affected through subcontractors. The Assessing Officer was of the view
that such turnover is includible in the turnover of L&T.


L&T argued that there was no such need in view of particular
provisions of the A P Vat Act and also on the principle of single transaction
theory. In other words, L&T contended that there was direct sale by the
subcontractors to the contractee and hence no turnover of subcontractor was
includible in its turnover. The Assessing Officer held that there was sale by
subcontractor to L&T i.e., to the principal contractor and again by L&T
to the contractee. In view of the above, the Assessing Officer held the turnover
affected through subcontractors as liable to tax in the hands of L&T. L&T filed
writ petition in the Andhra Pradesh High Court. The High Court held that in view
of the established position by the judgment of Supreme Court in the case of
Builders’ Association of India (73 STC 370), the turnover of subcontractor is
not includible in the turnover of L&T.

Against the above judgment the State of A.P. filed SLP in the
Supreme Court. The Supreme Court has now decided this issue vide its judgment in
State of Andhra Pradesh and Others v. Larsen & Toubro Ltd. & Others. The
judgment is reported in 2008 VIL 30 SC dated 26-8-2008. The Supreme Court has
dealt with the issue in the light of specific provisions of the A.P. VAT Act and
also the Constitution’s provisions like Article 366(29A)(b).

The Supreme Court observed that there can be two types of
works contracts : one, relating to construction and two, relating to movable
properties like repairs, etc. . . After taking note of the judgment of the
Supreme Court in the case of Gannon Dunkarley and Co. (9 STC 353), the Supreme
Court referred to the 46th amendment made to the Constitution by which deemed
sale categories were provided by way of Article 366 (29A). The Supreme Court
also observed that the above amendment to the Constitution has been approved by
the Constitution Bench in the case of Builders’ Association of India (73 STC
370). The Supreme Court also noted the provision in the A.P. Act which provides
for payment of tax on the value of the goods at the time of incorporation of
such goods in the works executed at the rates applicable to the goods. In
the light of above, the Supreme Court held that the taxable event is transfer of
property in goods involved in the execution of works contract and the said
transfer of property takes place when the goods are incorporated in the works.
The value at such point of time is a taxable value. In view of the above
provision, the Supreme Court observed that the scheme of taxation indicates that
there is a ‘deemed sale’ by the dealer executing the work, i.e., in this
case the subcontractor. The Supreme Court further observed that it is the
sub-contractor only, who affects transfer of property in goods, as no goods
vests in the main contractor, so as to be subject matter of a re-transfer. The
Supreme Court, in fact, observed as under :

“‘By virtue of Article 366 (29A)(b) of the Constitution
once the work is assigned by the contractor (L&T), the only transfer of
property in goods is by the subcontractor(s) who is a registered dealer in
this case and who claims to have paid taxes under the Act on the goods
involved in the execution of the works. Once the work is assigned by L&T to
its subcontractor(s), L&T ceases to execute the works contract in the sense
contemplated by Article 366(29A)(b), because property passes by accretion and
there is no property in goods with the contractor which is capable of a
re-transfer, whether as goods or in some other form.

17. The question which is raised before us is : whether the
turnover of the subcontractors (whose names are also given in the original
writ petition) is to be added to the turnover of L&T. In other words, the
question which we are required to answer is : whether the goods employed by
the subcontractors occur in the form of a single deemed sale or multiple
deemed sales. In our view, the principle of law in this regard is clarified by
this Court in the case of Builders’ Association of India (supra) as
under :

“Ordinarily, unless there is a contract to the contrary, in
case of works contract the property in the goods used in the construction of a
building passes to the owner of the land on which the building is constructed,
when the goods or materials used are incorporated in the building.”


On behalf of the State of A.P. the argument was that there
are two deemed sales i.e., one from subcontractor to main contractor and
the other from main contractor to contractee. It was emphasised that contractee
has no privity of contract with the sub-contractor, hence it cannot be a single
transaction. On the above line of argument, the Supreme Court observed as
under :


“19. If one keeps in mind the above-quoted observation of this Court in the case of Builders’ Association of India (supra), the position becomes clear, namely, that even if there is no privity of contract between the contractee and the subcontractor, that would not do away with the principle of transfer of property by the subcontractor by employing the same on the property belonging to the contractee. This reasoning is based on the principle of accretion of property in goods. It is subject to the contract to the contrary. Thus, in our view, in such a case, the work executed by a sub-contractor results in a single transaction and not as multiple transactions. This reasoning is also borne out by S. 4(7) which refers to value of goods at the time of incorporation in the works executed. In our view, if the argument of the Department is to be accepted, it would result in plurality of deemed sales which would be contrary to Article 366(29A) (b) of the Constitution as held by the impugned judgment of the High Court. Moreover, it mayresult in double taxation which may make the said 2005 Act vulnerable to challenge as violative of Articles 14, 19(1) (g) and 265 of the Constitution of India as held by the High Court in its impugned judgment.”

Thus, it can be said that the legal position which emerges at present is that in relation to construction activity, even though the subcontractors are involved, still there cannot be multiple transactions. The taxation will be only once. The Supreme Court has not dealt with the issue about such transactions in relation to moveable properties. It also appears that in relation to construction activity if there is anything contrary to the above understanding, then the position may be different. This is evident from observations in para 19 reproduced above. It may also be worth noting that in relation to similar construction activity, in case of L&T only, the Karnataka High Court has taken a different view while dealing with levy of turnover tax under the erstwhile Karnataka Sales TaxAct and it is held that there are multi-point transactions, one from subcontractor to main contractor and the other from main contractor to contractee. This judgment is reported in 16 VST 616. However, the judgment is dated 3-2-2006, that is prior to the above Supreme Court judgment. In view of this latest judgment of the Supreme Court, the controversy should be laid to rest.

Recent amendment – Scope of E-filing of returns expanded:
The Commissioner of Sales Tax, Maharashtra State, has issued Notification under Rule 17(5)(a) of the MVAT Rules, 2005 dated 30-8-2008. By this Notification the scope of E filing of returns has been expanded. Hitherto, dealers having tax liability exceeding Rs.I0 lakhs or refund exceeding Rs.l crore in the previous year (i.e., liable to file monthly returns) were liable to file E-returns. Now dealers having tax liability exceeding Rs.l lakh or refund exceeding Rs.I0 lakhs in the previous year are also made liable to file E-returns. In other words, in addition to dealers filing monthly returns, dealers filing quarterly returns are also now required to file E-returns. This position applies from the quarter starting 1st July, 2008. Therefore, for the quarter ending 30th September, 2008 and onwards, dealers covered by provisions of quarterly returns, will be required to file their returns by way of E-returns. Dealers filing monthly returns will continue to file E-returns, as earlier.

‘SALE PRICE/TURNOVER’ FOR LEVY OF CST

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Introduction :

Once the transaction is held to be a sale, the next question which arises is the quantum on which such tax is leviable. This is referred to as ‘sale price’ in relation to individual transaction and ‘turnover’ in relation to aggregate of transactions during a particular period. There may be a number of different elements which require consideration while determining sale price/turnover.

Definitions :

Under the CST Act, 1956, the above terms are defined as discussed below :

“(h) ‘sale price’ means the amount payable to a dealer as consideration for the sale of any goods, less than any sum allowed as cash discount according to the practice normally prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof other than the cost of freight or delivery or the cost of installation in cases where such cost is separately charged;

Provided that in the case of a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract, the sale price of such goods shall be determined in the prescribed manner by making such deduction from the total consideration for the works contract as may be prescribed and such price shall be deemed to be the sale price for the purposes of this clause.”

“(j) ‘turnover’ used in relation to any dealer liable to tax under this Act means the aggregate of the sale prices received and receivable by him in respect of sales of any goods in the course of inter-state trade or commerce made during any prescribed period and determined in accordance with the provisions of this Act and the rules made thereunder.”

From the definition of sale price, it appears that though all amounts charged to the buyer till delivery is given are to be considered as sale price, the amount charged separately for freight is not to be included in the sale price.

Interpretation of above definitions :

However, interpretation of the above definitions have attracted lengthy litigations. There are a number of judgments interpreting the above terms.

Recently, the Supreme Court had an occasion to deal with the above aspect. The Supreme Court has delivered judgment in case of India Meters Ltd. v. State of Tamil Nadu (34 VST 273).

In this case, the facts were that the appellant, M/s. Indian Meters Ltd. (referred to as dealer) sold meters manufactured by it to its customers within and outside Tamil Nadu. The dealer had charged applicable tax i.e., Tamil Nadu Sales Tax or Central Sales Tax on the price charged by it. The dealer had also collected separately amounts from the buyers towards freight charges, by raising debit notes. The dealer had not paid tax on the above amounts. The Sales Tax Authorities held that these amounts are also part of sale price and accordingly levied tax on the same under the respective Acts.

Though, the Tamil Nadu Sales Tax Appellate Tribunal held in favour of dealer, the High Court held that the said amounts are part of sale price and turnover and therefore correctly held as liable to tax.

The matter came before the Supreme Court. The Supreme Court examined the facts. It was found that the clause in the sale contract provided that the transfer of title to the goods was to take place only on delivery of goods at customer’s place and the customer’s obligation to pay would arise only after the delivery had been so effected. Simultaneously it was also found that there was a clause in the contract dealing with the price. It was provided that the price was payable per unit, ex-factory delivery. The Clause further provided that sales tax and excise duty will be payable only on ex-factory price.

Based on the above terms and conditions, it was argued by the dealer that since the prices are ex-factory and freight is charged separately, the said freight was not chargeable to tax. Various judgments were cited before the Supreme Court.

Supreme Court’s ruling :

The Supreme Court has confirmed the view of the High Court.

The Supreme Court observed that in the present case, the obligation to pay the freight was clearly on the dealer, as no sale could have taken place unless the goods were delivered at the premises of the buyer. It was further observed that for giving such delivery incurring cost of freight was required on part of the dealer. The Supreme Court held that though the contract mentioned the price as ex-factory price, the delivery was not at the factory gate. Therefore, the specification of what the price would be at the factory gate cannot have any impact on the place of delivery, held the Supreme Court. The Supreme Court also observed that had the delivery been completed at the factory gate, then the expenses incurred thereafter by way of freight could have been categorised as post-sale expenses and could not have been taxable. Thus, ultimately the Supreme Court confirmed the levy. The Supreme Court reproduced legal position in the following manner.

“In Paprika Ltd. v. Board of Trade, (1944) 1 ALL ER 372, the Court observed as under :

“Whenever a sale attracts purchase tax, that tax presumably affects the price which the seller who is liable to pay the tax demands, but it does not cease to be the price which the buyer has to pay even the price is expressed as ‘X’ plus purchase tax.”

In this case, the learned judge also quoted with approval what Goddard, L.J., said in Love v. Norman Wright (Builders) Ltd., (1944) 1 All ER 618:

“Where an article is taxed, whether by pur-chase tax, customs duty or excise duty, the tax becomes part of the price which ordinarily the buyer will have to pay. The price of an ounce of tobacco is what it is because of the rate of tax, but on a sale there is only one consider-ation though made up of cost plus profit plus tax. So, if a seller offers goods for sale, it is for him to quote a price which includes the tax if he desires to pass it on to the buyer. If the buyer agrees to the price, it is not for him to consider how it is made up or whether the seller has included tax or not” and summed up the position in the following words:

“So far as the purchaser is concerned, he pays for the goods that the seller demands, namely, the price even though it may include tax. That is the whole consideration for the sale and there is no reason why the whole amount paid to the seller by the purchaser should not be treated as the consideration for the sale and included in the turnover.”

The Supreme Court further referred to settled position as under:

“This Court had an occasion to deal with identical issues in the case of Hindustan Sugar Mills (1978) 4 SCC 271. P. N. Bhagwati J. (as His Lordship then was), clearly held that by reason of the provisions of the Control Order which governed the transactions of sale of cement entered into by the assessee with the purchasers in both the appeals before us, the amount of freight formed part of the ‘sale price’.

In this judgement, the Court comprehensively explained the entire principle of law by giving an example in para 8 of the judgment which reads as under:

“8. Take for example, excise duty payable by a dealer who is a manufacturer. When he sells goods manufactured by him, he always passes on the excise duty to the purchaser. Ordinarily, it is not shown as a separate item in the bill, but it is included in the price charged by him. The ‘sale price’ in such a case could be the entire price inclusive of excise duty, because that would be the consideration payable by the purchaser for the sale of the goods. True, the excise duty component of the price would not be an addition to the coffers of the dealer, as it would go to reimburse him in respect of the excise duty already paid by him on the manufacture of the goods. But, even so, it would be part of the ‘sale price’, because it forms a component of the consideration pay-able by the purchaser to the dealer. It is only as part of the consideration for the sale of the goods that the amount representing excise duty would be payable by the purchaser. There is no other manner of liability, statutory or otherwise, under which the purchaser would be liable to pay the amount of excise duty to the dealer. And, on this reasoning, it would make no difference whether the amount of excise duty is included in the price charged by the dealer or is shown as a separate item in the bill. In either case, it would be part of the ‘sale price’. So also, the amount of sales tax payable by a dealer, whether included in the price or added to it as a separate item, as is usually the case, forms part of the ‘sale price’. It is payable by the purchaser to the dealer as part of the consideration for the sale of the goods and hence falls within the first part of the definition?….”

Ratio of Supreme Court judgement:

The ratio of the judgement is required to be seen carefully. Even if the freight is collected separately, if the delivery is at the door of the customer, then in spite of the above exclusion of freight from the definition of sale price, it will be includible in the sale price and taxable.

The further ratio which comes out is that if it is established that the delivery is given at the seller’s place and the freight charges are incurred thereafter, then the said collection can be considered as post-sale collection. It will also be considered as reimbursement of expenditure made on behalf of the buyer. In such circumstances, it will not be taxable.

We hope the above judgement will settle the controversy for all time to come and the dealers can determine the taxation of freight accordingly.

New VAT Audit Form-704

S. 61 of The Maharashtra Value Added Tax Act, 2002 (MVAT Act) requires certain dealers to get their books of account audited and submit Audit Report so obtained from the Auditor i.e. either from a practising chartered accountant or a practising cost accountant. This report is required to be submitted within 10 months from the end of the financial year. Non-filing or late filing of Audit Report may attract penalty at the rate of 0.1% of the turnover of sales. The prescribed form of Audit Report (i.e. Form 704) has been replaced recently vide notification dated 26-8-2009 issued under Rule 17A(2) of MVAT Rules, 2005. The revised form of audit report is applicable for financial years commencing on or after 1st April 2008. Thus, from 26th August 2009 onwards, the VAT Audit Reports for F.Y. 2008-09 have to be given in this amended Form 704 only. Further, the Commissioner of Sales Tax, vide Notification dated 1st October 2009, has notified electronic format of Form 704 to facilitate the dealer to file the Audit Report electronically. From 1st October 2009 onwards all such dealers shall file the Audit Report in electronic format only.

Some of the important distinguishing features of this new form may be noted as under :

    1. Emphasis shifted from returns to tax liability.

    In the earlier report the main thrust was to certify the correctness and completeness of the returns filed by the dealer. In the new Form, the thrust is on certification of tax liability of the dealer based on his books and records.

    2. In the earlier report for almost each column and row, remarks from the Auditor were asked for. This was creating confusion and every Auditor followed different way of giving such remarks. Some of the publications even gave suggested remarks for each such column. The new Audit Form is designed in such a way that all remarks will get reported at one or two specified places only viz. para-3 or para-5 of Part-1. This will be helpful to the Auditor as well as the user.

    3. Most important distinguishing feature is that this new Audit Report is to be filed electronically. The earlier Report was to be filed physically. The Commissioner of Sales Tax has issued Circular bearing No. 27T of 2009 dated 1-10-2009 by which the procedure for e-filing of this Report has been clarified. Though, Auditor will give his Report to the dealer, the dealer will upload the same. Therefore, the Auditor may be required to give Report in Electronic Format along with physical copy to facilitate the dealer to file new Report Form. After uploading the Report the dealer is also required to submit ‘statement of submission’, as explained in the above Circular.

    4. The new VAT Audit Form has three parts. Part-1 is about certification, whereas Part-2 is about general information of the dealer and Part-3 is about calculation of tax liability.

    In Part-1, at the beginning, there are certain instructions to be followed by the auditor. There are about 19 instructions. The rule making authority has given weightage to these instructions, in as much as in the Certification Part the Auditor has to certify that he has read and understood the instructions and followed the same while preparing the Report. Thus, the Auditor is expected to follow the instructions and in any case, if not in position to follow the same, he will be required to report in para-3 of Part-1.

