Subscribe to the Bombay Chartered Accountant Journal Subscribe Now!

Category: Indirect Taxes

Software: Taxable as Service or Goods or Both?

fiogf49gjkf0d
Introduction:
The term ‘software’ is not defined in the Finance Act, 1994 (the Act). However, in Commissioner of Customs vs. Hewlett Packard India Sales Pvt. Ltd. 2007 (215) ELT 484, the Supreme Court referred to the meaning of software as given in Computer Dictionary by Microsoft 5th Edition:

“Software—Computer programs; instructions that make hardware work. Two main types of software are system software (operating systems), which controls the workings of the computer, and applications, such as word processing programs, spreadsheets, and databases, which perform the tasks for which people use computers. Two additional categories, which are neither system nor application software but contain elements of both, are network software, which enables groups of computers to communicate, and language software, which provides programmers with the tools they need to write programs. In addition to these task-based categories, several types of software are described based on their method of distribution. These include packaged software (canned programs), sold primarily through retail outlets; freeware and public domain software, which are distributed free of charge; shareware, which is also distributed free of charge; although users are requested to pay a small registration fee for continued use of the program; and vaporware, software that is announced by a company or individuals but either never makes it to market or is very late. See also application, canned software, freeware, network software, operating system, shareware, system software, vaporware, Compare firmware, hardware, liveware.”

Software under the description Information Technology Software (IT Software) was brought into the net of service tax with effect from 16th May, 2008 by defining the term “Information Technology Software” and introducing clause (zzzze) in section 65(105) of the Finance Act, 1994 (the Act) wherein various items were listed as taxable services in relation to IT software. From 1st July, 2012, under the new regime of negative list based taxation of services, “Development, design programming, customization, adaptation, upgradation, enhancement, implementation of information technology software” is specified in section 66E of the Act as one of the 9 declared services. In turn, the definition of ‘service’ includes a declared service in its purview. Service tax levied on IT software has been a matter of debate as it has been subject to multiple taxes. Under the VAT laws of the States, all types of software are treated as goods. This is because in a landmark ruling of the Supreme Court in Tata Consultancy Services vs. State of Andhra Pradesh’ (2004) 178 ELT 22 (SC) [TCS] where the question before the Court was whether Packaged Software was goods, the proposition argued before the Court was that software was intangible, and therefore not goods. The Court held as under :

“A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. Thus, a transaction of sale of computer software is clearly a sale of “goods” within the meaning of the term as defined in the said Act. The term “all materials, articles and commodities” includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes.”

The Central Government under the service tax law treats software as service except packaged or canned software. Section 65B(28) of the Act defines IT software as under:

“information technology software” means any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment”.

Chargeability to Central Excise Duty
Introduction of levy on Packaged Software

• Extracts from Finance Minister’s Budget Speech on 28.2.2006 :

Para 138 “I propose to impose an 8 per cent excise duty on packaged software sold over the counter. Customized software and software packages downloaded from the internet will be exempt from this levy”.

• Entry 27 – General Exemption Notification 6/06 – CE

“Any customised software (that is to say any custom designed software developed for a specific user or client) other than packaged software or canned software.”

Explanation: For the purpose of this entry packaged software or canned software means software developed to meet the needs of variety of users and it is intended for sale or capable of being sold off the shelf.”

In the TCS case, the Supreme Court has observed as under:

Para 26

“…….. We are in agreement with Mr. Sorabjee when he contends that there is no distinction between branded and unbranded software. However, we find no error in the High Court holding that branded software is goods. In both cases, the software is capable of being abstracted consumed and use. In both cases the software can be transmitted, transferred, delivered, stored, possessed etc. Thus even unbranded software, when it is marketed/sold, may be goods. We, however, are not dealing with this aspect and express no opinion thereon because in case of unbranded software other questions like situs of contract of sale and/or whether the contract is a service contract may arise”

For the purpose of Central excise, so long as software does not fit within the ambit of Packaged Software, which is capable of being sold off the shelf, there would be no question of excise duty.

Can the Concept of “manufacture” apply to Software at all?

Interestingly, even assuming software is considered as goods and packaged software is considered as excisable goods, excise duty can be imposed only if there is an “activity of manufacture” in terms of Section 2(f) of CEA.

The Supreme Court in the case of Seelan Raj and Other vs. Presiding Officer, First Additional Labour Court, Chennai – 2001 AIR SC 1127 was considering the issue under the Industrial Disputes Act. It was the contention of company that it was rendering computer services and developing customised soft-ware application. Dispute arose which was referred to the Labour Court and it was contended by the Company that it was a manufacturer of software and therefore it is not an establishment under the Industrial Disputes Act and much less a factory under the Factories Act and therefore the dispute should not be referred to Labour Court as it is not an industrial dispute under the Industrial Disputes Act. The Labour Court overruled the objection and held that legislation covers the establishment of the company and directed the reinstatement of the workmen back with wages. It was also held that the company was factory and had to comply with the Industrial Disputes Act. After various rounds of litigation, the matter landed before the Supreme Court. The Supreme Court observed that there is a distinction between packaged software and custom-built software. Standard Packaged Software is marketed as a standard product, to meet the requirements of a large number of users whereas customised software is meant to meet the particular requirement of the user. The hybrid form of software also exists whereby the standard package is altered so that it fits the customised needs more clearly adopting a basis of customisation. The Supreme Court, taking into account the debate on various aspects and the questions with reference to software, referred the dispute to the Larger Bench of the Supreme Court.

In the case of CCE vs. Acer India Ltd. (2004) 172 ELT 289 (SC) the following was observed by the Supreme Court:

“Para 81


We, however, place on record that we have not applied our mind as regards the larger question as to whether the information contained in a software would be a tangible personal property or whether preparation of such software would amount to manufacture under different statutes.”

CETA is aligned to the Customs Tariff and software is identically classified under entry 8523 80 20 as (Information Technology Software) under Chapter Heading 8523. Again, the CETA is only set out for tangible goods, and the software and the media cannot be split. Attention is drawn to Chapter Note 10 to Chapter 85 of CETA which states as under:

“For the purposes of heading 8523 ‘recording’ of sound or other phenomena shall amount to manufacture”.

In other words, the recording of software on a medium could be an activity of manufacture which would attract a charge of Central Excise duty.

CETA Classification for “Software” is entry 8523 80 20 (Information Technology Software). Information Technology software is then carved up into customised software (defined as custom designed software developed for a specific user or client) and packaged or canned software (defined as software designed to meet the need of variety of users and is intended for sale or capable of being sold off the shelf), and separate notifications set out the effec-tive rates of duty in respect of these two.

By Notification No. 6/2006-CE dated 1.3.2006, the effective rate for Customised Software is nil. Ac-cordingly, CVD on imports of Customised Software is also nil.

In this regard, attention is invited to the decision in Steag Encotec India Pvt. Ltd. vs. Commissioner of Customs (2010) 250 ELT 287 (Tri – Mumbai). In the facts of the case, the software, which was imported for use in coal based plants, required to be modified according to the needs to each of the plants on the basis of design and operating conditions which varied from one plant to another. The question before the CESTAT was whether such modification of the software would suffice to give it the character of customised software so as to qualify it for the aforesaid exemption. The CESTAT held that the exemption notification would not apply, as only software which “has to be developed from the basic building blocks, whereby a new software product should emerge as per the specific requirement of the client” would qualify as CS, and that software which has just been modified from PS would not.

Chargeability to Customs Duties

Section 12 of the Customs Act, 1962 [‘CA ’62] provides that customs duty shall be levied on goods imported into India. Section 2(22) of ‘CA ’62 defines goods to include “(a) vessels, aircrafts and vehicles; (b) stores, (c) baggage; (d) currency and negotiable instruments; (e) any other kind of movable property”. Therefore, for customs duties to apply on an import of software, it must answer to this definition of goods.

In Associated Cement Companies Ltd. vs. Commissioner of Customs (2001) 128 ELT 21 (SC), the Supreme Court had occasion to examine the scope of this definition. In the context of import of designs and drawings on paper, it was contended before the Court that the transactions were for a transfer of technology which was intangible, and that the medium was only a vehicle of transmission and incidental to the main transaction. It was accordingly contended that even though the technology was put onto a medium, it would not get converted from an intangible to a tangible thing which could be subject to customs duties. The Court did not accept these contentions, and held that all tangible movable articles would fall within the ambit of the definition of goods u/s. 2(22) (e) of CA ‘62, and that it was immaterial as to what types of goods were imported or what is contained in them or recorded thereon. In other words, if there was an import of tangible movable articles, there would be a levy of customs duty on these articles without any exclusion for an intangible contained in the articles. The Court went on to say, on the related subject of valuation of the imported goods, that once the intellectual property had been incorporated on the medium, the value of the medium would get enhanced, and customs duties would apply on this enhanced value. In the words of the Court:

“It is misconception to contend that what is being taxed is intellectual input. What is being taxed under the Customs Act read with Customs Tariff Act and the Customs Valuation Rules is not the input alone but goods whose value has been enhanced by the said inputs. There is no scope for splitting the engineering drawing or the encyclopedia into intellectual input on the one hand and the paper on which it is scribed on the other.”

The Supreme Court ruling in ACC’s Case seem to imply that, though the definition of “goods” in CA ‘62 is set out in the same terms as the Constitution and various Sales tax/VAT provisions, the goods must be tangible for a levy of customs duty to apply. Such a position appears to be inconsistent with the view taken in TCS and BSNL that the ambit of the term “goods” extends to intangibles. Then, a question arises as to why, the import of intangibles does not attract a levy of customs duty.

A possible answer could be that though intangibles are goods, as the taxable event of import, i.e. crossing the customs barrier, cannot arise (given the intangible nature of the goods), there cannot be a charge to customs duty. This would be in line with the Geneva Ministerial Declaration on Global Electronic Commerce, 1998 WT/MIN (98)/ DEC/2, according to which member countries are to “continue their current practice of not imposing customs duties on electronic transmission”.

What follows from above is that only software recorded on a tangible medium is liable to customs duty. In this connection, it is relevant to note that software is classified under Tariff Entry 8523 80 20 (Information Technology software) under chapter heading 8523 (Discs, tapes, solid-state non–volatile storage devices, “smart cards” and other media for the recording of sound or of other phenomena, whether or not recorded, including matrices and masters for the production of discs, but excluding products of Chapter 37) of the Customs Tariff. This classification accords with the position set out in TCS that the software and medium cannot be split up, and the implication that follows in respect of valuation of the medium. The classification also provides yet another answer as to why intangibles (like software), though constituting goods, are not liable to customs duty, i.e. the fact that the Customs Tariff Act, 1975 (“CTA”) is only set out for tangible goods. The Customs Tariff rate for entry 8523 80 20 (IT Software) is “Free”

This means that a packaged or a canned software is goods and when it is capable of being used by a large number of users, it also amounts to manufacturing of goods whereas customised software is fully exempt goods. Board’s Instruction F, no.354/189/2009-TRU dated 04-11-2009 also clarified in this regard that so far as excise duty/CVD is concerned, packaged software attracts duty @ 8% while customised software is fully exempted.

The question therefore arises is that if both packaged or canned software and customised software are ‘goods’ for the purpose of CEA, CA, 62, one dutiable and the other ‘exempt’, whether customised software can simultaneously be considered service for the purpose of service tax law?

Packaged/canned software vs. customised software:

So far as packaged or canned software is concerned, time and again, CBEC provided indication that it is considered goods and not exigible to service tax. Education Guide dated 20-06-2012 released along with the introduction of negative list based tax on services at Guidance Note No.6.4.1 & 6.4.4 has referred to the judgment of the Supreme Court in Tata Consultancy Services vs. State of Andhra Pradesh 2004 (178) ELT 22 (SC) and stated that sale of pre-packaged or canned software is in the nature of sale of goods and is not covered by the entry for declared service of development, design etc. of IT software. The Education Guide also states that the judgment of Tata Consultancy Services (supra) is applicable in case the pre-packaged software is put on a media before sale. “In such a case, the transaction will go out of the ambit of the definition of service as it would be an activity involving only a transfer of title in goods.” It is thus not a matter of doubt or debate that packaged or canned software is ‘goods’ both for the purpose of VAT laws of the States and the Central Excise law at least when canned/packaged software is made available on any tangible medium. The question however remains open in regard to customised software. In the Tata Consultancy’s case (supra) the Honourable Supreme Court did not decide as to whether unbranded software is considered ‘goods’ or not. This is mainly because whether uncanned software (unbranded software) were goods or not was not at all an issue before the Supreme Court in that case. However, the Court was in agreement with the submission made by the petitioner in the case that there was no distinction between branded and unbranded software. The majority opinion in the said judgment held that as they did not deal with the unbranded software when it is marketed or sold as goods and therefore did not express opinion on the same. In this regard however, the Supreme Court in Bharat Sanchar Nigam Ltd. & Another vs. UOI 2006 (2) STR 161 (SC) at Para 56 and 57 upheld that software whether customised or non-customised would become goods provided it satisfies the attributes of goods, namely (a) its utility (b) its capability of being bought and sold and (c) capability of being transmitted, transferred, delivered, stored or possessed.

Considering all the above, the issue that arises is:

When an item is specifically exempted under an exemption notification of the Central Excise Tariff Act, could it not mean that it is primarily ‘goods’ though exempted. Without having characteristic of goods, why would it find place as exempted item under the Central Excise law? Viewing this from another angle, we find similar inconsistencies in the service tax law also. For instance, process amounting to manufacture and trading in goods are listed along with other non-taxable services in section 66D when the activities per se do not have characteristic of a ‘service’, whether they can find place in the “negative list” of services. Under the earlier dispensation of law, notifying the value of goods and material sold by the service provider to the recipient of service as exempt under Notifica-tion No.12/2003-ST dated 20-06-2003 was also along the same lines. Nevertheless, this does not whittle down the fact that even customised software is more akin to being goods than a service as it can be utilised, transmitted, transferred, delivered and stored and possessed. As a matter of fact, it can be used only when it is stored on a tangible medium of the hardware. The Madras High Court in the case of Infosys Technologies Ltd. vs. Commissioner of Commercial Taxes 2009 (233) ELT 56 (Mad) relying on the decision in the case of TCS (supra) held that unbranded/customised software developed and sold by the petitioner, with or without obligation for system upgradation, repairs and maintenance or employee training, satisfies the Rules as ‘goods’, it will also be ‘goods’ for the purpose of sales tax. However amidst controversy, service tax is levied on customised software considering it as ‘service’.

Software: Can it be goods as well as service at the same time?

The question therefore arises is whether an activity or a transaction can be considered ‘goods’ as well as ‘service’ under different statutes and therefore exigible to tax more than once. Since the Central Excise law and Service Tax law are under a com-mon administration, dual levy generally here would not be attracted, yet by interpreting a transaction to be either ‘service’ or ‘goods’ and offering tax accordingly, one may have to face litigation from the administration of the other levy. In Yokogowa India Ltd. vs. Commissioner of Customs, Bangalore 2008 (226) ELT 474 (Tri.-Bang), the Indian company imported a software and claimed that it was a customised software, unique to only their usage and claimed exemption under Notification No. 6/2006-CE (referred above) for countervailing duty. The appellant in this case made a number of submissions in support of its claims that the software that it imported was not capable of being bought off the shelf and that this software was designed on the basis of their unique requirement. However, it was held that the software imported by the as-sessee consisted of several standard packages and only after further modification, it would acquire characteristic of custom designed software. What was imported was packaged software and therefore benefit of Notification No. 6/2006-CE was not available.

Later, however the Government issued Notification No. 53/2010-ST dated 21/12/2010 whereby packaged/ canned software was exempted subject to the condition that the value of such packaged/canned software had suffered excise duty when domestically produced or additional customs duty along with appropriate customs duty in case of imported packaged/canned and that the service provider made a declaration on the invoice that no amount in ex-cess of retail sale price declared on the said goods (packaged/canned software) is recovered from the customer. Similarly, the tug of war between the State law relating to VAT and service tax law of the Central Government being more intense, it makes tax compliant software businesses go through a rough bet of interpretation as to whether the transaction is of sale or of a service and have to bear consequent litigation cost for no fault of theirs. In the case of Sasken Communication Technologies Ltd. vs. Joint Commissioner of Commercial Taxes (Appeals), Bangalore (2011) 16 taxmann.com 7 (Kar.), VAT was demanded from the assessee who entered into an agreement for development of software for a client as per client’s specification & expressly agreed that software when brought into existence would be absolute property of the client. The Court observed that the assessee gave up their rights before software was developed. The agreement did not have any indication for purchase of software. It was provided in the agreement that all ideas, inventions, patentable or otherwise, as a result of programming or other services would be exclusive property of the client as it would be considered as work made on hire. The deliverable was entirely related to development. In short, software prior to being embedded on a material object, belonged to the client and the entire work was done through capable employees of the assessee & no indication existed in the agreement as to purchase of software even from the market and improvement thereon by the assessee. The court, therefore, held that the contract was for a service simplicitor.

The principle that a transaction cannot simultaneously be both for goods and services is recognised at various levels. The Supreme Court in All India Federation of Tax Practitioners 2007 (7) STR 625 (SC) observed that the word ‘goods’ has to be understood in contradistinction to the word ‘services’. In BSNL’s case (supra) it was categorically held that a transaction cannot be both for goods and services. Nevertheless, there being a thin line of divide between the two or both intertwined in many situations, there lacks clarity on the subject until a common code by way of Goods and Services Tax (GST) is implemented.

Software downloaded electronically:

The following is extracted from the Finance Minister’s Budget Speech on 28-02-06:

“Para 138

I propose to impose an 8% excise duty on packaged software sold over the counter. Customised Software and Software Packages downloaded from the internet will be exempt from this levy.”

In cases where the software is made available only through the medium of internet there is no express exclusion in Entry 27 stated above. However, the Explanatory Notes, which forms part of the Budget Papers read as under:

“Excise duty of 8% is being imposed on packaged software, is also known canned software on electronic media (software downloaded from the internet and customised software will not attract duty). [Serial 27 of Notification No. 6/2006)”]

The Central Excise Rules, 2002 contemplate payment of excise duty at the time of removal of excisable goods from the factory and at the rates prevalent on the date of removal from the factory. Where a customised software solution is sold to the customer through the medium of internet, the transaction can be considered as an e-commerce transaction and there is no physical removal of goods in a tangible form from the factory gate which is the requirement of levy of excise duty. Further, the software is not available in any medium for it to be considered as goods as per the rationale of the Supreme Court in TCS case.

The following judicial considerations need to be noted:

The Supreme Court in the case of Associated Cement Company vs. CC (2001) 128 ELT 21 held that where any drawings or designs or technical materials are put in any media or paper, it becomes goods. Hence, only if an intellectual property is put in a media, it is to be regarded as an article or goods.

In Digital Equipment (India) Ltd. vs. CC (2001) 135 ELT 962 Tribunal held that information transmitted via e-mail cannot be akin to import of record media in 85.23. In an e-mail transfer, no media as a movable article is crossing the international boundaries and there is no movable property movement involved. Therefore, transfer of information or idea or knowledge on e-mail transfer would not be covered within the ambit of goods under the Customs Act. If they are not goods, then they cannot be subject to any duty.

In Multi Media Frontiers vs. CCE (2003) 156 ELT 272 the Tribunal has observed that a software cannot exist by itself and for it to be put to use it has to necessarily exist on some suitable media such has floppy disc, tape or CD.

In Pantex Geebee Fluid Power Ltd vs. CC (2003) 160 ELT 514 (Tri), it was held that, a transfer of intellectual property by intangible means like email would not be liable to customs duty.

The Geneva Ministerial Declaration on Global Electronic Commerce Document WT/MIN (98) DEC/2 dated 25-05-1998 which is a declaration of an intent by members of WTO that they would continue their current practice of not imposing customs duty on electronic declaration.

Annual maintenance contract for electronically downloaded software:

When a software is bought and sold, annual or ongoing maintenance service is important for the user. Generally, under an Annual Maintenance Contract (AMC), upgradation or updation is done by way of installation of upgraded version of the software already sold or available with the user. It is common to provide license to such versions electronically vide internet or through paper licenses. Since this is part of the obligation of the AMC along with other maintenance services like debugging, troubleshooting etc. agreed to be provided during the currency of the AMC, the value of the licensed updation is also contained in the AMC and because it is difficult to determine the said value at the time of signing of AMC, it remains inseparable. Therefore, liability under both the laws is attracted, viz., VAT law of the State and the Service Tax law’], as the sale of license to use software is goods under deemed sale concept and providing upgradation, enhancement etc. is a ‘service’ with effect from 16-05-2008 as well as “declared service” with effect from 01-07-2012. In this context, Education Guide comments at para 6.4.4 are extracted for easy reference:

“6.4.4 Would providing a license to use pre-packaged software be a taxable service?

•    ‘Transfer of right to use goods’ is deemed to be a sale under Article 366(29A) of the Constitution of India and transfer of goods by way of hiring, leasing, licensing or any such manner without transfer of right to use such goods is a declared service under clause (f) of section 66E.

•    A license to use software which does not involve the transfer of ‘right to use’ would neither be a transfer of title in goods nor a deemed sale of goods. Such an activity would fall in the ambit of definition of ‘service’ and also in the declared service category specified in clause (f) of section 66E.

•    Whether the license to use software is in the pa-per form or in electronic form makes no material difference to the transaction.

•    However, the manner in which software is transferred makes material difference to the nature of transaction. If the software is put on the media like computer disks or even embedded on a computer before the sale the same would be treated as goods. If software or any programme contained is delivered online or is down loaded on the internet the same would not be treated as goods as software as the judgment of the Supreme Court in Tata Consultancy Service case is applicable only in case the pre-packaged software is put on a media before sale.

•    Delivery of content online would also not amount to a transaction in goods as the content has not been put on a media before sale. Delivery of content online for consideration would, therefore, amount to provision of service.” [emphasis supplied].

It is noted here that although in the Education Guide the Ministry of Finance has placed reliance on the TCS decision (supra), it has made it applicable in the manner it suits its own interpretation that mode of delivery of the software would determine whether it is ‘goods’ or the ‘service’. Thus, service tax is certainly made applicable as the license to use software is considered service. The ‘rationale’ as explained by the Education Guide that the manner of delivery of a software or a programme determines the character of the transaction is hard to digest.

Whether intangible nature of the ‘goods’ capable of being bought and sold, utilised, transmitted & transferred (electronically) and stored and possessed by the user ultimately loses its characteristic of being ‘goods’ and becomes ‘services’? The issue is certainly disputable. In practice, it can be observed that most of the AMCs entered into by IT sector carry both VAT and service tax at applicable rates.

Further, introduction of repairs and maintenance contracts in the execution of works contract vide Notification No. 24/2012-ST has added further confusion. Most contractors of AMCs treat AMCs as works contracts, given the fact that value of license or goods which is deemed sale as per VAT laws is inseparable. Accordingly, in many cases it is observed that persons entering into AMC charge and recover VAT at applicable rate (depending on whichever option under the VAT law is exercised) and service tax of 12.36% is charged and recovered on 70% value (effective rate of 8.652%) in terms of Rule 2A of the Service Tax (Determination of Value) Rules, 2006 introduced with effect from 1st July, 2012. Whether this practice is correct in terms of discussion here is an issue by itself as the service tax administration considers license to use software acquired electronically as pure service. In this sce-nario, would service tax be not demanded on full value of AMC considering it a service contract?

Applicability of VAT indeed would not be influenced by this interpretation as it independently treats the subject matter as sale of goods and therefore VAT is attracted at applicable rate. Thus, uncertainty and diverse practices would continue to persist till the issue is settled judicially as tremendous litigation would be generated on account of overlap. One such attempt made in Infotech Software Dealers Association vs. UOI 2010 (20) STR 289 (Mad) hardly provided any definite direction. In this case, the petitioner challenged legislative competency of the Parliament to levy service tax under the relevant clause section 65(105)(zzzze). The High Court in this case considered the incidental question that the transaction of the software in all cases amounted to sale or in some transactions, it could be considered ‘service’. The member of the Association in this case, supplied software to their customers pursuant to end user license agreements. To this, the High Court held that it is not sale of software but only the contents of the data stored in the software were provided and this amounted to service. It was further observed that to bring the “deemed sale” concept, there must be transfer of right to use any goods and when the goods as such is not transferred, the question of deeming sale does not arise and in that sense, transaction would be of service and not a sale.

The High Court further observed that the challenge to the amended provisions was only on the ground that software is goods and all transactions would amount to sale whereas the transactions may not amount to sale in all cases and it may vary depending upon the end user license agreement Therefore, competence of Parliament to levy service tax cannot be challenged so long as the residuary power is available under Entry 97 of the List-I and finally held “the question as to whether a transaction would amount to sale or service depends upon the individual transaction and on that ground, the vires of provision cannot be questioned”. The issue therefore remains open for interpretation when a dealer in software merely passes on license to the end user without any value addition to the license, whether it would still be treated as service.

Paradoxically, in spite of the fact that software sold electronically is notified as service, in case of Microworld Software Services P. Ltd. vs. CCE, MUM-I 2012-TIOL-1044-CESTAT-MUM, the company engaged into manufacturing software cleared packaged soft-ware on payment of appropriate duty. They also effected sale of software through internet. Central Excise authorities demanded and confirmed the duty and imposed penalties. At the lower appellate stage, 25% pre-deposit on duty and penalty was directed to be paid to hear the appeal. The pre-deposit of duty was paid and for the pre-deposit on the penalty portion, modification application was filed. Both modification application and appeal were dismissed for non-compliance of the order.

Appellant’s plea to CESTAT was that from F. Y. 2008-09, they had started paying service tax considering software cleared in tangible form attracted excise duty whereas Board’s Circular dated 29- 02-2008 clarified that service tax was payable on electronically supplied software. Further, they had informed revenue that they claimed exemption under Notification No. 6/06-CE for electronic supply of software. The revenue argued that Tariff heading 8524 covers software on floppy, disc/media/ CD Rom and also covers software on other media and the term “other media” covers electronically supplied internet. Based on the above submissions of the Appellant and considering their service tax payment and letter informing revenue about claim of the exemption under Notification No. 06/2006, the Bench found 25% pre-deposit of duty amount sufficient to hear the appeal and also found the case arguable and directed the Commissioner (Appeals) to hear the appeal on merits as the same was dismissed for non-compliance of section 35F without going into merits.

Considering the above process undergone by the Appellant, the following extract of TRU letter F. No. 334/1/2008 dated 29-02-2008 may be noted:

“4.1.3 Packaged software sold off the shelf, being treated as goods, is leviable to excise duty @ 8%. In this budget, it has been increased from 8% to 12% vide notification No. 12/2008-CE dated 01-03 -2008. Number of IT services and IT enabled services (ITES) are already leviable to service tax under various taxable services.

4.1.5 Software and upgrades of software are also supplied electronically, known as digital delivery. Taxation is to be neutral and should not depend on forms of delivery. Such supply of IT software electronically shall be covered within the scope of the proposed service.”

Relying on the above and taking action thereon and given the fact that both excise duty and service tax are administered by CBEC, it can be observed that litigation cannot be avoided by law-compliant assesses as well.

Conclusion:

Given various contradictions in interpretations by different agencies of the Government machineryas regards software, IT sector as a whole and consequently the economy is imparted by not only multiplicity of taxation but also by increasing frivolous and lengthy litigation process. This could be minimised if single Government agency deals with the concept of deemed sale, intangible goods and services for implementing fair tax system in the matter at different levels and avoid hardship of the tax payers considering that the tax payer is an important part of the system of revenue collection.

(2011) 24 STR 422 (Tri.-Chennai ) — Agsar Paints Pvt. Ltd. v. Commissioner of Service Tax, Mumbai.

fiogf49gjkf0d
Cenvat — Input credit disallowed — Penalty of Rs.10,000 imposed under Rule 15 of CENVAT Credit Rules Act, 2004 — However, service tax paid on telephone service used for sale promotion is an eligible input service.

Facts
The Commissioner of Central Excise disallowed the total credit of Rs.21,360 of service tax paid on (i) telephone services (ii) vehicle maintenance (iii) fixed telephones, and (iv) courier agency and also upheld a penalty of Rs.10,000.

An appeal was filed only against the denial of credit of service tax paid on the telephone services as the same was eligible input service since used in connection with the activity of business of manufacture of final products.

Held
It was held that credit of service tax paid on the telephone services which is eligible input service since used in connection with the activity of business of manufacture of final products was admissible. The duty demand and the penalty to be requantified in light of the extended credit of service tax in respect of tax paid on telephone service.

levitra

Notification No VAT 1512/CR-139/Taxation-1 Dated 21.11.2012

fiogf49gjkf0d
The Government of Maharashtra has issued Notification dated 21.11.2012 amending the Maharashtra Value Added Tax Rules, 2005 thereby extending the period for submission of MVAT Audit report u/s. 61 of the MVAT Act, 2002 from Eight Months to Nine months and fifteen days from the end of the year to which report relates.
levitra

Works Contracts vis-à-vis Builders and Developers

fiogf49gjkf0d
Introduction

A very interesting issue was under litigation in relation to scope of ‘Works Contract’. The background of the works contract taxation is the landmark judgment of Hon’ble Supreme Court in case of Gannon Dunkerly & Co. (9 STC 353)(SC). While examining the scope of ‘sale’ for levy of sales tax, the Hon’ble Supreme Court held that the word ‘sale’ has to be interpreted in a limited sense. In fact, the Hon’ble Supreme Court held that ‘sale’ will have following meaning.

“Thus, according to the law both of England and of India, in order to constitute a sale it is necessary that there should be an agreement between the parties for the purpose of transferring title to goods, which of course presupposes capacity to contract, that it must be supported by money consideration, and that as a result of the transaction property must actually pass in the goods ……”

From the above passage, it is clear that to be a ‘sale’, the following criteria should be fulfilled:

(i) There should be two parties to contract i.e. seller and purchaser,
(ii) The subject matter of sale is moveable goods,
(iii) There must be money consideration and
(iv) Transfer of property i.e., transfer of ownership from seller to purchaser.

Therefore, if the transaction was composite i.e. it also had labour as well as service element in it, it was held that it was not covered within the sales tax laws.

46th Amendment to the Constitution of India
To bring the ‘works contract’ transactions within the purview of sales tax levy, the Constitution of India was amended vide 46th amendment to the Constitution, in the year 1983. Along with other transactions, the ‘works contract’ transactions were also ‘deemed to be a sale’ for the purpose of levy of sales tax. The said purpose was achieved by inserting clause (29A) in Article 366 of the Constitution of India.

The relevant part is reproduced herein below for ready reference:
(29A) “tax on the sale or purchase of goods” includes–
(a) ……
(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;
(c) to (f) …… and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;”

Scope of the Supreme Court judgment
Wherever composite transactions were involving goods and services, they were deemed to be covered within the scope of above constitutional amendment and were considered to be taxable under sales tax laws. In other words, there was no controversy about such coverage.

However, the issue arose in relation to sale of under construction premises like sale of premises by builders and developers. Normally, the builders and developers come up with their own projects and enter into agreement with prospective buyers for sale of premises like flats and offices etc. The intention of the builder and prospective buyer is to give/get possession of immovable property like a ready flat. It was believed that such contracts are not works contracts.

The first controversy arose before Supreme Court in case of K. Raheja Construction (141 STC 298)(SC). In this case there was tri-party agreement where landlord as owner of land, K. Raheja as developer and prospective buyer were parties. The agreement was entered into when the construction was in progress.

The value of the land and construction was shown separately. The argument of the dealer i.e. K. Raheja was that the agreement is for sale of immovable property as premises and not for carrying out any ‘works contract’. However, the Supreme Court rejected the argument holding that the agreement is ‘works contract’.

Maharashtra Chamber of Housing Industry judgment
After above judgment in K. Raheja, MVAT Act, 2002, was amended on 20-06-2006, whereby definition of ‘works contract’ was provided in the Act. In view of this provision, the Commissioner of Sales Tax, Maharashtra State issued a circular fastening liability on builders. The amendment and the circular were challenged before the Hon’ble Bombay High Court based on sample agreement under Maharashtra Ownership Flat Act (MOFA). The main plea before the Hon’ble High Court was that the State cannot consider the agreement involving third element i.e. land, as works contract.

The Hon’ble Bombay High Court delivered a judgment as reported in (51 VST 168), wherein rejecting arguments of the builders and developers, the agreements under MOFA were considered to be works contract transactions and the levy of tax on such transactions was held to be constitutionally valid.

Judgment of Larger Bench of Supreme Court in Larsen & Toubro Limited and another vs. State of Karnataka and another & Others.

The K. Raheja judgment came to be analysed by the Hon’ble Supreme Court in case of Larsen & Toubro Limited and another vs. State of Karnataka and another (17 VST 460)(SC), Hon’ble Division Bench did not concur with the judgment in K. Raheja and referred the matter to Larger Bench. The Hon’ble Larger Bench has resolved the above controversy vide recent judgment in Larsen & Toubro Limited vs. State of Karnataka, Civil Appeal No. 8672 of 2013 dated 26.9.2013. Alongwith the above, Larger Bench also considered judgment of MCHI (51 VST 168), as it was also before Supreme Court out of an SLP filed by MCHI.

Out come of Larger Bench Judgment
The Hon’ble Supreme Court has analysed the arguments of both the sides. The main argument of the developers was that the contract involving two elements only i.e. goods and services, can be considered as ‘works contract’ under above article 366 (29A)(b). However, the Hon’ble Supreme Court has held that there is no such limitation and a contract involving a third element like land can also be considered as a works contract.

A further argument that was advanced was that there is transfer of immovable property and not transfer of movable goods. In this respect also, the Hon’ble Supreme Court rejected the argument observing that even if the goods used get transformed into immovable property and such immovable property get transferred to the buyer, still it will be taxable ‘works contract’ for sales tax purposes. However, the Hon’ble Supreme Court observed that while taxing value of goods in the contract, no portion relating to immovable property should get taxed.

The Hon’ble Supreme Court has also observed that the contract will commence from the stage when the agreement is entered into with the prospective buyer. In other words, the work completed prior to such agreement will not be taxable.

It is also held that if the sale is of completed premises then it will not be covered by the sales tax laws.

In relation to MVAT Act, 2002, the Hon’ble Supreme Court has observed that rule 58(1A) of the MVAT Rules, 2005 should be relooked at by the government and the effect should be clarified by the government. It is also observed that double taxation should be avoided.

Conclusion

The above judgment will have far reaching effect. It has expanded the scope of ‘works contract’ transactions which can be subjected to sales tax. The Bombay High Court judgment in case of MCHI was relating to agreement under MOFA, whereas the observations of the Supreme Court suggest that other contracts though not falling within the ambit of MOFA can also be covered under the works contract category.

In relation to MVAT Act, 2002 the Hon’ble Supreme Court has directed clarification of rule 58(1A), and has also directed to ensure that there is no double taxation. Under the above circumstances, the builders and developers in Maharashtra should wait till such clarification is given by the government, as for proper discharge of liability such clarification is absolutely essential.

Services by Directors

fiogf49gjkf0d
Services by Directors

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

(a) an activity which constitutes merely, –
i) A transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
ii) Such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of Article 366 of the Constitution; or
iii) A transaction in money or actionable claim;

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

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

Explanation 1 – for the removal of doubts, it is hereby declared that nothing contained in this clause shall apply to, –

(A) the functions performed by the Members of Parliament, Members of State Legislative, Members of Panchayats, Members of Municipalities and Members of other local authorities who receive any consideration in performing the functions of that office as such member; or
(B) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or
(C) the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or State Government or State Governments or local authority and who is not deemed as an employee before the commencement of this section. ……………

Services provided by Director to a Company – Taxability under Reverse Charge

• Vide Notification No.45/2012–ST dated 07-08- 2012, an amendment is made in the notification No.30/2012–ST dated 20-06-2012 by including the services provided or agreed to be provided by a director of a company to the said company, as a service taxable under reverse charge mechanism. Further, the extent of service tax payable on the same by the service provider and the service recipient is also stipulated as under:-

• Vide Notification No.46/2012–ST dated 07-08- 2012 the Rule 2(1)(d) of the Service Tax Rules, 1994, (ST Rules) which defines “person liable for paying service tax” is amended to insert a new item (EE) after item E as under : – “(EE) in relation to service provided or agreed to be provided by a director of a company to the said company, the recipient of such service”.

Payments to Directors – Service tax implications
i) Remuneration to Executive Directors

Sections 198 and 309 of the Companies Act, 1956 (“CA 56”) supplemented by Schedule XII, deal with remuneration of directors (including managing director and whole-time director) of a public company or a private company which is a subsidiary of a public company.

Section 309 of CA 56 lays down the ceilings on the remuneration payable to managing and whole-time employment of the company or a managing director may be paid remuneration either by way of a monthly payment or at a specified percentage of the net profits of the company or partly by one way and partly by the other.

The term ‘remuneration” is inclusively defined in the Explanation appended to section 198 of CA 56. This definition is relevant for the purposes of all the provisions of CA 56 which deals with director’s remuneration. The definition of ‘remuneration’, indicates that any payment by whatever name called and whether in cash, kind or money’s worth, or by way of perquisite, amenity or benefit, or by discharging an obligation amounts to ‘remuneration’, and such payment would attract the provisions of CA 56 regarding remuneration to directors

Section 309(2) of CA 56 contemplates payment to a director of remuneration by way of a fee for attending meetings of the board of directors or committees constituted by the board.

In case of managing director and whole time director, the payment of sitting fees forms part of managerial remuneration and if amounts are payable in accordance with Schedule XIII, no such sitting fees is payable to them; Department letter No. 3/1/90 CL – V, dated 18/07/1990, makes it very clear that, sitting fee may be paid only to a director who is not a whole time director or a managing director.

(ii) Remuneration to Non-Executive Directors

According to section 309 of CA 56, a public company can pay its non-executive director (meaning a director who is not a managing or a whole time director) remuneration in the form of fees for attending board meetings at the rate prescribed under CA 56, which are to be excluded for the purpose of the percentage limits on directors’ remuneration as specified in section 198 and 309 of CA 56.

In addition to sitting fees, a company’s nonexecutive director can be paid commission on net profits for a financial year. The total remuneration to all directors (executive and non–executive) excluding the fees for attending meetings, should not exceed the percentage limits laid down in section 198.

Section 309(4) permits payment of remuneration to the non–executive directors in two alternative ways:
• by way of monthly, quarterly or annual payment; or
• by way of commission.

(iii) Whether all Directors are employees of a Company

In terms of the provisions of CA 56 Act managing and whole time directors are executive directors and those who are not managing and whole time directors are non – executive directors. They are called “managerial personnel” and their appointment and remuneration are governed by the provisions of CA 56. Even when an executive director is designated as “executive chairman” or “executive vice chairman” or any other designation, such executive director is either a managing director or a whole–time director under CA 56 depending upon the nature and extent of powers of management because CA 56 does not recognise any other designation although it does not prohibit it. Therefore, a company has to treat its executive director either as managing director or whole–time director but both are equal so far as the provisions of the CA 56 regarding appointment and remuneration are concerned, all the provisions equally apply to both.

An important issue for consideration is, whether employer–employee relationship exists between the company and the executive directors.

It is a well–settled principle in company law that a director of a company as such is not a servant of the company and that the fees he receives are in recognition of services, but the same does not prevent a director or a managing director from, entering into a contractual relationship with the company, so that, quite apart from his office of director he becomes entitled to remuneration as an employee of the company. Further that relationship may be created either by a service agreement or by the articles themselves. [Refer CIT vs. Armstrong Smith (1946) 14 ITR 606 (Bom); (1946) 16 Comp as 172 (Bom)]

However, a managing director has a dual capacity. He may both be a director as well as an employee. It is, therefore, evident that, in his capacity as a managing director, he may be regarded as having not only the capacity as persona of a director but also the persona of an employee, or an agent depending upon the nature of his work and the terms of his employment. Where he is so employed, the relationship between him as the managing director and the company may be similar to a person who is employed as a servant or as an agent, for the term ‘employee’ can cover any of these relationships. The nature of his employment may be determined by the Articles of Association of the company and/or the agreement, if any, under which a contractual relationship between the director and the company has been brought about, under which the director is constituted as an employee of the company. The control which the company exercises over the managing director need not necessarily be one which tells him what to do from day-to-day. That would be too narrow a view of the test to determine the character of the employment. Nor does supervision imply that it should be a continuous exercise of the power to oversee or supervise the work to be done. The control and supervision is exercised and is exercisable in terms of the Articles of Association by the board of directors and the company in its general meeting.