    5. As stated above, Part-1 is about certification. Para-2(B) of Part-1 starts as under :

    “Subject to *my/our remarks about non-compliance, short comings and deficiencies in the returns filed and tax liability computed and presented in respective schedules and Para-4 of this Part, I/We certify that,. . . . .”

    Thus, an impression arises that this is not a Report as such but certification. Report is generally an opinion based on the overall verification of the records, certification means certifying correctness of the facts so certified. For example, if a ‘debtors list’ is certified as per any records, then such certification is expected to be correct as per actual amounts, leaving no difference even of Rupee or Paisa. Therefore, an issue may arise whether the VAT Auditor is giving certification, so that the amounts/tax liability mentioned in the Audit Report are verified fully in all its respects, including 100% accuracy of various claims. In certification in para-2(B), there are certain items, mentioning that the Auditor has fully verified the facts stated therein. For example, in clause (i) the Auditor certifies that ‘all such declarations and certificates are produced before me. I have verified the same and they are in conformity with the provisions related thereto’.

    Due to these kind of certification, question arises whether the Auditor is supposed to check each and every declaration form (like ‘C’ form), physically and that also with correctness of the details mentioned therein. There are certain more items of similar nature. Therefore, it is necessary to understand the scope of VAT Audit.

    To our understanding, though above is the mode of reporting, Audit Report is still an expression of opinion only and it is not a certification as understood in that manner. This aspect is clear from the overall reading of the Form, particularly from the reading of the responsibility statement after para-1C in Part-1. The said statement is as under :

    “Maintenance of books of accounts, sales tax related records and preparation of financial statements are the responsibilities of the entity’s management. Our responsibility is to express an opinion on their sales tax related records based on our audit. We have conducted our audit in accordance with the standard auditing principles generally accepted in India. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the sales tax related records and financial statements are free from material mis-statement(s). The audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates by management as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion.”

Based on above responsibility statement, it can be said that the report is in the form of opinion and not a certificate as such. Therefore, the Auditor can give the specified certificates in para-2(B) of Part-1, based on his satisfaction from the verification, which may include test verification of the relevant records. However, it is expected that the Auditor will maintain his working papers meticulously.

In Part-1 of new Form 704, the VAT Auditor has also to give a summary of total tax liability in a tabular format. Unlike the old Form, in new Form the Auditor is not to give any recommendation for revising the returns, etc. He has to only report about additional liability or refunds etc. The dealer will take his own decision to revise the returns accordingly or not. [There is amendment in S. 20(4) of MVAT Act, 2002 which is about revised returns. S. 20(4)(b) is about revising the returns pursuant to Audit Report. From reading of said section, it transpires that the dealer will be required to revise each individual return, as per the changes required in the same. In relation to old Form, the then Commissioner of Sales Tax had issued Circular 26T of 2006 dated 18-9-2006 by which the dealer was able to revise only last return, to take care of all the changes during the audit period. Thus, the responsibility of the dealer has increased.]

In Part-2, general information is called for. As compared to old Form, certain new requirements have been added. Like details about filing of returns and payment under Profession Tax Act/Luxury Tax Act etc. Though, strictly speaking, in the VAT Audit Report, details about other enactments can not be asked for, but, it appears that since the other enactments are also administered by the sales tax department, these details are asked for. The other distinguishing feature in Part-2 is that the Activity Code is also required to be reported. These Activity Codes are made available on government website and the Auditor, after selecting applicable codes has to give bifurcation of turnover qua such codes.

Part-3 is about computation of liability. It has six schedules and eleven Annexures. Schedules I to V are for reporting transactions under MVAT Act, 2002, whereas Schedule-VI is about reporting trans-actions under CST Act, 1956. As clarified in the Instructions, the Schedules are as per return format. Under MVAT Act, 2002, there are different type of returns viz. From Nos. 231, 232, 233, 234 & 235. Schedule-I relates to Form No. 231 and so on. It is also possible that more then one Schedule may apply, depending upon the type of returns applicable to the said dealer.

In addition to the Schedules, there are also Annexures from ‘A’ to ‘K’. These are supplementary to Schedules. In the Electronic Format, if the information is first filled up in the Annexures, related fields in the Schedules and Tables will be auto calculated. Though, there can be various minute details about each item of the Schedules/Annexure, for sake of brevity, the same are not discussed here. However, some of the additional items in this new Form, as compared to old Form, can be mentioned as under:

i) List of new suppliers on the purchase of which set off is claimed. (Annexure ‘G’. However, this Annexure is dropped in E-template).

ii) List of TIN wise suppliers showing total purchases and taxes. (Annexure ‘J’).

iii) List of TIN wise purchasers showing total sales and taxes. (Annexure ‘J’). At present, there is no requirement for noting the TIN of the purchasers and hence, probably the dealer may not have these details available. Depending upon the availability of such information and verification thereof to his satisfaction, the Auditor may have to give suitable disclosures.

iv) List of credit notes, party wise, showing amounts and taxes. (Annexure ‘J’).

v) List of debit notes, party wise, showing amounts and taxes. (Annexure ‘J’).

vi) Ratio analysis.  (Annexure  ‘F).
    
vii) Bank statement examination, for certification as per para-2(B)(m) of Part-I.
    
viii) Stock records requirement for reporting at – various places.

    ix) Reconciliation with Excise/Custom records. (Instruction-19).

    x) Interest  working  as per (Annexure  ‘A’ & ‘B’).

The new Audit Form-704 is more elaborate. It also requires more details than the old one. In the first year, it seems, it may be little difficult for some of the dealers to generate certain information required to be furnished in some of the annexures and in certain cases it may involve additional work. However/ in subsequent years, one may have to take care to get their accounting software suitably amended and also the procedure for maintaining primary records so as to generate the required information in the manner so required. It appears that in long run, the new Form will be much more dealer friendly.

LEASE TRANSACTION — IMPORTANT JUDGMENT ABOUT LEASE OF ‘SPACE SEGMENT CAPACITY’ IN TRANSPONDERS IN SATELLITE

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Introduction :


Whether a particular transaction is a transaction for
‘Transfer of Right to use goods’ (Lease transaction), so as to be liable under
Sales Tax Laws, is always an issue of contest. There are a number of judgments
analysing the scope of deemed sale by way of lease transaction. Mainly two
aspects are required to be determined. One is, whether the subject matter of
transaction is ‘goods’ and the other one is, whether on the facts of the case
the transaction is of lease or not. If answer to both the issues is yes, the
next


issue arises is about situs of lease transaction.

Criteria for determining nature of lease transaction :

Up till today there are a number of judgments specifying the
criteria for determining the nature of lease transaction. Reference can be made
to the judgments in following cases :

(a) Rashtriya Ispat Nigam Ltd., (126 STC 114) (SC)

In this case, amongst others, the Supreme Court held that to
be a lease transaction, there should be delivery of possession to the lessee.
Unless effective control given to party, no lease transaction takes place.

(b) Bharat Sanchar Nigam Ltd., (145 STC 91) (SC)

The issue in this case was about levy of lease tax on
services provided by telephone companies. The Supreme Court held that no such
tax is applicable as the transaction pertains to service. While holding so, one
of the learned Judges on the Bench observed as under in para 98 about the nature
of taxable lease transaction :


    “98. To constitute a transaction for the transfer of the right to use the goods, the transaction must have the following attributes :

    (a) There must be goods available for delivery;

    (b) There must be a consensus ad idem as to the identity of the goods;

    (c) The transferee should have a legal right to use the goods — consequently all legal consequences of such use including any permissions or licences required therefor should be available to the transferee;

    (d) For the period during which the transferee has such legal right, it has to be the exclusion to the transferor — this is the necessary concomitant of the plain language of the statute — viz. a ‘transfer of the right to use’ and not merely a licence to use the goods;

    (e) Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.”





Thus, it can be said that whether a lease sale has taken
place or not, can be decided in light of the above criteria laid down by the
Supreme Court.

(c) Agrawal Brothers v. State of Haryana,


(113 STC 317) (SC)

In this case the dealer has allowed its shunting material to
the contractor to whom it has awarded contract for construction. Rent was
charged for the same. In this case the Supreme Court observed that to the extent
the shunting material is handed over to the contractor, the delivery of
possession takes place and therefore the transaction is liable to lease tax.

In light of the above judgments the criteria becomes clear
that if effective control is passed on to the lessee, then lease transaction
takes place, otherwise not.

Whether subject matter of transaction is ‘goods’


The second issue is to decide about the nature of item, which
is subject matter of lease transaction. If it is goods, then only taxable lease
transaction can take place. The term, ‘goods’, is also analyzed in various
judgments. Brief reference can be made to the following important judgments :

(a) Bharat Sanchar Nigam Ltd., (145 STC 91) (SC)

In relation to meaning of goods the Supreme Court has
observed as under :

“54. The judgment in that decision is awaited. For the time being, we will assume that an incorporeal right is ‘goods’.

55. In fact the question whether ‘goods’ for the purpose of sales tax may be intangible or incorporeal need not detain us. In Associated Cement Companies Ltd. v. Commissioner of Customs, (2001) 4 SCC 593, the value of drawings was added to their cost since they contained and formed part of the technical know-how which was part of a technical collaboration between the importer of the drawings and their exporter. It was recognized that knowledge in the abstract may not come within the definition of ‘goods’ in S. 2(22) of the Customs Act.

56. This view was adopted in Tata Consultancy Services v. State of Andhra Pradesh for the purposes of levy of sales tax on computer software. It was held :

“A ‘goods’ may be a tangible property or an intangible one. It would become goods provided it has the attributes thereof having regard to (a) its utility; (b) capable of being bought and sold; and (c) capable of being transmitted, transferred, delivered, stored and possessed. If a software, whether customised or non-customised, satisfies these attributes, the same would be goods.”

57. This in our opinion, is the correct approach to the question as to what are ‘goods’ for the purposes of sales tax. We respectfully adopt the same.”

(b) Tata Consultancy Services, (137 STC 620) (SC)

In para 17 the Supreme Court has observed as under :

“17.    Thus this Court has held that the term ‘goods’, for the purposes of sales tax, can-not be given a narrow meaning. It has been held that properties which are capable of being abstracted, consumed and used and/or transmitted, transferred, delivered, stored or possessed, etc. are ‘goods’ for the purposes of sale tax. The submission of Mr. Sorabjee that this authority is not of any assistance, as a software is different from electricity and that software is intellectual incorporeal property whereas electricity is not, cannot be accepted. In India the test, to determine whether a property is ‘goods’, for purposes of sales tax, is not whether the property is tangible or intangible or incorporeal. The test is whether the concerned item is capable of abstraction, consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed, etc. Admittedly in the case of software, both canned and uncanned, all of these are possible.”

Situs of lease transaction:

If a lease transaction is a taxable lease transaction under Sales Tax Laws, then further issue is about the situs, i.e., where the sale has taken place. In this respect reference can be made to landmark judgment in case of M/s. 20th Century Finance Corporation Ltd. v. State of Maharashtra, (119 STC 182) (SC). In this case the Supreme Court has laid down as under about situs of lease transaction.

“35.    As result of the aforesaid discussion our conclusions are these:

    …………………….

    The appropriate Legislature by creating legal fiction can fix situs of sale. In the absence of any such legal fiction the situs of sale in case of the transaction of transfer of right to use any goods would be the place where the property in goods passes, i.e., where the written agreement transferring the right to use is executed.

    Where the goods are available for the transfer of right to use the taxable event on the transfer of right to use any goods is on the transfer which results in right to use and the situs of sale would be the place where the contract is executed and not where the goods are located for use.

    In cases of where goods are not in existence or where there is an oral or implied transfer of the right to use goods, such transactions may be effected by the delivery of the goods. In such cases the taxable event would be on the delivery of goods.
    The transaction of transfer of right to use goods cannot be termed as contract of bailment as it is deemed sale within the meaning of legal fiction engrafted in clause (29A)(d) of Article 366 of the Constitution wherein the location or delivery of goods to put to use is immaterial.”

Under the above background the Karnataka High Court had an occasion to deal with taxability of a particular transaction under the Karnataka VAT Act which is dealt with in the following judgment.

Antrix    Corporation    v.    Asst.    Commissioner    of Commercial Taxes, (29 VST 308) (Kar.):

In this judgment, delivered on 6-2-2010, the issue was about taxability of transaction of hiring of space segment capacity on transponders attached to IN-SAT Satellites. The facts are that, under the authority from the Department of Space of Government of India, the dealer entered into agreements with private parties for hiring of space in the satellite. The Sales Tax authorities considered the transaction as lease of goods liable to tax under the Karnataka VAT Act. The High Court has upheld the action of the sales tax authorities.

The High Court based on judgments cited above about ‘goods’, observed that the ‘Space Segment Capacity’ in transponders is goods by itself. The High Court also noted that they are capable of giving exclusive control to the parties. In respect of effective control the High Court observed that though the technical control on the satellite is of the dealer, (the satellite being controlled and operated by them), the ‘legal control’ is with the lessee. In respect of situs the High Court observed that though the satellite, in which the space is located and which is given on hire, is in orbit, which is 36000 kms away from the earth, still since the agreement is executed in Karnataka the situs will be in Karnataka. Accordingly the High Court justified the assessment of hire charges for space under Karnataka VAT Act, rejecting the writ petition of the dealer.

Conclusion:

The judgment will have considerable impact upon the judicial interpretation of nature of lease transaction.

Some Important Judgments Priority of Government Dues

Central Bank of India vs. State of Kerala and Others (21 VST 505)(SC)

    The facts before the Hon’ble Supreme Court were that the bank gave credit facilities to dealers against mortgage of moveable and immovable properties. When the bank sought to recover money by sale of properties through the Debts Recovery Tribunal (DRT) the Sales Tax Department intervened saying that by virtue of specific provisions in the State Sales Tax Acts (like Section 26B in the Kerala Act and Sec.38C in the BST Act, 1959) sales tax recovery has priority and first charge. The banks were insisting that since the properties are mortgaged to them and since recovery is under Central legislations viz., the DRT Act, 1993 they have priority. The respective High Courts of Kerala and Bombay held in favour of State Sales Tax Authorities. Hence matters were taken to the Supreme Court by respective banks. The Supreme Court confirmed the orders of the High Courts. Various constitutional challenges were raised. The Supreme Court, after dealing with same, rejected the said challenges.

Short gist of observations on constitutional issues is as under :

    The Supreme Court held that Article 254 of the Constitution gets attracted only when both Central and State legislations have been enacted on any of the matters enumerated in List III in the Seventh Schedule to the Constitution and there is conflict between the two legislations. The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 have been enacted by the Parliament under Entry 45 in List I in the Seventh Schedule, whereas the Bombay Sales Tax Act, 1959 and the Kerala General Sales Tax Act, 1963 have been enacted by the concerned State Legislatures under Entry 54 in List II in the Seventh Schedule. The two sets of legislations have been enacted with reference to entries in different Lists in the Seventh Schedule. Therefore, the Supreme Court held that Article 254 cannot be invoked for striking down the State legislations on the ground that they are in conflict with the Central legislations. The Supreme Court held that there is no ostensible overlapping between the two sets of legislations.

    The Supreme Court observed that there is no provision in either of 1993 or 2002 enactments by which a first charge has been created in favour of banks, financial institutions or secured creditors qua the property of the borrower. Under Section 13(1) of the 2002 Act, limited primacy has been given to the right of a secured creditor to enforce his security interest vis-à-vis Section 69 or Section 69A of the Transfer of Property Act. In terms of that sub-Section, a secured creditor can enforce security interest without intervention of the Court or Tribunal and if the borrower has created any mortgage of the secured asset, the mortgagee or any person acting on his behalf cannot sell the mortgaged property or appoint a receiver of the income of the mortgaged property or any part thereof in a manner which may defeat the right of the secured creditor to enforce security interest. The Supreme Court held that this primacy has not been extended to other provisions like Section 38C of the Bombay Act and Section 26B of the Kerala Act by which a first charge has been created in favour of the State over the property of the dealer or any person liable to pay the dues of sales tax, etc. Sub-Section (7) of Section 13 of the 2002 Act which envisages application of the money received by the secured creditor by adopting any of the measures specified under sub-Section(4) merely regulates distribution of money received by the secured creditor. It does not create a first charge in favour of the secured creditor, observed the Supreme Court.

    The Supreme Court also observed that the non obstante clauses contained in Section 34(1) of the 1993 Act and Section 35 of the 2002 Act give overriding effect to the provisions of those Acts only if there is anything inconsistent contained in any other law or instrument having effect by virtue of any other law. In other words, if there is no provision in the other enactments which are inconsistent with the 1993 Act or the 2002 Act, the provisions contained in those Acts cannot override other legislations. Section 38C of the Bombay Act and Section 26B of the Kerala Act also contain non obstante clauses and give statutory recognition to the priority of the State’s charge over other debts. These Sections and similar provisions contained in other State legislations not only create a first charge on the property of the dealer or any other person liable to pay sales tax, etc., but also give them overriding effect over other laws, held the Supreme Court.