It has been held in an English case that as directors they are not employees, but it cannot be doubted that a managing director may for many purposes properly be regarded as an employee. [Refer Boulting vs. Association of Cinematograph, Television and Allied Technicians (1963) 33 Comp. Cases 475 (CA)]

In one case, the question was whether the managing director was ‘employed’ by the company in any capacity. The managing director had claimed that he was not employed by the company, but that his position was an office or function of a director, i.e. he was an ordinary director entrusted with some special powers. However, this argument was rejected, and it was held that the proposition that a director can be regarded as having not only the persona of director but also the persona of employee was plain from the case of Beeton and Co. In re [1913] 2 Ch 279. Lord Normand summarised the position as follows :

“In my opinion, therefore, the managing direc-tor has two functions and two capacities. Qua managing director he is a party to a contract with the company, and this contract is a contract of employment; more specifically I am of opinion that it is a contract of service and not a contract for services. There is nothing anomalous in this; indeed it is a common place of law that the same individual may have two or more capacities, each including special rights and duties in relation to the same thing or matter or in relation to the same persons.”

Useful reference can also be made to Fowler vs. Commercial Timber Co. Ltd. [1930] 2 KBI (CA)

There are several cases under the Income Tax Act which dealt with this issue and the consensus appears to be that regardless of whether there is an agreement of service between the assessee company and the managing director the relationship between the company and the managing director is that of employer and employee. In some cases a provision or a term as to the removal or termination of the managing director has been considered to be one of the factors determining the relationship of employer and employee. [Refer Travancore Chemical Manufacturing Co (1982) 133 ITR 818 (KER) affirmed by SC – (1982) 137 ITR (St) 13]

The various provisions of CA 56 Act relating to managing director also indicate that a managing director has a role of an employee. For instance, the use of the term ‘agreement’ (section 2(26); use of the term “appoint or employ” (sections 316, 317); the expression “occupying the position of a managing director by whatever name called” (section 2(26); use of the expressions “appointment or employment” (section 267), the various kinds of remuneration enumerated in Schedule XIII, etc., go to indicate that a managing director is a director in the garb of an employee. Moreover, the Schedule also allows certain perquisites to the managing director and some of them (e.g. LTC) are to be given “in accordance with the rules of the company”. Section 17(2) of the Income Tax Act defines the term ‘perquisite’ the purport of which is that it is an amenity or a benefit granted by an employer to an employee. In fact, clause (iii)(a) of the said section specifically covers as perquisite the value of any benefit or amenity granted or provided free of cost or at concessional rate by a company to an employee who is a director thereof.

The nature of extent of control which is requisite to establish the relationship of employer and employee must necessarily vary from business to business and is by its very nature incapable for precise definition. It is not neces-sary for holding that a person is an employee, that the employer should be proved to have exercised control over his work. The test of control is not one of universal application and that there are many contracts in which the master could not control the manner in which the work was done.

There may be a formal contract between a managing director and the company evidencing the contractual relationship between the two. However, in the absence of a formal agreement the relationship may be established by an implied contract. Where a managing director is appointed, and acts as such, in accordance with the company’s articles, and no separate formal contract is entered into, the existence of an implied contract may be inferred, although the articles do not constitute a contract between the company and the managing director qua managing director.

Summation

In light of discussion above, it would reasonably appear that, a managing director is an employee of the company. This principle equally applies to any whole–time director or any other director (by whatever name called) who has executive powers relating to the management of the affairs of a company and responsibility to look after the day-to-day affairs of the company (fully or partly) under a service contract which is either express or implied and evidenced by the board/shareholders resolution appointing him and additionally, a formal agreement between him and the company.

Taxability of Services provided by Directors

According to one school of thinking, since a company is a legal entity, it has no option but to operate through the medium of directors. Therefore, services provided by directors to a company (excepting those on a contractual or professional basis), are essentially in a fiduciary capacity. Hence, such services would not fall within the ambit of ‘service’ as defined u/s. 65B(44) of the Act so as to be liable to service tax. However, this is a very extreme view, which is likely to be disputed by the service tax authorities.

Subject to such extreme view, it would reasonably appear that, with effect from 01-07-2012 services provided by directors to companies would be taxable except in the following cases:

•    Services provided by a director to a company in the course of or in relation to his employment as discussed in detail above.

•    Services provided by a director in a non– taxable territory to a company located in a non–taxable territory.

•    Services provided by a director to a company without consideration (for example in case of nominee directors where no sitting fee is paid).

•    According to Point of Taxation Rules, 2011, the point of taxation of services provided by a director to a company, would be either the time when invoice is issued for service provided or to be provided. If invoice is not issued within 30 days, point of taxation will be the date of completion of service. For sitting fees, date of completion of services, would generally be the date of meeting or the time when the payment/advance is received to the extent of such payment.

•    In case of reverse charge payments, point of taxation is reckoned from the date of payment by the company to the director.

Subject to the above discussion, the taxability for the period 01-07-2012 to 06 -08 -2012 (the period till amendment was brought in vide Notifications 45/2012 and 46/2012 provided above) and 07-08-2012 onwards and taxability of reimbursements is discussed hereafter.

Taxability of services provided by directors during the period 01-07-2012 to 06-08-2012.

Liability at the end of Directors

•    During this period, the director’s services were not covered under reverse charge, the directors would be liable to pay service tax and also comply with the requirements under the service tax law. The said position is confirmed by draft CBEC Circular F.No.354/127/2012–TRU dated 27-07-2012, which states that when a director receives payment in his personal ca-pacity, the same is liable to be taxed in the hands of the director. However, the concerned director would be entitled to the threshold exemption of Rs. 10 lakh, subject to compliance of stipulated conditions.

•    However, in the following cases, service tax would not be payable by the directors:

As per draft CBEC circular dated 27-07-2012, a director may also be appointed to represent an entity including Government who has either invested in the company or is otherwise authorized to nominate a director. Where the fee is charged by the entity appointing the director and is paid to such entity, the services shall be deemed to be provided by such entity and not by the individual director. Accordingly, in such cases, the service tax would be payable not by the director but by such entity appoint-ing the director. Nevertheless, in the case of Government nominee directors where the fee is charged by the Government appointing the director and is paid to the Government, the services may be deemed to be provided by the Government and may be liable to be taxed under the exclusion sub-(iv) of clause (a) of section 66D of the Act viz. support services by Government to a business entity. Such services are liable to be taxed on reverse charge basis from 01-07-2012 and therefore, tax is to be paid by the service recipient i.e. the company. Secondly, if the director is located in a non-taxable territory i.e. the State of Jammu & Kashmir or outside India, then service tax is not payable by such director. In this case, if the company is located in a taxable territory, the transaction would be covered under reverse charge from 01-07-2012 and tax is payable by the company.


Implications at the end of Company receiving the service

•    No service tax would be payable in respect of fees paid to directors located in taxable territory. However, in case of any payment towards taxable service to a director, located outside India or in the State of Jammu and Kashmir or in case of payment to Government against consideration of Government nominee director as discussed above, the company receiving the service is required to pay service tax under reverse charge as per Rule 2(1)(d) of ST Rules read with Notification No. 30/2012–ST dated 20-06-2012. Further, in case of reverse charge the threshold exemption of Rs. 10 lakh is not applicable.

•    Vide Circular No.24/2012, dated 09-08-2012 of Ministry of Corporate Affairs, Government of India, it is clarified that any increase in remuneration of non–whole time director(s) of a company solely on account of payment of service tax on commission payable to them by the company shall not require approval of Central Government u/s. 309 and 310 of the CA 56 even if it exceeds the limit of 1% or 3% of the profit [u/s. 309(4)] of the company, as the case may be in the financial year 2012-13.

Taxability of services provided by directors from 07-08-2012 onwards

Implications at the end of directors

For the period 07-08-2012 onwards, since the services by directors are covered under reverse charge, the directors are not liable to pay service tax. Even the entities receiving fee in respect of directors nominated by them are not required to pay service tax on the same.

Implications at the end of the Company receiving the service

The companies other than those located in a non taxable territory, would be required to pay service tax under reverse charge basis in respect of taxable services received from the directors for a consideration, irrespective of fact whether they are located within or outside the taxable territory or are nominee directors of Government/ other entitles. Further, as discussed earlier, the threshold exemption of Rs. 10 lakh is not applicable when the liability is fastened under reverse charge mechanism.

Further as stated above, the Circular No.24/2012-ST of the Ministry of Corporate Affairs is equally relevant here as well.

Taxability of reimbursements/out of pocket expenses

From 19- 04-2006, stringent provisions were introduced under the service tax law in regard to taxability of reimbursements. The Constitutional Validity of Rule 5 of the said Valuation Rules has been challenged before the Delhi High Court in International Consult & Tech (P) Ltd vs. UOI (2009) 19 STT 320 (DELHI), in particular on the ground being ultra vires the provisions of section 66 and 67 of the Act. The Delhi High Court has recently ruled in 2012 TIOL 66 DEL HC that Rule 5(1) of Valuation Rules is ultra vires of sections 66 & 67 of the Act. Implications of the said ruling in particular the continued relevance of principles laid down in Larger Bench ruling in Shri Bhagawathy Traders vs. CCE, Cochin 2011 (24) STR 290 (Tri.-LB) is discussed in detail in the January, 2013 issue of BCAJ. Hence the same are not repeated here.

Subject to the above, the following needs to be noted in particular, while determining taxability of expenses reimbursed to directors since the liability vests in the company under reverse charge:

•    According to Rule 5(1) of Valuation Rules, where any expenditure or costs are incurred by the service provider in the course of providing any taxable services, all such expenditure or costs shall be treated as consideration for the taxable services provided or to be provided and shall be included in the ‘value’ for purpose of charging of service tax on the said services. Expenditure or costs incurred by a service provider as “pure agent” of the recipient of service shall be excluded from the value of taxable service if all the conditions specified in Rule 5(2) of valuation Rules are satisfied.

•    For the purpose of Rule 5(2) of Valuation Rules, a pure agent is defined to mean a person who receives only the actual amount incurred to procure such goods or services.

•    According to the department clarification dated 19-04-2006, “value for the purpose of charging service tax is the gross amount received as consideration for provision of service. All expenditure or costs incurred by the service provider in the course of providing a taxable service forms integral part of the taxable value and are includible in the value. It is not relevant that various expenditure or costs are separately indicated in the invoice or bill issued by the service provider to his client”.

Penalty for inadvertent errors – Penalty not imposable when no malafide intention alleged in the Show Cause Notice.

fiogf49gjkf0d
Facts

Appellant inadvertently availed CENVAT credit of the value of invoice instead of the amount of service tax. On being pointed out, the Appellant immediately reversed the inadmissible portion of the credit and also paid interest.

Held

Show Cause Notice did not allege any malafide intention on part of the Appellant. Moreover, Appellant has shown its bonafide by reversing CENVAT credit on being pointed out and also paying interest on the same. Tribunal set aside the penalty.

levitra

The value of study materials is excludible from the value under the taxable category of “commercial Training and Coaching services” in terms of Notification No.12/2003-ST.

fiogf49gjkf0d
Facts

The Appellant engaged in providing the services of commercial training and coaching discharged service tax after excluding the value of study materials supplied to the students as per Notification No.12/2003. Based on CBEC Circular No. 59/8/2003 dated 20-6- 2003, Revenue contended that the exemption was available only to standard textbooks and not to the study material supplied as part of the service.

Held

Though the word “standard textbook” was used in CBEC Circular, the same was not used in the Notification No.12/2003. Also, the department did not dispute the fact of supply of study materials to students and documentary evidence for the same and thus satisfying all the conditions of 12/2003-ST. Held that there was no merit in the contention of the Respondent as the said notification has not used the word “standard textbook” and the books sold are of another entity and hence the appeal was allowed.

levitra

Debit notes issued by the service provider. No formal Invoice, Bill or challan issued. Can such debit note be considered as a valid document to avail CENVAT credit – Held, yes.

fiogf49gjkf0d
Facts

The service provider raised debit notes for provision of services instead of raising an Invoice or a challan. The Appellant having availed CENVAT credit on the basis of such debit notes, the Respondent objected to the same stating that they were not eligible documents as prescribed under Rule 9(1)(f) and disallowed the credit. Whether is it necessary to verify that service tax is paid by the vendor before claiming the CENVAT credit?

Held

The Honourable Tribunal allowed the CENVAT credit by applying the principle of Substance over Form. It stated that “a ‘bill’ is that which gives right to an actionable claim”. A party raising the bill communicates its intention to the recipient of such service, making him aware of his contractual obligation and value involved to provide such service. The Appellant cannot be denied benefit of CENVAT credit in case of reimbursement of expenses as it is already included in the taxable value. The Tribunal in this regard held that the department on its own can verify the claim and in the event of failure of such verification, the law will take its own recourse.

levitra

Can recovery be made from the bank in spite of interim stay granted by Tribunal?

fiogf49gjkf0d
Facts

The Appellant had filed an appeal along with the stay application with CESTAT in March, 2012. Hearing for the stay application was listed on 14th January, 2013 for which the department sought adjournment. However, the Tribunal granted interim stay as mentioning was made by the Appellant. In the meantime, the department had issued an attachment notice to the banker and the banker had deposited an amount of Rs. 6 crore into the exchequer.

Held

Interim stay was granted by the Tribunal vide its order dated 14th January 2013 and hence, it directed the department to refund the amount to the Appellant and not to proceed with the recovery proceedings during the pendency of the stay application.

levitra

Circulars No.158/9/2012-ST and No.154/5/2012-ST challenged on the ground that they are contrary to the Act and hence the differential service tax of 2% in case of chartered accountant’s services provided and invoices raised before 1st July 2012 and consideration received later than the said date cannot be collected.

fiogf49gjkf0d
Facts

The question of law arose as to when a “taxable event” occurs for the levy of service tax. In Association of Leasing & Financial Service Companies vs. UOI 2010-TIOL-87-SC-ST-LB, the Supreme Court held that the taxable event was the rendition of the service. However, from 1-4-2011, the Point of Taxation, 2011 were notified and accordingly, the point of taxation would be the point in time when a service is deemed to be provided. Rule 7(c) of the Point of Taxation Rules, 2011 provided the point of taxation for the 8 specified categories of service providers (one of them being chartered accountant) to be the time of receipt of consideration. The said Rule 7 was amended w.e.f. 1st April, 2012 and as a result, the said Rule 7(c) was deleted. Accordingly, the 8 categories of services (including CAs) are required to pay service tax on the date of issuance of invoice, instead of on the date of the receipt of consideration with effect from 1st April, 2012. The dispute arose on account of Government’s Circular No.154 (supra) read with Circular No.158 (supra) which provided to the effect that for the eight categories of persons (including CAs) even cases when invoice was raised prior to 31st March, 2012 (when the prevailing service tax rate was 10.3%) for a service provided before 31-3-2012, if the fee/consideration was received on or after 1st April, 2012, the new rate i.e. 12.36% amended with effect from 1-4-2012 would be applicable.

The Appellant pleaded that the Rule 4(a)(ii) of the Point of Taxation Rules, 2011 specifically covers a situation determining the point of taxation in case of change in rate of tax and the Appellant’s case falls under the said sub-clause and therefore the point of taxation would be the date of issuance of invoice.

Held

Circulars were quashed holding them contrary to the Finance Act, 1994 and the Point of Taxation Rules, 2011 and it was observed that in case a circular is contrary to the Act or the Rules, it has no existence in law.

levitra

Right to use trademark being intangible, whether it was “deemed sale” as defined under the Kerala Value Added Tax Act, 2003 when service tax was paid on royalty received.

fiogf49gjkf0d
Facts

Petitioner is engaged in marketing, trading, export and import of jewellery, diamond ornaments, platinum, watches etc. and the sole proprietor of the trademark “Malabar Gold”. The petitioner has entered into franchise agreements with several companies situated inside and outside Kerala and also abroad, to use the trademark and receives royalty as consideration. The petitioner paid service tax on royalty. The respondent contended that the transfer to use trademark is transfer of goods and therefore exigible to Kerala Value Added Tax Act, 2003.

The petitioner on receipt of show causes notices filed writ petition before the Honourable High Court. The petitioner relied on the case of Imagic Creative (P) Ltd vs. Commissioner of Commercial Taxes 2008 (9) STR 337 (SC) and BSNL vs. UOI 2006 (2) STR 161 (SC) while the respondents relied on the provisions of Article 366(29A) of the Constitution of India and decisions of Tata Consultancy Services vs. State of A.P. 2004 (178) ELT 22 (AP) and other similar decisions of the Kerala High Court. According to the petitioner, the cases relied by the respondent were prior to the application of the Finance Act, 1994 and they had paid service tax on the use of trademark and therefore, VAT should not have been levied as decided by the Supreme Court in the case of Imagic Creative (supra) and that VAT and service tax are mutually exclusive and both cannot be levied on the same transaction. The petitioner also contended that the right to use trademark not to the exclusion to the transferor was transferred and as held in BSNL (supra) this was one of the necessary attributes for treating the transaction as sale of goods not satisfied.

Held

The Honourable High Court held that the facts of the present case wherein it has been conceded by the petitioner that trademark is transferred for use for consideration i.e. royalty is distinguishable from the facts of BSNL case (supra) wherein the issue examined was whether BSNL provided sale or service in the light of the fact that BSNL was retaining physical control and possession and hence, BSNL case (supra) could not be considered. The Honourable High Court also held that the transfer of trademarks for use was exigible to Kerala VAT tax and as the petitioner did not challenge the applicability of service tax on such a transaction, it did not comment upon the same and hence, Imagic Creative (supra) could not be relied upon.

levitra

2013 (31) STR 343 (Tri.– Bang) Ambience Constructions India Ltd vs. Comm. of ST, Hyderabad

fiogf49gjkf0d
Refund of service tax paid under mistake of law – limitation period of section 11B is applicable.

Facts:
The Appellant, engaged in providing services of lodging and boarding in a hotel, paid service tax on 16-01-2008 under the category of “Renting of immovable property”. Since the taxing entry specifically excluded the said activity, the Appellant filed a refund claim on 28-01-2009 by virtue of payment under mistake of law.

Held:
The Hon. Tribunal relying on Mafatlal Industries vs. UOI 1997 (89) ELT 247 (SC) dismissed the appeal and held that since the provisions of law excluding the said activity existed while the payment was made and also when the refund claim was filed, the provisions of section 11B relating to time bar cannot be ruled out on the pretext of “payment under mistake of law” and the refund was eligible for rejection.

(Note: When tax was paid where there was no liability to pay, the Hon. High Courts have decided in favour of the assessees in Natraj & Venkat Associates 2010 (17) STR 3 (Mad.) and in KVR Constructions 2012 (26) STR 195 (Kar.))

levitra

2013 (31) STR 370 (Tri.-Chennai) Amalgamations Repco Ltd vs. C. C. Ex, Chennai

fiogf49gjkf0d
CENVAT credit – period prior to Notification No. 17/2009-ST dated 07-07-2009 – CHA and other services availed by manufacturer for exports – credit admissible

Facts:
The Appellant-manufacturers- availed CENVAT credit of service tax paid on CHA and other services used at ports for exporting goods, prior to the introduction of Notification No. 17/2009-ST dated 07-07-2009.

The department denied the CENVAT credit on the grounds that such services did not have any nexus with the manufacture and that the business activities sought to be included in the extended definition of input service did not include services rendered in the port area.

Held:
Considering various decisions of coordinate Benches and High Courts, the Hon. Tribunal allowed the appeal and held that it was the policy of the Government not to burden the export goods with domestic taxes and thus, the exporters were either exempted from taxes or were provided for alternative schemes of rebate/drawback of duties etc. Notification No. 17/2009–ST dated 07-07-2009 granted exemption to various taxable services provided to an exporter. Since the period involved was prior to the said notification date, the only way of following the EXIM policy and freeing export goods from domestic taxes is to allow the credit of service tax paid in respect of such consignments.

levitra

2013 (31) STR 300 (Tri.-Ahmd) Gujarat Co- 0p. Milk Mktg. Federation Ltd. vs. CCE, Vadodara:

fiogf49gjkf0d
Refund – Technical testing & analysis service used for export of goods – Absence of written contract between exporter and importer – No refund admissible.

Facts:
The Appellant, an exporter of goods, filed a refund claim for service tax paid on technical testing & analysis service. The Respondent rejected the said refund claim on the ground that the Notification provided for the existence of written agreement/ contract for such technical testing/analysis before export of goods which the appellant had not entered.

Held:
Since there was an absence of written contract between the Appellant and foreign party for technical testing of goods before export and also that there was no reference in the export order for the prerequisite of testing, the appeal was rejected.

levitra

2013 (31) STR 285 (Tri.-Ahmd) Comm. of ST vs. Krishna Communications

fiogf49gjkf0d
CENVAT credit – output servioces written off as bad debts – No reversal of CENVAT credit is required.

Facts:
The respondents providing advertising services were duly registered with the department and discharged service tax liability as and when the payments were received. The amounts already billed but subsequently found irrecoverable, were written off by it as bad debts.

The department demanded reversal of proportionate CENVAT credit taken on input services on account of such output service invoices being written off as bad debts which the Commissioner (Appeals) dropped holding that credit on input services was taken correctly and that the said input services were used for providing output services liable for payment of service tax.

The appellants contended that the value of bad debts constituted only 0.8% and that the eligibility of availment and utilisation the credit was not in question.

Held:
Observing that there cannot be one-to-one corelation for availing and utilising CENVAT credit of input services with provision of output service, the Hon. Tribunal held that the reasoning of the first appellate authority was correct and in consonance with the law and requires no interference and thus, rejected revenue’s appeal.

levitra

2013-TIOL-1068-CESTAT-MUM Magarpatta Township Development & Construction Co. Ltd. vs. Commissioner of Central Excise, Pune-III

fiogf49gjkf0d
Valuation – Notional interest on Interest-free security deposit, whether amounts to additional additional consideration – Held, No.

Facts:
The appellant provided renting of immovable property services and collected interest-free security deposit from the lessees for the damages, if any, caused to the property. The department contended to levy tax along with interest and penalty on the notional interest on security deposit considering it as an additional consideration for the provision of service. Relying on the decision of ISPL Industries Ltd. 2003 (154) ELT 3 (SC), the appellant contended that there was no evidence on record which proved that the security deposit in any way influenced the rent of property leased out and it was merely a presumption on part of the department.

Held:
Applying the case of ISPL Industries Ltd. (supra), the Hon. Tribunal observed that there was no evidence on record to prove that the notional interest on interest-free security deposit influenced the consideration received by the appellant and thus granted full waiver from pre-deposit.

levitra

2013-TIOL-1261-CESTAT-MUM Laxmi Tyres vs. Commissioner of Central Excise, Pune

fiogf49gjkf0d
Valuation – re-treading of tyres – Notification No.12/2003-ST dated 20-06-2003 – whether ‘sale’ includes ‘deemed sale’ Held “No’ – gross amount charged liable to tax.

Facts:
The Appellant was engaged in retreading of tyres and thus claimed the benefit of Notification No.12/2003-ST dated 20-06-2003 by deducting approximately 70% as material cost on which sales tax/VAT was paid and service tax was paid only on 30% of the remaining value.

Relying on Aggarwal Colour Advance Photo System 2011-TIOL-1208-CESTAT-DEL-LB which stated that the term ‘sold’ appearing in the said notification was to be interpreted using the definition of ‘sale’ in the Central Excise Act, 1944 and not as per the meaning of deemed sale under Article 366 (29A) (b) of the Constitution the department contented that tax was payable on the entire amount.

The appellant relied on the cases of Chakiti Ranjini Udyam 2009 (16) STR 172 (Tri-Bang) and PLA Tyre Works 2009 (14) STR 32 (Tri-Chennai) in support of its contentions.

Held:
Perusing the sample invoice issued by the appellant and relying on the larger Bench’s decision in Aggarwal Colour Advance Photo System (supra), the Hon. Tribunal disposed the appeal and held that the appellant was not eligible for the benefit of Notification No. 12/2003-ST and liable to discharge service tax liability on the gross amount charged for the said transaction.

(Note: Further, an application for Rectification of Mistake was filed by the appellant to consider the aspect of time bar not considered at the time of hearing of appeal which was dismissed by the Hon. Tribunal as the same would tantamount to ‘review’ of own order which is not permissible under law-2013-TIOL-1345-CESTAT-MUM).

levitra

2013-TIOL-1295-CESTAT-MAD M/s. C. H. Robinson Worldwide Freight India Pvt. Ltd. vs. Commissioner of Service Tax, Chennai

fiogf49gjkf0d
Stay – Taxability of ocean freight collected by multi-modal transporter – whether ‘reimbursement of expenditure while provoding Business Support Service’ or ‘Business Auxiliary Services’ – Held – neither reply to SCN nor OIO provide a clear picture of activity – ordered pre-deposit of part amount.

Facts:
The appellant, a multi-modal transporter, charged service tax under heads like terminal handling, bill of lading, agency charges etc., and diligently discharged the same under the category of “Business Support Services”. They also collected ocean freight on which no service tax was paid. The department contended to levy tax on the same considering it as reimbursable expenditure and thus issued SCN and demanded tax on such value of ocean freight under the category of “Business Support Service” which the adjudicating authority confirmed under the category “Business Auxiliary Service”.

Relying on the decision of O.K. Play (India) Ltd. 2005 (180) ELT 300 (SC), the department contended that the said service was rightly classified under “Business Auxiliary Service” and further relied on Leaap International Pvt. Ltd. which ordered a pre-deposit in a similar case under the category “Business Auxiliary Service”.

The appellant contended that 1) the order of the Adjudicating Authority was beyond the scope of the SCN, 2) there was no taxing entry under the Finance Act, and 3) Rule 5 of the Service Tax (Determination of Valuation) Rules, 2006 was struck down in the case of Intercontinental Consultants and Technocrafts Pvt. Ltd. and thus no demand was warranted.

Held:
Referring to the submissions made by the appellant, the Hon. Tribunal stated that the reply to the SCN and order-in-original did not provide a clear picture of the activity and thus ordered a pre-deposit of part amount.

(Note: The Hon. Tribunals, on similar facts, allowed the appeal in Interocean Shipping Company vs. CST, Delhi (2012) 28 Taxamann. com 238 (New Delhi – CESTAT); remanded the matter in Agility Logistics Pvt. Ltd. vs. CST–30 Taxmann.com 382 (Chennai– CESTAT); and granted full waiver of pre-deposit in M/s. Freight Systems Pvt. Ltd vs. CST, Chennai 2012-TIOL-1558-CESTAT-Mad).

levitra

2013-TIOL-1270-CESTAT-MAD Thiru Arooran Sugars Ltd. vs. Commissioner of Central Excise, Tiruchirapalli.

fiogf49gjkf0d
CENVAT Credit—’rent a cab service’, ‘telephone service’ and ‘contract bus service’ – no distinction between services used at factory and corporate office and both are eligible CENVAT credit.

Facts:
The Appellant, a manufacturer, availed CENVAT of “Rent-a-cab Service”, “Telephone Services” and “Contract Bus Services” received at the corporate office against which the department demanded tax, interest and penalty.

The department contended that providing “rent-acab service” for officers at the corporate office was a welfare activity and not related to manufacturing. It further contended that the said services do not fall within the inclusive portion of the definition and argued that unless proved that the said services were essential for the manufacture, they cannot be considered as input services.

Held:
Allowing the appeal, the Hon. Tribunal held that:

• As many Courts and Tribunals have already held earlier, rent-a-cab service is covered under the definition of “input service” and that it also includes the transportation of executives and employees from residence to corporate office and back.

• All the three services (supra) are covered by the definition of input service and that no distinction can be made between the factory and corporate office as per the provisions of the CENVAT Credit Rules, 2004.

• Where the expenditure is incurred by the company in its books of accounts there is a presumption in favour of the appellant that the service is availed in relation to its business and thus no nexus is required to be proved so long as Revenue did not contend anything to the contrary.

(Note: In a similar case in 2013 (31) STR 441 (Tri-Bangalore) Emcon Technologies India Pvt. Ltd. vs. Commissioner of C. Ex., Bangalore also the Hon. Tribunal allowed the credit of rent-a-cab service. Further, in case of rent-a-cab service, the issue pertains to the period prior to 01-04-2011, i.e., prior to amendment of definition of “input service”).

levitra

2013-TIOL-1322-CESTAT-MUM M/s Seva Automotive Pvt. Ltd. vs. CCE, Nagpur

fiogf49gjkf0d
Valuation – value of spare parts sold during rendering of service not to be included in transaction value – matter remanded.

Facts:
The department contended to levy tax on the value of spare parts sold during rendering of services which were charged separately in the bill/ invoice and on which VAT/sales tax liability was also discharged. 

Held:
Relying on the Board Circular dated 23-08-2007 and on the decisions of Ketan Motors Ltd. and Sudarshan Motors, the Hon. Tribunal allowed the appeal by way of remand and held that the cost of spare parts sold during the rendering of service cannot form part of the transaction value.

levitra

2013-TIOL-834-CESTAT-DEL M/s. Cerebral Learning Solutions Pvt. Ltd. vs. Commissioner of Central Excise, Indore.

fiogf49gjkf0d
Commercial training and coaching services – validity of CBEC Circular No. 59/8/2003-ST dated 20-06-2003 vis-a-vis Exemption Notification No.12/2003-ST dated 20-06-2003 – Held, circular is ultra vires.

Facts:
The Appellants provided “Commercial Training & Coaching Services” and composed and furnished course materials relevant to the coaching to its students. Relying upon Notification No.12/2003-ST dated 20-06-2003 granting exemption to the value of goods or materials sold, the Appellants separately raised an invoice of the materials sold and did not charge service tax on the same.

Relying on Circular No. 59/8/2003-ST dated 20-06- 2003 which stated that the Exemption Notification was applicable only where the value of the course material met the description of the standard textbooks which were priced, the department contended to levy tax along with interest and penalty on the said value of supply of materials.

Held:
Considering the circular to be misconceived, illegal and contrary to the statutory Exemption Notification dated 20-06-2003, the Hon. Tribunal stated that where the legislature had spoken in exercise of its statutory power exemption granted by the Central Government u/s. 93 of the Act, the CBEC had no manner of power, authority or jurisdiction to deflect the course of an enactment or the exemption granted. Grant of exemption from the liability to tax was a power exclusively authorised to the Central Government and no participatory role to the Board. In seeking to restrict the generality of the exemption granted by the Central Government, the CBEC transgressed into the domain of the Central Government which was clearly prohibited.

levitra

(2011) 24 STR 410 (Tri.-Delhi) — Punjab Venture Capital Ltd. v. Commissioner of Central Excise, Chandigarh.

fiogf49gjkf0d
Consultancy of fund management including the identification of the projects not covered in Management Consultancy service — Primary objects were to find investment proposal and fund allocation — Confusion between Banking and Financial Services and Management Consultants — Sections 65(12) and 65(65) of Finance Act, 1994.

Facts
The issue arose as regards the interpretation of the term ‘Management Consultant’ with the term ‘Banking & Financial services’.

Held
The Tribunal observed that the excerpts of Fund Management agreement clearly show that the activity was to explore possibility of investment by various modalities. Also, it is clear that the appellants carried out the activity of providing service of consultancy of Fund Management including the identification of the projects. Allowing the appeal, the Tribunal held that the Department’s case was not coming out clearly as regards nature of services provided by the appellants. The Tribunal held that the appellants were providing the service of banking and financial services as their primary objective was to find investment proposal which involved fund allocation.

levitra

(2011) 24 STR 408 (Tri.-Delhi) — Rakesh Porwal & Associates v. Commissioner of Central Excise, Jaipur-II.

fiogf49gjkf0d
Whether verification of address of client for the bank by Chartered Accountant (CA) is covered under the Business Auxiliary Services (BAS) as u/s.65(19) of Finance Act, 1994.

Facts
The appellant was a CA and was paying service tax on the fees received by him as Chartered Accountant. The dispute arose as regards the services rendered by the CA to M/s. HDFC for contact-point verification of residence and offices of the clients of the banks.

The Revenue held that the aforementioned services were covered under the Business Auxiliary service and accordingly confirmed the service tax demand of Rs.1,78,479 along with interest and penalty. The appellant referred to the agreement entered into by the appellant with M/s. HDFC for providing services of contact-point verification of residence and offices and any other services as per the set guidelines and formats set by the bank from time to time. The appellant also drew attention to the definition of BAS u/s.65(19) of the Finance Act which relates to the services in relation to promotion of marketing of services provided by the client.

Held
The Tribunal observed that the verification of the addresses given by the client cannot be considered to be a service similar to promoting or marketing the services of the bank or evaluating their prospective customers. Accordingly, it was held that the services provided by the appellant were not considered Business Auxiliary Service.

levitra

(2011) 24 STR 310 (Tri.-Del.) — Batra Sons v. Commissioner of Central Excise, Jalandhar.

fiogf49gjkf0d
Penalty — Non-registration — Section 75A of the Finance Act, 1994 (the Act) — Section 75A no more in statutory book from 10-9-2005, but at relevant time, such mandatory requirement of registration could not be dispensed with — Penalty imposable.

Penalty — Non-payment of tax — Penalty u/s.76 and u/s.78 of the Act — Revisionary authority imposing penalty in revision — No element indicating deliberate attempt to escape liability — Penalties cannot be imposed mechanically — Section 80 of the Act.

Penalty — Failure to file returns — Tax paid and revised returns filed after getting revised figures- Mala fide not imputed — Penalty u/s.77 of the Act set aside.

Facts
The appellants appealed against a revisional order passed u/s.84 of the Act levying penalty u/s.75A, 76, 77 and 78 of the Act and contended that the revisional order intended to impose penalty without justifiable reason and that all cases required consideration u/s.80 of the Act. The Revenue on the other hand submitted that there was no need to intervene with the orders passed as in the absence of imposition by the adjudication order, revisionary power was bound to be exercised.

Held
The Tribunal observed that while imposing the penalty, the authority failed to apply the law properly. As regards penalties levied under various sections, it was held that:

Revisionary authority in respect of penalty levied to the extent u/s.75A was justified even though the provision was no longer in force, but at the relevant point of time when the law was in force to regulate taxable activities, such a mandatory requirement could not be dispensed with. In the absence of any reason to establish mala fide intention on part of the assessee, the penalty imposed u/s.76 and u/s.78 of the Act was unwarranted and the same invited consideration u/s.80 of the Act which provides for non-imposition of penalty in case of reasonable cause on part of the assessee. As far as penalty u/s.77 was concerned, there was a failure in filing the return. However, the assessee paid the taxes and revised returns were filed. Also, the authority did not cite any reasonable ground for levying penalty under this section and thus penalty u/s.77 of the Act is set aside.

levitra

(2011) 24 STR 307 (Tri.-Del.) — Power Grid Corporation of India Ltd. v. Commissioner of Sales Tax, New Delhi.

fiogf49gjkf0d
Leasing telecommunication network to another telegraph authority — Not a taxable service — Since telegraph authority not a subscriber — The definition of leased circuit — As per interpretation of statutes — Includes part — Should satisfy the conditions/requirements of means port — Hence the plea of Revenue rejected.

Facts
The appellant, a holder of infrastructure provider category II licence under first proviso to section 4 of the Indian Telegraph Act, 1885 it also provides its services to M/s. Bharti Infotech Ltd. and M/s. Data Access India Ltd., who are also registered under the said provisions. The Revenue contended that the service of leasing of telecommunication network provided by the appellant was taxable in terms of clause (zd) of s.s 105 of section 65 of the Finance Act, 1994 which defined the taxable service as: “service provided to a subscriber by telegraph authority in relation to leased circuit”.

According to the appellant, M/s. Bharti Infotech Ltd. and M/s. Data Access India Ltd., (registered under the above provisions) could not be considered as subscriber as they were telegraph author- ity. Since the service was not provided to the subscriber, the appellant was not liable to pay the service tax. The appellant relied on the decision in the case of Fascel Ltd v. Commissioner, (2007) 7 STR 595 (Tribunal). Also, a Circular issued by the CBEC 91/2/2001-ST, dated 12-3-2007 was cited. The appellant further submitted that the facility of telecommunication network provided by them to different users on a band-width-sharing basis did not come within the meaning of ‘leased circuit’.

Held
Relying on the decision in the case of Reliance Telecom Ltd. v. CST, Ahmedabad (2007) TIOL 414- CESTAT AHM, the Tribunal held that telegraph authority receiving interconnecting service cannot be considered as a ‘subscriber’. As such, the demand failed except for about Rs.7 lakh in respect of service provided to M/s. Converges and M/s. Dakshe Services, as the same were not registered as telegraph authority.

levitra

(2011) 24 STR 290 (Tri.-LB) — Sri Bhagavathy Traders v. Commissioner of Central Excise, Cochin.

fiogf49gjkf0d
Valuation — Whether amount incurred as reimbursements to be included in the assessable value — Conflicting views of the Tribunal — C.B.E.C & C. Circular cannot be relied upon to support the claim of splitting part of amount as reimbursable expenses and rest as service charges — Costs for input services and inputs used in rendering services cannot be treated as reimbursable costs — Section 67 of the Finance Act, 1994 (the Act).

Facts
The appellant provided C&F agency services to several persons including M/s. Indian Oil Corporation Ltd. (hereinafter referred to as ‘IOCL’). A show-cause notice (SCN) was issued against the appellant, a registered assessee, for short payment of service tax of Rs.53,90,080 from April 2003 to March 2006 along with interest and penalty. The Tribunal (Referral Bench) while hearing the appeal noted the decision in the case of Sangamitra Services Agency v. CCE, Chennai (2007) TIOL 1335- CESTAT and a plethora of cases wherein it was held that “reimbursement charges should not form part of the gross value for the discharge of service liability”. The Tribunal (Referral Bench) also noted a contrary decision in the case of M/s. Naresh Kumar & Co. Pvt. Ltd. v. CST, Kolkata (2008) 11 STR 578 (Tribunal) wherein it was held that “the cost incurred on reimbursement of expenses if any, needs to be included in the gross value of the taxable services rendered.” In view of contrary decisions on the issue, the matter was referred to the Larger Bench. The appellants referring to the agreement with IOCL submitted that they were required to submit bills separately for both fixed operating expenses and service charges as a C & F agent. Also, according to the agreement, expenses incurred towards electricity and water charges, communication expenses, etc. were reimbursed on actual basis. Similar agreements were entered into with other parties. The appellant referred to the definition of value of taxable service which is defined as ‘gross amount charged for the services rendered’. In this behalf, the appellant submitted that expenses incurred on activities on behalf of the principal and recovered as reimbursements cannot be treated as part of value of C & F services. Referring to the various circulars, the appellant submitted that various services like Custom House Agent service and Steamer Agent service did not include several expenses incurred on account of exporter/importer. Also the value of Consulting Engineering service and manpower recruiting service did not include amount incurred on behalf of the clients which are reimbursed on actual basis.

The provisions of section 67 of the Act underwent changes w.e.f. 19-4-2006 only and the concept of consideration was introduced which included reimbursement also. The Revenue on the other hand submitted that during the relevant period the gross amount paid by the service recipient on which the service tax was charged included all the expenses incurred towards provision of service as service tax was a destination-based consumption tax. Also, during the relevant period Rule 6(8) of the Service Tax Rules, 1994 provided that “the value of taxable service in relation to services provided by a C&F agent to clients for rendering services of C&F operations in any manner shall be deemed to be gross amount of remuneration or commission (by whatever name called) paid to such agent by the client engaging such agent” and relied on the decisions of Nilesh Kumar & Co. Pvt. Ltd. [(2008) 11 STR 578 (Tri.)] and Harveen & Co. [(2011) TIOL 848 CESTAT-Del.]

Held
The Tribunal (Larger Bench) observed that on basis of various cases relied by the assessee and the Department, it was important to consider the scope of the term ‘reimbursements’. In case of service provider and service recipient, the question of reimbursements shall arise when the service recipient was legally bound to pay certain amount to any third party and the amount is paid by the service provider on behalf of the service recipient. The various circulars of the Board relied upon by the appellant clearly referred to amounts payable on behalf of the service recipient. However, the same could not be held to be in support of the claim of the assessee that the amount can be split as reimbursable expenses and the rest as towards service charges. The costs for input services and inputs used in rendering services cannot be treated as reimbursable expenses. No decision of the Division Bench of the Tribunal was shown by the assessee in their favour. Accordingly, it was held that the there was no conflict in the decisions rendered by the Co-ordinate Benches and the matter was returned to the Referral Bench for decision on merits.

levitra

(2011) 24 STR 387 (Mad.) — Strategic Engineering P. Ltd. v. Additional Commissioner, Central Excise, Madurai.

fiogf49gjkf0d
Writ jurisdiction — Writ petition not to be rejected for existence of alternative statutory remedy — After the admission of writ petition, the Court should normally hear the case on merits — Article 226 of the Constitution of India.

Whether erection and laying of pipes is liable to service tax under erection, commissioning and installation services or scientific or technical consultancy services.

Facts
The company, a manufacturer of FRP pipes, falling under Chapter No. 7014.00 of the Central Excise Tariff was also in the business of laying GRP pipes for its customers for consideration of labour charges. Order confirming the demand of service tax for the show-cause notice demanding service tax was served on the petitioner under the category of ‘Erection, Commissioning and Installation’ and ‘Scientific or Technical Consultancy services’ for services rendered by the petitioner to its non-resident clients. The writ was admitted without notice to the respondent. However, the Court directed the Revenue to file a counter on merits claimed by the petitioner. The respondent challenged maintainability on the ground of availability of alternate remedy. However, the Court found that subsequent to admission of the writ and filing of counter by the respondent, it was not appropriate to relegate the petitioner to alternate remedy. Further, the question involved in the writ was found purely legal and the Court decided to hear the merits of the case.

Held
The question pertained to whether or not commissioning and installation of pipes was covered by the service tax provisions of section 65(28) of the Finance Act, 1994 at relevant time. It was found that the service of commissioning and installation was redefined by substituting section 65(28) by section 65(39a) with effect from 10-9-2004 and wherein drain laying or other installation for transportation of fluid, etc. were inserted only with effect from 16-6-2005. It was further found that the respondent demanded service tax treating the business as execution of works contract. Since this service came into effect only from 1-6-2007, the demand raised for the period in question was found unsustainable and allowing the petition, the SCN and order were held to be the outcome of misreading of legal provision.

levitra

(2011) 24 STR 272 (Kar.) — Commissionerr of Central Excise and Service Tax, LTU, Bangalore v. Micro Labs Ltd.

fiogf49gjkf0d
Premium paid for employees’ health/medical insurance — CENVAT credit of service tax allowed — Input service should be utilised directly or indirectly in relation to the final product — Irrespective of the fact whether mentioned or not in the definition of input service in Rule 3 of the CENVAT Credit Rules, 2003 it amounted to input service.

Facts
The employer paid health insurance premium of the employees and claimed credit for the same. The adjudicating authority denied the credit. It was confirmed by the first Appellate Authority, however allowed by the Tribunal. The question for consideration was eligibility of the assessee to avail CENVAT credit towards payment of service tax on the Group Insurance Health Policy. The decision in the case of Commissioner v. Stanzen Toyotetsu India (P) Ltd., (2011) 23 STR 444 (Kar.) was referred to in which it was inter alia held that “the Group Insurance Health Policy taken by the assessee is a service which would constitute an activity relating to business which is specifically included in the input service definition”.

Held
It was held that services such as transport facility provided to the employees and vehicle insurance pertaining to the same, workmen’s compensation and expenses relating to the same, even though not expressly mentioned in the definition of input service tantamount to input services and the Tribunal’s decision was held legal and valid.

levitra

(2011) 24 STR 283 (Ker.) — Precot Mills Ltd. v. Union of India.

fiogf49gjkf0d
Demand — Transport service recipient — Retrospective amendment of statute — Demand in terms of amended statute sustainable only if matter was kept alive at time when original provision was in force — Otherwise demand unsustainable.

Facts
The petitioner, a manufacturer of cotton yarn engaged the services of transporter to transport the manufactured cotton yarn. With the introduction of levy of service tax on services rendered by goods transport operators, a question arose as to liability of the customers engaging the services of transporters to pay service tax.

The Supreme Court in the case of Laghu Udyog Bharati v. UOI, 1999 (33) RLT 911 held that “the person who is availing the services of a transporter could not be made liable for filing returns and paying service tax and that service tax being on the value of services, is payable only by the person who provides the services who only can be regarded as an assessee for the purpose of service tax”.

In the aftermath of the judgment, the Parliament enacted Chapter V and sections 116 and 117 of the Finance Act, 2000 whereby the persons engaging the services of the goods services operators were made liable to pay service tax during the period of 16-7-1997 and 15-10-1998.

The petitioner vide their original petition challenged the constitutional validity of sections 116 and 117. The petitioner also contended that even if sections 116 and 117 were considered to be valid, only in respect of demand notices issued while the provisions struck down by the Supreme Court were in force and the matter was alive can be continued by virtue of new sections.

Held
The High Court observed that the Supreme Court in J. K. Cotton Spinning and Weaving Mills Ltd. and Another v. Union of India and Others, (1987) 32 ELT 234 held that “even if a provision is amended with retrospective effect, the Department can proceed with the demand only if the matter was kept alive at the time when the original provision was in force.” Accordingly, allowing the original petition, the High Court held that the petitioner was not liable to pay service tax as demanded.

levitra

Software Development Charges — whether liable to VAT or Service Tax?

fiogf49gjkf0d
Introduction
When there are two different authorities to levy tax of a similar nature, there is bound to be a controversy. And one such controversy going around is whether development charges for software are liable to VAT or service tax? The issue is debatable as both the authorities consider the same under their jurisdiction.

There are certain judgments, mainly about aspect theory, under which the respective authorities under VAT and service tax consider some aspect of the transaction as liable to tax under their respective law and try to levy tax. This results in overlapping and also leads to double taxation of the same transaction. However, without making any attempt to analyse the theory of double taxation, etc., let’s try to understand the correct position of taxation of software development charges.

Software, whether goods?
The first issue in relation to taxation of software is whether softwares are goods. This issue has already been settled by the Supreme Court. Reference can be made to the judgment of the Supreme Court in the case of Tata Consultancy Service v. State of Andhra Pradesh, (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, cannot 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 sales tax. The submission of Mr. Sorabjee that this authority is not of any assistance as ‘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.”

Thus, in relation to ready software whether canned or uncanned, the Supreme Court has observed that they are goods and hence can be subjected to sales tax including VAT, as presently levied.

However, the issue still remains whether all uncanned softwares are liable to VAT. There may be two situations under the above category of uncanned software:

One is that uncanned software may be developed for a particular customer as per his specifications. The software developer reserves all IPR including copyright in the said software unto himself. He will transfer the same to the customer after the software is ready against consideration. The transaction satisfies the test laid by the Supreme Court.

The other situation is that the customer while putting the order for development of software may reserve his copyright and IPR in the said software to be developed unto himself right from original stage of development of the software. Under the above circumstances it can be said the developer is not developing any software as his property which he can transfer to the customer. In this case the software coming into existence belongs to the customer as copyright lies with him as and when the software is being developed. Therefore the software developer can be said to be rendering services for development and not selling any software. In such a case there is no justification for levy of VAT. If at all, applicable service tax may be leviable, but not VAT.

This issue has been decided now by the Karnataka High Court in the case of Sasken Communication Technologies Ltd. v. The Deputy Commissioner of Sales Tax, DVO-5 (W.A. Nos. 90-101/2011 dated 15-4- 2011). In this case also similar issue was involved. The dealer M/s. Sasken Communication Technologies Ltd. developed software for its customers. However, as per agreement the copyrights and IPR in the said software belonged to the customer right from original stage of development. The Karnataka High Court held that since the copyright belonged to the customer right from the beginning, the software coming into existence after development belonged to the said customer and therefore there is nothing in the hands of the developer to transfer the same to the customer. In other words there was no sale of goods against consideration so as to attract VAT. This was nothing but rendering of development services for software.

The High Court has observed as under about the nature of transaction:

“39. From the aforesaid Clauses it is abundantly clear that the parties have entered into an agreement whereby the assessee renders service to the client for development of software, i.e., for software development and other services. Pursuant to the agreement and the work orders, the service shall be performed by the assessee. Services must be requested by issue of a valid work order together with a statement of work. As compensation for the service rendered to the customer, the fees specified in the relevant work order or in the statement of work is payable and billing is done on a time and material basis or on a fixed price or on a monthly basis. Pricing for time and material projects shall be fixed at a rate set forth in Annexure-A to the agreement.

40. The assessee agrees that all patentable and unpatentable, inventions, discoveries and ideas which are made or conceived as a direct or indirect result of the programming or other services performed under the agreement shall be considered as works made for hire and shall remain exclusive property of the client and the assessee shall have no ownership interest therein. Promptly, upon conception of such an invention, discovery, or idea, the assessee agrees to disclose the same to the client and the client shall have full power and authority to file and prosecute patent applications thereon and maintain patents thereon. At the request of the client the assessee agrees to execute the documents including but not limited to copyright assignment documents, take all rightful oaths and to perform such acts as may be deemed necessary or advisable to confirm on the client all right, title and interest in and to such inventions, discoveries or ideas, and all patent applications, patents, and copyrights thereon. Both the source code of developed software and hardware projects of worldwide intellectual property in and each shall be owned by the client. The assessee acknowledges that all deliverables shall be considered as works made for hire and the client will have all right, title including worldwide ownership of intellectual property rights in and each deliverable and all copies made from it. If acceptable to the client, the client may reuse all or any of the components developed by the assessee outside the scope of those contracts for the execution of the projects under this agreement.

41. Therefore, even before rendering service, the assessee has given up his rights to the software to be developed by the assessee. The considerations under the agreement is not for the cost of the project, the consideration is for the service rendered, based on time or man-hours. Once the project is developed, all rights in respect of the said project including the intellectual property rights vest with the customer and he is at liberty to deal with it in any manner he likes. The assessee has agreed to execute all such documents which are required for the exercise of such absolute rights over the software developed by the assessee.

 42.   The ‘deliverables’ has been defined under the agreement to mean all materials in whatever form generated, treated or resulting from the development, including but not related to the software modules or any part thereof, the source code and or object code, enhancement applications as well as any other materials media and documentation which shall be prepared, written and or developed by the developer for the client under this agreement and/or project order. If the customer agrees to provide any hardware, software and other deliverables that may be required to carry out the development and provide the deliverables he may do so. Otherwise the assessee has to make or provide all those hardware and software to develop the deliverable and the final product. No doubt at the end of the day, this software which is developed is embedded on the material object and only then the customer can make use of the same. The software so developed even before it is embedded on the material object or after it is embedded on a material object exclusively belongs to the customer. In the entire contract there is nothing to indicate that the assessee after developing the software has to embed the same on a material object and then deliver the same to the customer so as to have title to the project which is developed. The title to the project/software to be developed lies with the customer even before the assessee starts rendering service.”

The above observations of the High Court entirely cover the debatable issue. The parties can now very well decide whether the transaction of development of software will be covered by VAT or service tax based on ownership in the copyright and IPR. We hope that the controversy will rest here and the future transactions will be free from any dispute.

A market is never saturated with a good product, but it is very quickly saturated with a bad one.
— Henry Ford

REFUND OF CENVAT CREDIT: OTHER THAN ON EXPORTS

fiogf49gjkf0d
Statutory provisions [Rule 5 of CENVAT Credit Rules, 2004 (‘CCR’)]

“Where any input or input service is used in the manufacture of final product which is cleared for export under bond or letter of undertaking, as the case may be, or used in the intermediate product cleared for export, or used in providing output service which is exported, the CENVAT credit in respect of the input or input service so used shall be allowed to be utilised by the manufacturer or provider of output service towards payment of,

  • duty of excise on any final product cleared for home consumption or for export on payment of duty; or
  • service tax on output service,

and where for any reason such adjustment is not possible, the manufacturer or the provider of output service shall be allowed refund of such amount subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by Notification.

Provided that no refund of credit shall be allowed if the manufacturer or provider of output service avails of drawback allowed under the Customs and Central Excise Duties Drawback Rules, 1995, or claims rebate of duty under the Central Excise Rules, 2002, in respect of such duty; or claims rebate of service tax under the Export of Services Rules, 2005 in respect of such tax:

Provided further that no credit of the additional duty leviable u/ss.(5) of section 3 of the Customs Tariff Act shall be utilised for payment of service tax on any output service.

 Explanation — For the purposes of this rule, the words ‘output service which is exported, means the output service exported in accordance with the Export of Services Rules, 2005.”

Refunds in situations other than export — A contentious issue

Rule 5 under CCR is the only provision which permits refund of CENVAT credit, essentially in case of exports. Refunds of unutilised CENVAT credit are often claimed in situations, other than export. For example, discontinuance of business, payments in case of disputes made in cash due to insistence by the Department instead of debit to CENVAT credit, Pre Deposits pending appeal made in cash instead of debit to CENVAT credit, etc.

Interpretation of the words ‘where for any reason such adjustment is not possible . . . .’ in Rule 5 has resulted in extensive litigations between the tax Department and the taxpayers.

Entitlement to refund in situations other than exports has been a very contentious issue and divergent judicial views have been expressed. There are very limited cases directly relating to service tax. However, there are extensive judicial precedents under Central Excise, principles in regard to which are relevant for service tax and which serve as a useful guide while dealing with issues of refunds relating to service providers.

The same are analysed hereafter along with the latest Larger Bench Ruling.

Mumbai Tribunal ruling holding that refund is inadmissible in situations other than exports

In the case of National Leather Cloth Mfg. Co. v. CCE, (2006) 198 ELT 400 (Tri-Mumbai) followed the ratio of the judgment in case of CCE, v. Rajashree Cements, (2001) 132 ELT 724 (Tri-Chennai) and denied the refund of MODVAT credit observing as under:

“The decision in the cases of Bombay Burmah, Arcoy Industries and Omkar Textile have been rendered contrary to the earlier decision of the Tribunal in the case of Rajashree Cements, which was delivered at an earlier point of time on 9-9- 2001. Moreover, Rajashree Cements also correctly notices the provisions of law which allow cash refund only in the case of unutilised credit in respect of export of final products. Hence, the decision in the said case is binding and the same requires to be followed until reversed by either Larger Bench or by any superior court”.

In the case of Rajashree Cements referred above, the Tribunal had held as under:

Para 5

“Accordingly, we hold that payment of duty through RG23A Part II account is a payment of duty and the refund of the same has to be given, if otherwise admissible and principle of unjust enrichment does not apply. However, the refund amount is to be given in RG23A Part II accounts if the same is in operation.”

In the case of National Leather, though it was an admitted fact that the appellants were not in a position to utilise the credit as they have closed down, legitimate refund was denied.

The three decisions of the Tribunal cited by the appellants and not followed in the above case of National Leather (supra) as the same were considered contrary to the decision in the case of Rajashree Cements are given below.

  • Assessee’s factory closing before allowance of Modvat credit by the Tribunal and utilisation of credit was prevented due to initiation of proceedings by the Department. It was held that the assessee was entitled to cash refund. [CCE v. Omkar Textile, (2002) 148 ELT 461 (Tri-Mum.)]
  • Amount originally paid by the assessee by debiting RG23A. Part II. The assessee moved out of Modvat credit scheme when dispute finally settled — It was held that the assessee is not able to utilise credit, the very basis of refund is defeated, in which case amount is to be given in cash. [CCE v. Arcoy Industries, (2004) 170 ELT 507 (Tri-Mum.)]
  • Section 11B contains no bar against payment of refund by cheque/cash in cases where original payment of duty was from Modvat/Cenvat account. Moreover, the assessee ceased to exist as a manufacturing unit and has no Cenvat account into which refund can be credited. [CCE v. Bombay Burmah Trading Corpn., (2005) 190 ELT 40 (Tri-Del.)]

Larger Bench Ruling in Gauri Plasticulture (P) Ltd. v. CCE, (2006) 202 ELT 199 (Tri-Mumbai) (LB)

In this case duty debit was made in CENVAT (MODVAT) account. However, the appellants could not utilise the credit due to departmental objections and insistence of payment from PLA Account. Thereafter the appellants surrendered their licence due to discontinuance on business and applied for refund of unutilised CENVAT credit.

The Larger Bench, under the peculiar facts of the case held that credit can be given in MODVAT Account, but if an assessee is not able to utilise, cash refund can be granted. The important observations made by the Larger Bench are as under:

Para 8

“Detailed reading of the above judgments, leads into the fact that wherever the assessee was unable to utilise the credit on account of objection raised by the Department or actions taken by them by way of initiation of proceedings or paid duty out of Modvat account at the Department’s insistence, and for that reason, he had to pay duty in cash or out of the PLA, they would be entitled to refund of that credit in cash, on the dispute being ultimately settled in their favour. In the decisions holding that such refund in cash is not possible, it has been observed that there is no provision allowing refund of such credit in cash. However, we are not in agreement with the above proposition for the simple reason that there is also express no bar in the Modvat Rules to that extent. We have to keep in mind that it is not the refund of unutilised credit, but the credit which has been used for payment of duty at the insistence of the Revenue or has been reversed because the Department was of the view that the same is not available for utilisation. This is a simple and basic principle of equity, justice and goods conscience. Had the Department not prevented the assessee from utilising the credit otherwise available to him, they would have been in a position to use the same towards payment of duty on their final product, which obligation they had to discharge from their PLA account. As such, on the success of their claim subsequently, if the assessee is maintaining Modvat credit and is in a position to use the same for future clearances, it should normally be credited back in the same account from where it was debited i.e., RG23A Part account. However, if an assessee is not able to use the credit on account of any reasons, whatsoever (which may be closure of his factory or final products being exempted, etc.) the refund becomes admissible in cash or by way of credit entry in PLA to the extent duty paid in cash or out of PLA during the relevant period.

Para 9

On the same basic principles of equity, justice and good conscience, if such refund in cash makes the assessee enrich because during the period when the dispute was pending, they had not paid any duty in cash and as such, the debit entry in Mod-vat account would have made no difference, as the credit would have been lying unutilised only in the account, such credit, cannot be refunded in cash.”

Karnataka High Court ruling in UOI v. Slovak India Trading Co. Pvt. Ltd., (2006) 201 ELT 559 (Kar.) [Confirmed by the Supreme Court (2008) 223 ELT A 170

In this case, the assessee was engaged in manufacture of shoes for M/s. Bata India Ltd. and was registered under the Central Excise. They surrendered their registration and a refund application was made on 14-5-2003 claiming a refund of Rs.4,15,057. During the Internal Audit, it was noticed that the assessee had availed CENVAT credit of the materials received by them during the past and had availed the credit to the tune of Rs.3,09,390. On scrutiny, it was noticed that there was neither production, nor clearance of finished goods. CENVAT credit availed by the assessee was irregular. A show-cause notice was issued in the matter with regard to irregular availment and also with regard to rejection of refund claim. Thereafter, an order was passed ordering allowance of CENVAT credit of Rs.3,72,405 availed. Refund claim was rejected in terms of section 11B of the Act. It was stated that there is no provision in Rule 5 of the CENVAT Credit Rules, 2002 with regard to refund. An unsuccessful appeal was filed by the assessee. Thereafter, the Tribunal was moved and the Tribunal allowed the appeal in terms of the impugned order.

The High Court held that Rule 5 of the CENVAT Credit Rules, 2002 does not expressly prohibit refund of unutilised credit where there was no manufacture in light of the closure of factory. Further, since the assessee has come out of the MODVAT Scheme, refund of unutilised credit has to be granted.

The Department’s appeal against the afore-said Court ruling was rejected by the Supreme Court.

Recent Larger Bench Ruling in the case of Steel Strips v. CCE, (2011) 269 ELT 257 (Tri.-LB)

The following question was referred to the Larger Bench regarding refund of unutilised amount of MODVAT credit in cash for the period from December, 1997 to September, 1999:

“Whether in cases where either on account of coercion by the Department or otherwise, the assessee pays the duty through PLA account, in spite of having sufficient balance in the MODVAT/CENVAT credit, on the factory or unit becoming inoperative and there being no likelihood of restarting the production, can such assessee be entitled for refund of the credit amount under the provisions of law in force?

Though, the Larger Bench ruling is with reference to section 11B of Central Excise Act, 1944, the observations are very relevant in the context of Rule 5 of CCR.

The Larger Bench distinguished the rulings of Larger Bench in Gauri Plasticulture (P) Ltd., Karnataka High Court in Slovak India as well as other rulings and held that refund of unutilised credit is only permissible in case of exports and for no other reason whatsoever that may be.

The Larger Bench made the following important observations while passing the order:

Para 5.7

“A distinction between provisions of the statute which are of substantive character and are built in with certain specific objectives of policy on the one hand, and those which are merely procedural and technical in their nature on the other hand, must be kept clearly distinguished. An eligibility criteria to get refund calls for a strict construction, although construction of a condition thereof may be given a liberal meaning if the same is directory in nature. The doctrine of substantial compliance is a judicial invention, equitable in nature, designed to avoid hardship in cases where a party does all that can be reasonably expected of it, but fails in or faults in some minor or inconsequent aspects which cannot be described as the ‘essence’ or the ‘substance’ of the requirement. Like the concept of ‘reasonableness’, the acceptance or otherwise of a plea of ‘substantial compliance’ depends upon the facts and circumstances of each case and the purpose and object to be achieved and the context of the prerequisites which are essential to achieve the object and purpose of the rule or the regulation. Such a defence cannot be pleaded if a clear statutory prerequisite which effectuates the object and the purpose of the statute has not been met. Certainly, it means that the Court should determine whether the statute has been followed sufficiently, so as to carry out the intent for which the statute was enacted and not a mirror image type of strict compliance. Substantial compliance means ‘actual compliance in respect to the substance essential to every reasonable objective of the statute’ and the Court should determine whether the statute has been followed sufficiently so as to carry out the intent of the statute and to accomplish the reasonable objectives for which it was passed.

Para 5.8

Fiscal statute generally seeks to preserve the need to comply strictly with regulatory requirements that are important, especially when a party seeks the benefits of an exemption clause, substantial compliance of an enactment is insisted upon, where mandatory and directory requirements are lumped together, for in such a case if mandatory requirements are complied with, it will be proper to say that the enactment has been substantially complied with notwithstanding the non-compliance of directory requirements. In cases where substantial compliance has been found, there has been actual compliance with the statute, albeit procedurally faulty. The doctrine of substantial compliance seeks to preserve the need to comply strictly with the conditions or requirements that are important to invoke a tax or duty exemption and to forgive non-compliance for either unimportant and tangential requirements or requirements that are so confusingly or incorrectly written that an earnest effort at compliance should be accepted.

Para 5.9

The test for determining the applicability of the substantial compliance doctrine has been the subject of a myriad of cases. Quite often, the critical question to be examined is whether the requirements relate to the ‘substance’ or ‘essence’ of the statute; if so, strict adherence to those requirements is a precondition to give effect to that doctrine. On the other hand, if the requirements are procedural or directory, in that they are not of the essence of the thing to be done, but are given with a view for the orderly conduct of business, they may be fulfilled by substantial, if not strict compliance. In other words, a mere attempt at compliance may not be sufficient, but actual compliance of those factors which are considered as essential. In the cases of refund substantial compliance with the law granting refund is sine qua non.

Para 5.11

No person has a vested right in any course of procedure. He has only the right of prosecution or defence in the manner laid down by law. He has no right other than to proceed according to the mandate of the statute governing the subject. Claim of refund is not a matter of right unless vested by law. That would depend upon the object of the statute and eligibility. The purpose for which law has been made and its nature, the intention of the Legislature in making the provision, the relation of the particular provision to other provisions dealing with the subject including the language of the provision are considerable factors in arriving at the conclusion whether a particular claim is in accordance with law. No injustice or hardship plea can be raised to claim refund in the absence of statutory mandate in that behalf and no equity or good conscience can influence fiscal courts without the same being embedded in the statutory provisions.

Para 5.13

It is well-settled principles of law that what cannot be done directly should not be allowed to be done indirectly. On surrendering of their licence, the appellants were not allowed to claim the refund of the unutilised credit in the Modvat account, and the same would have lapsed. As such, utilisation of the same towards payment of disputed demand of duty, after surrendering of their registration, had not led to a situation where the assessee was compelled not to use the

credit for regular clearances and had to make payment through PLA accounts. As such, in the instant refund in cash was not to be allowed.

Para 5.16

Modvat law has codified the procedure for adjustment of the duty liability against the Modvat account. That is required to be carried out in accordance with law and unadjusted amount is not expressly permitted to be refunded. In the absence of express provision to grant refund, that is difficult to entertain except in the case of export. There cannot be presumption that in the absence of debarment to make refund in other cases that is permissible. Refund results in outflow from treasury, which needs sanction of law and an order of refund for such purpose is sine qua non. Law has only recognised the event of export of goods for refund of the Modvat credit as has been rightly pleaded by the Revenue and instant reference was neither the case of ‘otherwise due’ of the refund, nor the case of exported goods. Similarly, absence of express grant in statute does not imply ipso facto entitlement to refund. So also absence of express grant is an implied bar for refund. When right to refund does not accrue under law, claim thereof is inconceivable. Refund of unutilised credit is only permissible in case of export of goods and for no other reason, whatsoever that may be. Thus, where the assessee pays duty through the PLA account, in spite of having sufficient balance in the Modvat/Cenvat credit account on the factory or unit becoming inoperative and there being no likelihood of re-starting the production, such an assessee cannot be entitled to refund of the credit amount under the provisions of law in force.”

Conclusion

The Department authorities are following the aforesaid Larger Bench ruling and denying refunds, though in many cases, the reasons could be genuine.

With due respects to the Larger Bench, it would appear that refund provisions being in the nature of beneficial provisions ought to be construed liberally rather than strictly in accordance with the settled principles laid down by the Supreme Court from time to time.

It is suggested that appropriate amendment need to be made in Rule 5 of CCR, whereby powers may be granted to CBEC to prescribe circumstances under which refunds may be permitted subject to appropriate revenue safeguards.

2013 (31) STR 334 (Tri.– Ahmd) Chowgule & Co. (Salt) Pvt. Ltd. vs. CCEx., Rajkot

fiogf49gjkf0d
Refund – wrong classification- service tax paid under category notified under Notification – Refund claim allowed.

Facts:
The
Appellant filed a refund claim under Notification No. 17/2009 –ST,
dated 07-07-2009 in respect of service tax paid on stevedoring &
documentation charges classified by the vendor under “Other Port
Services”. The department contended that since the said charges were
classifiable under “Cargo Handling Services” as per the Karnataka High
Court decision in case of M/s. Konkan Marine Agencies 2009 (13) STR 7
(Kar), the refund was liable to be rejected.

Held:
Examining
the notification, the Hon. Tribunal observed that the refund claim was
required to be sanctioned where service tax was paid under the category
of services notified under the notification. The service providers were
registered under the category of “Other Port Services” which was
notified in the said notification and thus, the appeal was allowed

levitra

Sales Tax — PSI units established under 1988 Scheme — Retrospective amendment to Rule — Providing calculation of CQB — Bad in law to that extent they are inconsistent with para 2.11 of 1988 GR — Rule 31AA of the Bombay Sales Tax Rules, 1959.

fiogf49gjkf0d
(2011) 41 VST 436 (Bom.)
Prasad Power Control Pvt. Ltd. and Another v. Commissioner of Sales Tax, Mumbai and Others.

Sales Tax — PSI units established under 1988 Scheme — Retrospective amendment to Rule — Providing calculation of CQB — Bad in law to that extent they are inconsistent with para 2.11 of 1988 GR — Rule 31AA of the Bombay Sales Tax Rules, 1959.


Facts:

The dealer company, entitled to sales tax exemption under the Package Scheme of Incentives (PSI), 1988 under the Bombay Sales Tax Act, 1959 as per terms and conditions of Government Resolution, dated September 30, 1988 subject to maximum specified limit of notional sales tax liability to be calculated as per Para 2.11 of the said GR. Section 41B of the Act, inserted from May 1, 1994, empowers the Commissioner of sales tax to determine the cumulative quantum of benefits (CQB) received by any dealer to whom any certificate of entitlement is granted under various specified PSI at any time from January 1, 1980, in the manner prescribed by the Rules. Rule 31AA was inserted in the Bombay Sales Tax Rules, 1959 from March 24, 1995 providing for calculation of CQB for any period starting from January 1, 1980. The assessment of the dealer was completed for the periods 1994-95 to 1996-97 and the assessing authority calculated CQB as per Rule 31AA against which dealer filed appeals before the Appellate Authority as well as filed writ petition before the Bombay High Court challenging the constitutional validity of Rule 31AA providing for calculation of CQB to that extent they are inconsistent with Para 2.11 of GR dated September 30, 1988.

Held:

 (i) There can be no dispute that the State Legislature has power to make laws with retrospective effect, but if that law arbitrarily impairs or seeks to take away the rights vested in the citizens, then such law must be held to be bad in law to the extent it is made retrospectively.

(ii) In the present case, the petitioners had a vested right in computing CQB as per Para 2.11 of the 1988 GR and since that vested right is sought to be divested by introducing Rule 31AA retrospectively, it must be held that Rule 31AA to the extent it seeks to apply to the units established under the 1988 scheme prior to the insertion of said rule is bad in law.

(iii) When the PSI itself was to operate based on the exemption granted under the sales tax law, it is difficult to envisage that in calculating the CQB, the Scheme intended to ignore the exemptions available under the sales tax law. In any event, the language used in Para 2.11 of the 1988 GR does not directly or indirectly indicate that in calculating CQB the exemptions provisions contained under the sales tax law have to be ignored.

(iv) The calculation of CQB under PSI 1988, as per Para 2.11 of 1988 GR, has to be made with reference to tax payable, by a unit not covered under PSI 1988, at maximum rate of tax payable under the Act or rules including exemptions or concessions available under any other provisions of the Act, rules or notifications. Accordingly, the High Court allowed the writ petition filed by the company.

levitra

Sales tax — TDS on works contract — At flat rate — On total contract value — Without any mechanism to determine taxable turnover, etc. — Constitutional validity — Invalid — Section 3AA of the Tripura Sales Tax Act, 1976.

fiogf49gjkf0d
(2011) 41 VST 386 (Gauhati) Sri Pradip Paul v. State of Tripura

Sales tax — TDS on works contract — At flat rate — On total contract value — Without any mechanism to determine taxable turnover, etc. — Constitutional validity — Invalid — Section 3AA of the Tripura Sales Tax Act, 1976.


Facts:

The dealer entered into works contract for digging and development of tube-well for State PWD of the Tripura Government. Under the contract, pipes were supplied free of cost by the Department and some little materials were supplied by the dealer. The State PWD deducted sales tax from payment of bills to the dealer/contractor at flat rate as provided in section 3A of the Tripura Sales Tax Act, 1976. The dealer filed writ petition before the Gauhati High Court challenging constitutional validity of provisions of section 3A of the Tripura Sales Tax Act, 1976 providing for levy of sales tax as well as provisions of TDS at flat rate u/s.3AA of the act. The High Court following various decisions of SC and other High Courts upheld constitutional validity of section 3A of the act providing levy of tax at different rate of tax on sale of goods involved in execution of works contract but TDS provisions were held as invalid.

Held:

 (i) Under the contract, the dealer was to supply necessary fittings and some other material however little they may be, the contract is not a service contract, but works contract involving sale of those goods and liable for sales tax on corresponding turnover of sales.

(ii) No tax can be imposed and recovered in respect of sale arising out of works contract as per section 3A inasmuch as tax is leviable on turnover of sales, but the manner of computation of turnover has not been provided in respect of works contract in the Act making thereby assessment and computation of tax inapplicable in respect of works contract.

(iii) Section 3AA of the act and Rule 3A(1) of the rules are bad in law inasmuch as it permits deduction of tax at flat rate.

levitra

Service tax demanded on construction of apartments for a client who in turn allotted it to its employees for residence — The issue highly debatable, however Board’s Circular No. 332/16/2010, dated 24-5-2010 in favour of appellant — Held: Activity covered by exclusion clause of the definition of ‘residential complex’ as per section 65(105) (zzzh) — Stay and waiver granted.

fiogf49gjkf0d
(2012) TIOL 283 CESTAT-Bang. — Nitesh Estates Ltd. v. CCE, Bangalore.

Service tax demanded on construction of apartments for a client who in turn allotted it to its employees for residence — The issue highly debatable, however Board’s Circular No. 332/16/2010, dated 24-5-2010 in favour of appellant — Held: Activity covered by exclusion clause of the definition of ‘residential complex’ as per section 65(105) (zzzh) — Stay and waiver granted.


Facts:

The appellant constructed residential complexes during March, 2007-March, 2008 for ITC Ltd. who provided the apartments for residence of its employees. Invoking extended period in July, 2009, service tax was demanded and penalty was levied. The appellant contended that residential construction was done for personal use of ITC Ltd. and hence was covered by exclusion clause u/s.65(91a) of the Act and relied on Board’s Circular 332/16/2010, dated 24-5-2010, wherein it was clarified that residential complex constructed by National Building Construction Corporation Ltd. (NBCC) for officers of the Central Government was not taxable. Support was also placed on Khurana Engineering Ltd. v. CCE, (2011) 21 STR 115 (Tri.-Ahmd.) wherein residential complexes constructed by the assessee for PWD/Government of India for residential use of the Central Government employees were held to be covered by the exclusion clause. The Revenue, on the other hand distinguished the situation wherein a person building on one’s own and not through a contractor, only would fall within the ambit of exclusion clause.

Held:

The issue is highly debatable, however the Board’s Circular and Tribunal’s decision (supra) could be taken support of. Further, considering that the appellant also had good case on limitation, recovery of dues was stayed, but the case was posted for early hearing.

levitra

Services of mining, loading, transportation and unloading — Whether cargo handling service or goods transportation service — Since tax paid as receiver of GTA service — Contract indicated small component of loading and unloading — Handling or transportation within factory or mining area does not amount to ‘cargo’ is well settled — In the contracts of appellants handling is incidental to transportation — Held revenue’s attempt to convert this to cargo handling appears far-fetched — Demand set as<

fiogf49gjkf0d
(2012)   TIOL   290   CESTAT-Del.   — R. K. Transport Company v. CCE, Raipur.
    

Services of mining, loading, transportation and unloading — Whether cargo handling service or goods transportation service — Since tax paid as receiver of GTA service — Contract indicated small component of loading and unloading — Handling or transportation within factory or mining area does not amount to ‘cargo’ is well settled — In the contracts of appellants handling is incidental to transportation — Held revenue’s attempt to convert this to cargo handling appears far-fetched — Demand set aside.


Facts:

The appellant provided integrated services of mining for excavation of bauxite ore, loading it into trucks at stock yards and transportation of the same by road and unloading the same at a specified area for two aluminium companies during August, 2002- March, 2006. Revenue proceeded the case considering this as cargo handling service. From 1-1-2005, the appellant discharged service tax as recipient of GTA service on consideration received for transportation of goods. For services other than transportation. The appellant paid service tax from 16-6-2005 under Business Auxiliary Service as services in relation to production were covered under Business Auxiliary Service. According to the appellant, services covered under mining service were not liable prior to 1-6- 2007. Relying on several decisions including Sainik Mining & Allied Services (2008) 9 STR 531 (Tri.) and Modi Construction (2008) 12 STR 34 (Tri.), the appellant contended that handling of goods within factory or mines could not be considered handling of cargo. The Revenue contended that argument of the assessee that mining was a dominant activity was incorrect and relied in support on Gajanand Agarwal v. CCE, (2009) 13 STR 138.

Held:

The contracts indicated insignificant component of cargo handling service and main activities were mining and transportation. No separate rates were available for loading and unloading as available in the case of Gajanand Agarwal (supra). The Revenue’s attempt to convert such activity from transportation and deny abatement claimed appeared farfetched to find legal support. Loading and unloading combined with transportation service rendered in respect of transportation would not become cargo handling service. The appeal was accordingly allowed.

levitra

Penalty — Education cess is for welfare of the state and appellant not entitled to credit of the same, hence no penalty leviable u/s.76 of Finance Act, 1994 (penalty for failure to pay service tax).

fiogf49gjkf0d
(2012) 25 STR 594 (Tri.-Del.) — Pahwa International Pvt. Ltd. v. Commissioner of Service Tax, Delhi.

Penalty — Education cess is for welfare of the state and appellant not entitled to credit of the same, hence no penalty leviable u/s.76 of Finance Act, 1994 (penalty for failure to pay service tax).


Facts:
The appellant wrongly utilised credit for education cess against service tax. Education cess was meant for specific purpose i.e., welfare of the state.

Held:

The appellant was not entitled to avail credit of education cess against credit for service tax. The penalty u/s.76 of the Finance Act, 1994, upon the appellant was waived.

levitra

Appellant, a labour contractor — Conversion process of tin plate to containers in the premises of M/s. NKPL — Tax levied on the appellant — The appellant was providing manpower recruitment or supply agency services — On the basis of facts it was held that there was no service tax liability.

fiogf49gjkf0d
(2012) 25 STR 471 (Tri-Ahmd.) — Rameshchandra C. Patel v. Commissioner of Service Tax, Ahmedabad.

Appellant, a labour contractor — Conversion pro-cess of tin plate to containers in the premises of M/s. NKPL — Tax levied on the appellant — The appellant was providing manpower recruitment or supply agency services — On the basis of facts it was held that there was no service tax liability.


Facts:

The appellant was a labour contractor and was doing conversion of tin plate to containers to pet jars in the factory premises of M/s. NK Proteins Ltd. (NKPL). The machinery, space and all other facilities were provided by NKPL. The appellant was required to take the required labour to the factory of NKPL to undertake the conversion depending upon the requirement of NKPL. According to the agreement, the appellant was to pay specific amount determined on the basis of number of containers produced by the appellant. Proceedings were initiated against the appellant on the ground that the activity undertaken amounted to providing manpower recruitment or supply agency.

Held:

To determine whether the service is taxable under manpower recruitment or supply agency, first of all it should be provided by manpower recruitment or supply agency and secondly it should be in relation to manpower supply or recruitment. The appellant was doing only contract manufacturing work and there was no question of any labour supply or manpower supply or manpower recruitment agency. Nowhere in the agreement there was any mention with regards to manpower supply or recruitment and the agreement specifically talks about the products to be manufactured and payments to be made. The appellant was also registered with the labour department as a contract manufacturer and not as a labour supply or manpower supply or manpower recruitment agency. The Department totally failed to show in which manner the service provided by the appellant could be categorised under manpower supply or recruitment. Hence it was held that the appellant was not liable to service tax.

levitra

Mutual fund distribution — Liability to pay service tax on commission — As per Service Tax Rules, 1994 such liability was on recipient of services i.e., mutual fund company — If they did not pay it, liability was not transferred to mutual fund distributor.

fiogf49gjkf0d
(2012) 25 STR 481 (Tri-Del.) — Raj Ratan Castings Pvt. Ltd v. Commissioner of Customs & Central Excise, Kanpur.

Mutual fund distribution — Liability to pay service tax on commission — As per Service Tax Rules, 1994 such liability was on recipient of services i.e., mutual fund company — If they did not pay it, liability was not transferred to mutual fund distributor.


Facts:

The appellant was a distributor of mutual fund units who received commission from mutual fund companies or asset management companies. The commission received by the appellant from the said companies, was taxed by the authorities on the ground that it provided Business Auxiliary Services to the mutual fund company.