    The Supreme Court analysed the background of the above legislations and observed that while enacting the 1993 Act and the 2002 Act, the Parliament was aware of the law laid down by the Supreme Court, wherein priority of the State dues was recognised. If the Parliament intended to create a first charge in favour of banks, financial institutions or other secured creditors on the property of the borrower, then it would have incorporated a provision like Section 529A of the Companies Act, 1956 or Section 11(2) of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 and ensured that dues of banks, financial institutions and other secured creditors should have priority over the State’s statutory first charge in the matter of recovery of the dues of sales tax, etc. In the absence of any specific provision to that effect, it is not possible to read any conflict or inconsistency or overlapping between the provisions of the 1993 Act and 2002 Act on the one hand and Section 38C of the Bombay Act and Section 26B of the Kerala Act on the other. And the non obstante clauses contained in Section 34(1) of the 1993 Act and Section 35 of the 2002 Act cannot be invoked for declaring that the first charge created under the State legislation will not operate qua or affect the proceedings initiated by banks, financial institutions and other secured creditors for recovery of their dues or enforcement of security interest, as the case may be.

The Supreme Court also held that the State legislations creating first charge in favour of the State operate in respect of charges that are in force on the date of introduction of the provisions creating the charge.

Observing as above, in elaborate judgment, the Supreme Court confirmed the orders of the High Courts and held that the provisions creating first charge for recovery of sales tax dues will prevail upon the charge in favour of banks under the DRT Act, 1993 and Securitisation Act, 2002.

Certificate of Entitlement – Stretching back effective date in assessment proceedings! appeals against assessment orders

Whirlpool India Ltd. S.A.1212 of 2003 dt.18.3.2009 (Larger Bench of M.S.T. Tribunal)
 
The issue before the Larger Bench was from reference judgment passed by the 2nd Bench in S.A.1212 of 2003 dt.31.3.2008. The appellant has filed this S.A. against assessment order for 1997-98. He was granted Certificate of Entitlement (COE) under PSI 1993, effective from 16.9.98. The date of commencement of commercial production was 1.3.98 and the appellant was praying to stretch back the effective date of COE in the assessment proceedings from 16.9.98 to 1.3.98. The Referring Bench noted judgments in case of Prav Electro (S. A. 575 of 96, dated11.1.2002) and Hikal Ltd., wherein it is held that the effective date can be stretched back in second appeal against assessment order also. The Referring Bench held a different view that the effective date cannot be stretched back in appeal against assessment order. Therefore, the matter was referred to the Larger Bench.

The Larger Bench, on hearing both the parties, observed that stretching back in appeal against assessment order is not permissible. The Hon’ble Larger Bench gave its verdict on different points raised by the appellant as under:

  • In the assessment proceedings, the Assessing Officer has authority to change the effect of COE and grant benefits  of exemption  by doing so.

The Assessing Officer in assessment proceedings u/ s.33 has no authority to change the effect of COE. The benefits of exemption u/ s.41 are dependent upon Entitlement Certificate (EC) & COE. The benefits could only be claimed by the appellant in respect of goods manufactured and sold during the eligibility period mentioned in E.C. and COE.

  • The 1993 PSI, provides unconditionally for grant of COE from the date of commencement of commercial production.

On close reading of the provisions contained in 1993 PSI, such a proposition cannot be advanced. The said Scheme does not provide for the same.

  • Other COE, being a certificate under 1993 PSI, is administrative in nature. The Assessing Officer has authority to change its effect in assessment proceedings. As such by the Tribunal too.

No doubt COE is a part of 1993 PSI. However, for regulatory aspect, it has been accommodated in Notification entry E-3, 136 u/s.41 of the Act. The authority to grant exemption to a specified class of sales is delegated by law to the Government u/ s.41 of the Act. Thus the COE and its regulatory aspect for grant of exemption to a specified class of sale in the Act is well absorbed in Notification entry E-3/136 u/s.41 of the Act. By law the Assessing Officer has to strictly follow Notification entry E-3/136 while consid-ering exemption to a specified class of sales. He has no authority to change the effect of COE in assessment proceedings and hence the Tribunal.

The Bombay High Court in Great Eastern case lays the law that ‘the sales tax liability accrues when event of sale takes place. It cannot be extinguished by subsequent certification with retrospective effect.’

Thus the proposition, canvassed by the appellant, does not get any support of law.

  • The benefits of exemption could be claimed unconditionally by the appellant on possessing of COE without looking into the eligibility period mentioned in COE.

The sales tax benefits become available to Eligible Unit (EU) on the basis of EC and COE and not on the basis of COE alone. They are available in respect of goods manufactured and sold during the eligibility period mentioned in EC and COE. All the Package Schemes viz.,1979, 1983, 1988 and 1993 of the Government adopt the benefits during the eligibility period given in EC and COE, the 1993 PSI does not adopt a different period or a different terminology.

  • A liberal interpretation be made of Notification entry E-3/136, u/s.41 of the Act for allowing the benefits of exemption to the appellant in assessment.

The ratio of the Supreme Court judgment in Wood Papers case, warrants strict construction of Notification entry E-3/136 u/s.41 of the Act. A plain reading of the Notification and plain construction of the Entry do not advance the case of the appellant. There is no contingency for full play to be given to the appellant for exemption and more particularly in assessment when the Assessing Officer has no authority.

  • The judgment of the Tribunal in the case of Prav Electro Spark Ltd. does advance the case of the appellant,

The Tribunal’s judgment in the above matter does not advance the correct proposition of law declared by the Apex Court in Jeypore case for the explained reason.

  • The effect of COE could be changed in the assessment proceedings by the Assessing Officer  and  benefits    of exemption could be made available to the appellant.

The ratio of the Bombay High Court’s judgment in  the  case of Great Eastern Spinning & Weaving Mills demolishes  this proposition, so also the Wood Papers judgment of the Apex Court. Such a proposition  of the appellant also goes against the Notification  E-3/136 u/s.d lof the Act.

  • Substantial justice be done to the appellant since he was pursuing alternate remedy for change of effect of COE by representing to the Commissioner and the Government.

The appellant did not agitate on the effect given to EC & COE at any point of time u/ s.55 of this – Act. The alternative remedy claimed by the appellant being administrative in nature, it has no sanctity of law and it is not a matter concerning the lawful remedy. In the present case we are in appeal against assessment (and no appeal is before us against COE). The powers which we possess u/ s.55 of this Act pertain to a limited aspect of what the Assessing Officer can do in assessment, we can do it in appeal, or what the Assessing Officer was supposed to do in assessment but not done, can be done by the Appellate Authority. This is the authority explained by the Bombay High Court in the case of M/ s.Amar Dye Chem, we are in possession . of. There exists no case for substantial justice when a matter pertains to strict construction and strict compliance of exemption conditions, as held by the Supreme Court, and when exemption is dependent on EC and COE and not COE alone.

  • The Tribunal has an authority to change the effect of EC & COE to date of commencement of commercial production certified by IA in assessment proceedings.

The appeal proceedings before the Tribunal are against the assessment. The Tribunal could deal with the grounds of appeal in the manner and authority the Assessing Officer remains in possession of. The ratio of the Apex Court judgment in Wood Papers (cited supra) warrants a strict interpretation of exemption notification. It does not allow the Tribunal to act otherwise. Any attempt of granting exemption by amending COE and EC in assessment shall amount to violation of the position of law declared by the Apex Court. It would be in breach of Notification so also result in subsuming the Notification to the appellant’s proposition. It is not a proposition of law.

Thus the Hon’ble Larger Bench held that the issue of stretching back the date of COE cannot be entertained in the appeal proceedings against the assessment order.

VAT Audit — Writ Petitions

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VAT

Audit of Accounts


“It is a specialised job which can only be undertaken by the
person professionally competent and trained to audit.”

The Bombay High Court, by its order dated 28th March 2008,
disposed of the writ petitions filed by The Sales Tax Practitioners’ Association
of Maharashtra, The Bar Council of Maharashtra and Goa, The Bombay Small Scale
Industries Association, The Maharashtra State Tax Practitioners’ Associations
Federation, and others, challenging the constitutional validity of S. 61 of
Maharashtra Value Added Tax Act, 2002.

While rejecting all such petitions, the Honourable High Court
considered two major questions, which may be posed as follows :

1. Whether provisions regarding audit of accounts u/s.61(1)
of the MVAT Act, 2002 are constitutionally valid [particularly with reference
to Article 14, Article 19(1)(g) and Article 254 of the Constitution of
India] ? Held, Yes.


2. Whether advocates and sales tax practitioners can be
empowered to audit the accounts, u/s.61 of the MVAT Act, and give Report in
Form 704 ? Held, No.



The main contentions of the petitioners were :

  •  For the last 56 years, advocates and sales tax practitioners have been enjoying an equal-level field in practice before the Sales Tax Authorities.

  •  The impugned provision seeks to keep out a class of advocates and sales tax practitioners from their legitimate field of practice.

  •  This class of practitioners and advocates have attained appreciable standard of expertise to understand and interpret the sales tax laws before the tax authorities under the Act.

  •  The advocates also practice in the field of sales tax before the High Court and Supreme Court. Therefore, there is no reason to take away a vested right of such large class of practitioners in a bid to favour a particular class at the cost of rest of the categories.

  •  U/s.82 of the Act, various categories of persons are entitled to practise, who are called sales tax practitioners. They comprise (1) Advocates, (2) Chartered Accountants (3) Other persons who hold qualification prescribed under the Act and (4) Government servants of the Sales Tax Department upon their leaving or retiring from the service in the sales tax department.

  •  On account of the impugned legislation, this class of advocates and practitioners is being denied the rightful field of practice for certifying deductions and claims under the Act.

  •  Perusal of S. 61 as also the reading of the prescribed form of audit would show that the audit is in fact a statutory return of the dealer for the purpose of enabling the Sales Tax Officer to complete assessment and therefore, involves minor skills, which can be better performed by the advocates.

  •  As such, exclusion of advocates and sales tax practitioners from performing audit or carrying on audit is clearly discriminatory, arbitrary and unreasonable.

  •  Several other States in the country have provided that the value added tax audit can be done not only by the C.A., but also by other professionals, including advocates.

  •  Sales tax practitioners and also advocates have been guiding the trade in giving due information of the ever-changing sales tax laws, the implication of various claims and in filing the returns and appearing in assessment and if necessary in appeals.

  •  There has been no grievance made against the easily accessible and expert services of this class.

  •  The sales tax practitioners and advocates have been giving commendable services to the industries at all stages of sales tax proceedings.

  •  Their valuable guidance and help is easily accessible at affordable charges.

  •  By the amendment what is sought to be done is to have the assessment of tax liability under the Act assessed, approved and certified as the correct liability of a dealer by a third agency, who is described as class of persons called Chartered Accountants.

  •  The work that the chartered accountant has to do is to verify the return with full details and certify the legality or otherwise of the claims in the returns. This function of assessment for the tax dues from a dealer under the MVAT Act has already been assigned and entrusted to the Commissioner or its delegates or officers appointed under the said Act.

  • The industries, therefore, would be obliged to engage services of chartered accountants over and above their respective appointee from the class of sales tax practitioners or advocates.

  • On account of this, heavy financial burden would be cast on small-scale industries and such burden is a serious impediment to the trade and would cut into the net profit of the respective industry.

  • This action of the State is unreasonable and cannot be done even under its exercise of ancillary legislation. The State Legislature under Entry 54 of the State List can enact law taxing sales. However, any ancillary legislation or procedure must have nexus to the object of the Act. The mandatory provisions of engaging services of CA are not based on any object of the Act, and as such, the provision is not within the legislative competence of respondent State as an ancillary provision.

  • The State Legislature by the impugned provisions has outsourced their statutory powers to assess the tax to a third party. Such delegation of powers is destructive of basic tenet of law and its enforcement.

  • The payment to be made to the chartered accountant is over and above the payment for the services of a sales tax practitioner who keeps the dealer well informed.

  • The audit charges to be paid to a CA are perceptively heavy. The industry will have to pay heavy burden by way of audit fees.

  • This additional compliance cost in terms of money and waste of time is an added impediment.

  • This additional payment is in pith and substance nothing but compulsory levy amounting to tax by the State. Such action offends Article 265 of the Constitution.

  • The impugned enactment is contrary to Article 19(1)(g) of the Constitution, since it prohibits the members of the petitioners from practising their profession and trade of their choice without there being any valid reason. [Since the petition raising this issue was by the Maharashtra Sales Tax Practitioner Associations’ Federation, and, not joined by any individual as petitioner, challenging vires of Article 19(1)(g), the BHC has not considered the maintainability of the petition].

  • The impugned S. 61 has resulted in divisive exelusion of advocates and sales tax practitioners, as the traders would not like to engage services of sales tax practitioners or advocates for certification.

  • The result is that a large section of Practitioners in mofusil area and small towns will be rendered out of practice and consequently adversely affecting their livelihood.

  • The requirement of CA alone for the certification in form 704 is wholly irrelevant and arbitrary.

  • No purpose is served by CA’s certification of correctness under the garb of audit of books of accounts.

  •  S. 82 of the MVAT Act provides which categories of persons are entitled to practise under the said Act. Explanation to S. 61 carves out a separate class which does not serve the object of S.61.

  • It causes  equals  to be treated  unequally.  This violates  the equality  right  under  Article  14.

  • As there is no reasonable basis for the exclusion, the  provision  is arbitrary  being  violative  of Article  14.

The petitioners placed reliance in the judgments of Omprakash Sud and Ors. v. State of J. & K. and Ors., 1981 (2) SCC 270, Suneel Jetley and Ors. v. State of Haryana, 1984(4) SCC 296, Deepak Sibal v. Punjab University & Ors., 1989(2) SCC 145, Ahmedabad Municipal Corpn. and Anr. v. Nilaybhai R. Thakore and Anr., 1999 (8) SCC 139 and in D. S. Nakara and Ors. v. Union of India, 1983 1 S.CC 305.

The petitioners also argued that S. 22 of the MVAT Act provides for audit (by the Department). S. 22(1)(a) to (e) contemplates all situations which require audit. This audit is carried out by the Officers empowered by the Commissioner or to whom powers have been delegated. S. 22 therefore, covers all situations which require audit. This situation arises after the returns are filed. There is no indication of any requirement of audit before filing of returns, and as such, S. 61 is directly in conflict with S. 22 and is ultra vires the scope of S. 22. S. 22(3) permits the audit to be conducted by an officer who may not be a chartered accountant. If S. 22 audit can be conducted by an officer who may not be a chartered accountant, then there is no reason why S. 61 audit cannot also be conducted by a person who is not a chartered accountant. S. 61 which requires audit only by a chartered accountant, therefore, is discriminatory. Reliance is placed on Municipal Corporation of Grater Bombay and Ors. v. Thukral Anjali Deokumar and Ors., (1989) 2 S.CC 249.

Before proceeding further, the Honourable High Court first made a reference to S. 61 of the MVAT Act and the amendments made thereto. The Court also referred to S. 82 of the MVAT Act and observed “S. 82 of the Act  permits  sales tax practitioners  and others set out therein, the right of appearance before any –  authority in proceedings under the Act. The right of appearance, therefore, has not been taken away. The right to appear subsists.  The limited  question  is whether u/s.61, the exercise of getting  the accounts audited, can be said to be part of the right to appear and plead before the Courts or judicial forums and or getting the accounts audited is part of the right conferred by S. 82 or in the alternative excluding other than chartered accountants and cost accountants is arbitrary or violative of the rights of these excluded categories to carryon their trade or profession. “

The Court also referred  to the dictionary  meaning of the expression  ‘audit’  and  ‘auditor’  as given in P. Ramanatha  Aiyar’s  Advanced  Law Lexicon, 3rd Edition,  Oxford  English  Dictionary  and  Mr. R. A. Irish’s book ‘Practical  Auditing’.  It also referred  to the discussion  on the subject in President,  Councillors and  Ratepayers  of the  Shire of Frankston  and Hastings v. Cohen, 102 C.L.R.  607 the High Court of Australia.

Responses  were invited from the respondents i.e., (1)the Government of Maharashtra and (2) the Institute of Chartered Accountants of India.