Held:

It was held that the liability to pay tax is of the service recipient i.e., the mutual fund company. If it was not paid by the company, proceedings have to be started against the company and the liability will not transfer to the mutual fund distributor.

levitra

Tax liability — Relevant date — Rate of tax — Advance payment — Demand for differential tax due to subsequent change of rate of tax — Rate of service tax increased from 8 to 10.2% w.e.f. 10-9-2004 — Appellant received advance payment before 10-9-2004 — Appellant paid tax on full value received — Department did not take any objection to such payment in advance — Held, rate that was applicable at the time of receipt of value of service will apply in a case where the appellant chose to pay tax on

(2012) 25 STR 459 (Tri.-Del.) — Vigyan Gurukul v. Commissioner of Central Excise, Jaipur-I.

Tax liability — Relevant date — Rate of tax — Advance payment — Demand for differential tax due to subsequent change of rate of tax — Rate of service tax increased from 8 to 10.2% w.e.f. 10-9-2004 — Appellant received advance payment before 10-9-2004 — Appellant paid tax on full value received — Department did not take any objection to such payment in advance — Held, rate that was applicable at the time of receipt of value of service will apply in a case where the appellant chose to pay tax on advance amount received.


Facts:

The appellant was providing commercial coaching services during the year 2004. The rate of service tax increased from 8 to 10.2% w.e.f. 10-9-2004. The appellant received advance payment before 10-9- 2004 for providing services part of which were provided after 10-9-2004. They paid tax @8%, the rate prevalent at the time of paying service tax on the amounts received by them. The Department did not take any objection to such payment in advance. At a later date, the Department request ed the appellant to deposit the differential service tax on that part of the advance fee collected by them during the period 1-9-2004 to 9-9-2004 against which services were rendered during the period from 10-9-2004 to 31-3-2005. The appellant deposited the differential amount of service tax. The appellant later felt that they need not have paid tax at the higher rate as advised by the Department and they filed a refund claim for the same. The Department rejected the claim.

Held:

It was held that the appellants cannot recover the additional tax amount from their students in view of the fact that the contracts with students were concluded. The appellant paid tax on full value received. The Department did not take any objection to such payment in advance. So at the later date when the rate of service tax increased, there was no reason for the Department to claim that the appellant should not have paid tax in advance. The rate that was at the time of receipt of value of service will apply in case where the appellant chose to pay tax on advance amount received. Comments: The current provisions of Point of Taxation Rules are also in line with the above judgment. Where bill has been raised and payment is also received before change in the rate, the old rate will apply.

Section 66A — Import of services — Constitutional validity upheld — Charge of service tax created on services provided from outside India by a person having a business establishment/fixed establishment from which the services are provided and received in India by a person who has a place of business, fixed establishment, permanent address or usual place of residence in India and the Rules in respect thereof made under powers conferred by sections 93 and 44 r.w.s. 66A of the Finance Act, 1994 ar<

fiogf49gjkf0d
(2012) TIOL 122 HC-ALL-ST — GLYPH International Ltd. v. Union of India & Others.

Section 66A — Import of services — Constitutional validity upheld — Charge of service tax created on services provided from outside India by a person having a business establishment/fixed establishment from which the services are provided and received in India by a person who has a place of business, fixed establishment, permanent address or usual place of residence in India and the Rules in respect thereof made under powers conferred by sections 93 and 44 r.w.s. 66A of the Finance Act, 1994 are not unconstitutional on both grounds; legislative competence and/or extra-territorial operation of laws.


Facts:

The petitioner, a software manufacturer and 100% exporter had an agreement with a US company whereby the US company would promote petitioner’s business activity in US. Service tax was demanded on the amount paid to the US company for the period 2008-09. The petitioner challenged the levy on the said US company’s services viz. AMC charges for upgradation of software and online support services. The grounds of the challenge were (a) constitutional validity of section 66A and Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 (Import Rules) (b) extra-territorial jurisdiction of the levy based on the scope of section 64 of the Act which provides that the Act will extend to whole of India except State of Jammu & Kashmir. The petitioner contended that section 66A and the Import Rules create another taxable event/ incidence of tax from services provided to services received in India and which was against the legislative scheme. While challenging constitutional validity the petitioner in the context of Entry 92C of the Union list contended that services rendered in India which would form part of GDP were sought to be taxed as they significantly contributed to GDP. However, levying service tax on services rendered outside India being not part of GDP would be unconstitutional. The petitioner also contended that unlike the Income-tax Act, there did not exist double taxation treaty in service tax and therefore hardship in the form of multiple taxation on the same activity would be caused. They placed reliance upon All India Federation of Tax Practitioners v. Union of India, (2007) 7 STR 625 (SC). Discussing various parts of the said decision, it was contended that service tax is a VAT which in turn is both a general tax and destination-based consumption tax leviable on services provided within the country. Further reliance was placed on various decisions, including on Ishikawajma Harima Heavy Industries (2007) 3 SCC 481. The Revenue, on the other hand, contended that 66A was a valid provision and did not suffer from the vice of unconstitutionality and inter alia relied on Tamil Nadu Kalyan Mandapam Association v. UOI, (2004) TIOL 36 SC-ST (wherein constitutional validity of section defining Mandap Keeper’s service was upheld) and All India Federation of Tax Practitioners (supra) (wherein legislative competence of Parliament to levy service tax on chartered accountants, cost accountants and architects was upheld). Among other decisions, Indian National Shipowners Association v. UOI, (2009) 13 STR 235 (Bom.) was also referred to and noted.

Held:

Constitutional validity of the competence of Parliament to levy service tax has been upheld by the Supreme Court in Tamil Nadu Kalyan Mandapam Association (supra), All India Federation of Tax Practitioners (supra) and Association of Leasing and Financial Service Companies (2016) TIOL 87 SC-ST-LB. In the case under examination, the concern was for objection to the legislative powers of the Parliament on its extra-territorial operations, namely, the charge in respect of taxable events/ incidence of service tax on services provided outside India. Citing excerpts from the decisions such as Shrikant Bhalchandra Karulkar v. State of Gujarat, (1994) 5 SCC 459, State of Bihar & Ors. v. Shankar Wire Products Industries & Ors., (1995) Supp. 4 SCC 646 and GVK Industries Ltd. v. Income-tax Officer & Anr., (2011) 4 SCC 36, the High Court held:

As held in GVK Industries Ltd.’s case, Parliament does not have power to legislate for any territory other than territory of India or part of it and such laws would be ultra vires. It follows therefore that Parliament is empowered to make laws with respect to aspects or cause that occur, arise or exist or may be expected to do so within the territory of India and with respect to extra-territorial aspects or cause that have an impact on or nexus with India. Citing various terms in the agreement of the petitioner with the US company, it was concluded, “we find that taxable services provided from outside India are received and can be taxed in India u/s.66A(1)(b) of the Act.” Further that Import Rules made in exercise of powers conferred by sections 93 and 94 r.w.s. 66A of the Finance Act, 1994 do not suffer from the vice of constitutionality either on the ground of lack of legislative competence or on the ground of extra-territorial operation of laws.

levitra

(2011) 24 STR 411 (Tri.-Chennai) — Commissioner of Central Excise (ST), Pondicherry v. Fairline Worldwide Express.

fiogf49gjkf0d
Rectification of mistake by Tribunal in service tax appeal — Section 74 of the Finance Act, 1994 providing a period of two years for rectification of mistake by any Central Excise Officer not applicable to appeals to Tribunal.

Facts
The application for rectification arose out of Tribunals final order No. 213/2010, dated 19-12-2010.

The Revenue contended that as section 74 of the Finance Act, 1994 provided for a two-year period of limitation for rectification of error by a Central Excise Officer, the same period of limitation should be applied in the case of orders passed by the Tribunal also.

Held
The Tribunal noted that there was no statutory provision for filing application for rectification in case of service tax appeals before the Tribunal. In the absence of an express provision for filing application for rectification in orders in service tax appeals disposed of by the Tribunal, the application was held one without merits.

levitra

Appellant claimed CENVAT credit — Based on delivery notes — Revenue’s contention — Delivery notes cannot be considered as valid documents for availment — Held, credit cannot be denied — Delivery notes valid for availment of credit.

fiogf49gjkf0d
(2012) 25 STR 428 (Kar.) — CCE, Bangalore v. Saturn Industries.

Appellant claimed CENVAT credit — Based on de-livery notes — Revenue’s contention — Delivery notes cannot be considered as valid documents for availment — Held, credit cannot be denied — Delivery notes valid for availment of credit.


Facts:

The appellant claimed CENVAT/Modvat of the duty paid on the basis of the delivery notes. The Revenue in its appeal against the Tribunal’s order, contended that delivery notes cannot be considered as valid legal document for availment of the credit.

Held:

It was held that the benefit cannot be denied on the grounds of non-compliance with procedures when sufficient evidence about the duty payment on inputs was available on records.

levitra

2013 (31) STR 279 (P&H) Commissioner of Central Excise, Ludhiana vs. City Cables

fiogf49gjkf0d
Benefit of reduced penalty – non-paymeny of penalty along with service tax and interest – 2nd proviso to section 78 applicable – directed to pay only 25% of the penalty.

Facts:
The respondent was a cable operator unregistered with the service tax department. After a search was conducted, the respondent deposited the entire amount of service tax with interest thereon before the issue of show cause notice. The adjudicating authority demanded tax along with interest and penalties and the Commissioner (Appeals) set aside penalties. On appeal, the Hon. Tribunal directed the respondent to pay penalty of 25% of the service tax demanded, relying upon J.R. Fabrics 2009 (238) ELT 209 and Bajaj Travels 2011 (21) STR 497 (P&H). The revenue appealed against the said order of the Hon. Tribunal contending that the benefit of reduced penalty of 25% can be availed only if the respondent had deposited the said amount within 30 days of the order.

Held:
Relying upon the decisions of the Delhi High Court in K.P. Pouches 2008 (228) ELT 31 and J. R. Fabrics (supra), the Hon. High Court allowed the appeal and held that the respondent was required to be informed to avail the benefit of reduced penalty. Such option only could have satisfied the purpose of insertion of such benefit in the Act. Since the amount of tax was already deposited before the issue of SCN, the direction of the Hon. Tribunal was fair, reasonable and met the ends of justice.

levitra

Penalty u/s.29(8) of MVAT Act vis-à-vis High Court judgment

fiogf49gjkf0d

VAT

S. 29(8) about levy of
penalty was amended from 1-7-2009. The amended S. 29(8), from 1-7-2009, reads as
under :

“29. Imposition of penalty
in certain instances :


(8) Where, any person or
dealer has failed to file within the prescribed time, a return for any
period as provided in S. 20, the Commissioner shall impose on him, a sum of
rupees five thousand by way of penalty. Such penalty shall be without
prejudice to any other penalty which may be imposed under this Act.”


It appears that from
1-7-2009 the quantum of penalty is sought to be fixed and also to make it
mandatory. Simultaneously, by amendment in S. 85(2) (b-2) the above penalty
order is made non-appealable. The learned Commissioner of Sales Tax has issued
Circular No. 22T of 2009, dated 6-8-2009 in which the implications of the above
amendments are explained and amongst others it is mentioned as under :


“3.
Penalty for non-filing or late filing of
returns — S. 29(8) is substituted :


(e) Amended sub-section
provides mandatory penalty and is in addition to any other penalty provided
under the Act.

(f) The officer shall
not have any discretion whether to levy or not to levy the penalty as also
to decide the quantum of penalty.

(g) The penalty order
passed under this Section is made non-appeallable; therefore there shall be
no appeal against the levy of penalty. [S. 85(2) amended]

(h) Needless to state
that since the levy of penalty for non-filing or late filing of returns has
become mandatory; there is no need to issue the show-cause notice before the
levy of such a penalty.”


The above mandatory levy of
penalty, in all circumstances, without right of appeal and without hearing
opportunity was agitating the minds of traders/dealers. On the behest of Tax
Consultants Association, Sangli and Federation of Association of Maharashtra,
writ petitions in case of Sanjay Dresses and Ravindra Udyog were filed before
Hon. Bombay High Court. In both the writ petitions the following challenges were
made :


(1) The S. 29(8) is
ultra vires the Constitution. It does not allow discretion in the matter of
levy of penalty. There can be a number of instances where delay will be due
to circumstances beyond control of the dealer, like medical emergency,
computer failure and others. The penalty amount of Rs.5000 may also exceed
the tax amount payable in return, e.g. tax payable may be Rs.100 but penalty
would be Rs.5000. The penalty is not commensurate to the object to be
achieved. This will be confiscatory as well as amounting to levy of tax on
income rather the penalty.

(2) That the order is
not appealable was also challenged. The penalty, being discretionary, the
mechanism of appeal is necessary.

(3) The penalty cannot
be levied without hearing. It is against the principles of natural justice.
Even assuming that the penalty is mandatory, still it may be levied in case
where return is not due, or the return is filed but not noticed by the
Department, etc., if levied without hearing. Therefore the hearing is a
must.

(4) The penalty be
deleted/reduced on the facts of the case.


When the above writ
petitions came up for hearing, the High Court was of the opinion that since
penalty order is passed without hearing, it is bad in law. At this juncture the
learned advocate on behalf of the Department tried to argue that post-levy
remedy is available like rectification. However when the High Court pointed out
that the hearing is required before the penalty order is passed, the learned
advocate conceded that the hearing is necessary before levy of penalty u/s.29(8)
and requested to set aside the order and remand back the matter. It is at this
point the High Court passed the order (Sanjay Dresses W.P. 1705 of 2009, dated
6-8-2010 and Ravindra Udyog W.P. 1214 of 2010, dated 6-8-2010, one of which is
reproduced below). When pointed out to the High Court that there are other
challenges, the High Court has specifically stated in the order that even after
passing a speaking penalty order, if there is a grievance, the petitioner can
again file a writ petition. Thus the other challenges are kept open to be dealt
with in subsequent matter, which may take place later.

“In the High Court of
Judicature at Bombay

Civil Appellate Jurisdiction
— Writ Petition No. 1705 of 2010

M/s. Sanjay Dresses …
Petitioner

v.

The State of Maharashtra …
Respondent

C. B. Thakar for the
petitioner.

V. A. Sonpal, ‘A’ Panel
counsel for the respondent.

Coram : V. C. Daga and S. J.
Kathawalla, JJ.

Dated : 6th August 2010.

P.C. :

Perused petition.

Heard learned counsel for
the petitioner and Mr. Sonpal, learned counsel for the respondent.

    2. Mr. Sonpal, during the course of hearing, urged that the impugned order levying penalty be set aside and the matter be remitted back for consideration afresh so as to enable the Department to comply with the requirement of principles of natural justice. He further submits that fresh notice will be issued to the petitioner indicating the grounds on which the Department proposes to levy penalty. That the petitioner would be given an opportunity to reply the same and after considering the reply and affording personal hearing to the petitioner a reasoned order would be passed dealing with all the contentions raised by the petitioner.

    3. In the above view of the submission, learned counsel for the petitioner seeks permission to withdraw this petition reserving his right to challenge adverse order on the grounds as may be available in law including the grounds raised in this petition. All contentions of the parties on merits are kept open.

    4. Petition stands disposed of as withdrawn in terms of this order with no order as to cots.
(S. J. Kathawalla, J.)    (V. C. Daga, J.)”

Conclusion :

    1) The other challenges like Constitutional validity, and non-appealability are still open issues before the High Court.

    2)Since the Department itself has accepted that hearing is necessary before levy of penalty, the said principle will be required to be followed in case of other dealers also. The Department cannot take a stand that hearing is required to be given only to those who come before the High Court and not to others, though principle of giving hearing before levy of penalty u/s.29(8) is accepted. It will be an absurd contradiction and also discriminatory. If any other dealer approaches the High Court on the same ground, surely it will be difficult for the Department to save the situation in view of their own admission about giving hearing.

Follow-up action in case of penalty orders already passed:

Since 1st July 2009, a large number of penalty orders have already been passed without giving hearing. Such dealers can now file Form 307 (Rectification) and ask for cancellation of such orders, as bad in law. The Department will be required to cancel the same, give hearing and then pass reasoned orders, if required.

It may be noted that, in several cases, in the matters of levying penalty, the courts and tribunals have ruled that penalty cannot be levied if there is a genuine reason for the delay.

Inter-State works contract vis-à-vis application of composition scheme provided under local act :

fiogf49gjkf0d
VAT

Inter-State works contract vis-à-vis application of
composition scheme provided under local act :


After 11-5-2002 inter-State works contracts are also liable
to tax under the CST Act. A question arises about deciding the value of goods
for levy of tax. Since works contract is a composite contract, involving supply
of goods as well as rendering of services, it becomes necessary to determine the
value of goods from the composite value for levy of tax under the CST Act.
Normally the said value is to be decided as per the guidelines given by the
Supreme Court in case of M/s. Gannon Dunkerly and Co. (88 STC 204) (SC). For
ready reference the relevant portion of the judgment is reproduced below :

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

(a) labour charges for execution of the works;

(b) amount paid to a sub-contractor for labour and
services;

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

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

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

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

(g) other similar expenses relatable to supply of labour
and services;

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

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

However to decide the value of goods, as per above
guidelines, is sometimes very difficult depending upon complexity of the
contract. Under Local Sales Tax Laws, a standard deduction method (i.e.,
abatement at fixed percentage) is provided for giving deduction for labour
portion and the balance is considered as value of the goods. Under the CST Act,
enabling provision for prescribing standard deduction rates is made by way of
proviso to S. 2(h) (definition of ‘sale price’) of the CST Act. However, till
today no such standard deduction rates are prescribed. Therefore, a question
arises as to whether a dealer can opt for such deduction rates provided under
the Local Act, for deciding the value of goods under the CST Act. Though the
issue was debatable, but, after the judgment of the Supreme Court in the case of
Mahim Patram (6 VST 248)(SC) it has became fairly clear. In light of the
observations made by the Supreme Court, it is felt that determination of value
of goods in a works contract is a part of assessment procedure and since by S.
9(2) of the CST Act the provisions of the Local Act for assessment are made
applicable to the CST Act also, the provisions about standard deduction can also
apply for determination of taxable value of works contracts under the CST Act,
1956. However after taking deduction of labour charges on standard deduction
basis, the further issue is about dividing the turnover in relation to
particular slab rates, like liable to 4%/12.5%, etc.

The determination of tax rate for a particular turnover under
the CST Act is provided u/s.8 of the CST Act, 1956. There is no other provision
under the CST Act for deciding the rate of tax. Therefore, though one can
determine the value of the goods, the division of the same in different slab
rates is again a complex issue. Under the Local Act, to avoid the difficulties
of reducing contract value by labour charges as well as deciding taxable value
into different slab rates, etc., the composition schemes are provided. Under
such composition schemes the dealer can pay the tax on total contract value
(lump sum) at prescribed percentage. Thus, such composition schemes make
taxation of works contracts easier and simpler. For example, under the MVAT Act,
2002, two composition schemes for works contracts are provided. Under one of the
schemes, on notified construction contract, a dealer can pay at the rate of 5%
of the total contract value, whereas under the other general scheme, a dealer
can pay at the rate of 8% of the total contract value. Such schemes are normally
optional and they are in lieu of tax payable as per normal rates under the Local
Act. As under such schemes there is no determination of rate of tax as per S. 8
of the CST Act, it was felt that such optional composition schemes cannot apply
to inter-State works contracts. S. 8 provides for deciding rate of taxes as per
legal provisions and there is also no alternative composition scheme under the
CST Act for paying tax on lump sum contract value.

However, it appears that the said issue is also now resolved
by the Central Sales Tax Appellate Authority (CSTAA). This authority, which is
set up to determine inter-State tax disputes under the CST Act, when two or more
states are involved, is constituted under the provisions of the CST Act, 1956.
The said authority has recently decided the above issue in the case of
Commissioner of VAT v. State of Haryana, (23 VST 10). In this case the issue
was about the nature of contract as well as determining assessable value of the
contract. The facts were that the contractor had received a contract from the
Government of New Delhi for improvement of roads, etc. For completing the said
work the contractor transported bituminous mixture (known as dense asphalt
concrete) from Haryana to New Delhi. The New Delhi authorities wanted to tax the
transaction as local sale. The Haryana Government protested the same on the
ground that it is inter-State sale from Haryana liable to tax in Haryana under
the CST Act, 1956. CSTAA agreed to this proposition of the Haryana Government.

The next issue under the said judgment was about discharging
of the CST liability on the said contract in Haryana. In Haryana, there was
composition scheme and a contractor could opt for the same. The CSTAA observed
as under :


“Just as in the Ll.P, Trade Tax Act, in the Haryana Value Added Tax Act, 2003 too, there are provisions dealing with the manner of determination of sale price of goods involved in a works contract. The relevant provisions are the following:

The definition of ‘sale’ includes consideration for the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract [vide (ze) of clause (ii)]. Clause (zg) defines ‘sale price’. Explanation thereto which is relevant for our purpose reads thus:
 
“Explanation (i): In relation to the transfer of property in goods (whether as goods or in some other form) involved in execution of a works contract, sale price shall mean such amount as is arrived at by deducting from the amount of valuable consideration paid or payable toa person for the execution of such works contract, the amount representing labour and other service charges incurred for such execution, and where such labour and other service charges are not quantifiable, the sale price shall be the cost of acquisition of the goods and the margin of profit on them prevalent in the trade plus the cost of transferring the property in the goods and all other expenses in relation thereof till the property in them, whether as such or in any other form, passes to the contractee and where the property passes in a different form shall include the cost of conversion.”

Thus the manner of ascertainment of sale price has been specified in Explanation (i). Then, Rule 49 of the Haryana Value Added Tax Rules, 2003 provides for a lump sum scheme of tax payment in respect of works contract. The framing of such rule is in accordance with S. 9 of the HVAT Act. It reads thus:

“A contractor liable to pay tax under the Act may, in respect of a works contract awarded to him for execution in the State, pay in lieu of tax payable by him under the Act on the transfer of property (whether as goods or in some other form) involved in the execution of the contract, a lump sum calculated at four percent of the total making an application to the appropriate assessing authority within thirty days of the award of the contract to him, containing the following particulars ….

and appending therewith a copy of the contract or such part thereof as relates to total cost and payments.”

Thus, the procedure for arriving at the sale price in relation to works contract has been put in place in the HVAT Act which was enacted in 2003 by repealing the Haryana General Sales Tax Act, 1973. It is, therefore clear that the ratio of the decision of the Supreme Court in Mahim Patram case (2007) 6 VST 248 applies with equal force to the present case.”

In light of above observations it appears that the CSTAA has considered both, deduction method as well as composition scheme, as applicable to the CST Act, 1956. Therefore, a dealer can now safely opt for composition scheme under the CST Act also for discharging tax liability on inter-State works contracts. This may be useful to dealers in discharging liability on inter-State works contract by opting for a simple method.

Liability of Builders — “K. Raheja” explained

fiogf49gjkf0d
VAT

A controversy is floating around as to whether Builders or
Developers are liable to sales tax (VAT) on sale of premises such as flats,
offices, etc.


It is well understood that sales tax (VAT) may be levied on
sale of goods and not on sale of immovable properties, and the transactions of
sale of flats, offices, etc. are in the nature of sale of immovable properties,
hence the same are outside the purview of sales tax laws. However, there may be
a situation where the builder or developer may commence construction activity
for building, etc. and while the construction is on, the builder may enter into
an agreement with the prospective buyer for sale of premises. These are normally
referred to as ‘Under-Construction Contracts’. The controversy is about the
above transactions. The Revenue Department is of the opinion that the work
carried on by the builder/developer, after entering into such Under-Construction
Contract, is liable to sales tax as works contract. The argument is that since
there is an agreement for sale of premises and the work, using the property of
the builder, is done after such agreement, the property used in such work can be
said to have been transferred in the execution of works contract and hence the
liability will accrue. In fact this was the issue taken up by the Sales Tax
Department in Karnataka in case of K. Raheja. The matter went to the Supreme
Court.

The Supreme Court delivered its judgment in 2005 in the case
of K. Rehaja Construction, which is reported in 141 STC 298. Based on this
judgment, the Department is taking a view that all under-construction agreements
are liable to sales tax as works contracts. A similar view is also tried to be
adopted by the Sales Tax Department of Maharashtra as is evident from Circular
issued by the Commissioner of Sales Tax bearing No. 12T of 2007, dated 7-2-2007.
In the ‘Sales Tax Corner’ of BCAJ (March, 2007), we have analysed the position
and observed that in spite of the judgment in the case of K. Raheja, all the
under-construction agreements cannot be liable to sales tax. The distinguishing
features in K. Raheja were also highlighted. In the case of K. Raheja, there
were in fact two separate agreements, one for sale of land and other for
construction, though embodied in one agreement. It is under these circumstances,
the Supreme Court observed that there is a separate sale of land and a separate
contract for construction. Therefore it was held by the Court that it is a works
contract liable to sales tax. In light of the above observations of the Supreme
Court it was pointed out that if in the under-construction contract the price of
land is not mentioned separately, then the judgment in the case of K. Raheja
cannot apply.

Recently the Gauhati High Court had an occasion to deal with
similar controversy in the case of Magus Construction Pvt. Ltd. and Others v.
Union of India, (15 VST 17). The issue was in relation to service tax on
builders. While deciding the issue, the High Court has dealt with the effect of
the judgment of K. Raheja. A gist of the judgment is as under :

The petitioner was involved in development and sale of
immovable properties like, flats, etc. They entered into ‘flat purchase
agreements’ with various purchasers, wherein the petitioner-company allotted and
sold flats to the purchasers. The petitioner-company entered into an agreement
for sale of flat, which was registered. The Service Tax Department issued notice
on the ground that the petitioner- company is providing ‘Commercial or
Industrial Construction Service/Construction of Complex Service’. The
petitioner-company filed writ petition before the High Court and contended that
the transaction between the petitioner and the flat purchaser was purely a
transaction of sale of flat (i.e., sale of immovable property) and not a
contract for rendering of service of any nature whatsoever.

The High Court observed that in the case of
petitioner-company, the petitioner was not shown to have undertaken any
construction work for and on behalf of proposed customer and the title in the
flat passed to the customer only on execution of sale deed and registration
thereof. Until the time the sale deed was executed, the title and interest
including the ownership and possession in the construction made remained with
the petitioner. The construction activities which the petitioner had been
undertaking were in respect of the petitioner’s own work and it was only the
constructed work which was sold by the petitioner-company to the buyer, who
might have entered into agreement for sale before construction had actually
started or during the progress of construction activity. Any advance made by a
prospective buyer was against the consideration for sale of flat to the
prospective buyer and not for the purpose of obtaining services from the
petitioner. Under the above circumstances, the Gauhati High Court held that the
transaction cannot be liable to service tax.

The same principle will apply even for deciding the liability
under sales tax laws. As there is no element of rendering services while
selling the flat, similarly there cannot be sale of material, as ultimately in
such an agreement the flat, an immovable property is sold.


Amongst others, in relation to the judgment of K. Raheja, the
High Court observed as under :


34. Referring to K. Raheja Development Corporation v. State of Karnataka Assistant, (2005) 141 STC 298 (SC); (2005) 5 RC 105; (2005) 5 SCC 162, learned Assistant Solicitor-General has submitted that when the construction activities are carried on by a person by creating its own agency, it would amount to construction services. There can be no doubt that when a person creates an entity and engages such entity for its own constructional activities for the purpose of construction of residential complex, not for itself but for others, it would amount to construction service. What may, however, be pointed out is that the decision of the Apex Court in K. Raheja Development (2005) 141 STC 298 (SC); (2005) 5 SCC 162, which the respondents rely upon, is not applicable to the case at hand, inasmuch as this decision was rendered on the facts of its own case. In the present case, the petitioner-company is not shown to have under-taken any construction work for and on behalf of proposed customer / allottees and the title, in the flat/ apartments so constructed, passes to the customer only on execution of sale deeds and registration thereof. Until the time the sale deed is executed, the title and interest, including the ownership and possession in the constructions made, remain with the petitioner-company. The payments made by prospective purchasers in instalments, are aimed at facilitating purchase of the flat/premises by these probable purchasers, so that they may not be required to pay whole consideration at a time. From the condition so incorporated in the relevant agreement for sale, it cannot be inferred that the petitioner company is making construction for and on behalf of the probable allottees or purchasers.

35. Further, in K. Raheja Development Corporation (2005) 141 STC 298 (SC); (2005) 5 RC 105; (2005) 5 SCC 162, the Apex Court was considering the issue relating to ‘sales tax’ and the issue therein was not at all related to ‘service tax’. While interpreting the provisions of ‘sales tax’ under the Karnataka Sales Tax Act, 1957, the Apex Court held in K. Raheja Development Corporation (2005) 141 STC 298 (SC); (2005) 5 RC 105; (2005) -I 5 SCC 162, that the definition of ‘works contract’ given under the Finance Act, 1994 is very wide and is not restricted to the ‘works contract’ as commonly understood, i.e., a contract to do some work on behalf of someone else. The Apex Court, therefore, held as under (at page 302 of STC) :

“…..The definition would  therefore  take within its ambit any type of agreement wherein construction of a building takes place either for cash or deferred payment, or valuable consideration. To be also noted that the definition does not lay down that the construction must be on behalf of an owner of the property or that the construction cannot be by the owner of the property. Thus even if an owner of property enters into an agreement to construct for cash, deferred payment or valuable consideration a building or flats on behalf of anybody else it would be a works contract within the meaning of the term as used under the Finance Act, 1994./1

36. In K. Raheja Development  Corporation  (2005) STC 298 (SC); 2005 5 RC 105; (2005) 5 SCC 162, the agreement provided that K. Raheja Development Corporation, as developers, on its own behalf, and also as developer for those persons, who would eventually purchase the flats, do the construction works. Thus, K. Raheja Development Corporation was not only undertaking construction work on its own behalf, but also on behalf of others who were prospective buyers. It is, in such circumstances, that K. Raheja Development Corporation was treated to have been doing the ‘works contract’. In the present case there is no material to show that the petitioner-company constructs the flat/ apartments on behalf of the prospective allottees and, hence, it cannot be said that the constructions done by the petitioner-company are the constructions undertaken by the petitioner-company for and on behalf of their prospective buyers/allottees. Thus, there is no ‘service’ rendered by the petitioner-company to the prospective allottees. Similar view has been taken by the Allahabad High Court in Assotech Realty Private Limited v. State of Uttar Pradesh, (2007) 8 VST 738, wherein the Court has held as under (atpage  759):

“……In the present case, we find that  the petitioner is constructing the flats/ apartments not for and on behalf of the prospective allottees but otherwise. The payment schedule would not alter the transaction. The right, title and interest in the construction continue to remain with the petitioner. It cannot be said that the constructions were undertaken for and on behalf of the prospective allottees and, therefore, the constructions in question undertaken by the petitioner would not fall under clause (m) of S. 2 read with S. 3F of the Act and are outside the purview of the provisions of the Act. In other words, they cannot be subjected to tax under the Act and the action, in imposing tax on such constructions treating them to be works contract, is wholly without jurisdiction ….

If the above observations are read along with the detailed facts narrated in the Supreme Court judgment, it transpires that if the land price is shown separately, then a presumption can be made that there is sale of land and construction thereon is a separate transaction. This will amount to carryon work on behalf of others i.e., on behalf of prospective buyers. Therefore, where there is no such separation, the ratio of the above judgment will apply and there cannot be any liability under sales tax as works contract. Though one can wait for a direct judgment on the issue, the above judgment will be useful for understanding the effect of K. Raheja Construction and for advancing the contention that builders/ developers cannot be liable to sales tax in relation to each and every under-construction agreement. The liability will depend upon the facts of each case based upon terms of agreement, etc.

2013 (30) STR 679 (Tri-Mumbai) Syntel International Pvt. Ltd. vs. C.C.Ex. Pune.

fiogf49gjkf0d
Refund of – Service tax paid on marketing services of foreign service provider u/s 66A as Business Auxiliary Services – Whether ‘input service’ – Held ‘yes’.

Facts:
The Appellant provided Customised Software Development services, renting of immovable property services etc. They engaged a company registered in USA to market/sell software services developed by them. For this service, they paid consideration to the foreign service provider and discharged service tax liability on reverse charge u/s. 66A. As these services were used in providing exported software development services, the Appellant being unable to utilise the full CENVAT credit on these input services, filed a refund claim which was rejected. The Appellant contended that for the subsequent period, the department allowed CENVAT credit of service tax paid on marketing services under the category of business auxiliary service and there was no issue in this regard.

Held:
The Hon. Tribunal, after placing reliance on the copy of the agreement with the foreign service provider and on the copy of the order passed by the department allowing the refund claim for the subsequent period, held that, the service so received by the Appellant qualifies as “Business Auxiliary Service” and further held that this was also considered as input service under Rule 2(l) of the CENVAT Credit Rules, 2004 and therefore the credit of service tax paid was admissible and eligible for refund as the appellant was unable to utilise the same.

levitra

2013 (30) STR 458 (Tri-Del)-Air India Ltd. vs. Commissioner of Service Tax, New Delhi.

fiogf49gjkf0d
Import of Service – Sec. 66A – Services of repair and overhaul of aircraft performed wholly abroad – Held not taxable – commission paid to GSA’s abroad in relation to business in India– Held taxable.

Whether service tax applicable u/s. 66A on services of repair and overhaul of aircrafts and in respect of commission paid to GSA’s abroad?

Facts:
The Appellant, a wholly Government of India Company, engaged in the business of transportation of passengers and goods by air appointed “General Sales Agents” (GSA) who represented them and handled their affairs in other countries for which they received commission. Appellant also received services of repair and overhaul of aircrafts abroad.

The revenue demanded service tax of Rs. 65.48 Crores on the said activities along with interest and penalty. According to the Appellant, the repair services were performed abroad and therefore not taxable u/s. 66A of the Finance Act, 1994. In respect of services received from GSA’s, the Appellant submitted that since the services were received by the Appellant’s branches, the same is not taxable in India and referred to Rajesh Exports Ltd. reported in 2013 (29) STR 147 (Tribunal).

Held:
There being no evidence to the contrary, the Hon. Tribunal held that the services of repair and maintenance were performed wholly abroad and hence the demand was unsustainable in terms of the provisions of Rule 3(1) of the Taxation of Service (Provided from outside India and received in India) Rules, 2006. After perusing the relevant clauses of the agreement with the GSAs as regards commission paid to them, the Tribunal held that the said service was used by the Appellant in India in relation to their business located in India and therefore would be liable to pay service tax on the same.

levitra

2013-TIOL-518-HC-MAD-CX Comm. Of C. Ex., Salem vs. Crocodile India Pvt. Ltd.

fiogf49gjkf0d
Inadmissible CENVAT credit – Reversal before utilisation thereof and before issue of SCN- No Penalty.
Facts:

The respondent a manufacturer of readymade garments claimed inadmissible credit of Rs. 15,07,414/- and subsequently reversed the same, evidently before the issue of SCN. The department confirmed interest and penalty although the assessee did not utilise credit and reversed immediately on receipt of intimation about the error. In absence of any other intention of wrongful gain, the Tribunal set aside the levy of penalty. The revenue challenges it in this appeal.

Held:
Undoubtedly, the respondents claimed inadmissible CENVAT and reversed the same before the issue of Show Cause Notice. Further, the Show Cause Notice being bereft of detailing grounds for imposing penalty under Rule 13(1) of the CENVAT Credit Rules, 2004 and following the decision of UOI vs. Rajasthan Spinning & Weaving Mills 2008 (231) ELT 3 (SC) wherein it was pointed out that application of section 11AC would depend on existence or of conditions expressly stated in the said section, the appeal was dismissed.

levitra

Branch Transfer of Parts, Components vis-à-vis Inter-State Sale

fiogf49gjkf0d
The issue whether transfer of goods from head office to a branch office is a branch transfer or inter- State sale is always highly debatable. As per section 6A(1) of the CST Act, 1956, when the transfer is not pursuant to a pre-existing contract of sale, it will amount to a branch transfer. However, whether the movement from head office to a branch or from one branch to another branch in another State is due to the pre-existing sale contract or not is a contentious issue and has to be decided on facts of the case. There are number of judgments, which throw light on the above subject.

Branch transfer of goods can be of two types, (a) finished goods and (b) intermediatory goods. In case of finished goods, there can be factual position that the goods have been moved because of a pre-existing sale order and hence it may amount to inter-State sale. However, in respect of intermediatory goods like parts and components, the situation may be different. Some aspects about transfer of components and parts can be examined as under:

Reference can be made to judgment of the Andhra Pradesh High Court in the case of Bharat Electronics Ltd. v. Deputy Commissioner (CT), No. II Division, Vijayawada & Another, (46 VST 179) (AP). The facts in this case are that the unit of the above appellant dealer at Machilipatnam in Andhra Pradesh dispatched certain materials to its branch in another State. The goods dispatched were manufactured goods at Machilipatnam, like night-vision devices, etc. The said goods were to be incorporated in the equipment manufactured at the branch in another State (where the goods were dispatched) and the finished goods were supplied by that branch to the customer. On the sale of finished goods, tax was discharged in the said State of sale. However, the Andhra Pradesh authorities disallowed branch transfer claim on the ground that such transfer was connected with pre-existing sale order and hence it G. G. Goyal Chartered Accountant C. B. Thakar Advocate VAT was inter-State sale. The issue was contested before the Andhra Pradesh High Court.

The High Court examined the nature of inter-State sale and its requirements. The High Court referred to observations in the case of K.C.P. Ltd. (Ramakrishna Cements) 1993 (88 STC 374) (AP) and reproduced following portion:

“that the company may have several units or divisions located at different places engaged either in the same line of manufacture or trading or in different manufacturing or trading activities. Normally, the units or divisions will have no separate identity of their own, much less a distinct legal entity. There may be separate establishments, separate planning and separate management, but these aspects by themselves do not detract from the basic characteristic of communion with the corporate body that had created these units or divisions. They can claim no independent existence apart from the company itself. The property of these units or divisions is legally held by the company. The profits generated by the units formed part of the company’s income and would go to the benefit of the general body of shareholders of the company. So also, the liabilities or losses incurred by the individual units, in the ultimate analysis, would have to be borne by the company. It was the company that could sue for the recovery of property or dues or be used for the outstandings due on account of dealing of the units. A single balance sheet was prepared by the company in respect of all the units and divisions owned and controlled by the company . . . .”

The Andhra Pradesh High Court also referred to law laid down by the Supreme Court in the case of Bharat Heavy Electricals Ltd. (102 STC 345) (SC) and reproduced the following observations:

“The Tribunal missed to note that the plant and equipment which is the subject-matter of contract such as boiler package or turbo-generator package is incapable of being manufactured and despatched as a finished unit. Necessarily, the equipment/components or assembled units have to be despatched to the customer’s site and installed there. The contract does not contemplate the dispatch of a readymade finished product to the customer’s place for instantaneous use in the power-plants, etc. On the other hand, it is clear from the terms of the contract, especially the price payment clause, that the components and parts forming part of the larger package should be supplied from time to time by BHEL. It is not at all possible to transfer the finished product such as ‘boiler package’ at a time. It may be noticed that the Tribunal itself has given a different reasoning for excluding the inter-unit transfers from the taxable net at paragraph 29, sub para 3. The Tribunal rightly puts it on the ground that the article transferred from the petitioner unit to the executing unit (Trichy, etc.) loses its identity as it is incorporated into a larger component or equipment. There is yet another closely allied reasoning to say that the goods sent to Trichy or other executing unit does not stand on the same footing as those sent direct to the customer’s site. In the case of the former, there is interruption of movement and the snapping of inextricable bond that should exist between the inter-State movement and the contract of sale. In regard to the goods sent to Trichy unit (or other executing units), the dispatch therefrom to inter-State customer takes place after assembling or processing and it is the sole concern of that unit. Trichy unit can even retain the goods for itself and divert them for any other use. There is nothing to indicate that the goods sent by Hyderabad unit to Trichy or other units are earmarked for any particular contract. The Hyderabad unit had no inkling of their ultimate utilisation and whether, how and when the goods will be moved to the customer’s place by Trichy unit. As far as Hyderabad unit is concerned, it is a case of pure and simple stock transfer to another unit under ‘F’ forms. At best, the inter-State movement, or to put it in other words, the inter-unit movement to Trichy can only be said to be for the purpose of fulfilling the contract, but not in the course of fulfilment of the contract of sale, a distinction recognised in the Tata Engineering & Locomotive Co.’s case (1971) 27 STC 127 (SC); AIR 1971 SC 477; (1971) 2 SCR 849. The movement to Trichy in our opinion is not a necessary consequence of the contract, nor is it incidental to the contract that goods of this nature should first be moved to Trichy. As already observed, there is no inextricable and uninterrupted bond between the contract and the movement of goods to Trichy or other sister units of the petitioner.”

After noting the above legal position, the High Court observed as under about the facts of the particular case before it:

“It is only if the goods, which move from one State to another, are sold as they are and are not incorporated in, or do not form part of, other goods would the question of such transfer of goods attracting levy of tax under the CST Act, as an inter-State sale, arise. It is not in dispute that the goods supplied by the Machilipatnam unit, to other units of BEL located outside the State, are merely components of, and are incorporated in, the goods manufactured by other units of the petitioner company locate outside the State of A.P., and the goods transferred by the Machilipatnam unit are not sold to the Armed Forces as they are. The transfer of goods by the Machilipatnam unit, to other units of the petitioner-company located outside the State, fall within the ambit of section 6A(1) of the CST Act, and are not inter-State sales exigible to tax u/s.6 of the Act. The order of the first respondent, holding that the transfer of such components by the Machilipatnam unit to other units of the petitioner-company situated outside the State constitutes inter-State sales under the CST Act, must therefore be quashed.”

Thus, the legal position emerges is that if the goods transferred are supplied as it is to the customer and link between transfer and such sale is established, then it may amount to inter -State sale from the moving State. However, if the transfer is of components and parts, then even if they are in relation to pre-existing order of finished goods in which such parts and components are to be incorporated, there is no possibility of inter-State sale of such parts and components from the moving State. This also clarifies the position that the movement should be linked with the ultimate goods to be supplied to the customer and not with the intermediatory goods which may be incorporated in the ultimate goods to be supplied. This judgment will certainly be a guiding judgment on the above-referred issue.

Service tax paid under reverse charge mechanism under the category of “Business Auxiliary Services” whether is a valid input service as defined in Rule 2(l) of the CCR, 2004.

fiogf49gjkf0d

Facts

The Appellant engaged in providing renting of immoveable property and export of customised software appointed Syntel Inc., USA as its agent for identifying customers overseas. Appellant paid commission to Syntel Inc., USA and discharged service tax liability under the category of “Business Auxiliary Services”. Since the Appellant was unable to utilise the total credit, filed refund claim of unutilised CENVAT credit under Rule 5 of CCR, 2004. The Appellant’s claim was rejected on the grounds that no proof was submitted proving the nexus of business auxiliary services to the output services.

Held

On perusal of the Business Associates Agreement between Syntel International Pvt. Ltd. and Syntel Inc., USA, the services were held in the nature of sales promotion and thus covered under “business auxiliary services”, a valid input service and eligible of refund. Further, the department had allowed subsequent refund claim and hence, the above refund was also allowed.

levitra

2013-TIOL-1541-CESTAT-MUM Commissioner of C. Ex., Pune vs. Aztecsoft Ltd.

fiogf49gjkf0d
Testing and analysis of IT Software – specific amendment in the definition of “Technical Testing and Analysis” to bring within its fold testing and analysis of IT software with effect from 16-05- 2008. Activity not taxable prior to the said date under any category.

Facts:
The Department appealed against the order of the Hon. Commissioner dropping the demands of the assessee for the period prior to 16-05-2008 for providing services of testing and analysis of computer software. Since the definition of “Technical Testing and Analysis” service was specifically amended on 16-05-2008 to include the said activity, it was taxable only with effect from 16-05-2008 according to the assessee. The decision of Stag Software Pvt. Ltd. in 2008 (10) STR 329 (Tri-Bang) and Relq Software Pvt. Ltd. in 2011 (23) STR 449 (Kar) were relied upon.

Held:
Referring to the definition of “Technical Testing and Analysis” prior to 16-05-2008 and as amended with effect from 16-05-2008, the budget instructions letter 334/1/2008 – TRU dated 29-02-2008 was referred to and relying on the decision of Relq Software (supra) held that testing and analysis of IT software would be effective only from 16-05-2008 when the said activity was specifically included under technical testing and analysis service as IT software services were introduced on the said date. Similar amendments were made in the taxable services of Business Auxiliary Services, technical inspection & certification, management repair of properties and consulting engineer’s services to include IT software services.
levitra

2013-TIOL-1504-CESTAT-DEL M/s. Ujjawal Parivahan Sahakari Samiti Ltd. vs. Commissioner of Central Excise, Jaipur-II

fiogf49gjkf0d
Loading/unloading & transportation of limestone with processing cannot be classified as cargo handling services.

Facts:
The appellant entered into an agreement to provide services as a contractor for hiring of machines, equipments, crushing & screening plant and other services for production of low silicon limestone gitties. The Department issued a show cause notice and contended to levy tax on the said activities under the category of “Cargo Handling Services” for the period up to 09-09-2004 and under the category of “Business Auxiliary Services” for the period from 2004-08. The appellant contended that the activity of transportation/loading and unloading was only incidental to the actual activity of processing of goods carried out by them on behalf of their principals which became taxable only with effect from 16-06-2005 under Business Auxiliary Services.

Held:
Referring to the definitions of “Cargo Handling Services” and “Business Auxiliary Services” and discussing the rules for clarification laid down in section 65A, it was concluded that the essential characteristic of the composite service was not Cargo Handling Service. Allowing the appeal, it was held that the activity of transportation/loading and unloading was only incidental to the actual activity of processing of goods which formed the essential character and that such activity became taxable only after the amendment in the definition of “Business Auxiliary Services” with effect from 16-06-2005, the liability of which the appellant discharged under Business Auxiliary Service, thus no penalty was also found leviable.

levitra

2013 (32) STR 86 (Tri.-Mum) Global Transgene Ltd. vs. Commr. of C. Ex., Cus. & S.T., Aurangabad

fiogf49gjkf0d
Package containing only a mark showing the technology used which is not a logo or trademark or hallmark of the assessee, cannot be considered to be granting representational rights. Therefore, the same is not covered under franchise services.

Facts:
The appellant obtained licenses, for self-use and to transfer the technology to sub-licensees, from a Chinese company. Accordingly, the department contested that the activity of sub-licensing was covered under franchise services as franchise rights
were given to the sub-licensees. The appellants stated that the activity of sub-licensing was not covered under the definition of ‘franchise service’. The appellants also produced samples of products which did not contain any logo or hallmark or trademark of theirs. In fact, the package label  clearly indicated that the seeds were manufactured and marketed by sub-licensees in their own name. The agreement was for transfer of technology in the form of seeds for a consideration. Further, though they provided certain training, the same was common in case of imported technologies and it could not be construed as providing representational rights. Revenue argued that one of the sub-licensees stated that the appellants had granted right to use logo and 3D hallmark of the technology which are clearly identifiable with the appellants. Further, only after testing the seeds, the appellants supplied 3D hallmark.

Held:
The appellants were not granted any representation  rights to represent the Chinese company in India and the appellants neither were entitled to nor granted any representational rights to sublicensees. The mark denoted on the package was neither a logo nor a trademark or hallmark of the appellants but was only denoting that the seeds contained the technology. The case thus was decided in favour of the appellants.

levitra

2013 (32) STR 113 (Tri.-Ahmd.) Larsen & Toubro Ltd. vs. Commissioner of C. Ex., Vadodara – II

fiogf49gjkf0d
Transactions between SEZ unit and DTA unit of the same entity are not leviable to service tax.

Facts:
The appellant set up 2 units viz. in an SEZ and in DTA. The SEZ unit also provided certain in-house work to DTA units. The respondents demanded service tax on the said transactions between SEZ and DTA units considering them as separate legal entities on the grounds that both the units were separately registered with the service tax department, raised invoices and fell under the definition of ‘persons’ as per the SEZ Act. The appellants contested that in the present case there was absence of two parties for the provision of taxable service by one person to another and also that the SEZ Act had no relevance for interpretation of the service tax law. Further, invoices were issued to satisfy SEZ law and internal monitoring purposes only. Also, SEZ Units never received any amount from DTA units as the same were interunit entries in books of accounts which were not taxable transactions.

Held:
Confirming the contentions of the appellant, the Hon. Tribunal held that merely entering into agreements and raising invoices did not mean SEZs were separate legal entities. Further, the definition of ‘person’ as per the SEZ Act, which included AOP or BOI, whether incorporated or not was not applicable in the present case as the units were not shown as AOP or BOI. Further, the presence of two persons was a must to levy service tax. In the absence of any definition under service tax law, the persons were held not to be separate legal persons and the transaction between SEZ and DTA units was not liable to service tax.

levitra

2013 (32) STR 95 (Tri–Delhi) – Endurance Technologies Pvt. Ltd. vs. Commr. Of C. Ex., Aurangabad

fiogf49gjkf0d
Service tax paid on mandap keeper services to celebrate the annual day function is eligible for CENVAT credit.

Facts:
The appellant manufacturer of assessable goods availed mandap keeper’s services to celebrate the annual day function which was attended by the employees, their family members and employees of their sister units and claimed CENVAT credit thereon. They relied upon Toyota Kirloskar Motor Pvt. Ltd. 2011 (24) STR 645 (Kar) and Ultratech Cement Ltd. 2010 (20) STR 577 (Bom.) in support of their claim. The revenue rejected the claim relying on the decisions of Manikgarh Cement 2010 (20) STR 456 (Bom.) and Eicher Motors Ltd. 2010 (20) STR 281 (Tri.-Del.).

Held:
Considering the inapplicability due to facts being distinct than in the present case than in the cases of Manikgarh Cement (Supra) and Eicher Motors Ltd. (Supra), the Hon. Tribunal relying on Toyota Kirloskar Motor Pvt. Ltd. and Ultratech Cement Ltd., allowed the claim of the appellant wherein the facts were similar.

levitra

2013 (32) STR 209 (Tri.-Del) Kansara Modler Ltd. vs. CCEx, Jaipur-II

fiogf49gjkf0d
Whether the receiver of services is entitled to utilise the CENVAT credit for payment of service tax under the Import Rules? Held, Yes.

Facts:
Appellant received “supply of tangible goods service” from outside India for the provision of its output services in India and utilised CENVAT credit for discharging the service tax payable as the service recipient of the said services. The department issued a show cause notice disallowing the utilisation of such CENVAT credit payment of service tax and confirmed the demand.

Held:
Referring to Rule 2(q) of the CENVAT Credit Rules, 2004 read with Rule 2(1)(d)(iv) of Service Tax Rules,1994 it was held that the Appellant was a person liable to service tax and thus becomes a taxable service provider under Rule 2(r) of the CENVAT Credit Rules, 2004 and consequently becomes output service provider under Rule 2(p) of the said Rules. Thus the order of the Commissioner (Appeals) disallowing the payment under reverse charge mechanism vide CENVAT credit was set aside.

levitra

2013 (32) STR 31 (Bom.) Oil & Natural Gas Corpn. Ltd. vs. Commissioner of C. Ex., S. T. & Cus., Raigad

fiogf49gjkf0d
Input services used indirectly in or in relation to manufacture of final dutiable products even at a distant place, are eligible to avail CENVAT credit.

Facts:
The appellant was engaged in the manufacture of dutiable goods such as naphtha, ethane-propane, LPG and residual gases at its Uran plant and exempted goods such as crude oil and natural gases at its Mumbai offshore location. The crude oil was either directly sold from Mumbai Offshore or further used to manufacture goods at the Uranplant. The appellant being registered input service distributors, distributed CENVAT credit. Revenue contended that crude oil manufactured at Mumbai Offshore was sold to its buyers therefrom before the Uran plant came into existence. Therefore, crude oil, used at the Uran plant to manufacture dutiable products, cannot be termed as semifinished goods and thereby concluded that input services were entirely used for exempted products and no CENVAT credit was admissible.

Analysing the definition of input services, the appellant contested that the services used whether directly or indirectly in or in relation to the manufacture of a final product are eligible input services to claim CENVAT credit. Accordingly, the definition was wide enough to cover current instance and as per Rule 6(1) and Rule 6(2) of the CENVAT Credit Rules, 2004, the appellant was entitled to CENVAT credit on pro-rata basis of service tax paid on the input services used in the manufacture of final dutiable products only.

Held:
Since the definition of input services under Rule 2(l)(ii) of CENVAT Credit Rules, 2004, uses expressions “directly or indirectly” and “in or in relation to” in conjunction, the intention of the legislature was to widen the scope and purview of the entitlement. Merely because the appellant manufactured exempted goods, the revenue cannot disallow benefit of CENVAT credit on the input services used in or in relation to the manufacture of dutiable final product. The dutiable final products manufactured at the Uran plant were fundamentally premised upon the manufacturing process commenced at Mumbai Offshore i.e., manufacture of dutiable products was impossible unless the process starts at Mumbai Offshore and there is continuous supply of crude oil from Mumbai Offshore to the Uran plant. Therefore, relying on the Hon. Supreme Court’s decisions in case of Escorts Ltd. 2004 (171) ELT 145 (SC) and Solaris Chemtech Ltd. 2007 (214) ELT 481 (SC), it was held that the appellant was entitled to CENVAT credit of input services used even indirectly in manufacture of dutiable final products subject to Rule 6 of CENVAT Credit Rules, 2004.

levitra

Sale Price in Banquet Hall under MVAT Act, 2002

fiogf49gjkf0d
Introduction
Under Maharashtra Value Added Tax Act, 2002, (MVAT Act), tax is levied on the ‘sale price’. There are situations where the transactions are composite and only part of it would be liable to VAT. In case of Works Contract the situation is clear due to judicial pronouncements. However, there are new types of transactions coming up for determination of ‘sale price’. One such instance is sale price, for the purpose of MVAT Act, in case of charges for Banquet Hall. Banquet halls normally arrange programs as per requirement of clients. Entire arrangement includes various services including serving of food and drinks. For example, if a marriage function is arranged in a banquet hall, then there will be arrangement for a stage, furniture, decoration, music, etc. and also supply of food and drinks.

Banquet Hall, a composite transaction
In case of banquet hall, the service provider i.e. hotels etc., are liable to pay service tax. Simultaneously there being supply of food and drinks, VAT is also applicable. An issue arises as to on what amount VAT is payable. One view can be that the entire charges are liable to VAT. Other view can be that only that portion of price, which is relating to food and drinks, can be liable to VAT.

Determination of disputed question (DDQ) in caseof Tip Top Enterprises
The dealer, M/s. Tip Top Enterprises, filed an application for determination, before the Commissioner of Sales Tax, to get the issue of ‘sale price’ for banquet hall under the MVAT Act decided. In the DDQ dated 25-05-2009, the learned Commissioner of Sales Tax, rejecting all the arguments of the dealer, held that the whole amount charged by the dealer (banquet hall) is liable to VAT.

Decision of Tribunal in above case
The matter went to Maharashtra Sales Tax Tribunal by way of appeal no. 41 of 2009. In the appeal, on behalf of appellant, following arguments were reiterated.

a) Referring to definition of ‘sale price’ in MVAT Act which reads as under:

“Section 2(25) “sale price” means the amount of valuable consideration paid or payable to a dealer for any sale made including any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof, other than the cost of insurance for transit or of installation, when such cost is separately charged,” it was submitted that the amount received against sale/supply of goods only can be considered and not the amount received for services as the ‘sale price’.

b) As per the definition of ‘sale’, the supply of food is deemed to be sale. The said definition  of ‘sale’ is as under in section 2(24) of MVAT Act, 2002:

“Section 2 (24) “sale” means a sale of goods made within the State for cash or deferred payment or other valuable consideration but does not include a mortgage, hypothecation, charge or pledge; and the words “sell”, “buy” and “purchase”, with all their grammatical variations and cognate expressions, shall be construed accordingly;

Explanation,-—For the purposes of this clause,—

a. a sale within the State includes a sale determined to be inside the State in accordance with the principles formulated in section 4 of the Central Sales Tax Act, 1956;
b.
i. the transfer of property in any goods, otherwise than in pursuance of a contract, for cash, deferred payment or other valuable consideration;

ii. the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

iii. a delivery of goods on hire-purchase or any system of payment by installments;

iv. the transfer of the right to use any goods or any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;

v. the supply of goods by any association or body of persons incorporated or not, to a member thereof or other valuable consideration;

vi. the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service is made or given for cash, deferred payment or other valuable consideration:”

Accordingly, it was submitted that in a banquet hall transaction, only supply of food and drinks part is ‘sale’.

c) Relying upon judgment of Hon. Supreme Court in case of Builder Association of India vs. Union of India (73 STC 370), the above argument was reiterated, more particularly citing the following observation.

“The latter part of clause (29-A) of article 366 of the Constitution makes the position very clear. While referring to the transfer, delivery or supply of any goods that takes place as per sub-clauses (a) to (f) of clause (29-A), the latter part of clause (29-A) says that “such transfer, delivery or supply of any goods” shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.”

Accordingly, it was submitted that under Article 366(29A)(f) only supply of goods is deemed to be a sale which can be subject matter of sales tax and not the total price of transaction. Therefore, it was urged that the levy on total amount was unconstitutional.

d) Based on judgment in case of Imagic Creative P. Ltd. (12 VST 371(SC), it was submitted that on the amount on which service tax is paid, VAT cannot be attracted, as both are mutually exclusive.

e) Citing judgment in case of Cap ‘N’ Chops Caterers vs. State of Haryana (37 VST 226) (P & H), it was submitted that the banquet transaction is in the nature of works contract and can be liable to the extent of goods value and service portion cannot be taxed.

f) Reliance was placed on the judgment in case of Bharat Sanchar Nigam Ltd. (145 STC 91) (SC). In this judgment Hon. Supreme Court has observed that the receipts towards hotel activity are divisible.

g) Reliance was also placed on following observation of Hon. Supreme Court in case of T. N. Kalyan Mandpam (135 STC 480)(SC).

“42. In regard to the submission made on article 366(29A)(f), we are of the view that it does not provide to the contrary. It only permits the State to impose a tax on the supply of food and drink by whatever mode it may be made. It does not conceptually or otherwise include the supply of services within the definition of sale and purchase of goods. This is particularly apparent from the following phrase contained in the said sub-article “such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods”.

Contentions of the Department
a) Relying upon judgment of Hon. Supreme Court in case of K. Damodarsamy Naidu [(2000) (117 STC 1), it was contended that the whole amount is liable to VAT. In this judgment, the Hon. Supreme Court was considering sale price in case of Restaurant.

b) Department also relied upon judgment of Bombay High Court decision in East India Hotels Ltd. (99 STC 197). In this case the restaurant was claiming reduction from sale price on account of luxuries provided in restaurant like AC facility etc., on the ground that they are towards providing extra facilities. However, the Hon. High Court has held that the whole price is liable to sales tax.

Conclusion of Tribunal
Hon. Tribunal delivered its judgment in above appeal no. 41 of 2009 dated 23-04-2013 and referred to above arguments as well as looked into the factual position. Tribunal referred to booking documents for banquet hall. It was seen that the hotel has quoted separate charges, towards rent of hall, about food and drinks and decorating etc. The charges towards food and drinks were almost at par with charges for same menu, when provided by hotel, in other than banquet hall.

In view of the above factual and legal position Tribunal held that the sale price for food and drinks will be the price agreed between the parties. In other words, Tribunal disapproved the DDQ, that whole amount towards banquet hall is liable to VAT. As per Tribunal, VAT can be levied on amount towards food and drinks as agreed between the parties. In relation to decoration charges, which were also charged separately in the quotation, Tribunal held that the same items may attract tax as lease transaction.

The above judgment will be useful to avoid double taxation. In absence of such judgment, dealer may become liable to service tax as well as VAT on the same amount. This is not expected, hence, it will certainly give relief from such double taxation.

Education: A Taxable Commercial Training Service?

fiogf49gjkf0d
Introduction:

Commercial training or coaching service was introduced in the service tax law from 1st July, 2003 by defining the expression, “commercial training or coaching” and “commercial training or coaching centre” in sections 65(26) and 65(27) respectively of the Finance Act, 1994 (the Act) as reproduced below:

Section 65(26):

““Commercial training or coaching” means any training or coaching provided by a commercial training or coaching centre”.

Section 65(27):

““Commercial training or coaching centre” means any institute or establishment providing commercial training or coaching for imparting skill or knowledge or lessons on any subject or field other than the sports, with or without issuance of a certificate and includes coaching or tutorial classes but does not include preschool coaching and training centre or any institute or establishment which issues any certificate or diploma or degree or any educational qualification recognized by law for time being in force.”

Consequently, taxable service in relation to this service was defined in section 65(105)(zzc) of the Act. Within a span of 4 to 5 years of the introduction of the service, in a significant number of cases, the co-ordinate Benches of the Tribunal at Bangalore and Chennai pronounced various decisions wherein various large and well-known institutions were held to be not liable under this taxing entry mainly on account of their status as non-profit making or charitable institutions. Understandably, as a consequence thereof, the Government appended an explanation to the definition to section 65(105)(zzc) of the Act vide the Finance Act, 2010 to come into effect retrospectively from 01-07-2003. Thus, the relevant provisions read as follows:

Section 65(105)(zzc):

““Taxable service” means any service provided or to be provided to any person, by a commercial training or coaching centre in relation to commercial training or coaching.

Explanation.—For the removal of doubts, it is hereby declared that the expression “commercial training or coaching centre” occurring in this sub-clause and in clauses (26), (27) and (90a) shall include any centre or institute, by whatever name called, where training or coaching is imparted for consideration, whether or not such centre or institute is registered as a trust or a society or similar other organization under any law for the time being in force and carrying on its activity with or without profit motive and the expression “commercial training or coaching” shall be construed accordingly.”

It is also relevant to note here that the Finance Act, 2011 with effect from 01-05-2011 amended the definition of commercial training or coaching centre in section 65(27) whereby exclusionary part of the definition was omitted and instead the said exclusion part was simultaneously declared exempt vide Notification 33/2011-ST from 01-05-2011.

Primarily, in terms of the above explanation, the scope of the service was expanded to exclude profit motive element. When the decision of the Madras Tribunal in Great Lake Institute of Management Ltd. (GLIM) vs. CST Chennai 2008 (10) STR 202 (Tri.-Chennai) was challenged by the Revenue in the Supreme Court, on noticing the above explanation the Apex Court set aside the Tribunal’s order and remanded the case for denovo consideration in the light of the said Explanation [2010 (19) STR 481 (SC)].

Larger Bench direction vide Interim Order No.ST/443/2013 in Great Lake Institute of Management Ltd. vs. CST Chennai & 5 others: [2013-TIOL- 1480-CESTAT-DEL-LB]

Recently, in a bunch of appeals filed before the Tribunal, a Division Bench prima facie doubted the reasons recorded in one of the decisions viz., Magnus Society vs. CC&CE, Hyderabad 2009 (13) STR 509 (Tri.-Bang). In this decision, a distinction was made between higher learning through a proper format of education imparted by institutions on one hand and those which are characterised as commercial training or coaching centres preparing students for entrance examinations to universities or the like. The matter therefore was referred to the Larger Bench of CESTAT (LB or the Bench). The limited reference however was made to examine whether the provisions relating to commercial coaching or training service as defined in sections 65(26), 65(27) and 65(105)(zzc) of the Act accommodate a distinction between imparting of specific skill by an institution such as in computer literacy, computer operations, spoken English or accountancy at one end and a broader format of education imparted by an institution of higher learning providing a course of instructions in MBA, management, computer science or similar disciplines. The Bench headed by Hon. President, CESTAT examined the said relevant statutory provisions in relation to commercial training or coaching services specifically considering the scope of the service in the light of the above explanation inserted with retrospective effect and also analysed various precedents including Magnus Society (supra), GLIM (supra) and a few others as summarised below.

On making primary examination of the statutory provisions, the Bench held a view that for an institution or establishment to claim immunity from the liability of service tax, it must establish any one of the following exclusionary parameters:

• The institute/establishment is not imparting skill, knowledge or lessons on any subject or field except sports.
• If the establishment is a pre-school coaching or a training centre.
• Institute/establishment which issues any certificate, diploma, degree or an educational qualification recognised by the extant law.

Thus, as per the preliminary remark of the LB, if any institute fails to fulfill any of the listed parameters, it would be considered a commercial training or coaching centre and consequently be liable for service tax.

Gist of analysis of various precedents:

In case of GLIM vs. CST, Chennai 2008 (10) STR 202 (Chennai), the appeal was allowed by holding that it being a recognised charitable organisation under the Income- tax Act, 1961 and engaged in public utility areas, profit motive was absent although it may have earned surplus. Since the decision was pronounced prior to incorporation of the Explanation and profit motive was excluded by virtue of the Explanation, the Supreme Court in Revenue’s appeal remanded the matter (2010 (19) STR 481 (SC) for denovo consideration in the light of the Explanation. Another pre- amendment decision in the case of Administrative Staff College of India vs. CC&CE, Hyderabad 2009 (14) STR 341 (Tri.- Bang), the Tribunal concluded that although profit might have been earned, the laudable objectives of the institution registered as a society could not be equated with those of a tutorial college and that the expression ‘commercial’ in the definition indicates that it qualifies coaching or training centre and not coaching or training. Further, that the registered society also exempted from income tax as charitable organisation cannot be considered a commercial centre. Revenue’s appeal to Supreme Court in this case was dismissed without recording any reasons—reported in 2010 (20) STR J117 (SC). In another decision in Magnus Society vs. CC&CE, Hyderabad (supra) following the decision in GLIM (supra), the appeal was allowed. In this case, in addition to the reason of absence of profit motive involved in services of the institution, Hon. Tribunal carved out distinction for the term ‘education’ as against coaching or training by observing that ‘education’ was a much broader term of which coaching and training was only a part and the breadth of the term education could not be encompassed in the definition containing narrow meaning. Institutes offering degrees recognised by law could not be covered within the ambit of the defined category of the service. This view was also reiterated in Institute of Chartered Financial Analysts of India vs. CE&CE, Hyderabad 2009 (14) STR 220 (Tri. -Bang) while noting that the states Governments have recognised ICFAI University by notifications and there also existed UGC recognition. Further, considering the exempt nature of the income, the activity being non-commercial was held as not liable for service tax. This deci-sion also was pronounced prior to incorporation of the explanation.

The stated provisions were also considered by the Kerala High Court in Malappuram District—Parallel College Assn. vs. UOI 2006 (2) STR 321 (Ker) wherein challenge was made on several grounds interalia including the grounds of discrimination and violation of Article14 of the Constitution. The pleas regarding education being non-taxable under the Constitution and coverage of parallel colleges by exclusionary clause were repelled. The Hon. Court however ruled that the impugned levy was discriminative since the burden of the levy ultimately fell on students and there was no ap-parent distinction between the students pursuing education in regular colleges or in parallel colleges. The case of Indian Institute of Aircraft Engineering vs. UOI & Ors 2013-TIOL -430-HC-DEL-ST also was discussed by the Bench with reference to what constituted approved institution regulated by law. In this case, the High Court had concluded that the institution in question provides education resulting in degree/diploma/qualifications recognised by law and therefore was covered by the exclusionary clause and consequently not subject to service tax. In addition to various decisions by CESTAT, decisions involving issue of entitlement to exemption from income tax on the ground of educational purpose, under the Income-tax Act also were discussed. The Bench however, noted that neither the precedents nor the relevant provisions of the Income-tax Act assisted them significantly to interpret the scope of the expression “commercial training or coaching” or “commercial training or coaching centre” which was for their limited consideration.

Training & Education: Whether literal meaning relevant?

In addition to discussing various precedent decisions on behalf of the appellants, reference was made to various textual authorities to analyse contours of relevant terms such as teach, education, training, coach etc. to elucidate what the words meant and consequently to draw distinction between the concept of ‘training’ and ‘education’ or to examine whether they overlap. However, it was noted that when legislatively mandated definition was available, it is impermissible to look to extra textual guidance. “A good faith interpretation of section 65(27) requires that whatever skills/ knowledge/lessons are imparted on any subject or field, the activity must be considered to be training or coaching.”

Conclusion:

The Bench finally concluded that the retrospectively introduced Explanation in section 65(105) (zzc) of the Act redefined the scope of the expres-sion “commercial training or coaching” in section 65(26) by virtue of which a commercial element or profit motive became an irrelevant ingredient to bring an institute or establishment within the fold of “commercial training or coaching centre” nor would any organisational structure of registration of the entity as a trust or society would determine taxability. On analysing the other facet of the definition of “commercial training or coaching centre” in section 65(27), it was held that the training or coaching for imparting skill, knowledge or lessons on any subject or field constitutes commercial training or coaching and the scope of “training or coaching” could not be restricted by super-adding any conditions by parameters of course content, syllabus, duration, etc. The Bench declined to agree with the restricted interpretation pleaded or as was made in the precedent decisions and held that in the definition contained in section 65(27), there would be no rationale for engrafting an exclusionary clause broadly formulated other than what is specifically excluded viz., an institute or establishment which issues any certificate, diploma, degree or any educational qualification recognised by law. The Bench further held that since Parliament introduced the ‘Explanation’ retrospectively to clarify ambiguities to ascertain the expression ‘commercial’, recourse to guidance from precedents was not warranted. The reference to the Larger Bench was accordingly answered holding that the activities of imparting skill, knowledge, lessons on any subject or field or when imparted by an entity, institution or establishment which is excluded by a specific and legislated exclusionary clause would alone be outside the fold of the taxable territory. Considering the scope of the reference, the Bench declined to consider whether any of the appellants were taxable or otherwise in terms of the exclusionary clause in section 65(27) as it stood prior to its amendment with effect from 01-05-2011 and therefore the appeals stood remitted to the respective Bench to decide based on principles discussed above.

The direction provided by the Larger Bench is likely to have far-reaching implications on various institutions offering higher studies especially in absence of appropriate regulatory authority in this regard as the exclusion in terms of the direction of the Larger Bench is meant only for the degree, diploma, a certificate or any qualification recognised by the law for the time being in force. It appears therefore that the litigation hereafter would hinge mainly around whether a degree/ diploma certificate issued by an institution can be construed as one recognised under the law in force. It may be noted that in the new era of negative list based taxation effective from 1st July, 2012, what is specifically non-taxable is by way of entry in the “negative list” of services contained in section 66D of the Act is “education as a part of a curriculum for obtaining a qualification recognised by any law for the time being in force.” In addition to preschool education, higher secondary education and approved vocational courses. Thus, a course or education recognised by law is the sole criterion for non-taxability

2013-TIOL-528-HC-AHM-ST Sports Club of Gujarat vs. Union of India

fiogf49gjkf0d
“Club or Association” service – levy of service tax on sums received from members held to be ultra vires.

Facts:
The
petitioner along with two other clubs filed a writ petition to declare
section 65(25a), section 65(105)(zzze) and section 66 of the Finance
Act, 1994 as amended by the Finance Act, 2005 to the extent that the
said provisions purported to levy service tax on amount received by the
club from its members as being ultra vires, beyond the legislative
competence of the parliament, unconstitutional, illegal and void. The
petitioners substantiated their contentions by referring and relying
upon the decision of Ranchi Club Ltd. vs. Chief Comm. of C.Ex. &
S.T. 2012 (26) STR 401 (Jhar) which further relied upon the decision of
the Full Bench of Patna High Court in Commissioner of Income Tax vs.
Ranchi Club Ltd. 1994 (1) PLJR 252 (Pat) (FB).

Held:
Considering
the decisions of the Hon. Jharkand High Court and the Full Bench of the
Patna High Court in Ranchi Club Ltd. (supra), the Hon. High Court
allowed the petitions and declared section 65(25a), section
65(105)(zzze) and section 66 of the Finance Act, 1994 as amended by the
Finance Act, 2005 to be ultra vires.
levitra

Appeal filing Forms ST-5, ST-6 & ST-7 amended Notification No. 5/2013 – ST dated 10th April, 2013

fiogf49gjkf0d
By this Notification, Service Tax Rules, 1944 have been amended which may be called Service Tax (Second Amendment) Rules, 2013 effective from 1st June, 2013. Under the amended Rules Form ST-5, ST-6 & ST-7 for filing appeal to Appellate Tribunal have been amended.

MVAT UPDATE

Mvat Notifications
Notification No. VAT-1513/CR-46(1)/Taxation-1 dated 30-03-2013

Vide this notification various amendments have been effected in Schedules A, B, C and D with effect from 01-04-2013.

Notification No VAT.1513/CR 46(7)/Taxation -1 dated 04-04-2013

By this notification, MVAT rate has been increased from 1% to 1.1% for sale of diamonds, articles made of precious metals and precious metal for the financial year 2013-2014. For pearls, precious stones and semiprecious stones, the MVAT rate continues to remain at 1%.

LA BILL XI OF 2013

Introduction of Maharashtra Tax Laws [Levy and Amendment] Bill, 2013, thereby providing amendments to the Maharashtra Stamp Act, the Maharashtra Value Added Tax Act, 2002 and the Maharashtra Tax on Lotteries Act, 2006.

levitra

Money transfer from abroad whether banking and financial services or business auxiliary services – Whether it is export of services when performed in India and whether the sub-agents appointed also deemed to have exported the services. Reimbursement of advertisement and sales promotion is export of services.

fiogf49gjkf0d
Facts:

Paul Merchants Ltd (PML) entered into an agreement with Western Money Union Network Ltd., Ireland (Western Union or WU) to enable the receipt of money transferred from persons from outside India to persons in India. PML had also appointed sub-agents to provide transfer of money services to Western Union. Western Union also reimbursed PML the advertisement and promotional expenses in India. The question arose whether the service of PML is categorised under Banking & Financial Services or Business Auxiliary Services and whether such services were to be considered as deemed to be export under Export of Services Rules, 2005 for the period 1st July 2003 till 30th June 2007. Similarly, the services of sub-agents were to be considered export or not as sub-agents were appointed by PML in India. Thirdly, whether the reimbursement of advertisement and promotion expenses were also to be treated as export and hence, no tax was chargeable. Lastly, whether a longer period was invokable. The two members of the Delhi Tribunal had a difference of opinion as to whether the services were in the nature of export as the said services were performed in India. The case was referred to the third member due to difference of opinion.

Held:

• The services provided by PML or the sub-agents were classified as “Business Auxiliary Services” which both the members agreed on and hence, no discussion was required on this subject. The major question was whether the service was to be considered as export as the services were provided in India. The term ‘export’ has not been defined either in Article 280(l)(b) or in any of the articles of the Constitution of India. “Though the Apex Court’s judgments in the case of the State of Kerala vs. The Cochin Coal Company Ltd. [(1961) 2 STC 1 SC] and Burmah Shell Oil Storage & Distribution Co. of India vs. Commercial Tax Officer & Others reported in (1960) 11 STC 764 (SC) explain the meaning of the term ‘export’. The ratio of these judgments which are with regard to export of goods, is not applicable for determining what constitutes the export of services. There was no question of Export of Service Rules, 2005, being in conflict with Article 286(1)(b) of the Constitution of India. The principle of equivalence between the taxation of goods and taxation of service had been laid down by the Apex Court in the case of Association of Leasing & Financial Service Companies vs. Union of India (2010-TIOL-87-SCST- LB) and All India Federation of Tax Practitioners vs. Union of India (2007-TIOL-149-SC-ST) in the context of constitutional validity of levy of service tax on certain services. This principle does not imply that service tax should be levied and collected in exactly the same manner as the levy and collection of tax on goods or that export of service should be understood in an exact manner in which the export of goods is understood. The question as to what constitutes export or import of service was neither raised nor discussed in the judgments of the Apex Court. There is nothing in Export of Service Rules, 2005 which can be said to be contrary to the principle that a service not consumed in India is not to be taxed in India. What constitutes export of service is to be determined strictly with reference to Export of Service Rules, 2005. The service is classified as “Business Auxiliary Service” and provided to WU and it is WU who is the recipient and consumer of this service provided by PML and their sub-agents, not the persons receiving money in India. Thus, when the person under whose instructions the services in question had been provided by the agents/sub-agents in India and who is liable to make payment for these services, is located abroad, the destination of the services in question has to be treated abroad.

The destination has to be decided on the basis of the place of consumption, not the place of performance of service.

• Reimbursement of advertisement and sales promotion received from WU is not taxable as the same are for the services provided to WU, which are exports of services. • The question of time bar is not relevant when the main question has been answered in favour of the agent and sub-agents.
• The services provided by the agent and subagents throughout during the period of dispute are classifiable as “Business Auxiliary Service” and the same have been exported. Hence no service tax is leviable. The following judgements were relied on for this matter:

• Muthoot Finance Corpn. Ltd. vs. CCE reported in 2010 (17) STR 303 (Tribunal-Bang)

 • Nipune Service Ltd. vs. CCE, Bangalore reported in 2009 (14) STR 706 (Tribunal-Bang)

 • Kerala State Financial Enterprises vs. CCE, reported in 2011 (24) STR 585 (Tribunal-Bang)

[Readers may note that contrary to the above, recently the Mumbai Tribunal did not grant complete stay in Life Care Medical System relying on Microsoft Corporation (I) Pvt. Ltd. vs. CST. New Delhi 2009 (15) STR 680 (Tri.-Del) reported at 2013 (29) STR 129 (Tri.-Mum), digest of which was provided in January 2013 of BCAJ under this feature].

levitra

Levy on Restaurants & Hotels Held Unconstitutional

fiogf49gjkf0d
Background

Service tax levy was introduced on Restaurants & Hotels as under:

• Services provided by air-conditioned restaurants with license to serve liquor, with effect from 01-05-2011, with an abatement of 70%.

• Short Term Accommodation Services provided by hotels, with effect from 01-05-2011, with an abatement of 50%.

The above services have been discussed earlier in this column in the August, 2011 and September, 2011 issues respectively of BCAJ and in particular, the dual taxation issues arising therefrom. The same are not repeated for the sake of brevity.

The above stated levies continued under negative list based taxation of services introduced with effect from 01-07-2012 also, with a few minor changes in the scope and rate of abatement. However, the scope of air-conditioned restaurant service was substantially expanded with effect from 01-04- 2013, withdrawing the condition of having license to serve liquor. Far reaching implications of this amendment also were discussed in the April, 2013 issue of BCAJ. With these facts in the background, discussed below is the recent Kerala High Court’s ruling wherein levy of service tax on restaurants and hotels has been held beyond the legislative competence of the Parliament. Considering that levy of tax on supply of food or drink whether by way of or as a part of service is a State subject, the levy by the Centre is held unconstitutional in a Single Member Bench’s decision.

Kerala High Court Ruling in Kerala Classified Hotels & Resorts Association & Others (2013) 31 STR 257 (KER)

The Petitioners through writ petitions challenged the validity of sub-clause (zzzzv) and (zzzzw) of clause 105 of section 65 of the Finance Act, 1994 (Act) and section 66 of the Act, as amended by the Finance Act 2011 relating to levy of service tax on taxable services referred there and for consequential reliefs. The relevant portion reads as under:

“(zzzzv) Services provided or to be provided to any person, by a restaurant, by whatever name called, having the facility of air-conditioning in any part of the establishment, at any time during the financial year, which has license to serve alcoholic beverages, in relation to serving of food or beverage, including alcoholic beverages or both, in its premises;

(zzzzw) Services provided or to be 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;”

Contentions of the Petitioner

The main contention urged by the petitioners was that the imposition of service tax in relation to serving of food or beverage including alcoholic beverages represents only sale of goods which transaction squarely falls under Entry 54 of List II (State List) of the 7th schedule to the Constitution of India and therefore within the exclusive competence of the State legislature. The service tax was originally introduced by Parliament in exercise of the residuary power under Entry 97 of List I. Though Entry 92 C has been introduced to List I of the 7th schedule which enables the Union to levy “taxes on services”, the said entry had not come into effect as it was not notified by the Government. Similarly the State legislature had enacted Kerala Tax on Luxuries Act, by which tax is levied for accommodation. By introducing service tax on the basis of sub-clauses (zzzzv) and (zzzzw) to clause 105 of section 65, the Parliament has encroached upon the legislative powers of the State under Entry 54 and 62 of List II.

Hence, the main contention of the petitioners was with reference to the legislative competence of Parliament to impose a tax on sale of goods/ luxuries which is absolutely the domain of the State legislation.