In its detailed reply, the Government of Maharashtra, through its Dy. Commissioner of Sales Tax submitted as follows:

“The Government of Maharashtra decided to introduce VAT system with effect from 1st April, 2005. At that time the Government decided to amend the VAT Act, 2002 in terms of the national consensus arrived at by the Empowered Committee of State
 

Finance Ministers. Accordingly, a draft bill was prepared for submission to the Government and it was made open for comments of the public. The amendment bill inter alia included a proposal on the request of advocates, tax practitioners and cost accountants to include them u/s.61 for tax audit along with the chartered accountants having stand-ing in profession for a period of 7 years or more. But there was no assurance directly or impliedly that such proposal will be accepted by the Govern-ment or enacted by the Legislature. Various aspects were considered including that under the Companies Act. S. 211(C) of the Companies Act requires that all companies in India must prepare their annual accounts in accordance with the Accounting Standards and get those accounts audited in accordance with the Auditing Standards laid down by the Institute of Chartered Accountants of India. The Government decided to continue the old provision of audit under MVAT i.e., audit u/s.61 only by chartered accountants.

Under the Companies Act, the Central Government has also constituted a National Advisory Committee on Accounting Standards (NACAS), which is required to recommend the Accounting and Auditing Standards. However, the Central Government did not issue any notification based on the recommendations of NACAS. The Accounting and Auditing Standards issued by the Institute of Chartered Accountants of India are binding. Thus, no corporate entity can prepare its accounts by an method other than that provided by ICAL Similarly, no audit can be conducted without following Auditing and Assurance Standards (AAS) issued by ICAL

The Accounting and Auditing Standards issued by the Institute of Chartered Accountants of India are based upon the Accounting and Auditing Standards issued by the International Federation of Accountants (IFAC). Accounting Standards Board of IFAC in the year 2002-2003 stands converted into independent Accounting Standards Board (ISAB). The Board to start with, Adopted Accounting Standards (AAS) issued by IFAC and now is in the process of revision of some of these Standards. The AS are very complex and there are major variances in respect of turnover of sales and purchases accounted as per AAS in the profit and loss account of the enterprise and turnover of sales and purchases which is required to be considered for the purpose of levy of tax under the Maharashtra Value Added Tax Act, 2002. Clear-cut comments on the major changes made by any firm in a given period in respect of accounting system, method of valuation of stocks and business model, etc. are required from the auditor.

These are complex accounting and audit issues which advocates, sales tax practitioners and company secretaries are not professionally qualified to handle.

S. 29 of the Advocates Act, 1961 provides that advocates would be the only class of persons to ‘practise the profession of law’. S. 33 of the Advocates Act bars any other professional to practise in any Court or before any authority, etc. S. 49 of the Advocates Act gives general powers to the Bar Council of India to make such rules. Under this power, the Bar Council of India has framed the rules, which prohibit an advocate from engaging in any other profession other than practicsing the profession of law. The requirement of S. 61 of the MVAT Act is of auditing of the books of accounts and giving a certificate of his conclusion after verification. This cannot be called as ‘practise the profession of law’.

The area u/s.61 is practising in the field of accountancy and auditing, which an advocate is not competent to undertake under the Rules framed by the Bar Council of India u/s.49 of the Advocates Act, 1961.

Parliament of the country has framed the Chartered Accountants Act, 1949. U/s.2(2) the area in which a member of the Institute of Chartered Accounts of India (ICAI) can practise is defined. The practice of accountancy and auditing can be carried out by the chartered accountants who are members of ICAI and are holding a certificate of practice.

If the advocates embark on practice in the area of accountancy and auditing work, then it would amount to practice in accounting and auditing and thus will violate the provisions of the Advocates Act, 1961 and the rules framed thereunder by the Bar Council of India. Therefore, the advocates cannot be allowed to carry out the function of an accountant or of an auditor.

As regards sales tax practitioners, they are not governed by any professional Act. Any graduate having acquired a Diploma in Taxation or having passed specified accountancy examination and acquired such qualifications as are prescribed by the Central Board of Revenue or having retired as an officer from the Sales Tax Department, can enrol with the Sales Tax Department as a sales tax practitioner. He is not required to be a qualified auditor, nor is he governed by the strict discipline and acceptability required under the Chartered Accountants Act, 1949 for any acts of omission and commission in the conduct of audit. Hence, a sales tax practitioner cannot be expected to provide the level of assurance and creditability of the audit of the accounts of a VAT payer expected by the Revenue. Hence, while a sales tax practitioner is qualified to appear in proceedings, he cannot conduct audit u/s.61.

All over India, as per information available, 30 States and Union Territories have introduced VAT, either in the year 2005-2006 or in the year 2006-2007. Information about audit provision in two States i.e., Nagaland and Mizoram is not available. Out of the remaining 28 States, four States (Haryana, Himachal Pradesh, Sikkim, West Bengal) have no provision for audit from independent professionals. Thirteen States and Union Territories have called for an Audit Report under the VAT Act exclusively from chartered accountants. These States are (i) Auranachal Pradesh, (ii) Bihar, (iii) Chattisgarh, (iv) Goa, (v) Madhya Pradesh, (vi) Maharashtra, (vii) Manipur, (viii) Meghalaya, (ix) Punjab, (x) Rajasthan, (xi) Dadra and Nagar Haveli, (xii) Daman and Diu, (xii) Chandigarh.

Another 7 States have called for Audit Report only from professionals who have knowledge in the field of accountancy i.e., chartered accountants or cost accountants. In those States the sales tax practitioners or advocates are not authorised to give the Audit Report, though they are allowed to represent. before the authorities. These States are (i) Assam, (ii) Delhi, (iii) Kerala, (iv) Orissa, (v) Tripura, (vi) Jammu and Kashmir, (vii) Uttranchal.

Only four States have allowed other professionals besides chartered accountants and cost accountants to conduct this audit. These States are (i) Andhra Pradesh, (Ii) Gujarat, (iii) Jharkhand and (iv) Karnataka.

The C.A.s were included after consideration and analysis of the facts as to their expertise and specialised training. The VAT is designed for the purpose of self- assessment by certifying returns by the C.As. The VAT is invoice-based system and the deductions are based on certification. A true and correct invoice of having paid Value Added Tax, in the treasury is required. It is therefore, necessary ingredient of certification of data contained in returns and encompasses entire sphere of verification of account books and vouchers. It is submitted that the experience of the income tax department shows that independent tax audit has improved the proper maintenance of books of accounts from the taxation point of view. The Empowered Committee had referred the issue to the Group of Commissioners of Sales Tax to decide the necessary provisions for audit. It was recommended by the said committee that the audit of certification of the books of accounts should be by specified authority only.”

The Institute of Chartered Accountants of India in its reply, submitted that VAT is an invoice-based system, where the major thrust is on self-assessment of the tax liability by the dealer. It is necessary therefore to respect book-keeping requirements and also necessary to ensure that the particulars furnished by the dealer are true and correct. Consequently, in the interest of the State, the Legislature has found it necessary to have the accounts audited.

The audit is a specialised subject and the same is required to be carried out after detailed verification of the books of accounts applying the accounting and auditing principles. Audit of accounts requires expertise. The chartered accountants being experts in the field of accounting and auditing, the said Act rightly provides that the accounts be audited only by chartered accountants.

To consider the challenges under Articles 14 and 19(1)(g), the Hon’ble Court referred to S. 44AB of the Income-tax Act, which contains a similar provision for audit of accounts of persons whose total sales or turnover or gross receipts exceeds the pre-scribed limits. This provision, when introduced for the first time, was challenged before various High Courts. And the Supreme Court in an appeal before it, has upheld the legality of the Section. [T. D. Venkata Rao (SC) (AIR 1999 sC 2242)]

In the case of R. Sathya Moorthy and Ors. v. Union of India and Ors., (1991) 189 ITR 491, the petitioner challenged the validity of S. 44AB of the Income-tax Act, before the Madras High Court. The challenge made was on behalf of Income-tax practitioners as also an assessee, to contend that u/s.44AB, as compulsory audit was restricted to chartered accountants, it violates both, Articles 14 and 19 of the Constitution.

The petition was dismissed and an appeal was filed before the Supreme Court. While dismissing the appeal, the Supreme Court held as under:

“The chartered accountants by reasons of their training having special aptitude in the matters of audits. It is reasonable that they, who form a class by themselves, should be required to audit the accounts of businesses whose income exceeds RsAO lakhs and professionals whose income ex-ceeds Rs.10 lakhs in any given year. There is no material on record, and indeed, in our view, there cannot be, that an income tax practitioner has the same expertise as chartered accountants in the matter of accounts. For the same reasons, the challenge under Article 19 must fail, and it must be pointed out that these income tax practitioners are still entitled to be authorised representatives of assessees.”

In view of above, the Justice F. I. Rebello & R. S. Mohite of the Bombay High Court opined that once the Supreme Court has upheld the legality of S. 44AB of the Income-tax Act, where the same terminology was used and which ‘was also a provision pertaining to audit, in our opinion, and considering the object of both the provisions, which is prevention of evasion of tax dues, the challenge by the petitioners on the ground of infraction of Article 14 and 19 will have to be similarly rejected. There are practically no distinguishing features. The only distinction, if any, is that, whereas S. 44AB is for the purpose of ascertaining ‘total income’, S. 61 is for certification whether VAT had been correctly assessed, collected and paid.

The various submissions now made under Articles 14 and 19 in the challenge to S. 61 were also advanced whilst challenging S. 44AB of the Income-tax Act before the various High Courts. The Madras High Court had referred to judgments of various other High Courts which had decided the challenge to S. 44AB. The judgments of the High Courts are Mohan Trading Co. v. Union of India, 196 ITR 134 (MP). Rajkot Engineering Association v. Union of India, 164 ITR 148 (Raj), A. S. Sharma v. Union of India, (1985) 175 ITR 254 (A.P.) and T. S. Natraj v. Union of India, (1981) 155 ITR 81 (Kar.).

After noting various points from the above-referred judgments, the Court rejected the challenge based on Article 14 on the following grounds:

(i) Chartered accountants by reason of their training have special aptitude in the matter of audit. An income tax practitioner does not have the same expertise as the chartered accountants in the- matter of accounts. The argument therefore, that the effect of such a provision will be to exclude all other categories of authorised representatives except the chartered accountants from carrying on their profession is liable to be rejected, as they constitute two distinct classes having a nexus with the object of the provisions, which is evasion of tax dues.

(ii)The contention that such a provision brings in an oppressive restriction is also liable to be rejected as auditing accounts is a specialised job. It may be true that some income tax practitioners may also ac-quire that skill by sheer practice without passing the necessary examination. But that does not preclude Parliament from prescribing special qualifications with reference to the auditing of accounts.

(iii) Legal practitioners and chartered accountants are equal for the purpose of representation of assesses before the Assessing Authority, but they are not equals for the purpose of compulsory audit. The preferential treatment given to the chartered accountants for the purpose of compulsory audit does not militate against the rule of equality under Article 14 of the Constitution. The terms ‘audit’, ‘auditing’ and the ‘functions of auditor’ clearly bring about the difference between the chartered accountants and others.

The object and purpose in providing compulsory audit is to facilitate the prevention of evasion of taxes, administrative convenience in quick and proper completion of assessments, etc. In the light of this object, chartered accountants and others cannot be said to be similarly situate. The qualifications and eligibility to be enrolled as income tax practitioners are entirely different from that of chartered accountants from the point of view of auditing.

(iv) Merely because apart from dealers whose turnover is more than 40 lacs, dealers dealing in liquor trade have also to get their accounts audited does not make the provision arbitrary. Such dealers are a class by themselves as they are carrying on a trade which is res extra commercium. They constitute a class by themselves and if the Legislature in its wisdom has provided that their accounts should be audited, it is neither unreasonable, nor treating them as a class arbitrary. The classification in the instant case is reasonable and has a nexus with the object which is to direct a class of dealers getting their accounts audited by a specialised agency,…so that there is no tax evasion.
 

On behalf of the petitioners, a distinction was sought to be made in certification under the Income-tax Act and under the VAT Act. In our opinion, the legality of the provisions or its non-arbitrariness is not dependent on the manner in which the form has to be filled, the contents thereof and the procedure. What is relevant is to consider the object of the Act and in selecting the class of professionals whether the Legislature has acted unreasonably or has imposed unreasonable restrictions on the right of the assessee and or income tax practitioners to carryon their occupation or profession. It must be noted that the chartered accoun-tants cannot certify the correctness and completeness of the sales tax returns, unless they audit the accounts of the dealer as maintained in the first part of S. 61. After audit, chartered accountant has to certify the various items in Part I of Form No. 704. These items are subject to audited observations of the chartered accountant and comments about the non-compliance, shortcomings, deficiencies, in the return filed by the dealer. There are various other requirements.

“Suffice it to say that it is a specialised job which can only be undertaken by the person professionally competent and trained to audit. Advocates are not qualified as observed by the Supreme Court in T. D. Venkatarao v. Union of India, 237 ITR 315. The other sales tax practitioner and retired employees definitely not.”

The settled law on the subject is that as 10Ifgas the twin tests of reasonableness of the classification and nexus with the object are satisfied, wisdom of legislation cannot be substituted. The State Legislature is free to decide in its wisdom as to how best to safeguard the State revenue. Different States may adopt different standards and policy of one Legislature may not be adopted by another Legislature, as the matter lies in the domain of policy making. Because some States have permitted sales tax practitioners to carryon audit need not necessarily mean that as the Legislature of the State of Maharashtra has not so provided, that would be arbitrary or that the classification considering the nexus of the object is arbitrary. It is for the State Legislature to decide how to protect its revenue and this is more true with regard to economic legislation. See R. K. Garg v. Union of India and Ors., 1982 Vol. 133 ITR 239 SC as also the observations of the Supreme Court in Para 16 in Directorate of Film Festivals and Ors. v. Gaurav Ashwin Jain and Ors., (2007) 4 Supreme Court Cases 737 wherein the

Court observed as under:
“16 ….    Courts    cannot    interfere    with  policy, either on the ground that it is erroneous or on the ground that a better, fairer or wiser alternative is available. Legality of the policy, and not the wisdom or soundness of the policy, is the subject of judicial review …. “

Rejecting the challenge under Article 19(1)(g), the Court after referring to the Supreme Court’s decisions in V. Sasidharan v. Peter and Karunakar, 1984 (4) SCC 230, State of Gujarat v. Mirzapur Moti Kureshi Kassab Jamat and Ors., (2005) 8 SCC 534 and Fertiliser Corporation Kamgar Union v. Union of India, AIR 1981 SC 344, observed: “in the instant case considering S. 82 of the VAT Act, the category of persons who are excluded from the ambit of explanation of S. 61 are not denied their right of appearance before the authorities under the Act. In other words, they are not prohibited from carrying on their profession.”

The High Court  further said that  there  is a difference between prohibition and restriction. Article 19(6) of the Constitution empowers the State to put reasonable restrictions in public interest. Apart from the power conferred on the State to impose reasonable restrictions under Article 19(6), there is a further power conferred under Article 19(6) of laying down professional or technical qualifications necessary for practising the profession as in the instant case.

Considering the tests laid down in MRF Ltd. v. Inspector, Kerala Government and Ors., 1998 (8) SCC 227 to judge the reasonableness of the restriction, can the provision which requires the audit to be done only by an accountant as explained, amount to an unreasonable restriction? In the matter of carrying out audit the State has chosen to confer that right only on a class of persons having expertise in the field. This cannot be said to be arbitrary or excessive in nature, so as to go beyond the requirement of the interest of the general public. That would be yet another reason as to why the challenge  under Article  19(1)(g) must fail.

Rejecting the challenge to the Constitutional validity of the Legislation under Articles 14 and 19 at the instance of the Bar Council of Maharashtra and Goa, The Court said :

“We may only point out that S. 29 of the Advocates Act till date has not been brought into force. Apart from that, one fails to understand the stand of the Bar Council after the decision of the Supreme Court in T. D. Venkatrao (supra) where the Supreme Court has accepted the fact that chartered accountants by the reason of their training have special aptitude in the matter of audit. The act of maintaining accounts is neither pleading, practice, nor acting.”

From the conclusion drawn by the Supreme Court and various High Courts and considering the contentions advanced, various challenge made by the petitioners including the challenge based on Articles 14 and 19, etc., the views expressed by the Hon’ble Bombay High Court, in the above decision, may be summarised as follows:

  • Chartered accountants by their training have special aptitude in the matter of audit.

  • Argument that it is oppressive restriction is re-jected as auditing accounts is a specialised job.

  • Legal practitioners and chartered accountants are equal for the purpose of representation of asses sees, but they are not equals for the purpose of audit.

  • Audit is a specialised job, which can be under-taken by a person professionally competent and trained to audit. Advocates and sales tax practitioners are not qualified.

  • Difference States may adopt different standards and policy.

  • Provisions u/s.61 have nothing to do.with provisions u/ s.22 of the MVAT Act. S. 22 is a special power conferred to the Commissioner.

  • The State has chosen to confer the right of auditing u/ s.61 only to CAs having expertise in the field. Therefore, challenge u/s.19(1)(g) must fail.

  • Following  SC judgment   in the  case  of L. M. Mahurkar  v. Bar Council  of Maharashtra,  (1996) 101 STC 541 & T. D. Venkatrao (supra), challenge to the constitutional validity of the legislation under Articles 14 & 19 at the instance of the Bar Council is rejected.

  • Audit of accounts by a chartered accountant does not amount to outsourcing the statutory power of the Government. It neither amounts to abdication, nor excessive delegation.

  • Such an exercise does not amount to conferring on the accountant a power to determine the correct tax liability of the dealer.

  • A certificate by CA is to enable the department to consider that the person having knowledge of audit and subject to the disciplinary control of its parent body has certified that the accounts are properly maintained.

  • This is to aid the officers in discharging their statutory duties.

  • The audit of accounts is to be conducted only in respect of certain specified class of dealers. The amount of fee which has to be paid is the amount to be decided between the dealer and that person whom he selects from amongst the accountants that are available. It cannot be said to amount to compulsory levy amounting to tax. Thus, challenging under Article 265 also fail.

  • The enactment is pursuant to the power of the State Legislature to make law within its competence. This does not attract Article 301.

The Bombay High  Court  thus  held:

“In our opinion, there is no merit in any of the petitions and consequently rule discharged in all the petitions. In the circumstances of the case, each party to bear their own costs.”


Methods of discharging tax liability on works contract under MVAT Act, 2002

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VAT

Works Contracts are in the nature of composite contracts. The
entire value of a works contract cannot be made liable to tax under the sales
tax (VAT) laws. The Supreme Court, in the case of Builders’ Association of
India v. Union of India, (73 STC 370) (SC), held that taxable quantum in a
works contract is the value of goods (in which transfer of property takes place
in execution of works contract). It is, therefore, necessary to find out the
value of the goods from the total contract value. The contractor can find out
the same by taking various deductions towards labour charges, etc. However,
sometimes it may be difficult to decide the deductions. Therefore, there are
schemes for standard deduction. There are also alternative composition schemes.
A brief discussion about various methods of discharging liability on works
contract under the Maharashtra Value Added Tax Act, 2002 may be as under.

(i) If in the contract itself the value of the goods and
labour is shown separately, then such values of goods will be taxable at
appropriate rates. In this respect reference can be made to the judgment in the
case of Imagic Creative P. Ltd. (12 VST 371) (SC), where such division is
upheld by the Supreme Court.

However, if the values are not separately specified but only
one aggregate value is mentioned, then the contractor can discharge tax
liability by any of the modes discussed hereunder.

(ii) As per Statutory Provisions :


Under this system tax payable on the value of goods can be
arrived at by adopting Rule 58 of the MVAT Rules, 2005, which reads as under :

“58. (1) The value of the goods at the time of the transfer
of property — in the goods (whether as goods or in some other form) involved in
the execution of a works contract may be determined by effecting the following
deductions from the value of the entire contract, insofar as the amounts
relating to the deduction pertain to the said works contract :


(a) labour and service charges for execution of the
works;

(b) amounts paid by way of price for sub-contract, if
any, to sub-contractors;

(c) charges for planning, designing and architect’s fees;

(d) charges for obtaining on hire or otherwise, machinery
and tools for execution of the works contract;

(e) cost of consumables such as water, electricity, fuel
used in execution of works contract, the property in which is not
transferred in the course of execution of the works contract;

(f) cost of establishment of the contractor to the extent
to which it is relatable to supply of the said labour and services;

(g) other similar expenses relatable to the said supply
of labour and services, where the labour and services are subsequent to the
said transfer of property;

(h) profit earned by the contractor to the extent it is
relatable to the supply of said labour and services : . . . . . .”


In the alternative, i.e., if dealer cannot ascertain the
labour portion on its own as per the above, the dealer can adopt the standard
deduction given in Table in Rule 58(1). The said Table is reproduced on the next
page.

(2) The value of the goods so arrived at under sub-rule(1)
shall, for the purposes of levy of tax, be the sale price or, as the case may
be, the purchase price relating to the transfer of property in goods (whether as
goods or in some other form) involved  in the execution of a works
contract.”

Table: Deduction from contract price towards labour charges

Table:
Deduction from contract price towards labour charges

 

 

 

Sr.

Type of works contract

*Amount 
to  be  deducted 
from  the  contract 
price

 

 

 

 

 

(expressed as a
percentage of the contract price)

(1)

(2)

(3)

 

 

 

1

Installation of plant and machinery

15%

 

 

 

2

Installation of air conditioners and air
coolers

10%

 

 

 

3

Installation of elevators (lifts) and
escalators

15%

 

 

 

4

Fixing of marble slabs, polished granite
stones and

25%

 

tiles (other than
mosaic tiles)

 

 

 

 

5

Civil works like construction of buildings,

30%

 

bridges, roads, etc.

 

 

 

 

6

Construction of railway coaches on under
carriages

30%

 

supplied by Railways

 

 

 

 

7

Ship and boat-building including
construction of barges,

20%

 

ferries, tugs,
trawlers and dragger

 

 

 

 

8

Fixing of sanitary fittings for plumbing,
drainage and

15%

 

the like

 

 

 

 

9

Painting and polishing

20%

 

 

 

11

Laying of pipes

20%

 

 

 

12

Tyre re-treading

40%

 

 

 

13

Dyeing and printing of textiles

40%

 

 

 

14

Annual maintenance contracts

40%

 

 

 

15

Any other works contract

25%

 

 

 

 

 

 

It can be seen, from the above, that as per Rule 58(1) — main provision, the contractor can determine his own labour portion and take deduction of the same from gross contract value. The balance will be liable to tax. The said taxable portion is to be divided between 0%, 4%/5% and 12.5% goods and tax payable shall be worked out accordingly.

    iii) In the alternative, i.e., if the contractor cannot ascertain the labour portion on his own, he can adopt the standard deduction given in the Table. The remaining portion, after applying deduction, will be liable to tax at applicable rates i.e., 0%, 4%/5% and 12.5%, as the case may be.

It may also be mentioned here that if one follows any of the above methods, he can avail the full set-off on goods purchased under VAT from local RD, subject to other conditions of set-off.

Composition Schemes:
    iv) In the alternative, contractor can pay tax by the Composition Scheme and in that case, he will be required to pay tax on full contract value 8%. No deduction of labour charges, etc., will be available. If one pays tax as per the above composition scheme, he will be entitled to set-off  64% of the normal set-off otherwise available. The reduction will apply to the goods which get transferred and not to other goods. In other words, for those goods (other goods) full set-off will be available.

    v) One more method of composition is available i.e., in case of Notified Construction Contracts. The list of notified construction contract (as per Notification issued by the Finance Department of Maharashtra on 30th November 2006) is as under:

NOTIFICATION

The Maharashtra Value Added Tax Act, 2002.

“No VAT.1506/CR-134/Taxation-1 — In exercise of the powers conferred by clause (i) of the Explanation to sub-section (3) of section 42 of the Maharashtra Value Added Tax Act, 2002 (Mah. IX of 2005), the Government of Maharashtra hereby notifies the following works contracts to be the ‘Construction Contracts’ for the purposes of the said sub-section, namely:

    A) Contracts for construction of:
    1. Buildings,

    2. Roads,

    3. Runways,

    4. Bridges, Railway overbridges,

    5. Dams,

    6. Tunnels,

    7. Canals,

    8. Barrages,

    9. Diversions,

    10. Rail tracks,

    11. Causeways, subways, spillways,

    12. Water supply schemes,

    13. Sewerage works,

    14.Drainage,

    15. Swimming pools,

    16. Water purification plants, and

    17. Jettys

    B) Any works contract incidental or ancillary to the contracts mentioned in paragraph (A) above, if such work contracts are awarded and executed before the completion of the said contracts.”

If a contract is covered by the above list, then the dealer (contractor) can discharge liability by paying 5% on total contract value. If the dealer pays by this composition scheme, then set-off on purchases will be granted after reduction @ 4% of purchase price of goods.

    vi) 1% Composition Scheme:
This scheme is prescribed by section 42(3A) for builders and developers who, along with construction, transfer immovable property like land. The Notification prescribing the scheme is issued on 9-7-2010. The Notification contains various conditions. (Desiring dealer should go through the same for further information.)

The dealer (contractor) may adopt any of the above modes as may be suitable in its case, and, contractwise choice can also be made. The choice of method will depend upon factual position of each case. One can adopt the method which works out for minimum tax liability.

Search & Seizure under mvat Act, 2002

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VAT

1. Introduction


The powers of inspection, search and seizure are necessary
for the purpose of effective administration of taxation laws, like Sales Tax. It
is, therefore, valid as per the Constitution also, subject to reasonable limits.

In Maharashtra, the Bombay Sales Tax Act, 1959 (BST Act) was
in operation till 31st March 2005. The Maharashtra Value Added Tax Act, 2002 (MVAT
Act) has come into operation from 1st April 2005.

Under the BST Act, section 49 was providing for necessary
powers of search and seizure. Similar powers have been provided through section
64 of the MVAT Act. The provisions of both the Acts are almost the same.
Therefore, the precedents and circulars issued in relation to the BST Act will
also remain applicable in that relation to the MVAT Act. At present, there are a
number of search operations. Therefore, the provisions of Search and Seizure are
briefly discussed herein.

2. Section 64 of the
Maharashtra Value Added Tax Act, 2002

2.1
Section 64 of the MVAT Act reads as under:

“64. Production and inspection of accounts and documents and
search of premises.

(1) The Commissioner may, subject to such conditions as may
be prescribed, require any dealer to produce before him any accounts or
documents, or to furnish any information, relating to stocks of goods of, or to
sales, purchase and delivery of goods or to payments made or received towards
sales or purchase of goods by the dealer, or any other information relating to
his business, as may be necessary for the purposes of this Act.

(2) All accounts, registers and documents relating to stock
of goods of, or to purchases, sales and delivery of goods, payments made or
received towards sale or purchase of goods by any dealer and all goods and cash
kept in any place of business of any dealer, shall at all reasonable times, be
open to inspection by the Commissioner, and the Commissioner may take or cause
to be taken such copies or extracts of the said accounts, registers or documents
and such inventory of the goods and cash found as appear to him to be necessary
for the purposes of this Act.

(3) If the Commissioner has reason to believe that any dealer
has evaded or is attempting to evade the payment of any tax due from him, he
may, for reasons to be recorded in writing, seize such accounts, registers or
documents of the dealer as may be necessary, and grant a receipt for the same,
and shall retain the same for so long as may be necessary in connection with any
proceedings under this Act or for any prosecution:

Provided that, on application of the dealer, the Commissioner
shall provide true copies of the said accounts, registers or documents.

(4) For the purposes of sub-section (2) or
sub-section (3), the Commissioner may enter and search any place of business of
any dealer or any other place where the Commissioner has reason to believe that
the dealer keeps or is for the time being keeping any accounts, registers or
documents of his business or stocks of goods relating to his business.

(5) Where any books of accounts, other documents, money or
goods are found in the possession or control of any person in the course of any
search, it shall be presumed unless the contrary is proved, that such books of
accounts, other documents, money or goods belong to such person.

Explanation: For the purposes of this section, place of
business includes a place where the dealer is engaged in business, through an
agent by whatever name called or otherwise, the place of business of such an
agent, a warehouse, godown or other place where the dealer or the agent stores
his goods and any place where the dealer or the agent keeps the books of
accounts.”

2.2. As per section 64(1), the Commissioner (which also
includes his deputy if so authorized) can call for any information or ask to
produce before him any accounts or documents relating to stock of goods or
sales/purchases, deliveries or any other information relating to the business as
may be necessary for the purpose of the Act. Thus above information, etc. can be
called in any proceedings. Since other information can also be called, even
ledger, cash/bank book, though not specifically mentioned, can be asked for
under the above provision. As per Rule 70 of MVAT Rules, 2005, notice for above
purpose shall be in Form 603.

2.3. As per section 64(2), the Commissioner can take
inspection of the above mentioned accounts or documents kept at any place of
business of dealer at any reasonable time and also take extracts/copies of the
same.

2.4. As per section 64(3), the Commissioner, if he has reason
to believe that the dealer is attempting to evade payment of any tax due from
him, he can seize the above mentioned accounts/documents, etc. He shall grant
receipt for the same. The said accounts can be retained so long they are
necessary in connection with any proceedings under this Act or for a
prosecution.

2.5. As per Rule 69, such seized books cannot be retained for
more then 21 days without recording reasons. However, if any longer retention is
required, and, if the authority seizing the books is below the rank of Jt. Comm.
of Sales Tax, then he can retain the same for a longer period by obtaining
permission from the higher authority. The Joint Commissioner can give permission
only up to one year, at a time, and it should be given after recording reasons
for the same. The time limit can be further extended, but only one year at a
time. However if the seizure is by a Joint Commissioner or any higher authority,
then no such permission is required.

2.6. If any accounts, documents, stocks or money is found at
any such place where visit is given then they shall be deemed to belong to the
person in whose possession they are found, unless the
contrary is proved. [Section 64(5)]. This is with a view to safeguard interest
of Revenue and to see that the dealer does not come out with false excuses.

2.7. By explanation to section 64(5), a Special meaning is
given to the ‘place of business’. Thus the authorities have very wide coverage.

2.8. Reference can be made to the judgment in case of Bhowal
Traders & Others (131 STC 145), wherein Gauhati High Court has held that when
there is no prohibition under the Act for searching the residential premises,
there can be valid search of residential premises also, if there is reason to
believe that the documents are lying there. From the above provisions in section
64(5), it appears that the authorities can search residential premises under the
MVAT Act, provided that other
conditions are fulfilled.

3.     It is expected that a search will be conducted only after having reasonable bonafide belief. (Har Kishandas Gulabdas & Sons – 27 STC 434). Reason for belief should be recorded before hand. (Hari-harajan Singh 98 STC 208 and Tapcon Int. (I) Pvt. Ltd. 104 STC 433).

    ‘Reason to believe’ means that the belief must be of a reasonable nature and as a prudent man. It must be based on some relevant material and not based on suspicions, gossip or rumours [Lit light Co. 43 STC 449 and Shree Nath Singh 82 ITR 147, Bhagwan Ind. Ltd. 31 STC 293, Lakhamani Mewal Das 103 ITR 437 (SC) and Laxman Das Saraf 103 STC 385].

    At all Reasonable Times means that it is normally not allowable for an hour or a day that is not a working hour or a working day respectively, even though the place of business is found open. (Mariyala Venkateswara Rao 2 STC 167). No entry is possible at odd or unearthly hours. (Deoralia Bros. 50 STC 113).

    Under the present provisions under the MVAT Act, there are no powers to seize goods or to ask for making advance payment of tax. The Enforcement authority (i.e. visiting officer), after inspect-ing books, etc., shall assess the dealer on the basis of materials found. As per section 23(5) of MVAT Act, such assessment can be qua transaction also. After passing such order, the tax may become due which then can be recovered as per provisions of law. The dealer can also prefer appeal, if aggrieved. However, practically, dealers are forced to make an advance payment.

Under the present MVAT Act, it is noticed that there are more issues about Input Tax Credit. The department, on the ground, that vendor of the purchaser has not paid taxes, claims the said amount from the purchaser. In fact, such ITC can be reduced only by passing the necessary statutory order. However the department tries to get the ITC difference paid without passing such order and insists upon revi-sion of returns by the dealers themselves. Legally, it appears to be an unjustified action, which the dealer can resist as per the law. The practice is neither justified nor according to the law.

    Documents seized as a result of illegal seizure.

Though search is found illegal, as per the view held by various High Courts, the materials can be used as evidence. [M.K. Annamalai Chetiar & Co. (16 STC 687) Purshottam Rangta 79 STC 39, Poornmal (93 ITR 505) and Kusanlata Singh (185 ITR 56(SC)]. However, it is worth noting that in cases where courts are satisfied about wrongful seizure action, heavy costs can be levied by the court on the De-partment. Reference can be made to judgment in case of Director General of I.T. v. Diamond Stone Export Ltd. & Others (291 ITR 438)(SC).

8. Procedure of Search and Seizure

No procedure for search action is provided in the Act itself. This will be governed by other normal provisions. Enforcement Authorities normally take a statement of the person searched. The person can reply to the extent possible. If he subsequently finds that the statement given by him was not correct or was under duress, he can retract the same. The retraction should be as early as possible. It is also held that admission in the statement is not conclusive. The retracted statement is to be read together to evaluate weight of admission for appreciating evidence. Also admission should be of concerned dealer/person and not of any other person on his behalf. Reference in this respect can be made to the judgment in case of C.I.T. v. Ashok Kumar Soni (291 ITR 172)(Raj).