Contention of the Revenue

The respondents contended that the legislation has been brought in terms of Article 248 of the Constitution read with Entry 97 of List I of the 7th schedule. Therefore according to the respondent, on a perusal of judgments cited by them it is all the more clear that service tax can be imposed on the service involved during the sale of a product and so long as the Statute does not transgress upon any restriction contained in the Constitution, contentions regarding lack of legislative power cannot be sustained. It is further contended that the Sales Tax Act and the Kerala Tax on Luxuries Act are framed by the State Government. Service tax levied by the Government of India is not for serving alcoholic beverages and it is a tax on the services provided by restaurants and hotels. In that view of the matter, according to them, the challenge to the provisions aforesaid is absolutely baseless and seeks for dismissal of the writ petitions.

Questions for Consideration before the Court

The following questions arose for consideration by the Court:

Whether “taxes on the sale and purchase of goods” in Entry 54 of List II of the seventh schedule covers service in the light of the definition of “tax on sale and purchase of goods” under Article 366 (29A)(f) of the Constitution of India.

Whether the service provided in a hotel, inn, guest house, club etc. imposed with luxury tax under the State Act in terms of Entry 62 of List II can be separately assessed and imposed by the Union with service tax, invoking the residuary powers at Entry 97 of List I of the Constitution.

Judgment relied upon by the Revenue for Consideration of Constitutionality of a statute

The judgment in State of M.P. vs. Rakesh Kohli, (2012) 6 SCC 312) = (2012-TIOL-44-SC-MISC) was relied upon by the respondent to highlight the principles to be kept in mind by courts while considering constitutionality of a statute and the Supreme Court held as under:

“32. While dealing with constitutional validity of a taxation law enacted by Parliament or State Legislature, the Court must have regard to the following principles:

(i) there is always presumption in favour of constitutionality of a law made by Parliament or a State Legislature,

(ii) no enactment can be struck down by just saying that it is arbitrary or unreasonable or irrational but some constitutional infirmity has to be found,

(iii) the Court is not concerned with the wisdom or unwisdom, the justice or injustice of the law as Parliament and State Legislatures are supposed to be alive to the needs of the people whom they represent and they are the best judge of the community by whose suffrage they come into existence,

(iv) hardship is not relevant in pronouncing on the constitutional validity of a fiscal statute or economic law, and

(v) in the field of taxation, the legislature enjoys greater latitude for classification.”

Similar views were expressed by the Supreme Court in Karnataka Bank Ltd. vs. State of A.P. [(2008) 2 SCC 254], Govt. of A.P. vs. P. Laxmi Devi [(2008) 4 SCC 720] and Greater Bombay Coop. Bank Ltd. vs. United Yarn Tex (P) Ltd. (2007) 6 SCC 236). There is no dispute regarding the proposition as held in the above judgments and hence the only enquiry is to find out whether the impugned legislation has trenched upon the legislative powers of the State Government, keeping in mind the limitations as held in the aforesaid judgments.

• Important and Relevant Judgments for consideration by the Court

  •  In Godfrey Phillips India Ltd. vs. State of U.P., (2005) 2 SCC 515) = (2005-TIOL-10-SC-LT-CB) the Supreme Court held as under:

“83. Hence on an application of general principles of interpretation, we would hold that the word “luxuries” in Entry 62 of List II    means the activity of enjoyment of or indulgence in that which is costly or which is generally recognised as being beyond the necessary requirements of an average member of society and not articles of luxury.”

“93. Given the language of Entry 62 and the legislative history we hold that Entry 62 of List II does not permit the levy of tax on goods or articles. In our judgment, the word “luxuries” in the entry refers to activities of indulgence, enjoyment or pleasure. Inasmuch as none of the impugned statutes seek to tax any activity and admittedly seek to tax goods described as luxury goods, they must be and are declared to be legislatively incompetent. However, following the principles in Somaiya Organics (India) Ltd. vs. State of U.P. while striking down the impugned Acts we do not think it appropriate to allow any refund of taxes already paid under the impugned Acts. Bank guarantees if any furnished by the assessees will stand discharged.”

In T.N. Kalyana Mandapam Assn. vs. Union of India, (2004) 5 SCC 632) = (2004-TIOL-36-SC-ST) the Supreme Court was considering whether the imposition of service tax on the services rendered by the mandap-keepers was intra vires the Constitution, and held as under:

“44. In regard to the submission made on Article 366(29-A)(f), we are of the view that it does not provide to the contrary. It only permits the State to impose a tax on the supply of food and drink by whatever mode it may be made. It does not conceptually or otherwise include the supply of services within the definition of sale and purchase of goods. This is particularly apparent from the following phrase contained in the said sub-article “such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods”. In other words, the operative words of the said sub-article are supply of goods and it is only supply of food and drinks and other articles for human consumption that is deemed to be a sale or purchase of goods.”

In K. Damodarasamy Naidu & Bros. vs. State of T.N., (2000) 1 SCC 521) = (2002-TIOL-884-SC-CT-CB) while considering the entitlement of the States to levy tax on the sale of food and drink a Constitutional Bench of the Supreme Court held as under:

“9. The provisions of sub-clause (f) of clause (29-A) of Article 366 need to be analysed. Sub-clause (f) permits the States to impose a tax on the supply of food and drink. The supply can be by way of a service or as part of a service or it can be in any other manner whatsoever. The supply or service can be for cash or deferred payment or other valuable consideration. The words of sub-clause (f)    have found place in the Sales Tax Acts of most States and, as we have seen, they have been used in the said Tamil Nadu Act. The tax, therefore, is on the supply of food or drink and it is not of relevance that the supply is by way of a service or as part of a service. In our view, therefore, the price that the customer pays for the supply of food 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 the 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 the 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.”

Other judgments considered by the Court were as follows:

  •     Assn. of Leasing & Financial Services Companies vs. UOI (2011) [2 SCC 352 = 2010–TIOL–87–SC–ST– LB.]

  •     All India Federation of Tax Practitioners vs. UOI (2007) [TIOL–149 –SC– ST]

  •     BSNL vs. UOI (2006) [TIOL–15–SC–CT–LB]

  •     Federation of Hotel & Restaurant Assn of India vs. UOI (2002) [TIOL- 699 –SC–MISC]

•    Observations & Findings of the Court

On a consideration of the law laid down by the Supreme Court, I am of the view that:

Para 18

“There are two judgments which throw light on the subject matter in issue. Those are K. Damoda-rasamy Naidu (Supra) and T.N. Kalyana Mandapam Assn. (Supra). In fact, the effect of Article 366(29-A)(f) has been considered by the Supreme Court in Assn. of Leasing & Financial Service Companies (Supra) and other judgments referred above includ-ing BSNL (Supra) . But the factual situation with reference to the case on hand is available only in the cases referred above. But it could be seen that in T.N. Kalyana Mandapam Assn. (Supra) the question was with reference to services rendered by mandap-keepers which is not the situation here. Here the factual situation is almost similar to the statement of law as held by the Supreme Court in K. Damodarasamy Naidu (Supra).”

Para 19

Now, coming to Article 366(29-A)(f) of the Constitution of India one could see that a deeming provision has been incorporated by way of 46th amendment to the Constitution of India and the history of such a legislation has been clearly dealt with in the judgments cited above. The very purpose of incorporating the definition of tax on sale or purchase of goods in Article 366 was to empower the State Governments to impose tax on the supply, whether it is by way of or as a part of any service of goods either being food or any other article for human consumption or any drink either intoxicating or not intoxicating whether such supply or service is for cash, deferred payment or other valuable consideration. The words “and such transfer delivery or supply of goods” is deemed to be a sale of those goods by the person making the transfer. Therefore the incidence of tax is on the supply of any goods by way of or as part of any service. When food is supplied or alcoholic beverages are supplied as part of any service, such transfer is deemed to be a sale. Apparently, the transfer is during the course of a service and when the deeming provision permits the State Government to impose a tax on such transfer, there cannot be a different component of service which could be imposed with any service tax in exercise of the residuary power of the Central Government under Entry 97 of List I of the Constitution of India.

Para 20

Therefore, it can be seen from Article 366(29-A)(f) that service is also included in the sale of goods. If the constitution permits sale of goods during service as taxable, necessarily Entry 54 has to be read giving the meaning of sale of goods as stated in the Constitution. If read in that fashion, necessarily service forms part of sale of goods and State Government alone will have the legislative competence to enact the law imposing a tax on the service element forming part of sale of goods as well, which they have apparently imposed. I am supported to take this view in the light of the Constitution Bench judgment in K. Damodarasamy Naidu (Supra).

Para 21

Coming to the next question regarding the imposition of service tax in respect of hotel, inn, guest house, club or camp site etc., the contention of the petitioners is based on Entry 62 of List II. What exactly is the meaning of the expression ‘luxuries’ in Entry 62 of List II has been held by the Constitution Bench judgment of the Supreme Court in Godfrey Philips India Ltd. (Supra), wherein it is held that luxuries is an activity of enjoyment or indulgence which is costly or which is generally recognised as being beyond the necessary requirements of an average member of society. While giving the said meaning to Entry 62 and if we look at the sub-clause (zzzzw), the service tax is imposed on services provided in a hotel and other similar establishments when State Legislature had enacted the Kerala Tax on Luxuries Act by exercising their legislative power under Entry 62 of List II. When applying the dictum laid down in Godfrey Philips India Ltd. (supra) which gives an extended meaning to the word ‘luxuries’, I am of the view that the amendment now made to the service tax trenches upon the legislative function of the State under Entry 62 of List II.

Having come to the aforesaid findings, these writ petitions are allowed as follows:

•    It is declared that sub-clauses (zzzzv) and (zzzzw) to clause 105 of section 65 of the Finance Act 1994 as amended by the Finance Act 2011 is beyond the legislative competence of the Parliament as the sub-clauses are covered by Entry 54 and Entry 62 respectively of List II of the Seventh Schedule.

•    That if any payments have been made by the petitioners on the basis of the impugned clauses, they are entitled to seek refund of the same.

Impact of Kerala High Court Ruling

•    As per the Court order, the petitioners are entitled to seek refund of service tax. However, it may not be easy and feasible inasmuch as the restaurants merely collect service tax from the customers and pay to the Government. Hence, if the service tax collected (rightly or wrongly) is duly deposited with the Government, onus stands discharged under the law. Alternatively, the prospect of each customer filing for refund of tax is highly unlikely.

•    Since the ruling is a consequence of a Writ Petition and there being presently no other conflicting High Court ruling, a view could be adopted (although debatable) to the effect that this ruling is applicable to restaurants across the country. However, the Government would without any doubt file an appeal before the Supreme Court against the High Court Order. Hence, it would appear that there is no finality on the issue.

•    Whether the Kerala High Court ruling would apply under the negative list based taxation regime introduced with effect from 01-07-2012, is a matter which is being intensely debated.

It is interesting to note the following clarification issued in the context of Negative List regime of service tax:

•    Extracts from Education Guide (TRU Circular dt. 20/6/12)

Para 6.9

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 part of the activity. [Section 66E (i) of the Act]

Para 6.9.1

What are the activities covered in this declared list entry?

The following activities are illustration of activities covered in this entry –

•    Supply of food or drinks in a restaurant;

•    Supply of food and drinks by an outdoor caterer.

In terms of Article 366(29A) of the Constitution of India, supply of any goods being food or any other article of human consumption or any drink (whether or not intoxicating) in any manner as part of a service for cash, deferred payment or other valuable consideration is deemed to be a sale of such goods. Such a service therefore cannot be treated as service to the extent of the value of goods so supplied. The remaining portion however constitutes a service. It is a well settled position of law, declared by the Supreme Court in BSNL’s case [2006 (2) STR 161 (SC)], that such a contract involving service along with supply of such goods can be dissected into a contract of sale of goods and contract of provision of service. This declared list entry has been incorporated to capture this position of law in simple terms.

Based on the above, the Government could contend that what is being taxed is only the service component without encroaching upon the powers of the State Government under the Constitution. This aspect would have to be judicially tested.

The 46th amendment to the Constitution which introduced clause 29A to the Article 366 contained six transactions which were deemed to be a transaction of sale or purchase of goods. For example, tax on the transfer of property in goods involved in the execution of a works contract is one of the deemed sales transportation under this amendment.

After the judgment by the Kerala High Court, an old debate is likely to be revived. The question arises is that whether on similar grounds, the levy of service tax on a transaction of works contract where the buyer only intends to buy, say for example a constructed building and pay consideration on per square foot of constructed building could also be challenged? The buyer of the building has no interest in the services that the builder has used in construction of such building. Therefore, can the Central Government tax the services that are provided in a works contract when these transactions are deemed sales under the Constitution?

The clause 29A was introduced in Article 366 of the Constitution, as it was felt necessary to declare those transactions as deemed sale of goods which could otherwise lead to a dilemma in classification between sale of goods and/or services.

•    Yet another question arising out of this situation is, shouldn’t there be a similar provision in the Constitution to declare the other portion of such transactions as the deemed/declared services as is done for sales tax/VAT, before the same could be brought under the tax net by the Centre?

There are no ready answers to the above posers. However, it appears that, there could to be a fresh round of litigations and resultant uncertainties.

Conclusion

To conclude, it would appear that the Kerala High Court does not resolve the larger burning issue of dual taxation of transactions by the Centre and the States whereby the increased burden is being felt by the end user/consumer. To put it in simple terms, an ideal scenario would be that in case of composite transactions, one component is taxed by the States and the other by the Centre in terms of clear statutory provisions. However, presently despite the fact that service tax is being levied on the service component (40%), the States continue to charge VAT on the 100% amount, resulting in dual taxation and increased burden on the end user/consumer.

It is expected that the GST regime would address this burning issue impacting businesses and end users. However, it is felt that the Government needs to urgently address this issue without waiting for the introduction of GST Regime whereby Empowered Committee of State Finance Ministers can have a dialogue with the Centre and States and arrive at an agreement for a consistent abatement regime across the country which can be adopted by the Centre as well as the States.

The substantial benefit of CENVAT credit should not be denied for procedural defects of minor nature. On the other part, the assessees should also make an honest attempt to follow the procedures laid down under relevant Rules.

fiogf49gjkf0d
 Facts:

The appellants providing telephone services throughout India took CENVAT credit on certain equipments installed at other secondary switching areas (SSAs) registered separately with service tax authorities. Since the equipments were not used in the premises of the appellants, CENVAT credit was disallowed.

However, the appellants argued that the services were rendered throughout India from any SSA using capital goods installed anywhere in the country. Since the issue was technology based and facts were to be determined, the matter was remanded back by the Tribunal. On examination, the Tribunal observed that in case the proposition of the appellants is accepted, all the SSAs using equipment installed at any other SSA would be eligible for CENVAT credit. Further, DGM (Projects), Salem had placed the order for these capital goods and had handed over the duty paying documents to BSNL, Salem and CENVAT credit was availed only once by BSNL, Salem and the capital goods were used in the premises of BSNL. It was contested by the appellants that there was no condition of installing the capital goods in the premises of service provider unlike in the case of capital goods used in the manufacture of excisable goods as per Rule 2(a)(A) of the CENVAT Credit Rules, 2004. The only condition to be satisfied was that the capital goods should be used for providing output services and accordingly, the appellants were eligible for the CENVAT credit. The department’s contention was that the equipments had to be used by the registered entity and if it is used elsewhere, the department cannot verify the use of the capital goods and correctness of the CENVAT credit availment. Hence, the appellants should have taken registration as input service distributor and should have followed the proper procedures.

Held:

The present case was of not following appropriate procedures and not a case of misutilisation of ineligible CENVAT credit. No CENVAT credit was distributed since the entire CENVAT credit was availed by only one office and the same could have been verified by the department. The premises, where equipments were installed, belonged to BSNL and also the capital goods were used for providing output services.

Therefore, substantial benefit of CENVAT credit was not to be denied for procedural defects of minor nature. However, the procedures laid down under the Rules should not be circumvented quoting different decisions of the Tribunal and BSNL was directed to make an earnest attempt to follow such procedures.

levitra

CENVAT credit can be availed on capital goods received in the premises of service provider only after the services became taxable.

fiogf49gjkf0d
Facts:

The respondents were brought into service tax net with effect from 16-6-2005. They availed CENVAT credit on capital goods received in the premises of service provider on 5-5-2005 i.e. prior to services became taxable.

Held:

Decision delivered by Gujarat High Court in case of Gujarat Propack 2009 (234) ELT 409 (Guj) was not applicable to the present case as the facts of the case were completely different. Following the decision delivered by larger Bench of the Tribunal in case of Spenta International Ltd. 2007 (216) ELT 133 (Tri.-LB), it was held that CENVAT credit was available in respect of capital goods received in the premises of service provider only after the goods became dutiable and therefore, the respondents were not eligible for the said CENVAT credit on capital goods received prior to the date of the service becoming taxable.

levitra

Payment of duty made under protest during investigation – To be considered as ‘deposit’ and not duty – Principle of unjust enrichment not applicable.

fiogf49gjkf0d
Facts:

Appellant paid duty under protest during the investigation and later, it was held that it was not dutiable. Revenue asked to prove there was no unjust enrichment. It was a case of refund of ‘deposit’ and not of ‘duty’ as per the appellant wherein the principle of unjust enrichment was not applicable.

Held:

The Department did not bring anything on the record that the appellant had passed on the incidence of the duty. Further, the amount was paid under protest. Therefore, the same was in the nature of ‘deposit’ and not ‘duty’.

levitra

Imported as well as indigenous drawings and designs – Once considered as ‘goods’ by customs authorities, cannot be considered ‘services’ by service tax authorities – Import of services cannot be taxed prior to insertion of section 66A.

fiogf49gjkf0d
 Facts:

• Appellant, a company incorporated in Japan, entered into four different contracts with TISCO to set up a Skin Pas Mill at Jamshedpur. Two agreements were for supply of imported as well as indigenous designs and drawings and the other two were for supply of plant, machinery and equipments. A demand of Rs. 76 lakh was made treating supply of drawings and designs as “consulting engineer’s services”.

• Appellant’s appeal before Tribunal was remanded with a direction to consider the bill of entry and determine whether they were goods. The Commissioner after considering the relevant bill of entry, confirmed the demand and also levied equal amount of penalty. Hence, this appeal. According to the appellant, customs authorities had assessed the imported drawings and designs as ‘goods’ and appropriate customs duty was paid under chapter 49 by TISCO, and therefore, the same could not be considered as services by the service tax department for the levy of service tax and that erection, commissioning and installation activities were not covered under the head of “Consulting Engineer’s Services” as per CBEC circular dated 13-5-004.

• Further, the Indian service tax authorities had no jurisdiction to tax the appellant being a foreign company. Moreover, such services became taxable only after 18-4-2006 in the hands of recipient under reverse charge. The impugned activities were carried out much before the same. Whereas according to the revenue, designs and drawings were in essence system engineering or basic engineering and the scope of “consulting engineer’s services” was very wide. Though the appellant was a foreign company, it had a project office as well as representational office in India for more than 15 years which can be considered as fixed establishments.

Held:

• Designs and drawings imported and assessed as ‘goods’ cannot be considered as ‘services’ and be subjected to service tax. The activities purported before the insertion of section 66A, i.e. before 18-4-2006 could not be taxed under service tax.

levitra

CENVAT credit pertaining to input services for the period prior to having service tax registrationallowed.

fiogf49gjkf0d
 Facts:

 The appellant having an office in Software Technology Park was engaged in software export. They obtained registration in 2009 and availed CENVAT credit in respect to period from April 2008 to March 2009. Revenue took a view that they had not obtained registration during the said period and therefore, could not be said to be provider of taxable output services. Hence, CENVAT credit cannot be allowed. The appellant argued that the issue was no more res integra as the same is fully covered by Tribunal’s decision in case of Well Known Polyesters Ltd. reported in 267 ELT 221, wherein it was held that service tax registration is not a pre-requisite to avail CENVAT credit.

Held:

Admitting appellant’s plea and relying on the Tribunal’s decision in case of Well Known Polyesters Ltd. (supra), Tribunal held that the appellant was eligible to claim CENVAT credit of the service tax paid on input services, after getting registration even if the registration is not in place at the relevant time of availing input services.

levitra

Service tax not collected along with insurance premium in first three instalments – Insurance policy silent about service tax – Unfair trade practice – Insurance company cannot claim it subsequently.

fiogf49gjkf0d
Facts:

Second respondent took life Insurance policy from the appellant at an annual premium of Rs. 4,810/- in 2006. Service tax was applicable to insurance premium during the extant period. However, for the initial three years, appellant did not charge service tax on the premium. In 2009, the appellant asked for service tax along with the insurance premium. The second respondent approached the first respondent, who in turn held that no separate charge of service tax could be collected by the appellant over and above the premium of Rs. 4,810/-. A writ petition filed by the appellant against the order of the first respondent was dismissed and therefore, this appeal.

Held:

Policy was issued when service tax was in force. The appellant showed by way of its conduct that service tax was included in the premium in the initial three years. If the premium did not include service tax, the insurance company could have stated it explicitly. The company offered services to public at large and was duty bound to disclose real price being charged. Non disclosure of real price would be tantamount to conduct of unfair trade practice as per Consumer Protection Act, 1986 and the appeal was dismissed.

levitra

High Court should examine and decide the case on merits when huge stakes are involved and Puloma Dalal, Jayesh Gogri Chartered Accountants Part a: Service Tax Recent Decisions ? Indirect Taxes 45 46 56 Bombay Chartered Acountant Journal, February 2013 BCAJ INDIRECT TAXES 596 (2013) 44-B BCAJ not dispose the case on the grounds of delay in filing appeal by department.

fiogf49gjkf0d

Facts:

High Court disposed off the case on the grounds of delay in filing appeal by the department.

Held:

In cases where huge stakes are involved, the High Court should examine and decide the case on merits and should not dispose off the same based on the mere grounds of delay in filing appeal by the department. In such a case, the High Court may impose costs on the department. Accordingly, the present matter was remitted to the High Court to decide the case de novo in accordance with the law.

levitra

Composite construction contracts entered into prior to 1-6-2007 on which service tax was discharged already, cannot be reclassified as works contract services post 1-6-2007 to avail the benefit of composition scheme.

fiogf49gjkf0d
Facts:

The appellant was engaged in executing various composite construction contracts and paid service tax taking abatement under Notification No. 1/2006-ST dated 1-3-2006 prior to 1-6-2007 under erection, commissioning or installation services, commercial or industrial construction services and construction of residential complex service. Works contract service was introduced with effect from 1-6-2007 and consequently, a composition scheme was introduced whereby service tax was payable @ 2% on the gross amount charged for works contract. The appellant classified the ongoing contracts as on 01.06.2007 under works contract service.

Circular No. 98/1/2008 dated 4-1-2008 clarified that classification of services was to be determined as per the nature of services and it cannot be vivisected into two different taxable services on the criteria of time of receipt of consideration. Based on this circular, a SCN notice was issued challenging such change in the classification and payment under the Composition Scheme.

The appellant contested the said Circular on the ground of being contrary to Rule 3(3) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 and section 65(105) (zzzza) of the Finance Act, 1994 and that this would result in keeping the similar contracts on different footing and that it could not override the statutory provisions.

According to revenue, the Circular was explanatory in nature which merely explained Rule 3(3) of the said Rules and that the appellant had challenged the Circular and not the provisions of Rule 3(3). Therefore, as per the provisions of Rule 3(3), the appellant cannot opt for the Composition Scheme. The revenue also contended that reclassification was not permissible and in view of Rule 3(3), the appellant did not enjoy the benefit of Composition Scheme.

Held:

• Circular No.98/1/2008-ST dated 4-1-2008 only explained the provisions of Rule 3(3) and it was not contrary to the Act or the Rules.

• Since the appellant had not challenged constitutional validity of Rule 3(3), the Honourable Supreme Court did not comment on the same.

 • Even if the Circular were to be set aside, Rule 3(3) was operational and as per Rule 3(3), the assessees had the option to pay service tax under Composition Scheme before payment of service tax in respect of the works contract and the option so exercised was applicable to the entire works contract. Since the appellant had already paid service tax prior to 1-6-2007, Composition Scheme was not available to the appellant.

• Thus, the Supreme Court has upheld the decision of Andhra Pradesh High Court (2010 (19) STR 321 (AP).

levitra

“Goods/Sales Return” – Scope

fiogf49gjkf0d
Introduction

Under Sales Tax laws, the sales effected are liable to tax. However, if there is sales return (also referred to as “Goods return”) then the amount relating to such returns is not liable to tax. However, there are certain time limits for allowing this deduction. For example, under MVAT Act, 2002 and CST Act, 1956 following are the time limits for allowing the claim of ‘goods return’.

Rule 3 of MVAT Rules, 2005

“3. Goods returned and deposits refunded:- The period for return of goods and refund of deposits for the purposes of clauses (32) and (33) of section 2 shall be six months from the date of the purchase or, as the case may be, the sale.”

Similarly, Section 8A (1) (b) of CST Act provides as under:

“Section 8A (1)(b) The sale price of all goods returned to the dealer by the purchasers of such goods,-

(i) Within a period of three months from the date of delivery of the goods, in the case of goods returned before the 14th day of May, 1966.

(ii) Within a period of six months from the date of delivery of the goods, in the case of goods returned on or after the 14th day of May, 1966.

Provided that satisfactory evidence of such return of goods and of refund or adjustment in accounts of the sale price thereof is produced before the authority competent to assess or as the case may be, re-assess the tax payable by the dealer under this Act.”

It can be seen from above, that the total period (time limit) allowed for claim of goods returns is six months. The issue, for consideration herein is, if the goods return is beyond a period of six months, because of valid reasons, whether the claim is tenable. More particularly, such issue arises in relation to medicines where there is date of expiry of the medicines. In normal circumstances, the said dates are beyond the period of six months. In other words, if there are unsold medicines lying with the dealer after the expiry date, such medicines have to be returned, which may be beyond six months. In such a situation, whether the statutory time limits for ‘sales return’ can be ignored and deduction can be allowable.

Recently, Honourable Kerala High Court had an occasion to deal with such an issue. The judgment is in case of Glaxo Smithkline Pharmaceuticals Ltd. vs. State of Kerala (50 VST 486)(Ker). In this case, the medicines were returned by the buyers after the expiry date and such dates were beyond six months. In other words, the sales returns were beyond six months and the assessing authority disallowed the claim. Before the Honourable High Court, the dealer made two fold arguments. It was his submission that either sales returns should be allowed or the sales should be considered as unfructified sales. The High Court, after considering the arguments, gave detailed judgment on the same, observing as follows:

“3. After hearing both sides, what we find is that the petitioner’s claim of sales return was not allowed because the rule does not permit it. What was sold was medicines with potency and what is returned much after sale and second round of sale is medicines, the life period of which is over. Having had a pre-fixed period of potency, it is unlikely that sales return of life expired medicines will be within three months. Manufacture of medicines itself is geared up to patient demand soon after marketing is done. Therefore, when first sales are made, the medicines sold will have beyond three months shelf-life. Therefore, sales returns do not happen within three months of sales. So much so, under the existing rules which permit deduction of sales return only within three months of sale, the petitioner or other medical companies cannot get deduction of sales returns. The Kerala General Sales Tax Act or the Rules do not specifically provide any provision for refund or adjustment of tax paid in respect of sale of medicines which have lost potency at the hands of the dealer and which have been collected and destroyed by the company. The only provision for granting deduction is rule 9(b)(i) which provides for sales return within three months of sale which does not happen, because no medicine sold will have such short-period of three months of shelf-life. The petitioner also has no case that the sales return claimed of shelf-life expired medicines were within three months of the sale by the petitioner and so much so, the claim was rightly rejected in assessment and confirmed by the Tribunal. We do not find any error with the finding of the lower authorities.

 The counsel for the petitioner raised an alternate contention that transaction should be treated as unfructified sales and so much so, since there is no time-limit for claiming deduction, the petitioner is entitled to refund of tax paid. This is opposed by the Government Pleader on several grounds.

In the first place, the sale of the item has really taken place from the petitioner to the distributor and from the distributor in turn to the dealer. The fact that the last retail dealer could not sell the medicine with the shelf-life period does not mean that the sale by the petitioner to distributor and in turn to dealer had not taken place. On the other hand, goods reach retail dealers only on second sales and admittedly the petitioner has not directly sold medicines to the retail dealers who returned the goods through distributors.

 Therefore, the petitioner’s claim that the sale has not taken effect and on return of the medicines after expiry of the shelf-life, the original sale gets cancelled or frustrated is unacceptable. The practice followed is that shelf-life expired medicines are collected by the company from distributors and destroyed as part of the condition of the marketing to save dealers from loss. In fact, such loss is essentially borne by the manufacturing company, and the dealers or distributors obviously and rightly are not called upon to meet the loss. Further, as a matter of practice, the medicines returned on expiry of shelf-life are not replaced by the petitioner as such. But its value is reimbursed to the distributors through credit notes who in turn issue credit notes to retail dealers. Therefore, it is not a case of return of medicine on expiry of shelf-life and cannot be treated as fructified sales or unfructified sales. So much so, the petitioner’s contention in this regard is also not acceptable.”

Conclusion

It can be seen that statutory provisions apply in spite of genuine difficulties. The claim of unfructified sale is also not maintainable. The legislatures should provide relief in such genuine cases. In fact, in the above judgment, the Honourable High Court has observed for providing necessary statutory relief.

levitra

Taxability of Sub-Contracted Services

fiogf49gjkf0d
Preliminary

Sub–contracting is a significant mode of business operations in the country (both in the manufacturing sector as well as the service sector).

In order to deal with the issue of multiple taxation, Central Excise exemptions have been granted by issuing Job work Notifications, which have the force of law. Under service tax, there are no statutory provisions which specifically deal with taxability of sub-contracted services. However, clarifications have been issued by the service tax authorities in the matter from time to time, while taxability of sub–contracted services remains a highly contentious issue.

With effect from 1-7-2012, taxability of sub-contracted services has assumed increased significance with the introduction of Negative List based taxation of services, more particularly in view of the fact that, despite substantially widening the taxation base, the threshold exemption continues to be 10 lakh. Hence, the same is discussed hereafter, separately for position prior to 1-7-2012 and after 1-7-2012.

Position prior to 1-7-2012:

• Department clarifications on or after 23/08/2007.

A Master Circular No.96/8/2007-ST dated 23-8- 2007 was issued by the Government whereby all the earlier circulars, clarifications etc. from time to time till the date of the said circular were superseded. An extract from the said circular is provided in Table 1:


   
• Circular No. 138/07/2011, May 2011
“Subject: Representation by Jaiprakash Associates Limited, Noida, in terms of Judgement dated 14-2-2011 in W.P. No. 7705 of 2008 – regarding

1. The Works Contract Service (WCS) in respect of construction of dams, tunnels, road, bridges etc. is exempt from service tax. WCS providers engage sub-contractors who provide services such as Architect’s Service, Consulting Engineer’s Service, Construction of Complex Service, Design Services, Erection Commissioning or Installation Service, Management, Maintenance or Repair Service etc. The representation by Jaiprakash Associates Limited seeks to extend the benefit of such exemption to the sub-contractors providing various services to the WCS provider by arguing that the service provided by the sub-contractors are “in relation to” the exempted works contract service and hence they deserve classification under WCS itself.

2. The matter has been examined.

(i) Section 65A of the Finance Act, 1994 provides for classification of taxable services, which mentions that classification of taxable services shall be determined according to the terms of the sub-clauses (105) of section 65. When for any reason, a taxable service is prima facie, classifiable under two or more sub-clauses of clause (105) of section 65, classification shall be effected under the sub-clause which provides the most specific description and not the sub-clauses that provide a more general description.

(ii) In this case, the service provider is providing WCS and he in turn is receiving various services like Architect service, Consulting Engineer service, Construction of complex, Design service, Erection Commissioning or installation, Management, Maintenance or Repair etc., which are used by him in providing output service. The services received by the WCS provider from its sub-contractors are distinctly classifiable under the respective sub-clauses of section 65(105) of the Finance Act by their description. When a descriptive sub-clause is available for classification, the service cannot be classified under another sub-clause which is generic in nature. As such, the services that are being provided by the sub-contractors of WCS providers are classifiable under the respective heads and not under WCS.” …………………..

3. “Therefore, it is clarified that the services provided by the subcontractors/consultants and other service providers are classifiable as per section 65A of the Finance Act, 1994 under respective sub-clauses (105) of section 65 of the Finance Act, 1944 and chargeable to service tax accordingly.”

 • CBEC Circular No. 147/16/2011-ST dated 21-10-2011 “

1. Reference is invited to the Circular No.138/07/2011– Service Tax dated 06.05.2011 wherein it was clarified that the services provided by the sub-contractors/consultants and other service providers to the Works Contract Service (WCS) provider in respect of construction of dams, tunnels, road, bridges etc. are classifiable as per section 65A of the Finance Act, 1994 under respective sub-clause (105) of section 65 of the Finance Act and are chargeable to service tax accordingly. Clarification has been requested as to whether the exemption available to the Works Contract Service providers in respect of projects involving construction of roads, airports, railways, transport terminals, bridges, tunnels, dams etc., is also available to the subcontractors who provide Works Contract Service to these main contractors in relation to those very projects.

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

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

  • Taxability of sub-contractors under VAT – Important Judicial Principles

In the case of Larsen & Toubro Ltd. v. State of Andhra Pradesh (2006) 146 STC 610 (AP), there were three parties, viz.:
Contractee – One who awarded the contract

Contractor – One who took the whole con-tract

Sub–Contractors – To whom main contractor gave the contract.

Petitioner filed a writ petition praying for a declaration that section 4(7), Explanation VI to section 2(28) of the Andhra Pradesh Value Added Tax Act, 2005, Rule 17(1)(a) and 17(1)(c), read with Rule 17(1)(e) of the Andhra Pradesh Value Added Tax Rules, 2005 are against Article 366(29A)(b) of the Constitution of India and the scheme of levy and recovery of taxes both at the hands of the nominated sub-contractors and the main contractor is beyond the legislative competence of the state legislature. The Andhra Pradesh High Court held as under:

•    “Sub–contractor is an agent of the contractor – Though there are two agreements in the transaction of execution of works contract by a contractor through sub-contracts, satisfying the definition of “works contract” under the APVAT Act, it must be noticed that there is no agreement between the contractee and the sub -contractor and, consequently, there is no legal relationship creating either rights or obligations between them under an agreement. In between the contractee and the sub -contractor, the relationship is simply that the sub-contractor is an agent of the contractor.

•    Property in goods passes directly from the sub-contractor to the contractee – In a works contract, the property in goods passes directly to the contractee by the theory of accretion. In the event of a contractor awarding the contract to a sub-contractor, the property in goods does not pass to the contractor at any point of time. The sub-contractor is only an agent of the contractor and the property in goods passes directly from the sub-contractor to the contractee and, therefore, there can be only one sale recognised by the legal fiction created under Article 366(29A).”

•    Taxing both contractor and sub-contractor would be double taxation – That to hold that there are two taxable events in such a transaction, enabling the State to levy and collect tax both from the sub-contractor and the contractor, would be violative of Article 14 also for the reason that wherever a contractor executes a works contract himself without employing the sub-contractor, the deemed sale of goods involved in such execution of works contract would attract the tax only once and whenever the contractor employs a sub-contractor, the transfer of property in the same goods involved in the execution of such works contract attracts the tax twice, which is plainly irrational and violative of article 14 of the Constitution of India.

•    Finally, the Andhra Pradesh High Court concluded that it is open for the State to frame appropriate rules to collect the same either from the sub-contractor or from the contractor, we emphasise, not from both. That means that tax can be collected from sub-contractor or from the contractor, but not from both.

The Supreme Court in State of Andhra Pradesh v. Larsen & Toubro Ltd. [2008] 17 VST 1 (SC) affirmed the above decision of AP High Court.

The Supreme Court explained that by virtue of Article 366(29A)(b) of the Constitution of India, once the work was assigned by the contractor the only transfer of property in goods would be by the sub-contractor, who was registered dealer, and who claimed to have paid the taxes under the Act on the goods involved in the execution of works.

Once the work was assigned by the assessee to the sub-contractor, the assessee ceased to execute the works contract in the sense contemplated by Article 366(29A)(b) because the property passed by accretion and there was no property in the goods with the contractor which was capable of re-transfer, whether as goods or in some other form. Thus, in such a case, the work executed by the sub-contractor resulted only in a single transaction and not multiple transactions.

The position emerging from the ruling of Larsen & Toubro Ltd. by the Andhra Pradesh High Court (affirmed by the Supreme Court) can be summed up as under:

•    Sub-contractor is an agent of main contractor and has no privity of contract with contractee.

•    Property in goods in a sub-contract works contract passes directly from the sub-contractor to the contractee and there can be only one sale recognised by legal fiction created under Article 366 (29A) of the Con-stitution of India.

•    Taxation of contractor and sub-contractor on the same works contract (or a part thereof) would mean double taxation.

The above important principle laid down by the Supreme Court in the context of VAT, could be relevant for service tax, in appropriate cases.

  •    Taxability of sub-Contracted services under service tax – judicial considerations

•    In regard to position for the period prior to 23.08.2007, based on relaxations granted through departmental clarifications, the matter stands settled by various judicial rulings viz.

•    Urvi Construction vs. CST, (2010) 17 STR 302 (Tri.-Ahmd)

•    CCE vs. Shivhare Roadlines (2009) 16 STR 335 (Tri.–Del)

•    Harshal & Company vs. CCE (2008) 12 STR 574 (Tri.– Ahmd)

•    Semac Pvt Limited vs. CCE (2006) 4 STR 475 (Tri.–Bang)

•    Shiva Industrial Security Agency vs. CCE (2008) 12 STR 496 (Tri.– Ahmd)

•    Synergy Audio Visual Workshop P. Ltd. vs. CST (2008) 10 STR 578 (Tri.– Bang)

•    OIKOS vs. CCE, (2007) 5 STR 229 (Tri.–Bang)

•    Viral Builders vs. CCE (2011) 21 STR 457 (Tri.– Ahd)

to the effect that there cannot be double taxation in cases where services are rendered by a person through another person to the ultimate consumer, as long as the main contractor who has the privity of contract with the final cus-tomer has paid service tax on the gross amount.

•    Some of the important observations by judicial authorities as regards taxation of sub–contracted services are as under:

Vijay Sharma & Co. vs. CCE (2010) 20 STR 309 (Tri.–ND) (LB)

Para 9

It is true that there is no provision under Finance Act, 1994 for double taxation. The scheme of service tax law suggest that it is a single point tax law without being a multiple taxation legislation. In absence of any statutory provision to the contrary, providing of service being event of levy, self same service provided shall not be doubly taxable.

CCE vs. Areva T&D India Ltd (2011) 23 STR 33 (Tri – Chennai)

Para 6

……………..

The dispute relates to services rendered by the respondents to their customers utilising engineering firms as sub-contractors. The original authority held that the respondents have not rendered any “Repair Service”. It is not being disputed that the respondents are having contract for rendering services with the ultimate customers and they receive payment from them and ensure the quality of services rendered to them. Mere engagement of sub-contractors for some of the activities does not take away the role of respondents as service provider to their ultimate clients. The reasoning adopted by the original authority may lead to the conclusion that the respondents are not liable to pay any service tax at all in respect of activities undertaken through sub-contractors. Apparently, the implications are not being understood or appreciated by the original authority. From the facts of the case, it emerges that the respondents are rendering services to their ultimate customers and while rendering the said service, they are receiving services from the engineering firms appointed by them. They receive payment of service charges from the ultimate customers and part of it is paid to the sub-contractors for the services rendered by them and naturally the respondents are making some profits…………..

National Building Construction Corp Ltd vs. CCE & ST (2011) 23 STR 593 (Tri.–Kolkata)

In this case, NTPC awarded contract to NBCC who entrusted work for site formation and clearance to two sub-contractors and Demand raised against sub-contractors for providing service to NTPC on behalf of NBCC. The Tribunal observed as under:

Services were rendered by sub–contractor to main contractor who are answerable to NTPC, and no service was rendered by sub-contractors to NTPC on behalf of NBCC main contractor. Hence, no tax was demandable as a case of revenue neutrality &    NBCC having paid tax on the entire amount received from NTPC.