    The Commissioner of Sales Tax has issued a Trade Circular bearing No.1T of 1995 dated 21.1.95, explaining the rights and duties of the dealer visited by the Enforcement Officer. The said circular will be useful under the MVAT Act also.

    “Mini Enforcement”

Under the MVAT Act, there is one more provision, which is not exactly like search/seizure, but allows the departmental authorities to visit place of business of a dealer. This provision is contained in section 22 of MVAT Act i.e. Business Audit. The business audit contemplates audit of records of a dealer by sales tax authorities at the place of business of the dealer. As per the provisions of law, it has to be by prior intimation and cannot be a surprise visit in the nature of search/seizure.

However, the Commissioner of Sales Tax has issued a Trade Circular bearing No.25T of 2008 dt.23.7.2008, in which the scope of Business Audit is explained. From the said Circular, it is clear that this provision can be treated as relating to search/seizure, if the department wants to do the same. From the above circular, it is also clear that the powers are almost the same as search except that the authorities cannot seize the records. However they can call for the investigation team and convert the ‘business audit’ into ‘search and seizure’ action, ultimately the result will be same. This provision is, therefore, called “Mini Enforcement”.

Conclusion

Though the search/seizure provisions are necessary for effective implementation of the Act, we hope that the same will be utilised in a fair manner and with the utmost care. It should not become a tool in the hands of authorities to harass the dealers.

‘Sale in transit’ vis-à-vis S.C. judgment in A & G Projects & Technologies

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VAT

A very interesting but confusing situation has arisen in
relation to ‘sale-in-transit’. As per the provisions of Central Sales Tax Act,
1956, each inter-State sale is liable to tax. However, the intention of the
Government is not to levy tax on all such transactions when such transactions
are effected in the course of single movement. In other words, under the CST Act
an exempted sale category has been carved out so as to give exemption to
subsequent inter-State sale in the course of single movement. The reference is
to the provisions of S. 6(2) of the CST Act, 1956. The said Section is
reproduced below for ready reference :



“6 Liability to tax on inter-State sales


(2) Notwithstanding anything contained in Ss.(1) or
Ss.(1A), where a sale of any goods in the course of inter-State trade or
commerce has either occasioned the movement of such goods from one State to
another or has been effected by a transfer of documents of title to such goods
during their movement from one State to another, any subsequent sale during
such movement effected by a transfer of documents of title to such goods to a
registered dealer, if the goods are of the description referred to in Ss.(3)
of S. 8, shall be exempt from tax under this Act.

Provided that no such subsequent sale shall be exempt from
tax under this sub-section unless the dealer effecting the sale furnishes to
the prescribed authority in the prescribed manner and within the prescribed
time or within such further time as that authority may, for sufficient cause,
permit, :

(a) a certificate duly filled and signed by the
registered dealer from whom the goods were purchased containing the
prescribed particulars in a prescribed form obtained from the prescribed
authority, and

(b) if the subsequent sale is made to a registered
dealer, a declaration referred to in Ss.(4) of S. 8.


Provided further, that it shall not be necessary to furnish
the declaration referred to in clause (b) of the preceding proviso in respect
of a subsequent sale of goods if, :

(a) the sale or purchase of such goods is, under the
sales tax law of the appropriate State exempt from tax generally or is
subject to tax generally at a rate which is lower than three per cent or
such reduced rate as may be notified by the Central Government, by
notification in the Official Gazette, under Ss.(1) of S. 8 (whether called a
tax or fee or by any other name); and

(b) the dealer effecting such subsequent sale proves to
the satisfaction of the authority referred to in the preceding proviso that
such sale is of the nature referred to in this sub-section.”



The implication of above Section is that the first
inter-State sale transaction will fall u/s.3(a) of the CST Act and, therefore,
be liable to tax in the hands of first vendor in the moving State. However
subsequent sale effected by first purchaser, by transfer of documents of title
to goods, to his purchaser will be exempt. In fact any number of such sales
effected during the course of the said movement will remain exempt. As defined
u/s.3(b) of the CST Act, the movement of goods commences when the goods are
handed over to the common carrier and it ends when the delivery of the same is
taken from carrier. Thus during this course of movement, a number of
transactions can take place and they will be exempt. However for availing the
exemption the respective selling dealer will be liable to collect the pair of
forms as stated below.

When the first purchaser sells, he will be required to
collect E-I form from his vendor and C form from his purchaser.

When the subsequent purchaser sells, he will be required to
collect E-II form from his immediate vendor and C form from his buyer. This pair
of E-II and C forms will continue for all subsequent sales taking place in the
course of the same movement. Thus a very good facility has been provided by the
law to avoid cascading burden of tax. Except tax on the first transaction the
tax burden on subsequent sale transactions in the same movement can be avoided.
In popular terms this type of sales are referred to as ‘in-transit sales’.

The nature of ‘in-transit sale’ is now clear by number of
judgments. There can be different situations about the above exempted category
of sale. The simple is that the first purchaser buys the goods without reference
to any pre-existing order from his customer. However after the goods are in
transit he may receive the order from buyer and sell the goods by transfer of
documents. There cannot be any dispute about this transaction and it is
straightaway covered by S. 6(2).

However, dispute sometimes arises when the first purchaser
has pre-existing order. For example, A in Maharashtra has order for supply from
B in Gujarat. A purchases the said goods from C in Tamil Nadu and directs C to
dispatch the goods to B. In this case sale by C to A will be first inter-State
sale and sale by A to B will be subsequent inter-State sale and this will be
exempt subject to production of forms. However the sales tax authorities take
objection that since the goods were already earmarked for B, before putting the
goods in transport, the exempted sale as ‘sale-in-transit’ cannot take place.

However this cannot be a correct position. It is true that there was pre-existing order with A and accordingly the goods were purchased from C. However the sale to B by A is taking place only at the time of putting the goods in carrier. It is at that point of time, because of the instructions of A, the goods are booked in the name of B and hence this is transfer of documents and accordingly covered by S. 6(2). The pre-existing order with A can at the most be considered to be agreement to sale, but actual sale is taking place when the transport documents are made in his name, because of instructions of A. In this respect it can also be mentioned here that there is no need for physical endorsement of transport documents and the transfer can take place by instructions also, which can be referred to as contractive transfer. In other words when the transport documents are taken out in the name of B, the goods stood transferred to B and that is because of contractive transfer of documents, the transaction is duly covered by S. 6(2), hence exempt, subject to other conditions.

This is now a settled law in light of number of judgments on the said issue. Reference can be made to the following judgments:
 
State of Gujarat v. Haridas MuIji Thakker, (84 STC 317) (Guj.) :

In this case the facts are that the Gujarat dealer received order from another dealer in Gujarat. For supplying the said goods, the vendor dealer in Gujarat placed order on Maharashtra dealer and instructed to send the goods directly to the Gujarat purchasing party. Gujarat High Court held that the sale by Maharashtra dealer to Gujarat vendor dealer is first inter-State sale and the one by Gujarat vendor to Gujarat purchasing dealer is second inter-State sale. The Gujarat High Court also held that the second inter-State sale is exempt u/ s.6(2) being effected by transfer of documents of title to goods. In this case though there was no physical transfer of L.R., etc. The Gujarat High Court held that there is constructive transfer by instruction and hence duly covered by S. 6(2). This judgment duly covers both issues that there is no need for physical transfer and also that having predetermined parties does not affect the claim.

Fatechand Chaturbhujdas  v. State of Maharashtra, (S.A. 894 of 1990, dated 12-8-1991) (M.s.T. Tribunal) :

In this case the local party purchased goods from another local party and directed the same to be despatched to outside State party. Even though local party was shown as consignor, taking the view that while placing order there is term for outside place dispatches, Maharashtra Sales Tax Tribunal held that the sale between two local parties is first inter-State sale and the sale by local party to outside party is subsequent inter-State sale, duly exempt ul s.6(2).

Duvent  Fans P: Ltd. v. State of TamiI Nadu, (113 STC 431) (Mad.) :

A local dealer purchased goods from another local dealer and directed to send them to his purchaser’s place in another State. The Madras High Court held that the first transaction is first inter-State sale and the second sale is also subsequent inter-State sale exempt ul s.6(2) of the CST Act. This judgment also clarifies the nature of exempted sales ul s.6(2) of the CST Act.

In fact there are many judgments on this issue. However, since the legal position about transfer of documents is clear from the above judgments, for sake of brevity no further citations are given here.

In the light of the above legal position the nature of ‘in-transit sale’ is fairly settled and dealers are day in and day-out  effecting  such type of transactions.

However, recently the Supreme Court has delivered judgment in case of A & G Projects & Technologies v. State of Karnataka, (19 VST 239) (sq. The facts in the above case are very peculiar and the gist is as under:

The appellant, a registered dealer under the Karnataka Sales Tax Act, 1957, as well as the Central Sales Tax Act, 1956, was engaged in execution of electrical contracts. It was awarded three independent contracts towards: (i) supply of capacitor banks, (ii) execution of civil works, and (iii) creation and commissioning of capacitor banks at various sub-stations of the Karnataka Power Transmission Corporation. Pursuant to those contracts the appellant appointed Bay West as contractor located outside Karnataka for procuring capacitor banks because the latter had a prior arrangement with the manufacturers. The appellant filed its return showing turnover of inter-State sales under the Central Sales Tax Act, 1956, contending that the goods originated from the manufacturers and ultimately reached the Corporation though title to the goods vested in Bay West. According to the appellant there were three sales and it claimed exemption from tax u/s.6(2) of the Central Sales Tax Act, 1956, on the ground that the second and third sales were subsequent sales. The Assessing Officer held that the appellant was not entitled to the exemption. The Tribunal held that the movement of goods was not from the State of Karnataka, but into the State and therefore there was no inter-State sale in the State of Karnataka. On revision the High Court held that the sale of goods in favour of the Corporation was complete when the goods were appropriated to the Corporation before the commencement of goods from the place of manufacture in Tamil Nadu to the Corporation in Karnataka and, therefore the inter-State sales fellu/s.3(a), thus not entitled to exemption u/ s.6(2). The Supreme Court proceeded on the fact that all three transactions are held to be covered by S. 3(a) of the CST Act by lower authorities and accordingly interpreting S. 9(1) of the CST Act decided that the transactions are liable to tax in moving State and notin State of Karnataka.

In the above case the Supreme Court was concerned about appropriate State entitled to levy tax in relation to inter-State sale covered by S. 3(a) read with S. 9(1) of the CST Act. As can be inferred from the judgment more than one inter-State sale transactions can be liable in the same State if they are covered by S. 3(a). The Supreme Court was not analysing S. 6(2). However while dealing with the issue in relation to S. 9(1), the Supreme Court has observed about nature of ‘in-transit sale’ which can be covered by S. 6(2). Relevant portion is as under:

“Within S. 3(b) fall sales in which property in the goods passes during the movement of the goods from one State to another by transfer of documents of title thereto whereas S. 3(a) covers sales, other than those included in clause (b), in which the movement of goods from one State to another is under the contract of sale and property in the goods passes in either States [SEE: Tata Iron & Steel Co. Ltd. v. S. R. Sarkar, (1960) 11STC 655 (sq at page 667]. The dividing line between sales or purchases u/s.3(a) and those falling u/s.3(b) is that in the former case the movement is under the contract whereas in the latter case the contract comes into existence only after the commencement and before termination of the inter-State movement of the goods.” (Italics ours)

In the light of the above observations an issue arises as to whether having pre-existing order with the buyer will affect the claim. In the light of the above observations, one may be tempted to say that the ‘in transit sale’ must take place only after commencement of the movement and if there is a pre-exiting order with the ‘intransit’ seller, then such sale cannot qualify for S. 6(2). However it appears that such conclusion is not at all intended nor warranted.

As stated above, the Supreme Court was not analysing S. 6(2) as such, but it has referred to S. 6(2) for correctly defining scope of S. 9(1). Secondly, the Supreme Court has not laid down anything contrary so as to nullify the understanding till today as well as the above-referred High Court judgments. Even if there is pre-existing order it cannot be equated with the contract of sale. The sale takes place only when the transport documents are transferred or stand transferred by implication like contractual transfer. When the Supreme Court says about con-tract coming into existence after movement commences, the reference or the meaning of the term ‘contract’ used therein is to actual sale. The pre-existing order is at the most an agreement to sale, but the actual transfer of documents is a contract of sale and obviously the said contract is taking place after the movement has commenced, as discussed above. Therefore, on merits also the said observations are not laying down any different position. It is possible that because of the above observations the department may again proceed with their theory of existence of pre-existing order for disallowing claims. However, in the light of the position discussed above, it is not warranted and the legal position as prevailing today should remain applicable even after the above judgment.

2013 (30) STR 609 (Tri-Bang.) Commissioner of Central Excise, Customs & Service Tax, Visakhapatnam vs. R.A.K. Ceramics India Pvt. Ltd.

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Transportation of empty containers from CFS to factory of exporter held to be “in relation to export goods” and thus eligible for refund under Notification No.41/2007.

Facts:
A manufacturer of ceramic tiles cleared such goods for export as well as for home consumption. It incurred freight for transport of goods by road which also included transportation of empty containers from CFS to the respondent’s factory and claimed refund vide Notification No. 41/2007–S.T against freight towards export. After allowing the refund claim, the amount representing transportation of empty containers from CFS to the factory was demanded back treating it as erroneous and contending that such services are not for transportation of goods for export.

Since the services were utilised by them for transportation of goods for exports, it was contended by the assessee that no service tax was payable by them and relied upon the decision of CCE, Madurai vs. Tata Coffee Ltd. [2011 (21) S.T.R. 546 Tri- Chennai].

Held:
Relying on Tata Coffee Ltd. (supra), it was held that the expression used in Notification No. 41/2007 “in relation to transport of export goods” was wide enough to cover event of transport of empty containers from the yard to the factory for stuffing the goods.

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2013 (30) S.T.R. 454 (Delhi) Sercon India Pvt. Ltd. vs. Commissioner (Adjudication) Service Tax

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No service tax on amount received by service receiver towards reimbursement of expenses – Intercontinental Consultants relied upon.

Facts:
The revenue imposed service tax on the reimbursed expenses of Rs. 37.55 crore received by the petitioners against which the CESTAT granted partial relief to the petitioner with regard to amount of pre-deposit. The petitioner filed a writ petition before the High Court for waiver of deposit of the balance amount and submitted before the Hon’ble Court that, he had only received a sum of Rs. 14.22 crore by way of reimbursement for expenses incurred by it. The petitioner further referred to Intercontinental Consultants & Technocrats Pvt. Ltd. vs. Union of India 2013 (29) S.T.R. 9 (Del) wherein Rule 5(1) relating to reimbursement of expenses was held to be ultra-vires the provisions of section 67 of the Act.

Held:
Referring to International Technocrats Pvt. Ltd. (supra), it was held that the amount of Rs. 14.22 Crores actually received by the petitioner towards reimbursement of expenses could not be a subject matter of service tax and the petition was allowed.

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2013 (31) STR 229 (Tri-Mumbai) Greenspan Agritech Pvt. Ltd. vs. Commissioner of C. Ex, Pune-I

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Refund Notification No.17/2009-ST dated 07-07-
2009 providing time limit of one year from date pf export did not have
retrospective effect.

Facts:
The appellant, a
100% EOU, filed a refund claim for the period October 2007 to February
2008 on 18-1-/2008 under Notification No.41/2007-ST dated 06-10-2007
which was partly rejected on the grounds of limitation and partly as not
admissible under the said notification.

The appellant contended
that since the notifications were amended time to time increasing the
period to file the refund claim from “2 months” to “6 months” vide
Notification No.32/2008-ST dated 18-11-2008 and further to “1 year” vide
Notification No.17/2009-ST dated 07-07-2009, they filed the refund
claim in time and further relied on ITW Signode India Ltd. vs. Collector
of Central Excise 2003 (158) ELT 403 (SC).

The department
contended that the part refund was time–barred as filed beyond the
admissible period of 6 months as per Notification No.32/2008 and thus
not to be allowed.

Held:
The Hon. Tribunal held that
undisputedly the refund claim was filed beyond the period of “6 months”.
The amending notification was issued after the event of the date of
export and hence, the same was time-barred. The decision of ITW Signode
India Ltd. (supra) is irrelevant in the present case as the issue
involved is the claim of benefit of notification which was required to
be strictly construed and thus time-barred.

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2013 (31) STR 249 (Tri-Mumbai) Amdocs Business Services Pvt. Ltd. vs. Commissioner of C. Ex., Pune.

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In case of a continuous exporter of a taxable output service, credit for input service is available, irrespective of the period to which the service pertained.

Facts:
The Appellant was a continuous exporter of taxable output services and thus filed a refund claim under Rule 5 for the period October 2010 to December 2010 for unutilised service tax paid on input services. The adjudicating authority rejected part refund of invoices for the period September 2008 to November 2008 and October 2009 to January 2010.

The department relied on Notification No.05/2006– CE (NT) dated 14-03-2006 and contended that since the services in respect of which credit was taken could not have been used for the export in the month of October 2010, refund was not admissible.

The Appellant relied on Circular No. 120/01/2010 dated 19-01-2010 and on the decision of CCE, Mysore vs. Chamundi Textiles (Silk Mills) Ltd. 2012 (26) STR 498 (Tri-Bang) and contended that there was no bar in Notification No.05/2006-CE (NT) to grant refund of input services not pertaining to the period of export for which claims were made.

Held:
Relying on Circular No.120/01/2010 dated 19-01-2010 and on Chamundi Textiles (Silk Mills) Ltd. (supra), the Hon. Tribunal held that since the Appellant was a continuous exporter of taxable output service, they were eligible for the refund of the entire amount of service tax paid by them on the input services irrespective of when the credit was taken.

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2013 (31) S.T.R. 152 (Tri.-Del) Om Shiv Transport vs. Commissioner of Central Excise, Allahabad

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Whether service tax can be demanded from service provider under one service and from service recipient under another service for the same transaction?

Facts:
The Appellants were engaged in transportation of coal in tipping trucks from coal stockyard of Northern Coal Fields Ltd. (NCL) including loading of coal into tipping trucks and railway wagons by employing their own pay loaders apart from manual breaking of coal to the stipulated sizes. The revenue demanded service tax on this considering it a cargo handling service.

The Appellants, relying on Circular No. 137/175/2007- CX4 dated 06-08-2008, contended that the services were in the nature of transport of goods by road. In respect of the same transaction, NCL was assessed to service tax as recipient of service of transport of goods by road vide adjudication order dated 09-01-2008. Invoking extended period of limitation was not warranted since the transaction was already adjudicated against NCL.

Held:
Relying on the decision of the Orissa High Court in case of Coal Carriers vs. CCE 2011 (24) STR 295 (Ori), the Tribunal held that the goods become cargo when loaded into a railway wagon/truck/ tipper and that there is a distinction between goods and cargo. Services in respect of goods were leviable to service tax under transport of goods by road services and services in respect of cargo were leviable to service tax under cargo handling services and thus, the Appellant’s services would fall under cargo handling services. However, the adjudication order did not consider certain aspects and the matter was remanded to consider the applicability of extended period of limitation in lieu of the transactions having been noticed by the revenue qua notice issued to NCL and whether service tax could be assessed once again on the same transaction under cargo handling services in the hands of the Appellants when it was already classified as transport of goods by road and service tax was collected from NCL as recipient of services.

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2013 (31) STR 174 (Tri-Del) Narayan Builders vs. Commissioner of Central Excise, Jaipur.

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In case of conflicts between two High Courts, the decision of the High Court in whose jurisdiction the cause of action arose is to be followed.

Facts:
The Appellants entered into an agreement with Kota Thermal Power Station (KTPS) for execution of works for coal handling system including clearing under coal handling operation circle.

In view of the clarification issued in the Regional Advisory Committee meeting on 06-09-2004, the revenue contended to levy tax on the said activity under cargo handling services. The department further relied on the decision of Coal Carriers vs. CCE 2011 (24) STR 395 (Ori.) which held such service to be taxable.

The Appellants relied on various judgments of the Delhi Tribunal and Rajasthan High Court decision in case of S. B. Construction Company vs. Union of India 2006 (4) STR 545 (Raj.) wherein the activity of the Appellants were held not to be cargo handling services u/s. 65(23) of the Finance Act, 1994.

Held:
The Hon. Tribunal at New Delhi which was neither in the jurisdiction of the Rajasthan High Court nor the Orissa High Court. The tribunal relied on the Full Bench decision of Delhi Tribunal in Madura Coats vs. CCE 1996 (82) ELT 512 which clarified that in case of conflicting decisions amongst High Courts relating to interpretation of statutory provisions or notifications, the decision of the jurisdictional High Court from where the matter was adjudicated earlier, must be followed.

Accordingly, since the cause of action had arisen within the jurisdiction of the Rajasthan High Court and the Appellants were assessed to service tax by Jurisdictional Commissioners and the Appellate Commissioner within the territorial jurisdiction of Rajasthan High Court, the Tribunal followed the decision of Rajasthan High Court in case of S. B. Construction (Supra) and decided the matter in favour of the Appellants.

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2013 (31) STR 123 (Tri – Delhi) VGL Softtech Ltd. vs. CCEx, Jaipur.

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Only a Division Bench can decide the matter involving determination of liability?

Facts:
Appellant preferred an appeal along with stay application against an order of Respondent levying service tax on activity of maintenance of software for the period 09-07-2004 to 30-07-2005. A Single Member Bench decided exparte on non-appearance and directed the Appellant to deposit the entire demand along with penalty within 8 weeks. The Appellant filed a Miscellaneous Application to recall the order of the Single Member indicating that the jurisdiction of the division Bench was exercisable in the present case. On merits, the Appellant contended that the said activity was exempt vide Notification No. 20/2003-ST dated 21-08-2003 and since Explanation to section 65(zzg) [which levied service tax on software maintenance] was introduced from 01-06-2007 onwards, service tax was not applicable prior to the said date.

Held:
The Hon. Tribunal (division Bench) held that, since the Central Excise Act required the appeal involving a question of determination of liability to be heard by the division Bench, the order of Single Member Bench was recalled. On Merits, it was observed that at relevant time the said activity was exempt vide Notification No. 20/2003 and further an Explanation to section 65(zzg) was effective only from 01-06-2007. Accordingly, the stay application and appeal were allowed.

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2013-TIOL-1196-CESTAT-DEL Monsanto Manufacturer Pvt. Ltd. vs. Commissioner of Central Excise, Ghaziabad.

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Classification of service – essential character. Storage Charges integral part of Clearing and Forwarding Service, hence taxable under Clearing and Forwarding Service and not under Storage and Warehousing Service.

Facts:
The Appellant entered into an agreement with HLL to provide services of cold storage/clearing and forwarding operations of frozen products. Tax, interest and penalties were demanded for the said service which was confirmed by the adjudicating authority and also by the Commissioner (Appeals).

The Appellant contended that charges towards cold storage facility were distinct and different from holding of the goods which may take place during clearing and forwarding operation and were in the nature of rental for providing cold storage facility and thus incidental to the services of Clearing and Forwarding Services. Relying on CCE vs. Kulcip Medicines (P) Ltd. – 2009 (14) STR 608, they contended that the activity did not fall under C&F service. The respondents contended that the Appellant acted as a consignment agent and thus, activity of storage was an integral part of the operation of Clearing and Forwarding service.

Held:
Referring to the definition of Clearing and Forwarding service and the agreement entered by the Appellant, it was held that the Appellant was its principal’s agent. Since, the Appellant was required to maintain specific temperature for storage of frozen goods before dispatching the same as per direction of HLL, the storage of the goods in cold storage was an inseparable part of Clearing & Forwarding activity undertaken by the assessee. The essential character being Clearing and Forwarding service, referring to section 65A(2)(b), the storage charges were to be included in the taxable value and chargeable to service tax.

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2013-TIOL-1054-CESTAT-MUM M/s. Kotak Securities Ltd. vs. Commissioner of Service Tax, Mumbai-I.

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Service tax is payable on equity research as market research agency.

Facts:
The
Appellant conducted equity research and prepared research reports on
the financials of listed companies for their affiliate company M/s.
Kotak Mahindra Capital Company Ltd. (KMCC) and received research fees on
which no service tax was paid. An SCN demanding tax, interest and
penalties was issued to the Appellant under the category “Market
Research Services”.

The Appellant contended that they did not
provide any services in relation to product, service or utility and thus
non-taxable under the said category. It further contended that no
service was provided by them to KMCC as it was under common shareholding
of the Kotak Mahindra Group. Further, placing reliance on Circular
No.109/3/2009- ST dated 23-02-2009, it was contended that the Appellant
and KMCC jointly provided services to clients on a cost/revenue sharing
basis, and thus out of tax net.

Held:
Ordering the pre-deposit of 50% of the dues confirmed, the Hon. Tribunal observed as follows:

•
The Appellant did not produce any evidence to prove that the amount
shown under “Fee Income/Research Fees Received” in its Profit & Loss
Account was for services other than “Research Activities” undertaken
for KMCC.

• In respect of sharing of expenses not to be
considered as consideration; when a service provider charges a
consideration, he takes into account all the expenses incurred by him
and includes an element of profit. Thus, expenses were an integral part
of the consideration charged. That would not mean that the amount
received is not a consideration for the services rendered. Service tax
was a tax on provision of service and hence, whatever amount was charged
for such provision, service tax was payable, irrespective of whether
any profit was made by the service provider in the said transaction.

•
It was not in dispute that the Appellant conducted equity research and
prepared reports on the financials of the listed companies. Equities
would come under the categories of products and were considered as goods
under the Sale of Goods Act, 1934. Therefore, research on equity was a
product research. Referring to the definition of Market Research Agency
u/s. 65(69), the activity undertaken by the Appellant would fall within
its scope and accordingly, the Appellant was, prima facie, liable to pay
service tax on the said activity.

• The Appellant informed the
department of the activities undertaken by them only in March 2004 and
September 2004 and SCN was issued in March 2005. It was the date of
knowledge that was relevant for computing the time limit and thus the
SCN was not held time barred.

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2013 (31) STR 227 (Tri.-Del) Paharpur Cooling Towers Ltd. vs. Commissioner of C. Ex. Raipur

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Free supplied materials includible in the valuation of taxable services vide Circular No. 80/10/2004- ST dated 17-09-2004 read with Notification No. 15/2004-ST dated 10-09-2004.

Facts:
The appellant did not include the value of free supplied materials in the gross amount of taxable services and claimed abatement under commercial or industrial construction vide Notification No. 15/2004-ST dated 10-09-2004. The appellant further did not pay service tax on advances received and also availed the benefit of CENVAT credit.

The department contended that in view of the said notification read with Circular No. 80/10/2004-ST dated 17-09-2004, tax was to be levied on value addition and thus free supplies would be included in the valuation of taxable services. Further, service tax on advance received should also have been paid and CENVAT disallowed.

Held:
The Hon. Tribunal dismissing the appeal in totality held as below:

• The adjudicating authority rightly decided the issue against the appellant with respect to free supplied materials following the taxation of incremental value principle and thus, liable to tax.

• The consideration received before, during and after providing taxable services is leviable to service tax and thus, advance was also liable to tax.

• Since there was no taxability, admissibility of CENVAT credit did not arise.

• Section 73 of the Finance Act, 1994 was rightly invoked since the appellants did not claim abatement in accordance with law.

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2013 (31) STR 226 (Tri.-Del.) Jai Shree Road Lines vs. Commissioner of Central Excise, Jaipur-II

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IConsideration of services is liable to service tax and not sharing thereof.

Facts:
The appellant already deposited service tax on consideration towards GTA services. On sharing such consideration with the truck owners the department demanded service tax considering the same as commission received from providing business auxiliary services.

Held:
Considering the basic principle that only the consideration for services provided, and not appropriation of income, is liable to service tax under Finance Act, 1994, the appeal was decided in favour of the appellant.

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2013 (31) STR 251 (Tri-Ahmd) Aakash The Place To Celebrate vs. Commr. Of S. T., Ahmedabad.

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Service tax paid on advance money received. Amount refunded along with service tax, – Rule 6(3) of Service Tax Rules applicable and not section 11B, hence credit claimed without time limit.

Facts:
The appellant collected advance from its clients and paid service tax on the same. Due to unforeseen circumstances, they refunded the advances along with service tax. The appellant filed a refund claim of which part amount was rejected on the grounds of time bar u/s. 83 of the Finance Act, 1994 read with section 11B of the Central Excise Act, 1944.

The appellant contended that, in the present case, Rule 6(3) of the Service Tax Rules, 1994 was applicable and thus they were eligible to avail credit of service tax paid by them since they have refunded the amount along with service tax to their clients.

The department contended that the amount was collected as service tax and deposited with the Government. Further, placing reliance on the Tribunal’s decision in case of Gujarat Road Transport Corporation, they contended that once the provisions of section 11B were invoked, the refund claim was to be filed within 1 year from the relevant date.

Held:
Citing Rule 6(3) of the Service Tax Rules, 1994, the Tribunal held that the present case was covered by Rule 6(3) since all the conditions mentioned in the said Rule were satisfied. The Tribunal further observed that the appellant was again carrying on the same business and the appellant could utilise the credit of such excess service tax paid. Rule 6(3) of the Service Tax Rules, 1994, does not prescribe any time limit and therefore, the appellant could avail the total credit of such excess service tax paid for discharging subsequent service tax liability.

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2013 (31) STR 77 (Tri-Delhi) CCEx, Chandigarh vs. Facinate Advertising & Marketing.

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Incentives received in the course of advertising services – Not taxable. Bad debts and discounts are deductible for payment of service tax.

Facts:
The Revenue challenging the decision of CCE (Appeals) contended that incentives received by an advertising agency, bad debts and cash discounts were taxable and thus to be included in the taxable value.

Held:
The Hon. Tribunal dismissing the appeal held that incentive was a receipt for appreciation of performance of services which was not known while providing the said service. Bad debts were on account of non-receipt of consideration and, similarly cash discounts were also not received. Thus, they do not enter into the realm of receipt of consideration to be included in the taxable value.

(Note: The period in dispute appears to be pertaining prior to the introduction of Point of Taxation Rules, 2011).

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Indian Oil Corporation Ltd. vs. Commissioner of Trade Tax, U.P., Lucknow, [2012] 47 VST 66 (All)

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Sales Tax-Sale Price-Goods Kept in Bonded Warehouse by The Manufacturer Outside the State- Excise Duty Paid by The Purchaser Outside the State-Forms Part of Turnover-section 2(h) of the Central Sales Tax Act, 1956.

Facts:
The company had transferred petroleum products from its bonded warehouse to bonded warehouse of other marketing companies situated outside the State of UP and excise duty was paid by the purchaser of goods when goods were removed from the bonded warehouse. The assessing authorities included the amount of excise duty paid by the purchaser in turnover of sales and levied tax under the CST Act. The assessment order passed by the assessing authority was confirmed by the Tribunal. The petitioner company filed a petition before the Allahabad High court against the order passed by the Tribunal.

Held
The excise duty is leviable on the manufacture of product and it is at the point of removal. No goods can be removed from the factory or warehouse without the payment of duty. Therefore the initial liability to pay the excise duty was on the manufacturer while removing goods from the factory to its warehouse. However, if the permission is granted to remove the goods from the factory or warehouse to another warehouse licensed u/s. 140 belonging to some other person, without payment of duty, the duty is payable on the clearance of goods from such warehouse. In such circumstances the payment of duty is only deferred or extended from the stage of removal of goods from the factory to warehouse of the manufacturer or purchaser, but the liability to pay the excise duty, which is chargeable and payable under the act, by the manufacturer does not cease. The incidence of excise duty is directly relatable to manufacture but its collection can be deferred to later stage as a measure of convenience or expediency.

The court after following various decisions of the SC held that the excise duty paid by the purchaser is liable to be included in sale price for the purpose of the levy of tax under the Central Sales Tax Act, 1956.

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State of Tamil Nadu vs. Sri Ram Packages [2012] 47 VST 59 (Mad)

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Central Sales Tax–Deemed Export-Sale of Packing Material to Exporter-Export by Agent of Purchasing Exporter-Exempt ion Allowed-Central Sales Tax Act, 1956, section 5(3)

Facts
The Department filed a petition before the Madras High Court against the order of Tribunal allowing claim of exemption from payment of tax on sale of packing material to the exporter although actual export was made by the agent.

Held
The Tribunal has recorded findings of facts that as per the contract the person who exported yarn is an agent of the buyer and concluded the transaction as falling under the category of principal/ agency transaction and allowed the claim. The Tribunal has thus reached a finding of a fact with reference to the transaction of the assessee by way of agency sale to an exporter and there is no scope to hold otherwise. Accordingly, the petition filed by the department was dismissed.

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Modi Industries Ltd. vs. State of U.P. and Others [2012] 47 VST 47 (All)

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Sick Industrial Unit-BIFR-Recovery Of Dues-As Per Assessment Order After Remand-Passed After Cut Off Date-For Period Prior to Cut Off Date-Is Current Outstanding Dues-Protected By Rehabilitation Scheme-Sick Industrial Companies (Special Protection) Act, 1985.