  •     Taxability position of sub-contracted services

•    For the period prior to 23-8-2007, it would appear that there was reasonable clarity based on department clarifications and judicial rulings to the effect that in case of sub-contracting of services, where the main contractor has discharged the service tax liability on the gross amount, there would be no liability to service tax at the end of the sub-contractor.

•    For the period on or after 23-8-2007, based on department clarifications dated 23-8-2007, 6-5-2011 and 21-10-2011 stated above and subject to observations in paras (c) & (d) hereafter, it would appear that a better view would be that sub–contracted service provider (SCSP) is to be treated as an independent service provider and taxability needs to be determined based on appropriate service classification, applying the principles for classification of services contained in section 65A of the Act.

•    In the context of works contract services, based on Supreme Court ruling in the L&T case discussed above, it can be contended that in case of sub-contracting, tax can be collected either from the sub-contractor or the main contractor, but not from both.

•    In the absence of statutory provisions under service tax law as regards taxability of sub-contracted services, larger issue as to whether there can be liability at the end of sub-contractor at all, in cases where main contractor has discharged the service tax liability on the gross amount, remains judicially unresolved for the period on or after 23-8-2007.

•    Taxability of sub-contracted services provided to SEZ Units are discussed separately.

Position on or after 01/07/2012

  •     Provisions u/s. 66F of the Finance Act, 1994 (Act)

Section 66F of the Act (principles of interpretation of specified description of services or bundled services) provides as under:

“(1) Unless otherwise specified, reference to a service (hereinafter referred to as main service) shall not include reference to a service which is used for providing main service.”

……………..

Para 9.1-1 of Guidance Note 9 of Education Guide issued by CBEC dated 20/06/2012 provides the following illustrations to explain this first rule of interpretation contained u/s. 66F of the Act:

“Provision of access to any road or bridge on payment of toll is a specific entry in the negative list in section 66D of the Act. Any service provided in relation to collection of tolls or for security of a toll road would be in the nature of service used for providing such specified service and will not be entitled to the benefit of the negative list entry.

Transportation of goods on an inland water-way is a specific entry in the negative list in section 66D of the Act. Services provided by an agent to book such transportation of goods on inland waterways or to facilitate such transportation would not be entitled to the benefits of the negative list entry.”

From the above illustrations, it is clear that, as per section 66F(1), services procured for providing a service (main service) are not automatically classifiable under the same category as the main service. The above provision seems to confirm the position clarified by CBEC in May, 2011 and October, 2011 (referred earlier)

  •     Mega Exemption Notification No.25/2012 – ST dated 20/6/12 (Mega N 25)

Despite the fact that excepting provisions u/ s. 66F(1), no specific provisions have been made under service tax law in regard to taxability of sub-contracted services, significant exemptions have been granted to specific sections of sub–contracted services under Mega N25. The relevant entry is reproduced hereafter:

•    Entry No. 29

“Services by the following persons in respective capacities –

(a)    sub-broker or an authorised person to a stock broker;
(b)    authorised person to a member of a commodity exchange;
(c)    mutual fund agent to a mutual fund or asset management company;
(d)    distributor to a mutual fund or asset management company;
(e)    selling or marketing agent of lottery tick ets to a distributor or a selling agent;
(f)    selling agent or a distributor of SIM cards or recharge coupon vouchers;
(g)    business facilitator or a business corre spondent to a banking company or an insurance company, in a rural area; or
(h)    sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempt.”

•    In addition to (a) above, sub-contracted services could be exempted from service tax, if they fulfill the criteria for entitlement to specific exemption under a notification (other than 10 lakh exemption). To illustrate:

Mega N25 (Entry No. 13)

“Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of –

(a)    a road, bridge, tunnel, or terminal for road transportation for use by general public;

(b)    a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana;

(c)    a building owned by an entity registered u/s. 12AA of the Income-tax Act, 1961(43 of 1961) and meant predominantly for religious use by general public;

(d)    a pollution control or effluent treatment plant, except when located as a part of a factory; or a structure meant for funeral, burial or cremation of deceased;”

Mega N25 (Entry No. 14)

“Services by way of construction, erection, commissioning, or installation of original works pertaining to,-

(a)    an airport, port or railways, including monorail or metro;

(b)    a single residential unit otherwise than as a part of a residential complex;

(c)    low-cost houses up to a carpet area of 60 square meters per house in a housing project approved by competent authority empowered under the “Scheme of Affordable Housing in Partnership” framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;

(d)    post-harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or

(e)    mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages;”

  •     Taxability position of sub-contracted services

•    Subject to observations in paras hereafter, it would appear that, a better view would be that SCSP is to be treated as an independent service provider and taxability needs to be determined based on appropriate service & classification applying the principles contained in section 66F of the Act.

•    In the context of works contract services, based on Supreme Court ruling in L&T case discussed earlier, it can be contended that in case of sub-contracting, tax can be collected either from the SCSP or the main service provider (MSP), but not from both.

•    Despite the fact that specific exemptions have been granted to a large section of sub-contracted services, it is a well settled principle laid down by the Supreme Court to the effect that, an exemption cannot necessarily imply liability to tax/duty. Hence, the larger issue as to whether there can be liability at the end of SCSP at all in cases where MSP has discharged the service tax liability on the gross amount, needs to be tested judicially.

•    Another point required to be noted is that all SCSPs do not necessarily enjoy the exemption that is available to MSP under Mega N25. For instance, certain services provided to the Government, local authority etc. are exempt under “entry No. 25” of the said Mega N25. However, when a sub-contractor is retained by MSP providing services to the Government, technically services provided by SCSP to MSP are not provided to the Government, Therefore unless SCSP enjoys exemption independently under any other entry, he would be liable for service tax in spite of the fact that his services are merged into the services of MSP who ultimately provides services to the Government.

•    Taxability of sub-contracted services provided to SEZ units are discussed herein below:

Taxability of sub–contracted services provided to SEZ Units

The relevant extracts from Notification No. 40/2012–ST dated 20-6-2012 (“N40”) are as under:

“The exemption contained in this notification shall be subject to the following conditions, namely:-

(a)the exemption shall be provided by way of refund of service tax paid on the specified services received by a unit located in a SEZ or the developer of SEZ and used for the authorised operations:

Provided that where the specified services received in SEZ and used for the authorised operations are wholly consumed within the SEZ, the person liable to pay service tax has the option not to pay the service tax ab initio, instead of the SEZ unit or the developer claiming exemption by way of refund in terms of this notification.

Explanation – For the purposes of this notification, the expression “wholly consumed” refers to such specified services received by the unit of a SEZ or the developer and used for the authorised operations, where the place of provision determinable in accordance with the Place of Provision of Services Rules, 2012 (hereinafter referred as the POP Rules) is as under:-

(i)    in respect of services specified in Rule 4 of the POP Rules, the place where the services are actually performed is within the SEZ ; or

(ii)    in respect of services specified in Rule 5 of the POP Rules, the place where the property is located or intended to be located is within the SEZ; or

(iii)    in respect of services other than those falling under clauses (i) and (ii), the recipient does not own or carry on any business other than the operations in SEZ;

…………………”

The substantive position of exemption in regard to services provided to SEZ units prior to 1-7-2012 continues with effect from 1-7-2012 as well, excepting consequential changes due to introduction of POP Rules in lieu of Rules for Export of Services/lImport of Services which were in force upto 30-6-2012.

According to one school of thinking, benefit of exemption under N 40 would not be available in regard to services availed by a MSP from a SCSP in regard to services provided by them for SEZ projects. This is supported by one or more of the following reasons:

•    SCSP has privity of contract with MSP and has no independent legal relationship with SEZ clients of MSP. Hence, MSP is the recipient of Services provided by SCSP and not SEZ clients of MSP.

•    According to department clarifications dated 23-8-2007, 6-5-2011 and 21-10-2011 and provisions of section 66F(1) of the Act, SCSP is to be treated as an independent service provider and taxability determined accordingly.

•    Though according to Rule 10 of SEZ (Amendment) Rules, 2009 benefit of exemptions & concessions available to a Contractor shall also be available to sub-contractors read with section 51 of SEZ Act, it has been judicially held that, provisions of SEZ Act/Rules do not necessarily override the provisions of the relevant statute. [Reference can be made to UOI v. Essar Steel Ltd. (2010) 249 ELT 3 (GUJ) affirmed by Supreme Court – (2010) 255 ELT A 115]

According to an alternative school of thinking, benefit of exemption under N 40 would be available in regard to services availed by MSP from SCSP in regard to services provided by them for SEZ projects. This is supported by one or more of the following/reasons:

•    SCSP has provided services on behalf of MSP to their SEZ clients. Hence, though privity of contract is between MSP and their SEZ clients, there is a constructive receipt of service by units located in SEZ from SCSP. Hence, benefit of N 40 would be available.

•    Views expressed through department clarifications that, a SCSP is an independent service provider, has no statutory force. Hence, taxation at the end of SCSP results in multiple taxation which is not contemplated under the scheme of service tax law generally.

•    Section 51 of SEZ Act read with Rule 10 of SEZ (Amendment) Rules, 2009 supports the contention that benefits available to a MSP should also be available to a SCSP.

Based on the above, it would appear that entitlement to the benefit of N 40 by a SCSP continues to be a contentious issue.

CENVAT credit on service tax paid on input services availed in connection with services provided by MSP to units in SEZ/developers of SEZ.

For availment of CENVAT credit under CENVAT Credit Rules, 2004 (CCR) on input services availed for “exported services”, it has been a settled position that, “exported services” are to be treated in the nature of “taxable services” and not “exempted services”. Hence, restrictions on availment of CENVAT credit under Rule 6 of CCR, would not apply and benefit of CENVAT credit of service tax paid on input services is available. However, whether services provided to a unit in SEZ/developer of SEZ, are to be treated as being in the nature of “exported services” or “exempted services” has also been a very contentious issue.

With effect from 1-3-2011, however, a new sub–rule (6A) has been inserted in Rule 6 of CCR to the effect that provisions of sub–rules (1), (2), (3) & (4) of Rule 6 of CCR shall not apply in cases when taxable services are provided, without payment of service tax to a unit in SEZ/developer of a SEZ for their authorised operations. Hence, with effect from 01/03/2011, benefit of CENVAT credit would be available on service tax paid on input services availed in connection with services provided to a unit in SEZ/developer of SEZ. This amendment has been given a retrospective effect, by the Finance Act, 2012. Hence, MSP can avail benefit of CENVAT Credit in cases where service tax is paid on services availed from SCSP for SEZ Projects on which Service tax has been paid by a MSP, subject to conditions stipulated under CCR.

CENVAT credit of the service tax paid — Input services such as rent-a-cab service, outdoor catering services provided by the manufacturer to its employees working in the factory — held that such services are in relation to manufacture of final product — Hence, eligible input service.

fiogf49gjkf0d
(2012) 25 STR 428 (Kar.) — CCE, Bangalore v. Bell Ceramics Ltd.

CENVAT credit of the service tax paid — Input services such as rent-a-cab service, outdoor catering services provided by the manufacturer to its employees working in the factory — held that such services are in relation to manufacture of final product — Hence, eligible input service.


Facts:

The appellant claimed Cenvat credit of service tax paid by the appellant under rent-a-cab service and outdoor catering service to transport its employees to the factory and back and to provide food for them. The appellant was of the view that these services fall under input services which were entitled to credit.

Held:

Any service used by the manufacturer whether directly or indirectly in relation to the manufacture of the final product shall be considered to be eligible input service. Hence, CENVAT credit of the same can be availed.

levitra

2013 (30) S.T.R. 176 (Tri- Del) Sharwan Kumar vs. Commissioner of Central Excise, Chandigarh-I.

fiogf49gjkf0d
Whether process of denting & painting done by job worker inside the factory of vehicle manufacturer would be taxable under “business auxiliary service”?

Facts:
The appellant was undertaking certain jobs within the factory of JCBL Ltd. which was manufacturing bus bodies falling under Chapter-8707 of the Central Excise Tariff. The revenue was of the view that, the above activity amounted to “production or processing of goods for, on behalf of the client” as specified under the definition of “Business Auxiliary Service” and service tax was payable. The contention of the appellant was that the appellant was doing the activity in the factory of the manufacturer of excisable goods and these activities being incidental and ancillary to manufacture was covered by the definition of manufacture and such processes are specifically defined to be ‘manufacture’ in Section Note 6 of Chapter XVII of the Central Excise Tariff Act (CETA). Alternatively, they were eligible for exemption from service tax on such activity under Notification 8/2005-ST dated 01-03-2005 which provides exemption to job-workers doing processes when the principal manufacturer pays excise duty on the goods so produced. In the present case, JCBL paid excise duty on the bus bodies.

Held:
The JCBL’s factory manufactured bus bodies. The process of denting and painting were essential for completion of manufacture of bus bodies and the Tribunal did not find any reason to hold that these processes cannot be considered to be part of manufacturing activity within the meaning of section 2(f) of the Central Excise Act, 1944. Tribunal observed that Note 6 of Chapter XVII of CETA, these processes were essential for transforming the semi finished bus body into a complete and finished article. So if the process done by the appellant alone was seen, then also the argument of Revenue fails. The respondents denied the claim of the appellant for exemption under Notification 8/2005-ST on the reasoning that the appellant did not produce any evidence of duty payment of goods manufactured by JCBL Ltd. which was also not acceptable as they did these jobs within the factory of JCBL who regularly submitted excise returns to the excise department which also administers service tax levy. In absence of department establishing anything to the contrary, the appellant could not be penalised. Appeal as such was allowed.
levitra

2013 (30) STR 184 (Tri- Del) Kota Pensioners Hitkari Sahakari Samiti Ltd. vs. C.C.E. Jaipur-I.

fiogf49gjkf0d
Whether co-operative society formed by retired Central/State Government employees is a “Commercial Concern”?

Facts:
The Appellant is a co-operative society of retired Central/State Government servants. Jaipur Vidyut Vitaran Nigam Ltd. (JVVNL) authorised the Appellant to collect electricity bills raised on its consumers and for such services commission was paid to the Appellant. The Appellant was not paying any service tax on such commission received. Revenue’s view was that the service rendered by the Appellant to JVVNL was taxable as business auxiliary service. Whereas the Appellant was not registered and did not pay service tax, the demand was confirmed and penalties were also levied. The Appellant contended that, during the period prior to 01-05-2006 only services rendered by a “commercial concern” was taxable under entry 65(105)(zzb) and the co-operative society formed by retired military personnel cannot be considered as commercial concern. They also contended that it provided services to JVVNL and not to the customers on behalf of JVVNL. Therefore, the activity cannot be classified within the clause “any customer care service provided on behalf of the client” or under the clause “provision of service on behalf of client” and therefore the activity was not taxable under Business Auxiliary Service. The Revenue relied on the decision in the case of Punjab Ex-servicemen Corporation vs. UOI 2012 (25) S.T.R. 122 (P & H) wherein the Hon. Court held that a co-operative society of ex-servicemen run without any profit motive had to be considered a commercial concern for the purpose of levy of service tax under the Finance Act, 1994.

Held:
It was held that in view of the decision in the case of Punjab Ex-servicemen Corporation (supra), Appellant could not get out of the tax net on pleading that they were not a commercial concern. The services provided was covered by the expressions “any customer care service provided on behalf of the client” and also under the clause “provision of service on behalf of client” and hence taxable. However, in view of the earlier Tribunal decision which was in favour of the Appellant for some time, it held that the extended period was not invokable and penalties also were deleted.
levitra

2013 (30) STR 31 (Tri- Bang) Commissioner of Central Excise, Guntur vs. Varun Motors.

fiogf49gjkf0d
Can sales office be registered as “Input Service Distributor”?

Facts:
The Respondent, an authorised distributor for ‘Bajaj’ two and three wheelers operated from Vijayawada for 19 zones in the District to undertake sales and servicing of the vehicles. The respondent registered themselves as “Input Service Distributor” (ISD) in respect of their office premises at Vijayawada. It was held that it being a sales office could not be treated as service provider and therefore could not be granted registration as ISD and revoked the registration. Consequent upon the revocation, a credit of Rs. 48,143/- distributed as service tax credit to one of the authorised service stations was denied and ordered to be recovered. Appeal to Commissioner (Appeals) was allowed and therefore revenue filed the present appeal.

Held:
The Tribunal observed that the definition of the “Input Service Distributor” as defined in Rule 2(m) of the CENVAT Credit Rules, 2004 reads: “Input Service Distributor” means an office of the manufacturer or producer of final products or provider of output service, which receives invoices issued under Rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purpose of distributing the credit of service tax  paid on the said services to such manufacturer or producer or provider, as the case may be.” The reading of the definition clearly indicates that it is to be an office of the manufacturer or producer of final products. The sales office of the respondent was also undisputedly an office of the assessee/ service provider and therefore, there should be no objection to the said premises being treated as premises of “ISD”. Rejecting the revenue’s appeal, the credit distributed by ‘ISD’ was also held as regular.
levitra

2013 (31) STR 480 (Tri.-Del.) Rambagh Palace Hotels Pvt. Ltd. vs. Commissioner of Central Excise, Jaipur

fiogf49gjkf0d
Valuation – Rules of classification- Mandap Keeper service – room charges of hotel accommodation service not to be included – Hotel accommodation and Mandap Keeper are distinct services.

Facts:
The Appellants provided mandap keeper’s services and convention services and discharged service tax on banquet charges, banquet sundries and banquet food. The Appellants, however, did not discharge service tax on the value of room charges booked by them for the purpose of marriage, conference, meetings etc. The department contended to include such room charges in the value of mandap keeper services.

Held:
Relying on the decision of Merwara Estates vs. C.C.E., Jaipur 2009 (16) STR 268 (Tri.-Del.), the Hon. Tribunal held that renting of hotel rooms cannot be held to be covered under the definition of mandap keeper services especially when the hotel has an identity, responsibility and function distinguishable from the mandap. The Tribunal further observed that the activity of giving hotel rooms on rent to customers, who might organise functions in the hotel, was different from that of the activity of a mandap keeper and that the definition of mandap keeper did not cover temporary accommodation of hotel rooms or boarding or temporary residence. Further, the functions were also not held in hotel rooms which were used for stay.

levitra

2013 (31) STR 472 (Tri-Del.) Commissioner of C. Ex., Indore vs. Spendex Industries Ltd.

fiogf49gjkf0d
GTA services – payment of service tax through CENVAT Credit – Held, permissible in law.

Facts: The Respondents received GTA services and paid service tax under reverse charge mechanism by utilising CENVAT credit which the department disallowed.

The revenue contended that since the services were not output services, the Respondents were not entitled to use CENVAT credit for payment of tax.

The Respondents contended that inasmuch as they were liable to pay tax in respect of GTA services received by them, they were required to be treated as provider of taxable services in terms of the relevant rules. They further relied upon the Delhi Tribunal’s divisional bench decision in case of Shree Rajasthan Syntex Ltd. vs. CCE, Jaipur 2011 (24) STR 670 (Tri.-Del.) and Delhi Tribunal’s decision in case of Dhillon Kool Drinks & Beverages Ltd. 2011 (263) ELT 241 (Tri.-Del.) relating to a similar case.

Held:
Relying on the divisional bench decision in the case of Shree Rajasthan Syntex Ltd. (Supra), it was held that the recipient of services from GTA i.e. the Respondents were liable to pay service tax and were deemed to be service providers in view of Rule 2(r) of the CENVAT Credit Rules, 2004 and therefore, were covered under Rule 2(p) of the CENVAT Credit Rules, 2004 and, thus, the Respondents were eligible to utilise CENVAT credit to pay off service tax liability.

levitra

Nagarjuna Construction Company Limited and Another vs. State of Karnataka and Others, [2011] 45 VST 390 (Kar)

fiogf49gjkf0d
VAT-Constitutional Validity-Works Contract- Provision to Levy Tax on Advance Received Even Not Incorporated in Works-Invalid, Rate of Tax-Declared Goods-Used In Works Contract- Provision to Levy Tax @12.5%-Invalid-S/s. 4(1) (C), 7; Entry 23 of Schedule. VI of The Karnataka Value Added Tax Act, 2003 and S/s. 14 and 15 of The Central Sales Tax act, 1956.

Facts
The petitioners engaged in undertaking turnkey projects and other works contracts for third parties were assessed to tax under the Act. The orders of assessments were revised on the ground that the turnover offered for tax at a rate of 4 % on turnover of iron and steel, involved in the execution of works contracts, was not permissible for the reason that the “works contract of civil works” is a distinct entry in the Sixth Schedule and therefore, tax is attracted on the said turnover at the rate of 12.5 % as provided therein. The petitioners filed writ petitions before the Karnataka High Court challenging the constitutional validity of provisions of the act providing for levy of tax more than 4% on turnover of declared goods used in the execution of works contract in the same form.

Held
Section 4(1)(c) read with serial No. 23 of the Sixth Schedule to the KVAT Act does not enable the respondents to levy tax at the rate of 12.5 % in respect of declared goods used in the same form, in the execution of works contracts, which fall u/s. 14 of the Central Sales Tax Act, 1956. Consequently, proceedings initiated or concluded in respect of the petitioners seeking to levy tax, as questioned above, were quashed by the High Court to that extent.

Further, the “Explanation” inserted by a notification dated 27th May, 2006 requires a registered dealer to include the advance amounts received as part of total turnover in the month in which the execution of works contract commences and pay tax thereon, even though there is no transfer of property in any goods involved. The Explanation certainly runs counter to the tenor of the charging section 4(1) (c) and runs counter to the definitions of “taxable turnover”, “total turnover” and “turnover” under the Act. It is also in direct conflict with article 366(29A)(b) of the Constitution of India.

Similarly, section 7 of the KVAT Act, which creates a legal fiction that a transaction of sale is completed for the purposes of the Act when payment is received as advance, is akin to bringing to tax an agreement to sell goods, even before the property in the goods passes to the buyer. This is plainly contrary to the very definition of “sale” under the Act itself. Therefore, to the said extent, these provisions were held by the High Court as unconstitutional.

levitra

Veeaar Constructions vs. State of Andhra Pradesh, [2011] 45 VST 352 (AP)

fiogf49gjkf0d
Sales-Works Contract- Determination of Sale Price- Deduction For Depreciation, Maintenance and Cost of Consumables-Used in Execution of Works Contract-Permissible-Section 5F of The Andhra General Sales Tax Act, 1957 and Rule 6(2) (D) of The Andhra General Sales Tax Rules, 1957

Facts
The dealer filed revision petition before the Andhra Pradesh High Court against the appeal order passed by the Tribunal confirming order of the appellate and reassessing authority in not granting deduction from contract value for depreciation on Vehicle, Maintenance Expenses on Tipper and Consumables used in execution of works contract for the purpose of determining sale price of goods to levy of tax under the act.

Held
The assessee is entitled for exemption not only on the charges for obtaining on hire or otherwise machinery and tools used for execution of the works contract but also on the amounts spent by the contractor on such machinery as a consequence of using them for the execution of the works contract including the value of the proportionate wear and tear of the machinery which is otherwise identified as depreciation on the premise that it is equivalent to the hire charges spent otherwise. The dominant idea for exempting the said charges should be use of the machinery for execution of the works and the amounts spent by the contractor on such machinery. Otherwise, there is no necessity to use the word “or otherwise” under rule 6(2)(d). Accordingly, the revision petition filed by the dealer was allowed.

levitra

2013-TIOL-1029-CESTAT-MUM – D. P. Jain Co. Infrastructure Pvt. Ltd. vs. CCE, Nagpur.

fiogf49gjkf0d
Runways not equivalent to roads and thus not covered by any exemption notification or any section under the Finance Act, 1994
Facts:
The appellants discharged service tax under GTA services, Site Formation and Clearance, Excavation, Earth Moving and Demolition Services. They were also engaged in repairs and strengthening of roads, improvement and resurfacing of runways for airport authorities & military airbases and construction of toll plazas on which service tax was not discharged and the department contended to levy and confirmed the same alongwith interest and penalties. The appellants contended that service tax on management maintenance and repair of roads was exempted from service tax vide Notification No.24/2009-ST dated 27-07-2009 and further vide insertion of section 97 in the Finance Act, 2012 for the prior period 16-06-2005 to 26-07-2009 and also contended that runway was nothing but a species of road which was also excluded from the definition of “Commercial or Industrial Construction Service”. Further, in respect of the construction of runways, they contended that part of it related to defence airports which were non-commercial government buildings and thus exempt vide section 98 as inserted in the Finance Act, 2012.

The respondents submitted to remand the matter pertaining to the exemption u/s. 97 and 98 of the Finance Act, 2012 as they were inserted subsequently and strongly refuted the plea that runways could be considered as a specie of road, in the light of the definition of ‘runway’ according to International Civil Aviation Organisation (ICAO). They, relying upon Nirode Chandra Mukherjee vs. Chairman of Commissioners AIR 1936 Cal 506 and Sarat Chandra Ghatak & Ors vs. Corporation of Calcutta and Anr Air 1959 Cal 36, further contended that for considering the ‘runway’ as a ‘road’, public access was a must.

Held:
If the definition of ‘Commercial or Industrial Construction Service’ excluded construction of roads there would have been no need to exempt the same vide a notification and further vide insertion of a section and thus the Hon. Tribunal remanded the matter considering the retrospective exemption available vide the newly inserted sections 97 read with Notification No.24/2009-ST dated 27-07-2009 and section 98 of the Finance Act, 2012 providing clear direction that the benefit of exemption available to maintenance & repair of roads will not ipso facto apply to runways.

levitra

2013 (31) STR 367 (Tri.-Delhi) Jindal Vegetable Products Ltd. vs. CCE Meerut–II

fiogf49gjkf0d
Penalty u/s. 78 – retrospective amendment settled the issue – extended period cannot be invoked.

Facts:
The Appellant did not pay tax under the category “Renting of Immovable Property Services” for the period 2007-08 and 2008-09 against which a show cause notice was issued in 2010 (after retrospective amendment) invoking extended period and imposing penalties u/s. 76 and u/s. 78 on the pretext of fraud, wilful misstatement and suppression of facts.

Held:
The Hon. Tribunal relying on the Supreme Court’s decision in Continental Foundation Jt. Venture 2007 (216) ELT 177 held that, where there were doubts regarding the interpretation of provisions of law during the period of dispute, extended period cannot be invoked.

levitra

Sale of abandoned cargo, whether it was liable for service tax under the category of “Cargo Handling Service” and “Storage Warehousing Service”.

fiogf49gjkf0d
Facts

The Appellant was selling abandoned cargo and paying VAT thereon. Commissioner demanded service tax on sale of such abandoned cargo after meeting various expenses incurred under the category of “Cargo Handling Service” and “Storage Warehousing Service”. The Appellant relied on the Circular no.11/1/2002-TRU, dated 1st August 2002 and on cases of Mysore Sales International Ltd. vs. Assistant Commissioner 2011 (22) STR 30 (Tribunal) and India Gateway Terminal Pvt. Ltd. vs. Commissioner 2010 (20) STR 338 (Tribunal).

Held

It was held that sale of abandoned cargo is not exigible to service tax as the circular mentioned above clearly states that no service tax was to be levied on the activities of the custodian where he auctions abandoned cargo and VAT is paid in respect of sales. Placing reliance on Mysore Sales International Ltd. (supra) and India Gateway Terminal Pvt. Ltd (supra), the impugned order was set aside.

levitra

Prosecution under Central Excise Laws

Excise Duty Spectrum

Prosecution is one of the means of enforcing law.


1.1 The dictionary meaning of the word ‘prosecution’ is
‘prosecuting of someone in respect of a criminal charge’. The word is an
extension of ‘prosecute’ which itself means instituting legal proceedings.

1.2 S. 9 of the Central Excise Act, 1944 hereinafter
referred to as ‘the act’ contains provisions regarding penalties and offences.

This Section provides for imprisonment of 6 months to 7 years
and fine in cases where revenue involved in an offence is more than Rs.1 lac and
in other cases 3 years imprisonment and/or fine. For the second and subsequent
offence the imprisonment may extend to seven years and fine. Offences u/s.9
however are non-cognizable, as defined in Code of Criminal Procedure, 1973 by
virtue of S. 9A(1) of the Act. However, S. 9A(1) of the Act provides that for
adequate reasons, which are to be recorded in judgment, imprisonment can be for
less than 6 months. Very specifically the following are not adequate
reasons :



  •  first-time conviction
  •  levy of penalty paid or confiscation of goods
  • any other action taken or proceedings initiated under the Act
  •  accused is not the principal offender
  • the age of the accused.




2.1
Offences entailing prosecution :





  • Evasion of duty.



  • Removal of excisable goods in contravention of any of the provisions of the
    Act or rules made thereunder.



  • Possession of in transporting, depositing, keeping, concealing, selling or
    purchasing, or in any other manner dealing with excisable goods which he knows
    or has reason to believe are liable to confiscation.



  • Contravention of any of the provisions of this Act or the rules made
    thereunder in relation to credit of any duty allowed to be utilised towards
    payment of excise duty on final products.



  • Failure to supply any information required by the Excise rules.



  • Supplying false information.



  • An attempt to commit, or abet commission of any of the above offences.



2.2 It is because of the possession of excisable goods that
transporters, warehouse keepers and purchasers also are caught in the Excise
net. Similarly next time when the Department asks for information and an
assessee either does not furnish it or furnishes false information we know the
force behind it.

2.3 It is important to note that even an attempt to commit an
offence is enough to entail prosecution and fine.

Who can be prosecuted — S. 9AA of the 1944 Act :

3.1 S. 9AA provides that every person who, at
the time the offence was in charge of the company, and/or was responsible for
the conduct of the business, as well as the company shall be deemed to be guilty
of the offence and shall be liable to be proceeded against and punished. The
phrase ‘every person’ can lead to the highest officer viz. : managing
director, whole-time director and the person authorised to sign the excise
documents.

3.2 S. 9AA(2) provides that if the offence is committed and
it is proved that the offence has been committed with the consent or connivance
of, or is attributable to, any neglect on the part of any director, manager,
secretary or other officer of the company, then such person shall also be deemed
to be guilty of that offence and shall be liable to be proceeded against and
punished accordingly.

3.3 However, if a person proves that the offence was
committed without his knowledge or that he had exercised all due diligence to
prevent the commission of an offence, then such person will not be liable for
prosecution.

3.4 Persons involved in the removal of excisable goods.

3.5 Persons in possession of excisable goods.

Guidelines for launching prosecution :

4.1 The Central Board of Excise & Customs (CBEC) has issued
guidelines and procedures vide Circular Nos. 15/90-CX.6, dated 9-8-1990;
208/31/97-CX, dated 4-4-1994, 35/35/94-CX, dated 29-4-1994, 30/30/94-CX, dated
4-4-1994 and 208/21/2007-CX, dated 15-6-2007.

4.2 These instructions are as follows:

1.    Prosecution should be launched with the final approval of the Chief Commissioner or Director General of Central Excise Intelligence in specified cases after the case has been carefully examined by the Commissioner in the light of the guidelines.

2.    Prosecution should not be launched in case default is of technical nature or where the additional claim of duty is based totally on a difference of interpretation of law.

3.    Before launching any prosecution, it is necessary that the Department should have evidence to prove that the person, company or individual was guilty, had knowledge of the offence, or had intention to commit the offence, or in any manner possessed mens rea (mental element) which would indicate his guilt.

4.    In case of public limited companies, prosecution should not be launched indiscriminately against all directors of the company, but it should be restricted to only against directors like the managing director, director-in-charge of marketing and sales, director (finance) and other executives who are incharge of day-to-day operations of the factory.

5.    For the purpose of initiating proceedings, the Commissioners should go through the case file and satisfy themselves that action is taken only against those directors/partners/executives/officials where reasonable evidence exists of their involvement in duty evasion. For example, nominee directors of financial institutions, who are not concerned with day-to-day management should not be prosecuted unless there exists definite evidence to the contrary.

6.    A monetary limit of Rs.25,OO,OOOis prescribed for initiation of prosecution. However, if evidence to show exists that the person or the company has been systematically engaged in evasion over a period of time and evidence to prove mala fides is available, prosecution should be considered irrespective of the monetary limit.

7.    Persons liable to prosecution should not normally be arrested unless their immediate arrest is necessary. Arrest should be made with the approval of the Assistant Commissioner or the senior-most officer available. Cases of arrest should be reported at the earliest opportunity to the Commissioner, who will consider whether there is a fit case for prosecution.

8.    Decision on prosecution should be taken immediately on completion of the adjudication proceedings. Prosecution may be launched even during the pendency of the adjudication proceedings if it is apprehended that undue delay would weaken the Department’s case.

9.    Prosecution should not be kept in abeyance on the ground that the party has gone in appeal! revision.

10.    It is necessary to reiterate that in order to avoid delays, the Commissioner should indicate at the time of passing the adjudication order itself whether he considers the case to be fit for prosecution so that it could be further processed for being sent to the Chief Commissioner for sanction.

Procedure for prosecution:

1.    In all such cases where the Commissioner of Central Excise incharge of judicial work is satisfied that prosecution should be launched, an investigation report should be carefully prepared and signed by an Asstt. Commissioner endorsed by the Commissioner and forwarded to the Chief Commissioner for decision within one month of the adjudication of the case. Report should be in the prescribed format.

2.    A criminal complaint in a Court of Law should be filed only after the sanction of the jurisdictional Chief Commissioner or Director General of Central Excise Intelligence in specified cases has been obtained.

3.    Prosecution, once launched, should be vigorously followed. The officer incharge of judicial work should monitor cases of prosecution at monthly intervals and take corrective action wherever necessary to ensure that progress of the prosecution is satisfactory.

4.    In large cities, where a number of Central Excise divisions are located, all prosecution cases could be centralised in one office, so that it will be easier for the officers to deal with the cases.

5.    In order that the prosecution may have a deterrent effect, conviction should be secured with utmost speed. Hence, regular monitoring of the progress of prosecution case is mandated.

6.    As a matter of practice, whenever in a case approval of the Chief Commissioner is sought for launching prosecution, the concerned officer should immediately take charge of all documents, statements and other exhibits that would be required to be produced before a Court. The list of exhibits, etc. should be finalised in consultation with the Public Prosecutor at the time of drafting of the complaint. It should be ensured that all exhibits are kept in safe custody.

7.    It is apparent that generally in cases of sizable evasion, persons convicted under the Act suffer very light penalties which is contrary to the spirit of the Act, as well as the purpose of launching prosecution. The Board, therefore, desires that the Commissioners of Central Excise responsible for the conduct of prosecution, should study the judgments of the Courts and where it is found that the accused persons have been let off with light punishment, the question of filing appeal should be examined with reference to the evidence on record within the stipulated time. This is equally applicable to cases where the Court orders acquittal without recording sufficient reasons in the judgment despite existence of adequate evidence which was provided to the Court.

8.    S. 9B of the Act grants power to publish the name and place of business of person, etc. convicted by a Court of Law. The power is being exercised very sparingly by the Courts. The Board desires that in all cases of conviction, the Department should make a prayer to the Court to invoke this Section. The Board vide Circular No. 849/7/2007-CX, dated 19-4-2007 has issued guidelines in this regard.

9.    For launching prosecution where there is only one Adjudicating officer for a number of factories located under different Commissionerates, procedure prescribed in the Board’s instruction No. 35/35/94-CX, dated 29-4-1994 also needs to be followed.

Either before or after the institution of prosecution, any offence under this Chapter can be compounded by the Chief Commissioner on payment of demanded sum and compounding fees. The Board has issued detailed instructions regarding compounding of offences. Procedures and guidelines for withdrawal of prosecution have also been prescribed by the Board.

Judicial decisions:

Having considered the law and the guidelines, let us consider some of the decisions of the Supreme Court and High Courts on prosecution:

1.    I. T.e. Limited v. Collector of Central Excise, Delhi 1996 (84) ELT 404 SC:

Penalty:

Majority order of the CEGAT holding that penalty is imposable for each transaction with reference to each gate pass and clearances under Rule 9(2) of Central Excise Rules – Supreme Court found no ground to interfere with the said majority opinion – Appeal to Supreme Court dismissed – S. 35L of the Act.

Prosecution:

Difference of opinion amongst Members of the Tribunal on the question of quantum of penalty – Consequent upon imposition of penalty, no prosecution should be launched against the assessee – S. 9 of the Act.

2.    Collector of Central Excise, Hyderabad v. Electrolytic Foils Ltd., 1997 (91) ELT 543 sc:

Appeal for prosecution  dismissed when respondents cannot be served notice since the unit was completely closed down and even land on which unit stood had been sold – S. 35L of the Act.

Order:

The service on the respondent has not been possible because the unit has closed down and the information supplied by the Deputy Commissioner (Legal) is that even land on which the unit stood has since been sold to M/s. Nagarjuna Palma (India) Ltd. which is constructing its own factory on the land purchased by it. It is, therefore, obvious that the respondent unit has completely closed down and even the parcel of land owned by it has been dis-posed of and, therefore, we see no reason in permitting the appellant to pursue this appeal. We dispose of the appeal since the respondent cannot be served.

3.    Santram Paper Mills v. Collector of Central Excise, Ahmedabad 1997 (96) ELT 19 SC:

Prosecution:

Tribunal deciding against assessee – Effect – Prosecution in a Criminal Court is to be determined on its own merits and according to law, uninhibited by the findings of the Tribunal – S. 9, S. 33 and S. 35D of the Act.

4.    Parsin  Chemicals  Ltd.  v. Asstt.  Commissioner, 2003 (154) ELT A176 SC:

Prosecution:

Whether to be quashed if launched by authority contrary to Circulars issued by Board ? (2) – Contravention and evasion of duty spread over two years – Whether Board Circular No. 15/90-CX. 6, dated 9-8-1990is applicable? – (3) Whether Board’s Circular No. 208/31/97-CX. 6, dated 12-12-1997 is perspective in nature?

The Supreme Court granted leave in petition for special leave to appeal filed by Parsin Chemicals Ltd. Against order of the Andhra Pradesh High Court 2002 (146) ELT 39 (A.P.). While granting leave, the Supreme Court passed the following order:

Leave granted. Stay to continue.

The Andhra Pradesh    High Court had held that:

  • as per the guidelines in Board’s Circular No. 15/ 90-CX. 6, dated 9-8-1990 , prosecution should be considered irrespective of the monetary limit when the contravention and evasion of excise duty is not in relation to any particular incident, but spread over two years.

  • the prosecution is not to be quashed even if launched by an authority contrary to Circulars issued by the Board, as it is for the Court to decide as to whether there is any contravention.

  • Board Circular letter ENo. 208/31/37-CX. 6, dated 12-12-1997 for enhancing the monetary limit for prosecution to Rs.25 lakh is prospective in nature and is applicable in cases where contravention and evasion is subsequent to 12-12-1997.

5.    P. Krishnamurthi v. Assistant Collector of c. Ex., IDO, Shivakasi 1978 ( 2) ELT (J 628) Mad. :

Prosecution:

A minor cannot be prosecuted for offences merely on the ground that he is a partner of a firm which is being prosecuted for violation of Central Excise Law, because he cannot look after the affairs of the factory.

6.    Kedar Nath Goenka v. Superintendent of Central Excise, 1978 (2) ELT (J 538) Cal. :

Prosecution:

It is clear from the words ‘whoever commits’ in S. 9(1) that a person is made personally liable for an offence committed under the Central Excises Act and the liability cannot be extended to any other person merely by virtue of an office or position he holds in a company or firm, unless it is specifically averred in the complaint that he is guilty of an act of commission or omission which amounts to an offence punishable under the Act.

7.    Union of India v. [asbhai and another, (8) ELT902 M.P. :

Summary    trial  for offence:

If the offence committed was punishable with imprisonment for a term exceeding two years such as in Central Excise Act, the trial Magistrate was not competent to try an accused summarily u/s. 461 of the Code of Criminal Procedure and if so tried, the trial is absolutely void. [para 9]

Scope of S. 9 of the Act, and S. 260 and S. 461 of Criminal Procedure Code.