Facts
BIFR by order dated 12-03-2007, prepared rehabilitation scheme for the petitioner having cutoff date as of 30-06-2007. The UP Commercial Tax Department applied to BIFR to allow recovery of current dues. The BIFR passed order dated 26- 03-2008 permitting the Department to recover the current dues. The company filed writ petition before the Allahabad High Court against the said order passed by the BIFR.

Held
The words “outstanding dues” and “current dues” are to be understood in the context of rehabilitation scheme prepared by the BIFR, and the object and purpose of section 22 of the Sick Industrial Companies (Special Protection) Act, 1985. The objectof preparing rehabilitation scheme is to give a protective umbrella to the sick units for rehabilitation to provide for deferment or for a different treatment of the payment of current dues, prior to the cut-off date which may be termed as outstanding dues. The current dues for the purpose of rehabilitation scheme are those which fall due after the cut-off date. The liabilities created, taxes falling due, assessed and demand rise after the cut-off date, do not fall within the provision of section 22 of the SICA Act. Any demand in pursuance of the assessment order, prior to the cut-off date had to be classified as outstanding dues to be protected by the scheme. In the case of reassessment, after remand of a period prior to cut-off date, the dues do not partake the character of current dues and is protected by the rehabilitation scheme. Accordingly, the writ petition filed by the company was allowed.

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[2013] 38 taxmann.com 298 (Ahmedabad – CESTAT), Kothari Infotech Ltd. vs. CCE

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Whether refund in respect of service tax paid on services exported in terms of Export of Service Rules, 2005 can be denied, if exporter service provider failed to file declaration required under Notification No. 12/2005? Held, No.

Facts:
The appellant was marketing agent of various printing machines in India supplied by its foreign supplier. It filed refund claim on 03-11-2008 in respect of service tax paid between the period from 13-04-06 to 09-02-07 under the category of “Business Auxiliary Service” on the ground that it was providing services as a commission agent to its foreign supplier and consideration in the form of commission in convertible foreign exchange. The appellant further contended that it was never liable to service tax under the category of “Business Auxiliary Service.”

Held:
The Tribunal held that, the services in the instant case constitute ‘export’ under Export of Service Rules, 2005 and hence, Rule 5 of Export of Service Rules, 2005 would be applicable. Non-filing of declaration vis-à-vis satisfying all the conditions under the said Rule 5 read with notification 12/2005-ST dated 19th April 2005 requires to be examined, the Tribunal referred to the judgment in the case of Manubhai & Co. vs. CST [Final Order No. A/1446/2010-WZB/Ahd., dated 17-9-2010 had clearly held that the requirement of filing of declaration is of procedural nature under notification and delay, if any, can be condoned. The Tribunal thus allowed refund claim file subject to the appellant filing declarations as required under the said notification read with Export of Service Rules, 2005 before the adjudicating authority.
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[2013] 38 taxmann.com 142 (Mumbai – CESTAT) I2IT (P.) Ltd. vs. CCE

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Whether mess charges and hostel fees, laptop charges are to be included in the value of ‘Commercial Training and Coaching Services’? Held, No.

Facts:
The appellant was engaged in imparting education to students enrolled with them for various courses in fields of management, engineering and information technology. Issue before the Tribunal was whether the appellant is liable to pay service tax on that part of the value including mess charges, hostel charges and payment for the laptops supplied to the students.

Held:
The Tribunal held that, these charges are not consideration received for the providing the service of commercial coaching or training. Mess charges and hostel fees are for providing boarding and lodging to the students and cannot be attributed to the training or coaching rendered. Similarly, the amount recovered for the supply of laptops also cannot be attributed to the services rendered (it relates to supply of goods) and therefore, these amounts collected towards mess charges, hostel charges and laptops are excludable from the taxable value of the service rendered.

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2013 38 taxmann.com 145 (New Delhi – CESTAT) Gargi Consultants (P.) Ltd. vs. CCE, Allahabad

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Whether extended period is invokable if decision of Tribunal during the relevant period is in favour of the assessee but is subsequently reversed by the Hon’ble Supreme Court? Held, No.

Facts:
The appellant was engaged in providing “computer training” services during FY 2004-05 and was registered under the category of “Commercial Coaching & Training” service. Show-cause was issued demanding service tax on the ground that during the period July 2004 to March 2005 it has provided “computer training” and has not discharged service tax liability on the same. Appellant contended that that during the relevant period, all the decisions of the Tribunal were in its favour. Appellant also contended that the ‘computer training’ was vocational training and therefore exempt vide notification 9/2003-S.T. 12-06-2003 read with subsequent notification No. 24/2004-ST dated 10- 09-2004. Further it stated that the exemption in relation to ‘computer training’ was withdrawn vide notification 16-06-2005 and thus the same cannot have retrospective effect.

Held:
The Tribunal held that, although the issue on merits was no longer res integra, during the relevant period as Hon’ble Supreme Court in the case of Sunwin (supra) held during the period from 10-09-2004 to 15-06-2005, an assessee providing “computer training” services was required to pay service tax in as much as the subsequent notification effective from 16-06-2005 was only a clarificatory notification and was effective retrospectively. The Tribunal further held as such, there was a bona fide belief on the part of the appellant not to pay service tax on the “computer training services” on the basis of decisions being in its favour at that point of time. Thus, in the instant case, there was a bona fide belief on the part of the appellant and hence invocation of extended period was not justifiable.
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2013] 38 taxmann.com 67 (Ahmedabad – CESTAT) Gujarat State Petronet Ltd vs. CCE, Ahmedabad

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Whether service receiver can avail CENVAT credit of duties in respect of materials used by the service provider, as the service provider opted for benefit available to him under notifications specifically disentitling him to avail CENVAT Credit? Held, No.

Facts:
Appellant was engaged in rendering taxable service under the category of “Transport of goods through pipelines or other conduit service” u/s. 65(105)(zzz) of the Finance Act, 1994. It has adopted Engineering Procurement and Commissioning (EPC) model for laying of oil and gas transmission pipelines for which it received services of various EPC contractors for fabrication, assembly with equipments and devices, installation and commissioning of a pipeline system. The contract between the appellant and the contractors was on a lump sum basis; yet, two invoices were issued, one for sale of the materials (including pipes) and the other for the services rendered by them. EPC contractors claimed deduction in respect of the value of materials and goods sold in the course of rendering the taxable service and also did not take CENVAT credit of duties charged thereon under Notification 12/2003-ST dated 20-06-2003. However, the appellant availed credit of duty paid on the pipes by the EPC contractors on the basis of duty paying documents issued by the manufacturer wherein, the pipes were in the name of the contractors and appellant was shown as consignee. The appellant used the said credit to discharge its service tax liability on its output service of “transportation of goods through pipelines or other conduit services”. Department denied such CENVAT credit to the appellant.

Held:
Exemption notification has to be interpreted strictly and when the explanation to Rule 3(7) of CENVAT Credit Rules specifically provides that once the benefit of a notification is availed, no credit would be available under Rule 3 in respect of duty paid on the inputs/capital goods in respect of which a service provider or a manufacturer has availed the benefit of Notification No. 12/2003. The restriction applies not only on the service provider but extends to the service recipient, also. Further, pipes were used for construction of pipeline by the EPC contractors and pipeline system is supplied/sold to the appellant. Pipes can be considered as inputs only for provision of service of construction/erection of pipelines and not otherwise. The Tribunal stated that the definition of input/capital goods in case of service provider is stricter than that applicable to the manufacturer. Therefore, pipes were ineligible for credit as inputs/capital goods. The Tribunal also held that the CENVAT credit on construction services pertaining to the period prior to 01-04-2011 is an eligible input service. The Tribunal also held that in case the service recipient has purchased material and given to the service provider and the same is utilised by the service provider for provision of its service and the material is supplied back to the service recipient, the service recipient is entitled to CENVAT credit if all other requirements of the definition of inputs/capital goods are satisfied. The Tribunal further held that in case of materials being bought by the service recipient and given to the service provider, CENVAT credit cannot be denied on the ground that the service recipient is not registered as first/second stage dealer, Rule 9(2) may be invoked which provides discretionary powers to the Assistant/Deputy Commissioner to allow CENVAT credit in respect of defective documents, if satisfied. However, charge of suppression was not upheld noting that non-disclosure of additional information to department cannot amount to suppression of facts.
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2013 (32) STR 93 (Tri.-Del) Mahindra World City Ltd. vs. Commissioner of Central Excise, Jaipur – I

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For tax paid on services consumed outside SEZ, exemption is not available under Notification No. 4/2004-ST dated 31st March, 2004.

In case service tax is paid on such services, the refund application should be filed u/s. 11B of the Central Excise Act, 1944 read with section 83 of the Finance Act, 1994 within 1 year from the relevant date as no procedure was prescribed under the said notification 4/2004.

Service recipient can claim refund of service tax only when incidence of service tax is not passed on.

Refund under Notification no. 9/2009-ST dated 4th March, 2009 is available subject to fulfilment of prescribed conditions only.

Facts:
The appellant paid service tax due to ambiguity in Notification No. 4/2004-ST dated 31st March, 2004. Therefore, the appellant filed a refund claim in view of section 26(e) of the SEZ Act, 2005 read with Rule 31 of the SEZ Rules, 2006 which states that no service tax is leviable in relation to authorised operations in SEZ. The refund got rejected on the following grounds:

• Refund can be filed by the person who pays service tax and not by service recipient
• Unjust enrichment
• Part amount on the basis of time bar
• No provisions to refund service tax paid on services consumed outside SEZ.

Held:
The Tribunal observed that since service tax was not payable under Notification No. 4/2004-ST dated 31st March, 2004 but was paid by the appellant, they could claim the benefit of refund of service tax. However, there being no procedure to claim refund under the said Notification, the refund application ought to have been filed under section 11B of the Central Excise Act, 1944 read with section 83 of the Finance Act, 1994. The Tribunal held that refund claim was not filed within 1 year from the relevant date i.e., the date of payment of service tax and accordingly, part refund was held to be time barred. Since there were no provisions to refund service tax paid on services consumed outside SEZ, the Commissioner (Appeals) order upheld the rejection. Service recipient can claim refund of service tax only when incidence of service tax was not passed on. In the present case, there was no evidence to prove absence of unjust enrichment and thus refund was not available to the appellant. Though part period was covered by Notification No. 9/2009-ST dated 4th March, 2009, since the appellant had not filed refund claim under the said Notification No. 9/2009-ST and in absence of evidence on records of fulfilment of conditions prescribed under the notification, refund was not allowed.

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2013 (32) STR 217 (Tri.-Del.) Surya Consultants vs. CCEx., Jaipur-I

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Tribunal should follow the decision of jurisdictional High Court in case where contradictory judgements of other High Court exists—If any other decision discusses both the decisions then it should also be considered.

Facts:
Having been imposed penalty u/s.s 77 & 78 of the Finance Act, 1994 on confirmation of demand of tax, the appellant challenged the decision by relying on the decision of the Punjab & Haryana High Court in CCE vs. First Flight Courier Ltd. 2011 (22) STR 622 (P&H). The respondent relied on the decision of Kerala High Court in Asst. Commr. of CE vs. Krishna Poduval 2006 (1) STR 185 (Ker) for imposition of penalties u/s.s 76 & 78 of the Finance Act, 1994.

Held:
Delhi Bench fell within the jurisdiction of Punjab & Haryana High Court and thus its decision had to be followed and not the contradictory decision of the other High Court pronounced before the said decision. The Tribunal also held that both the decisions stood discussed in CCE Haldia vs. Mittal Technopak Pvt. Ltd. 2012-TIOL-1507-CESTAT-KOL. This decision should have also been considered. The Tribunal followed the decision of the Punjab & Haryana High Court and set aside the order of the Commissioner (Appeals) with consequential relief.
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Amendments in Schedules A, C and D w.e.f. 1-4-2012 — Notification No. VAT.1512/ C.R.40/Taxation-1 of MVAT Act, 2002, dated 31-3-2012.

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Vide this Notification amendments have been carried to entries in Schedule A, C & D.

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Rate of reduction in set-off in case of branch transfer — Notification No. VAT-1512/CR-43/ Taxation-1, dated 31-3-2012.

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From 1st April, 2012 in case of branch transfer that when goods are transferred from Maharashtra State to branch in other State then the set-off on the corresponding purchase of taxable goods will be reduced by 4% as against 2% till then.

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Profession Tax Act, 1975 — Procedure for online submission of application for obtaining registration and enrolment — Trade Circular No. 5T of 2012, dated 31-3-2012.

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From 1st April, 2012 application for registration (PTRC) and enrolment (PTEC) under the Profession Tax Act should be electronically uploaded in ‘Form I’ and ‘Form II’, respectively.

Remaining processes of obtaining registration/ enrolment such as verification of documents, etc. will remain the same. Manually filled forms will not be accepted on or after 1st April 2012 except for non-resident employer/person and Government departments. Procedure for online application has been explained in the Circular.

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Electronic refund of service tax paid on taxable services used for export of goods — Circular No. 156/7/2012-ST, dated 9-4-2012.

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By this Circular it has been announced that a Committee has been constituted to review the scheme for electronic refund of service tax paid on taxable services used for export of goods, made operational vide Notification 52/2011-ST, dated 30th December, 2011.

 The Committee has been instructed, as a part of the review, to

(a) evolve a scientific approach for the fixation of rates in the schedule of rates for service tax refund; and

(b) propose a revised schedule of rates for service tax refund, taking into account the revision of rate of service tax from 10 to 12% and also movement towards ‘Negative List’ approach to taxation of services. The Committee will submit its report before 20-6-2012. Views and suggestions may be posted at the e-mail address: feedbackonestr@gmail.com.

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Point of Taxation Rules — Clarification reg. airline tickets — Circular No. 155/6/2012-ST, dated 9-4-2012.

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In view of reports that some airlines are collecting differential service tax on tickets issued before 1st April 2012 for journey after 1st April 2012, causing inconvenience to passengers, this Circular clarifies that Rule 4 of the Point of Taxation Rules 2011 deals with the situations of change in effective rate of tax. In case of airline industry, the ticket so issued in any form is recognised as an invoice by virtue of proviso to Rule 4A of the Service Tax Rules 1994. Usually in case of online ticketing and counter sales by the airlines, the payment for the ticket is received before the issuance of the ticket. Rule 4(b)(ii) of the Point of Taxation Rules 2011 addresses such situations and accordingly the point of taxation shall be the date of receipt of payment or date of issuance of invoice, whichever is earlier.

Thus the service tax shall be charged @10% subject to applicable exemptions plus cesses in case of tickets issued before 1-4-2012 when the payment is received before 1-4-2012. In case of sales through agents (IATA or otherwise including online sales and sales through GSA), when the relationship between the airlines and such agents is that of principal and agent in terms of the Indian Contract Act, 1872, the payment to the agent is considered as payment to the principal.

Accordingly, as per Rule 4(b)(ii), the point of taxation shall be the date of receipt of payment or date of issuance of invoice, whichever is earlier. However, to the extent airlines have already collected extra amount as service tax and do not refund the same to the customers, such amount will be required to be paid to the credit of the Central Government u/s.73A of the Finance Act 1994 (as amended).

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Point of Taxation Rules — Clarification reg. individuals or proprietorships, partnerships, eight specified services — Circular No. 154/5/2012-ST, dated 28-3-2012.

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It has been clarified that for invoices issued on or before 31st March 2012, the point of taxation shall continue to be governed by the Rule 7 as it stands till the said date. Thus in respect of invoices issued on or before 31st March 2012 the point of taxation shall be the date of payment.

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Clarifications w.r.t. goods specified in registration certificate vis-à-vis in declaration/ certificate under CST Act, 1956: Trade Cir. No.22T of 2012. Dated 26.11.2012

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It is clarified that the application for declaration under CST Act should not to be rejected only because nomenclature of the goods stated in such application does not exactly match with nomenclature of the goods mentioned in the registration record. If the goods mentioned in such application match with the class or classes of goods as mentioned in the certificate of registration, then declaration can be issued without any need to carry out the amendments to CST registration certificate.
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Cancellation of assessment order u/s. 23(11): Trade Circular No.21T of 2012 dated 26.11.2012

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It has been clarified that the application u/s. 23 (11) for cancellation of assessment order cannot be rejected if the order has been passed u/ss. (3A) of section 23, because even though the order has been passed within the extended time period, it is required to be made u/ss. (2) and (3).
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Refund through Electronic Clearance Service (ECS) Trade Cir.No.-20T of 2012 dated 19.11.2012

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It is clarified that ECS facility for remittance of refund will be optional for dealers in Greater Mumbai & that to avail the benefits of ECS, it would be mandatory to submit the mandate form physically.
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