8.    Union of India v. Ram Narayan Sahu, 1986 (25) ELT 148 Cal. :

Prosecution:

Acquittal  invalid  when  complaint filed u/s.9(1)(d) (ii) of the Act treated as summons case instead of warrant case – Warrant case envisages sentence for more than two years, while S. 9(1)(d)(ii) prescribes three years imprisonment – Hence complaint u/s.9 is a complaint case – Case remanded to the Trial Court for retrial treating the case as warrant case – S. 2(w) and S. 256 of the Code of Criminal Proce-dure.

Distinction between a warrant case and a summons case

Warrant case means a case relating to an offence punishable with imprisonment for a term exceeding two years, while summons case is one which is not a warrant case. In determining the nature of the case, the Court will have to be guided by the consideration of the maximum punishment liable to be imposed on the accused according to the disclosures made in the petition of complaint. The advantage of following this procedure is that treating the case as a warrant case, the Magistrate trying the case will be competent to impose the minimum punishment, while the disadvantage of treating the case as a summons case he would not be in a position to impose the maximum punishment prescribed for the gravity of the offence, if the offence so demands. [para 5]

Prosecution:

An order of acquittal passed in a summons case u/s.256 of the Code of Criminal Procedure is not treatable as an order of discharge u/ s.249 of the Code of Criminal Procedure.

The difficulty in construing the order of acquittal u/ s.256 as an order of discharge u/ s.249 of the Code is that a fresh complaint for the same offence filed .hereafter is barred u/ s:468 of the Code. [para 5]

The Trial Magistrate is directed to treat the case as a warrant case and try it according to the procedure prescribed therefor by the Code. [AIR 1938 Cal. 205; AIR 1909 Pat. 105 relied upon], [para 5]
 

9.    Sharadchandra Shripad Marathe v. Gurushant Gangadhar Kamble, 1986 (25) ELT 915 (Bombay) :

Prosecution of a new  employee:

Complaint regarding conspiracy to evade excise duty – Process issued by the Trial Court quashable when petitioner joined service a few days before the excise raid – Inherent powers exercisable, if the process of Trial Court results in abuse of the process and gross injustice to the petitioner – Asking the petitioner to approach the Trial Court for discharge in the face of the admitted position is not worth-while – S. 482 of the Code of Criminal Procedure read with Article 226 of the Constitution of India.

Prosecution of New Director:

Accused Director joining company only a few days before raid and not a participant in conspiracy to evade taxes – Inherent powers of the High Court invokable where allowance of prosecution would amount to abuse of process of Court and gross injustice to the accused – Process issued quashable – S. 9(1)(d) of the Act, read with S. 120B of the Indian Penal Code, – S. 482 of the Code of Criminal Procedure, and Article 227 of the Constitution of India.

Vicarious    liability    :

Deeming provision for vicarious liability of Directors for acts committed by the Company is inapplicable against Directors not holding office prior to introduction of provision from 27-12-1985 – S. 9AA of the Act.

10.    Mulki Suryanarayanrao Rau and Anoher v. Gurushant Gangadhar Kamble and Others, 1987 (30) ELT 712 (Born.) :

Prosecution: Evasion of duty :

S. 9 of the Act and S. 120B of the Indian Penal Code – Conspiracyto evade payment of duty – If on proper evidence, the Court is satisfied that certain persons did conspire to commit the offence of tax evasion, the company as well as the persons who committed or conspired to commit such offence are punishable with imprisonment and fine. – Persons will include all those who aided and abetted the commission of an offence, whether inside or outside the company.

Prosecution:

Criminal conspiracy – Conspiracy is a matter of inference deducible from some criminal acts of the parties accused, done in pursuance of an apparent criminal purpose and to carry it into execution.

When conspiracy continued even after the retirement of accused Nos. 8, 9 and 10, it could be inferred that the tax evasion must be with complete knowledge of all the conspirators including those who retired.


Defence:

Merely because Secretary of the company was working under superior direction is no defence for criminal acts – therefore, he cannot be absolved from liability of tax evasion.

Proceedings Character:

The grant of Central Excise licence would partake the character of adjudication proceedings and not the character of criminal proceedings.

Prosecution:

Initiation of criminal process by Magistrate against accused not quashable when there is sufficient material to show that the said accused were in league with the company in the matter of evasion of duty.

Criminal conspiracy:

Agreement of two or more persons to do an illegal act is a positive fact which could be proved by direct or circumstantial evidence.

Criminal conspiracy to evade payment of duty – Modus operandi of levying a surcharge over the price of goods for freight, insurance and handling charges whether came up before the Board of Directors or not is a matter of evidence and prosecution cannot shut up from leading such evidence – S. 9 of the Act, 1944 and S. 120B of the Indian Penal Code.

Criminal conspiracy to evade payment of duty – Evidence of documents as defence not necessary to prove the innocence at this stage of initiation of proceedings – Only prima facie evidence is required to be considered for the allegations made in the complaint.
 
Vicarious    liability    :

Penalty – Firm – Directors of a firm – Penalty irnposable on the Directors for their individual acts and not on the principle of vicarious liability.

11.    Brahm Vasudeva and Others v. K. L. Bajaj, Assistant Collector, Central Excise Division, Jalandhar, 1988 (33) ELT 20 (P&H) :

Complaint without disclosing the manner in which the petitioners were concerned with the commission of offence or manufacture of goods – Complaint not maintainable – S. 9 of the Act, 1944.

12.    G. P. Goenka v. Asstt.  Collector of Central Excise, 1988 (37) ELT 167 (A.P.) :

For launching criminal prosecution proceeding against a company. The accused company must be represented by some person who is in charge of overall affairs of company – S. 9AA of the Act, 1944. (A.P.)

13.    K. K. Girdhar v. M. S. Kathuria,  1988 (37) ELT 353 (Delhi) :

Personal presence of accused – Offence u/ s. 9(1)(a) of the Act, 1944 – Granting of remand to custody at the instance of police, personal presence of the accused is not required before the Magistrate – though, as a matter of caution, personal presence of the accused is desirable, so that the accused may move an application for his release on bail- S. 344 of the Criminal Procedure Code.

14.    Hrushikesh Panda v. Union of India, 1992 (61) ELT 591 (Orissa):

Prosecution:

Clearance of goods by firm without excise gate passes and recovering duty from consignees but not crediting it to Excise Department – Managing Director liable under Rule 225 of Central Excise Rules, 1944 for non-payment of duty – Conviction and sentencing of petitioner u/s.9(1)(b) and (bb) of the Act, valid.

15.    Utkal Fero Alloys Ltd. v. State of Orissa, 1992 (61) ELT 600 (Orissa) :

Prosecution:

Detailed reasons not required to be given at the stage of cognizance of offence as there exists a prima facie- case against the accused – Order of the Magistrate valid S. 9(1), (b), (bb) of the Act read with Rules 9(1), 53, 173B, 173C, 173F, 173G of Central Excise Rules, and S. 204 of Code of Criminal Procedure, 1973.

16.    Toesta Electronics v. Asstt. Collector of Central Excise, Bangalore, 1995 (75) ELT 456 (Kar.) :

Prosecution:

There is no statutory requirement for sanction of any prescribed authority for prosecuting a person u/s.9 of the Act read with Rule 207 of Central Excise Rules, Prosecution – Compounding of offence – Natural justice – Provisions of Rule 210A of Central Excise Rules, applicable to offences punishable u/s.9 of Central Excises and Salt Act, – But there being no need for any sanction of any authority for launching prosecution u/s.9. The question of issue of notice making an offer to the accused for compounding the offence at the stage of sanction for prosecution does not arise.

Prosecution against companies and firms (apart from their officers concerned) maintainable, there being no obligatory sentence of imprisonment in all cases u/s.9 of the Act. A specific averment as to the involvement of directors, managers, partners, etc. in the complaint is not mandatory – It is sufficient if papers enclosed with the complaint indicate their involvement prima facie – S. 9 of the Act.

Goods manufactured and cleared without obtaining licence – Exemption from payment of excise duty to excisable goods does not dispense with requirement of obtaining licence – Prosecution against petitioner for not having obtained licence, proper – S. 6 of the Act read with Rule 174 and Rule 9(1)(b) of Central Excise Rules.

17.    Vasu Chemicals v. Assistant Commissioner of Central Excise, Madurai 2001 (134) ELT 24 (Mad.) :

Prosecution:

Criminal proceedings not to be stayed till disposal of appeal against order of confiscation, because confiscation proceedings having nothing to do with criminal prosecution – S. 482 of the Code of Criminal Procedure.

18.    H. S. Ranka v. P. K. Mehra, Asstt. Collector, Dept. of Central Excise, [aipur 2002 (150) ELT 1413 (Raj.) :

Prosecution:

Order of Collector against accused of non-accountal of goods in RG-1 register set aside by Tribunal on basis of some correspondence without recording any evidence – Prosecution launched not on basis of that order, but on physical verification of excisable goods – Held : criminal proceedings could not be quashed on basis of decision of the Tribunal finding in favour of accused, though Criminal Court may take that into account – S. 9 of Act. However, judgments in rem of Civil Court have binding effect on Criminal Court – S. 41 of Evidence Act,1872. [para 10]

Prosecution:

Offence by company – No allegation made in complaint or evidence brought on record that the chairman of the company was personally guilty of any omission or commission of a punishable offence – Petition for prosecution u/ s.482 of Code of Criminal Procedure set aside – S. 9 of the Act. [paras 11, 12]

19.    Rajni v. Union of India, 2003 (156) ELT 28 All. :

Prosecution:

Arrest of person under the Act has to be made only when there is a prima facie case against the accused and that too by following the due process of law except in cases prescribed u/s.13 – Authorities working under a special act such as Central Excise Act, cannot override the provisions of the Code of Criminal Procedure as regards the arrest or filing of the complaint – S. 9AA, S. 13 and S. 19 – On completion of the enquiry the authorities have power to file a complaint and pray before the Court for action in accordance with law. [paras 24 and 25]

20.    Kamaiaka  Minerals  & Mfg. Co. Ltd. v. Asstt.  CC & CE.,  Davangere,  2005 (184) ELT 356 Kar. :

Complaint filed against company and Managing Director and Director of company for having committed an offence punishable u/s.9(1)(i) of Central Excise Act, – No allegation was made that accused were in charge of company or responsible for conduct of business of the company at the time of commission of offence – Complaint also did not disclose essential ingredients of the offence – Held: proceedings cannot be launched against company u/s.9(1)(i) of the Act – read with S. 482 of Code of Criminal Procedure. [paras 9, 10]

21. Inder Setia v. Central Excise Department,  Noida, 2008 (224) ELT 385 All. :

Bail :

Arrest made for offence punishable u/s.9 and u/s. 9AA of Central Excise Act, read with Indian Penal Code – Power of arrest u/s.13 is confined to offences prescribed in Central Excise Act, – Offences u/ s.420, u/ s.467, u/ s.468 and u/ s.471 IPC were added for which Central Excise officers have no power to arrest – Arresting without any notice and without summoning, held power u/s.13 was exercised arbitrarily. Dispute as to who is responsible for payment of excise duty, can be settled only by the proper forum and the High Court abstained from recording any finding thereon – S. 9A makes offences non-cognizable and S. 9A(2) makes offences compoundable either before or after the institution of prosecution – In spite of existence of such provision, without ascertaining facts, S. 13 was resorted to for arresting the applicant – As there was no charge of tampering of evidence or charge of absconding – The applicant was released on bail.

I would conclude by stating:

1.    To avoid harassment and eliminating chances of prosecution of Directors the Board of Directors of a company should delegate, authorise and make responsible a person for each unit registered under the Central Excise Act, 1944 and at regular intervals take a compliance report from such person. It would be advisable also to have the compliance reports audited by internal auditors and or secretary of the company.

2.    The challenge in this ever-changing environment of increasing litigation where at times the individuals concerned take the safer course of initiating prosecution proceedings is to ensure awareness of and compliance with the relevant laws, rules and regulations to avoid even the remote chance of prosecution. Let us always be aware of the fact that prosecution impacts both business and reputation.

Important Representations of BCAS Incorporated in Amended Model GST Law

The draft model GST law released by the empowered Committee was hosted on the website of DOR inviting comments from stake holders and public at large. BCAS had made a detailed representation to the  finance minister on the model GST law.

“We are pleased to inform you that the Government has accepted most of our suggestions and incorporated the same in the amended model GST law released on 26th november 2016”.

Reproduced below is the detailed table of recommendations that have been accepted in the amended model GST law.

62. [2015-TIOL-2705-CESTAT-MUM] M/s Vamona Developers Pvt. Ltd vs. Commissioner of Customs, Central excise and Service Tax, Pune-III

62. [2015-TIOL-2705-CESTAT-MUM] M/s Vamona Developers Pvt. Ltd vs. Commissioner of Customs, Central excise and Service Tax, Pune-III

Input services used for construction prior to 01/04/2011 are allowable as CENVAT credit. Further registration is not a condition for availing of CENVAT credit.

Facts

The Appellant engaged in the construction and sale of commercial properties constructed a mall at Pune for which they received various input services and capital goods during the period June 2007-March 2011. They availed the entire credit on input services in 2011 when the construction was ready for renting out and also took centralised registration in Pune on the said date. The department contended that the input service credit is inadmissible for the construction of a mall resulting in an immovable property which is neither excisable nor any service tax is payable and is used for Renting of Immovable Property Service. Further the credits pertained to the period prior to registration.

Held

The Tribunal held that the entire credit has been availed on input services which have been used for providing the output service of Renting of Immovable Property service for which there is no restriction under clause (l) of the definition of “input service”. The words “setting up” in the definition of input service were deleted only from 01/04/2011. Accordingly, there is no restriction on use of input service for construction of building prior to the said date. Further, relying on the decision of the Karnataka High Court in the case of mPortal India Wireless Solutions Pvt. Ltd [2011-TIOL-928-HC-KAR-ST], it was held that registration is not a condition for availing CENVAT credit. Further, the Tribunal also validated the availing of credit after a period of five years by stating that it is only in 2011 that the Appellant was sure of whether the property would be sold or rented and 20% of the property was sold and therefore they availed credit only when the remaining property was ready for renting out.

Note: Readers may note a similar decision in the case of Maharashtra Cricket Association vs. Commissioner of Central Excise, Pune-III [2015-TIOL-2418-CESTAT-MUM] digest provided in the BCAJ December 2015 issue. Further it should be noted that the proviso to Rule 4(7) of the CENVAT Credit Rules with effect from 01/09/2014 provides that the credit should be taken within a period of 6 months of the issue of the document specified in Rule 9(1) of the said rules. [Extended to one year with effect from 01/03/2015].

25. [2015-TIOL-2086-CESTAT-DEL] Commissioner of Service Tax, Delhi vs. M/s Bagai Construction.

25. [2015-TIOL-2086-CESTAT-DEL] Commissioner of Service Tax, Delhi vs. M/s Bagai Construction.

The taxable event for the levy of service tax is the date of rendition of service. Thus the rate prevalent at the time of provision of service would be the applicable rate irrespective of the rate prevalent at the time of receipt of payment.

Facts:

Assessee paid service tax under works contract service at the rate of 2.06% which was the rate prevalent prior to 01/03/2008 for the payments received after the said date. Although the rate applicable at the time of receipt of payment was 4.12% it was contended that the payments received related to the services rendered prior to 01/03/2008 therefore the old rate should apply.

Held:

Relying on the decision of the Delhi High Court in the case of Vistar Construction P. Ltd vs. Union of India & Ors [2013-TIOL-73-HC-DEL-ST] wherein the Court held that the rate of tax applicable on the date on which the services were rendered would be the one that would be relevant and not the rate of tax on the date on which payments were received. The Tribunal decided the matter in favour of the Assessee.

[Note: Readers may note that the issue pertains to the period prior to the introduction of the Point of Taxation Rules, 2011. However, section 67A of the Finance Act, 1994 provides that the rate of service tax, value of taxable service and rate of exchange will be as applicable at the time when the taxable service has been provided or agreed to be provided. Therefore the taxable event being the provision of the service provided or agreed to be provided, the ratio of the aforesaid judgment may be applied.

20. 2015 (39) STR 972 (Ker.) Dileep Kumar V. S. vs. Union of India

20. 2015 (39) STR 972 (Ker.) Dileep Kumar V. S. vs. Union of India

If the assessee has alternate remedy to file appeal before the Tribunal, writ is maintainable even if there is a provision of mandatory pre-deposit before filing appeal.

Facts:

The petitioner’s demand was confirmed by adjudicating authority and first appellate authority without expressly considering the issue of jurisdiction as directed by the Hon’ble High Court. Further, the appellate authority did not consider the plea of limitation. Accordingly, the petitioner filed the writ.

Held:

The petitioner had an effective alternate remedy to file appeal before appellate tribunal after payment of mandatory pre-deposit. The condition of mandatory pre-deposit for filing appeal was not so onerous to deprive the petitioner of an effective right of appeal. Comparing the present and erstwhile provisions of pre-deposit, only 10% of confirmed tax demand needed to be deposited which is fairly reasonable and imposes a lighter burden on the assessees. The writ therefore was dismissed.

53. [2014] 48 taxmann.com 6 (New Delhi – CESTAT) Amit Khanna vs. Commissioner of Central Excise, Bhopal.

53. [2014] 48 taxmann.com 6 (New Delhi – CESTAT) Amit  Khanna  vs.  Commissioner  of  Central Excise, Bhopal.

Stay – Whether CENVAT Credit is allowed if benefit of small scale exemption under Notification 6/2005-ST is denied to assessee? Held, Yes.

Appellant provided taxable services of cable network. It took over another cable operator who was availing threshold limit exemption under Notification No. 6/2005-S.T. The department observed that the other cable operator was not eligible for exemption under Notification No. 6/2005 and therefore demanded service tax and consequential interest and penalties. At the time of application for waiver of pre-deposit and stay, appellant argued that even if it was liable for service tax for the period prior to take-over, it would be eligible to take credit of input service received from other multi-system operators in that period. Therefore, net service tax would be much lower. Accepting the submission, the Tribunal expressed a prima facie view that CENVAT Credit of input service can be taken in respect of years for which exemption under Notification No. 6/2005-S.T. was denied and service tax was demanded. Pre-deposit was accordingly ordered of reduced amount.

40. [2014] 36 STR 543 (Kar) CST, Bangalore vs. Team Lease Services Pvt. Ltd.

40. [2014] 36 STR 543 (Kar) CST, Bangalore vs. Team Lease Services Pvt. Ltd.

CENVAT credit on group mediclaim services is an input service under Rule 2(l) of CENVAT Credit Rules, 2004.

Facts:

The appellant claimed CENVAT Credit on input service on group mediclaim services for the period April 2007 to September 2010 and the said credit was allowed by the Tribunal. The revenue aggrieved by the Tribunal’s order filed the instant appeal.

Held:

The appeal was dismissed as reliance was placed on the cases of (i) Commissioner vs. Micro Labs Ltd. – 2011(24)STR 272 (Kar) and (ii) Commissioner vs. Stanzen Toyotetsu India Pvt. Ltd. – 2011 (23) STR 44 of the same Court wherein the said CENVAT Credit was allowed.

[2013] 40 taxmann.com 369 (Punjab & Haryana HC) Barnala Builders & Property Consultants vs. DCCE&ST

75. [2013] 40 taxmann.com 369 (Punjab & Haryana HC) Barnala Builders & Property Consultants vs. DCCE&ST

Whether order passed by designated authority under section 106(2) of the Finance Act, dealing with VCES, 2013 is appealable? Held, Yes

Facts:

The applicant filed a writ petition against the order of the designated authority who rejected assessee’s application u/s. 106(2) of the Finance Act, 2013, as introduced vide the Finance Act, 2013 dealing with Voluntary Compliance Encouragement Scheme, 2013. The revenue contended that the circular dated 08-08-2013 issued by CBEC stated that such order passed u/s. 106(2) was not appealable and thus the writ was not maintainable.

Held:

Allowing the writ, the Hon. High Court held that all other provisions of the Act except to the extent specifically excluded would apply to the proceedings under the scheme and hence, the impugned order would necessarily be appealable u/s. 86 of the Indian Finance Act, 1994.

Whether Transfer of Intellectual Property Rights, While Transferring Whole Business, Liable to Sales Tax?

Introduction

Under Sales Tax/VAT Laws , tax is levied on transaction of ‘sale’. ‘Sale’ can be said to have taken place when it fulfills minimum criteria laid down in the Sale of Goods Act. This aspect has also been dealt with by Honourable Supreme Court, in the landmark judgment, in the case of Gannon Dunkerley and Co. (9 STC 353). In respect of ‘sale’ transaction, Honourable Supreme Court has observed as under:

“Thus, according to the law both of England and of India, in order to constitute a sale, it is necessary that there should be an agreement between the parties for the purpose of transferring title to goods, which of course presupposes capacity to contract, that it must be supported by money consideration, and that as a result of the transaction property must actually pass in the goods ……”

From the above passage, it is clear that to be a ‘sale’, the following criteria should be fulfilled.

(i)    There should be two parties to contract i.e., seller and purchaser,
(ii)    The subject matter of sale should be moveable goods,
(iii)    There must be money consideration and
(iv)    Transfer of property i.e., transfers of ownership from seller to purchaser.

If the above criteria are fulfilled, there is no doubt that it will be a ‘sale’. However, to come within sales tax net, the further requirement is that it should be in ‘course of business’.

Part/whole transfer of business – vis-à-vis Sale of Intellectual Rights

An issue arises when intellectual rights are transferred to transferee while transferring part or whole of business. In other words, there may be cases where a running division of a business concern may be transferred to other business concern or the whole business concern may be transferred to another entity.

Normally, transfer of division or whole business to other concern does amount to sale. It is a transaction of change in constitution. Reference can be made to determination order in case of Bharat Bijlee Ltd. (DDQ 11/2004/Adm-5/54/B-2 dt. 12-10-2004)

In this case, one division of the company was transferred to another company under a scheme of arrangement. Commissioner of Sales Tax, Maharashtra State, noted that the Division is transferred in its entirety and held that there is no sale of any goods as such. It is change of constitution and not ‘sale’.

The judgment in case of Coromandel Fertilisers Ltd. (112 STC 1)(A.P.) was relied upon.

Coromandel Fertilisers Ltd. (112 STC 1)(A.P.)

In this case, the whole business was transferred to the other company. Sales tax authority considered the same as sale of ‘good’ i.e., the transfer of busi-ness was considered as sale of goods liable to tax. Honourable A.P. High Court rejected the contention, holding that it is not covered under Sales Tax Laws. The goods consisted in business were also held as not liable to tax, as business itself ended and transaction cannot be said to be in the course of business.

Kwality Biscuits (P) Ltd. vs. State of Karnataka (53 VST 66)(Karn)

Recently Honourable Karnataka High Court had an occasion to consider this situation.

In this case, the facts were as under:

“The petitioner- dealer was engaged in manufacture and sale of biscuits and confectionery, wheat products, jams, jellies and creams. Its promoters entered into an agreement with Britannia, under which the promoters of the dealer-company agreed to exit the business of biscuits by effecting a sale of the entire business as a whole and as a going concern. The entire assets as well as liabilities including the movables and immovables, goodwill, intellectual property assets such as registered trademarks and brand names as well as unregistered trademarks and brand names stood transferred by virtue of sale/transfer of equity shares held by the promoters along with their family members in the dealer-company in favour of Britannia. The question was whether the sale of intellectual property owned by the dealer-company attracted payment of sales tax under the Karnataka Sales Tax Act, 1957:

Honourable Court referred to various judgments, throwing light on various aspects involved like, meaning of ‘business’, ‘goods’ and others.

In respect of ‘business’, amongst others, reference made to judgment of Honourable A. P. High Court in Coromandel Fertilisers Ltd. (112 STC 1)(A.P.) as under:

“22. In order to highlight the issue which we propose to address ourselves in extenso, it is necessary to note that the Act ordains that transfer of property in goods for valuable consideration must be ‘in the course of trade or business’ (vide section 2(1)(n)). This is so, because the incidence of tax falls on a dealer who ‘carries on the business of buying, selling, supplying or distributing goods’ (vide section 2(1) (e)). A sale by a person who carries on the business of buying, selling, etc., and a sale in the course of business are the twin indispensable requirements to attract the charge of tax under the APGST Act. The crucial question then is, whether these requirements are satisfied. Is there an element of business present in these disputed transactions? Assuming there was a sale of goods, did such sale take place ‘in the course of business’ and by a person who carries on the business of buying and selling goods?”

They have also referred to the meaning of the word “business” as explained in the aforesaid Raipur case [1967] 19 STC 1 (SC), as under (pages 14 and 29 in 112 STC):

“24. The expression ‘business’, though extensively used in taxing statutes, is a word of indefinite import. In taxing statutes, it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business, there must be a course of dealings, either actually continued or contemplated to be continued with a profit-motive, and not for sport or pleasure. Whether a person carries on business in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transactions must ordinarily be entered into with a profit-motive. By the use of the expression ‘profit-motive’, it is not intended that profit must in fact be earned. Nor does the expression cover a mere desire to make some monetary gain out of a transaction or even a series of transactions. It predicates a motive which pervades the whole series of transactions effected by the person in the course of his activity. In actual practice, the profit motive may be easily discernible in some transactions; in others, it would have to be inferred from a review of the circumstances attendant upon the transaction.

70.    We are therefore of the view that transfer of goods involved in the process of disposing of the entire cement manufacturing unit hitherto owned by the petitioner-company does not tantamount to ‘business’ within the meaning of section 2(1)(bbb) of the Act and the sale is not ‘in the course of business’. The charge to tax is therefore not attracted under the APGST Act.”

In the light of above, Honourable High Court made observations as under:

“Therefore, to attract the liability to pay tax u/s. 5 of the Act, a dealer must be carrying on the business of buying, selling, supplying and distributing goods. A person to be a dealer must be engaged in the business of buying or selling or supplying goods. A person is a dealer within the meaning of the Act, when he carries on the business of buying or selling of goods for consideration paid or payable in future. What is required is that, sale or purchase must take place during the course of business of buying or selling in view of definition of “dealer” in clause (h) of section 2 of the Act. The expression “business”, though extensively used in taxing statutes, is a word of indefinite import. In taxing statutes, it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business, there must be a course of dealings, either actually continued or contemplated to be continued with a profit-motive and not for sport or pleasure. Whether a person carries on business in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transactions must ordinarily be entered into with a profit-motive. “During the course of business” postulates a continuous exercise of an activity. It also connotes some real, substantial and systematic or organised course of activity or conduct set with a purpose. In taxing statutes, it is used in the sense of a whole time occupation or profession of a person which requires continuous attention and labour. The expression “carrying on business” requires something more than mere selling or buying. It is not merely the act of selling or buying that makes a person a dealer, but the object of the person who carries on the activity is important to attract levy of sales tax. “Sale” means every transfer of the property in goods by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration. A sale by a person who carries on the business of buying, selling, etc., and a sale in the course of business are the twin indispensable requirements to attract the charge of tax. The taxing statutes must be construed with strictness and no payment is to be exacted from the subject, which is not clearly and unequivocally required by the statute.”

On the facts of the case, Honourable High Court held that the intellectual properties are required till business is running and there is no possibility of selling them. In other words, the High Court held that the sale is not in the course of business or incidental to carrying on business and no tax can be attracted on the same.

Conclusion

The judgment throws light on aspect of ‘course of business’ vis-à-vis such inevitable items where transfer can take place alongwith transfer of running business only and there cannot be independent sale, so as to become taxable as separate sale. It will be useful for dealers in taxation of similar transactions.

Service tax refund to exporters through the Indian Central EDI System (ICES) — Circular No. 149/18/2011-ST, dated 16-12-2011.

Vide this Circular, the Government has proposed to introduce a simplified scheme for electronic re-fund of service tax (STR) to exporter of goods on the line of duty drawback. According to this new scheme, exporters have two options i.e., (i) either they can opt for electronic refund through ICES (Indian Custom EDI System) system, which is based on the ‘schedule of rates’ (to be notified shortly) or (ii) they can opt for refund on the basis of docu-ments, by approaching the Central Excise/Service Tax formations. To obtain benefit under the new electronic STR scheme, an exporter should have a bank account and also a Central Excise registration or service tax code number and the same should be registered with Customs ICES using specified ‘Annexure-A’ Form and an exporter should declare his option to avail STR on the electronic shipping bill while presenting the same to the proper officer of the Customs.

Establishing Taxable Event — Burden on Whom?

Introduction:

Under fiscal laws, and more particularly under Sales Tax Laws, many a time an issue arises as to whether any taxable transaction has taken place or not? The tax under Sales Tax Laws can be levied only if there is a transaction of sale or purchase, as the case may be. It is possible that on the facts of the case the dealer may be contending that his transaction is not sale/purchase transaction and hence no tax should be levied on the same. Under the above circumstances, dispute arises as to on whom the burden lies to prove the taxable event. There are a number of judgments throwing light on the said issue. Reference can be made to the following important judgments.

Judgments:

(a)    Haleema Zubair Tropical Traders v. State of Kerala, (19 VST 142) (SC)

The gist of the judgment is as under:

The assessee was the proprietor of two concerns: Tropical Traders and Poseidon Food Co. Tropical Traders was a dealer in tiles, and, the business of Poseidon Food Co. was to render services to various exporters in respect of inspection and certification of quality of the items sought to be exported.

The assessee declared taxable turnover of Rs.28,20,474, being sale of goods, for the purpose of sales tax under the Kerala General Sales Tax Act, 1963. However, receipt shown as commission amounting to Rs.45,80,168 from the business of Poseidon Food Co. was also sought to be assessed by the Department on the ground that it was not supported and proved by any documentary evidence. Before the Appellate Authority the assessee produced the income-tax returns and the assessment orders as well as copy of orders placed by exporters and the certificate granted by the Marine Products Export Development Authority. The first Appellate Authority held that the profes-sional services rendered by the assessee to the exporters involving skill and knowledge did not constitute any transfer of property and that the levy of sales tax on the sum of Rs.45,80,168 was not in order. The Sales Tax Appellate Tribunal, however, reversed the decision of the first Appellate Authority on the ground that the onus was on the assessee to prove that the receipts were not the result of sale. The High Court dismissed the revision petition of the assessee as well as a review application.

On appeal, the Supreme Court, setting aside the decision of the High Court and remitting the matter to the Assessing Authority, held that the Assessing Authority ought to consider the matter afresh on the basis of the materials placed by the assessee, viz., income-tax returns, assessment orders, certificate issued by the MPDEA, etc.

This shows that the authorities are under obligation to consider the material placed before it and prove the taxable event. They cannot put such burden upon an assessee.

(b)    Girdharilal Nannelal (39 STC 30) (SC)

The facts of the case can be noted as under:

The Sales Tax Assessing Authority treated a cash-credit entry of Rs.10,000 (which was declared as undisclosed income for income-tax purpose) in the account books of the appellant-firm in the name of the wife of one of its partners as income of the appellant out of concealed sales and added Rs.1,00,000 to the turnover of the appellant on the basis that the sum of Rs.10,000 represented 10% of the profit. The explanation offered by the appellant that the sum of Rs.10,000 was given by the partner of the firm to his wife to obtain her consent for his second marriage and that the amount was lying with her and had been deposited by her with the appellant was not accepted by the sales tax authorities. The High Court also was not satisfied with the explanation and inferred that the amount reflected profits of the appellant’s business and those profits arose out of sales not shown in the account books.

On further appeal, the Supreme Court held that in order to impose liability upon the appellant for payment of sales tax by treating the amount of Rs.10,000 as profits arising out of undisclosed sales of the appellant, two things had to be established: (i) The amount was the income of the appellant and not of the partner or his wife. (ii) The amount represented profits from income realised as a result of transactions liable to sales tax and not from other sources. The onus to prove the above two ingredients was upon the Department. The fact that the appellant or its partner and his wife failed to adduce satisfactory or reasonable explanation with regard to the source of that amount would not in the absence of some further material had the effect of discharging that onus and proving both the ingredients. In such a case no presumption arose that the amount represented the income of the appellant and not of the partner or his wife. It was necessary to produce more material in order to connect that amount with the income of the appellant as a result of sales. In the absence of such material, mere absence of explanation regarding the source of the amount would not justify the conclusion that the amount represented profits of the appellant derived from undisclosed sales.

The above judgment also further reiterates the principle that the burden lies on the Sales Tax Department, if it wants to levy sales tax.

(c)    Mittal & Co. (69 STC 42) (All.) The gist of the judgment is as under:

The assessee did not maintain manufacturing account and contended that no sale was effected inside the State during the assessment year and the Assessing Officer estimated the sale on the ground that the assessee, in past, had effected sale inside the State. In revision the Allahabad High Court held that though the initial onus to establish that no sale was made by the assessee is on the assessee, no evidence could be adduced for establishing a negative fact. When the assessee denies the factum of sale, the onus shifts to the

Revenue to disprove the contention of the assessee.

This judgment also clearly lays down that negative burden cannot be cast on the assessee. It is the Department who has to bring evidence for justifying levy of tax.

(d) M. Appukutty v. STO, (17 STC 380) (Ker.)

The Kerala High Court observed that principles of natural justice demand that there should be a fair determination of a question by quasi -judicial authorities. Arbitrariness will certainly not ensure fairness. If giving a mere opportunity to show cause, and to explain, would satisfy the principles of natural justice, the notice to show cause be-comes an empty formality signifying nothing, for, after issuing the notice to show cause, the authority can decide according to his whim and fancy. The judicial process does not end by making known to a person the proposal against him and giving him a chance to explain. It extends further to a judicial consideration of his representations and the materials and a fair determination of the question involved.

If the quasi-judicial authority dis-regards the materials available or if it refuses to apply its mind to the question and if it reaches a conclusion which bears no relation to the facts before it, to allow those decisions to stand would be violative of the principles of natural justice. Arbitrary decisions can also, therefore, result in violation of the principles of natural justice which is a fundamental concept of Indian jurisprudence. If a decision is allowed to be made as it likes, it may amount to even a mala fide decision.

In particular the High Court observed as under:

“The rejection of the account books does not give the Taxing Authority a right to make any assessment in any way it likes without any reference to the materials before him. The process of best judgment assessment, whether it be one relating to income-tax, agricultural income-tax or sales tax, is a quasi-judicial process, an honest and bona fide attempt in a judicial manner to determine the tax liability of a person. And such determination must be related to the materials before the authority.”

Therefore, even in the best judgment assessment, the authorities are under obligation to refer to the material on record and to arrive at just and proper conclusion. In one way this judgment also casts burden on the authorities to establish taxable event before levy of tax.

Conclusion:

From the above precedents, it can very well be said that for levying tax, it is the duty of the taxing authority to prove the taxable event. Even in cases where dealer fails to prove his case, it will not automatically entitle the authorities to levy tax. In such cases also they will be required to bring sufficient supporting evidence about taxable event before levy of tax.

10. Haryana and Another, VAT App. No. 73 Of 2011, Dated 27th October, 2016 (P&H).

10. Haryana and Another, VAT App. No. 73 Of 2011, Dated 27th October, 2016 (P&H).

VAT- Classification of Goods – Paper Napkins-Covered By Entry Paper, Entry 57 of Schedule C of The Haryana Value Added Tax Act, 2003.

Facts

The appellant engaged in the business of manufacture and sale of tissue paper, napkin, toilet paper rolls, kitchen wipes and facial tissues filed application u/s. 56(3) of the Haryana Value Added Tax Act,2003 to the State Government for clarification, as to under which Entry the aforesaid goods being manufactured by the appellant would fall and the rate of tax leviable thereon. The Financial Commissioner and Principal Secretary to the Government of Haryana, Excise and Taxation Department, vide order dated 18.1.2010, opined that the goods being manufactured by the appellant were not forming part of Entry 57 of Schedule ‘C’ of the Act. Hence, it would be taxable @ 12.5%, being unclassified goods. The order was challenged before the Tribunal. The Tribunal, vide order dated 29.7.2011, dismissed the appeal. The Company filed appeal before the Punjab and Haryana High Court against the impugned order of the Tribunal.

Held

Entry 57 in Schedule ‘C’ only prescribes ‘paper’, ‘paper board’ and ‘newsprint’. It does not provide for any inclusions or exclusions. It further does not provide for any user test. The word ‘paper’ used in the Entry is in generic form, which will include all types of paper, which has its essential characteristics. It is not in dispute that even the tissue paper, napkin, toilet paper rolls etc. retain the essential characteristics of paper. It is only that it is in different strength and is used for different purposes. There is no competing entry to find out whether product falls in entry ‘A’ or ‘B’. The residuary entry is to be invoked in case, with liberal construction to the specific entry, the product could not be found to be forming part thereof. Accordingly, the High Court allowed the appeal and held that the tissue paper, paper napkins etc. are covered by entry 57 of the Schedule C of the act within the expression paper and liable to 4% tax.

9. Commercial Tax Officer & Ors. vs. State Bank of India & Anr., Civil Appeal No. 1798 of 2005, dated 8th November, 2016 (SC).

9. Commercial Tax Officer & Ors. vs. State Bank of India & Anr., Civil Appeal No. 1798 of 2005, dated 8th November, 2016 (SC).

Purchase Tax – Purchase – Surrender of Exim Scrips – to SBI – Upon Cancellation – Not A Purchase, Section 4(6)(iii) of The Bengal Finance Act, 1941.

Facts

The State Bank of India, a body corporate constituted under the State Bank of India Act, 1955 for the extension of banking facilities in the country and for other public purposes. In March, 1992, the RBI took a policy decision to the effect that the unutilised Exim scrips in the hands of the holders who were willing to dispose of the same should be mopped up through specified branches of the SBI. The RBI, pursuant to the circular sent a letter on March 18, 1992 to the Chairman, State Bank of India, Bombay, authorising all designated branches of the said Bank to purchase Exim scrips from holders, who intended to dispose of the same at a premium of 20 % of the face value of the Exim scrips, from March 23, 1992, subject to certain terms and conditions. Thereafter, SBI purchased Exim scrips as directed by the RBI from various holders of Exim scrips. The department treated these as purchase of goods and levied purchase tax on 20 % premium paid to the holder of scrips who surrendered it to the Bank. The Calcutta High Court in writ petition filed by the Bank against the order of the Tribunal deleted the levy of purchase tax and hold surrender of Exim Scrips is not a purchase. The department filed appeal before the SC against the judgment of High Court.

Held

The replenishment licences or Exim scrips would be goods, when they are transferred or assigned by the holder/owner to a third person for consideration, they would attract sale tax. However, the position would be different when replenishment licences or Exim scrips are returned to the grantor or the sovereign authority for cancellation or extinction. In this process, as and when the goods are presented, the replenishment licence or Exim scrip is cancelled and ceases to be a marketable instrument. It becomes a scrap of paper without any innate market value. The SBI, when it took the said instruments as an agent of the RBI did not hold or purchase any goods. It was merely acting as per the directions of the RBI, as its agent and as a participant in the process of cancellation, to ensure that the replenishment licences or Exim scrips were no longer transferred. The intent and purpose was not to purchase goods in the form of replenishment licences or Exim scrips, but to nullify them. The said purpose and objective is the admitted position. The object was to mop up and remove the replenishment licences or Exim scrips from the market. Be it noted that the initial issue or grant of scrips is not treated as transfer of title or ownership in the goods. Therefore, as a natural corollary, it must follow when the RBI acquires and seeks the return of replenishment licences or Exim scrips with the intention to cancel and destroy them, the replenishment licences or Exim scrips would not be treated as marketable commodity purchased by the grantor. Further, the SBI is an agent of the RBI, the principal. The Exim scrips or replenishment licences were not goods, which were purchased by them. The intent and purpose was not to purchase the replenishment licences because the scheme was to extinguish the right granted by issue of replenishment licences. The ownership in the goods was never transferred or assigned to the SBI. Therefore, the SBI was not liable to levy of purchase tax under the Act. The appeal preferred by the Revenue was dismissed by the SC.

Exemption for services provided by certain associations of dying units — Notification No. 42/2011- Service Tax, dated 25-7-2011.

The above Notification has exempted the club and association services provided in relation to ‘project’ by an ‘association of dyeing units’. The term ‘project’ is explained as common facility set up for treatment and recycling of effluents and solid waste discharged by dyeing units, with financial assistance from the Central or State Government.