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Category: Indirect Taxes

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.

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 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.

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

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 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.

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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.

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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.

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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.

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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.

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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.

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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).

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“Goods/Sales Return” – Scope

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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.

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Taxability of Sub-Contracted Services

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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

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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.”

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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.

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(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.

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

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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.
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2013 (30) STR 184 (Tri- Del) Kota Pensioners Hitkari Sahakari Samiti Ltd. vs. C.C.E. Jaipur-I.

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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.
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2013 (30) STR 31 (Tri- Bang) Commissioner of Central Excise, Guntur vs. Varun Motors.

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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.
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2013 (31) STR 480 (Tri.-Del.) Rambagh Palace Hotels Pvt. Ltd. vs. Commissioner of Central Excise, Jaipur

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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.

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2013 (31) STR 472 (Tri-Del.) Commissioner of C. Ex., Indore vs. Spendex Industries Ltd.

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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.

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Nagarjuna Construction Company Limited and Another vs. State of Karnataka and Others, [2011] 45 VST 390 (Kar)

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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.

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Veeaar Constructions vs. State of Andhra Pradesh, [2011] 45 VST 352 (AP)

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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.

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2013-TIOL-1029-CESTAT-MUM – D. P. Jain Co. Infrastructure Pvt. Ltd. vs. CCE, Nagpur.

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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.

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2013 (31) STR 367 (Tri.-Delhi) Jindal Vegetable Products Ltd. vs. CCE Meerut–II

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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.

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Sale of abandoned cargo, whether it was liable for service tax under the category of “Cargo Handling Service” and “Storage Warehousing Service”.

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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.

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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.

Clarification on Completion of Service under Point of Taxation Rules — Circular No. 144/13/2011-ST, dated 18-7-2011.

The Service Tax Rules and Point of Taxation Rules require the assessee to issue an invoice within 14 days of Completion of Service (COS), but the term COS is not clearly defined anywhere, hence CBEC has come up with clarification vide this Circular.

Accordingly, COS would not just mean physical completion of work, but would also include completion of some other auxiliary activities and basic formalities like quality testing, etc. which are pre-requisites to arrive at the invoiceable figure.

E returns in Profession Tax — Notification VAT/AMD.1010/IB/PT/Adm-6, dated 14-7-2011.

With effect from 1st August, 2011, every dealer holding Professional Tax Registration Certificate shall pay the tax in Challan MTR6 and file the electronic return in Form IIIB in respect of period from 1st April, 2006.

3 more banks can collect VAT — Notification No. VAT.1511/C.R.94/Taxation 1, dated 22-7-2011.

By this Notification, three more banks, namely, Oriental Bank of Commerce, Vijaya Bank and Andhra Bank have been added to collect MVAT & CST w.e.f. 22-7-2011.

Due date for payment of Profession Tax extended — Notification No. PFT/2011/Adm – 29/NTF, dated 13-7-2011.

For the year 2011-12, due date for payment of Profession Tax has been extended from 30th June, 2011 to 31st August, 2011 for the tax payable by an enrolled person who has already enrolled on or before 31st May, 2011.

Inter-State sales vis-a-vis Branch Transfer

A debatable issue arises about nature of transaction of dispatch of goods from one branch to another branch in other state. If the dispatch amounts to Branch transfer, the sale by branch to customer will be local sale.

On the other hand if the dispatch is not considered as branch transfer it will amount to inter-State sale from the moving state. To decide the nature of movement, whether inter-State sale or branch transfer, reference is required to be made to CST Act, 1956.

Under CST Act the nature of inter-State sale transaction is defined. Therefore, if the transaction falls into said definition, it will be inter-State and if not covered by the said definition, it will be a local sale. The definition of the inter-State sale is given in S. 3 of the CST Act, 1956. The said section is reproduced below for ready reference:

“A sale or purchase of goods shall be deemed to take place in the course of interstate trade or commerce if the sale or purchase –

    a) occasions the movement of goods from one State to another; or

    b) is effected by a transfer of documents of title to the goods during their movement from one State to another.”

It can be seen that if there is movement of goods from one state to another state because of sale, such sale will be inter-State sale. There is no condition that the clause for movement from one state to another state should be expressly provided in the sale agreement. In other words, even if the implied link between the movement and sale is established, it will be inter-State sale.

On the other hand, if the movement of goods from one state to another state is without reference to any pre-existing sale, it will not be an inter-State sale.

The cases of inter-State sales vis-a-vis branch transfers are required to be seen in light of above legal position. The branch and the head office or other branch in other State, are one and the same entity. Therefore, when a branch in one State transfers goods to branch in other State, there can be two situations: First, the branch in one State may be
transferring goods to branch in other State without reference to any particular sale agreement etc. in the transferee State. In other situation, the branch in transferee State may have pre-committed sale agreement and the branch in transferring State may be sending the goods to the branch in pursuance of said agreement. The receiving branch may thereafter deliver the goods to the customer. In this case also, though the delivery is to a branch, the transaction will be considered as an inter-State sale. In short, if there is nexus between dispatch from one State and sale in other State, such sale will be in the category of inter-State sale.

There are number of judicial pronouncements deciding nature of transactions. Reference can be made to following few important judgments:

Nivea  Time  (108 STC 6) (Born.)

The observations of the Bombay High Court on nature of interstate sale are as under:

“8. S. 3 of the Central Sales Tax Act, 1956 lays down when a sale or purchase of goods is said to take place in the course of interstate trade or commerce. It says:

‘A sale or purchase of goods shall be deemed to take place in the course of interstate trade or commerce if the sale or purchase –

c) occasions the movement of goods from one State to another; or

d) is effected by a transfer of documents of title to the goods during their movement from one State to another.’

In this case, we are concerned with sale or purchase falling under clause (a).

9. It is well-settled by now by a catena of decisions of the Supreme Court that a sale can be said to have taken place in the course of inter-State trade under clause (a) of S. 3, if it can be shown that the sale has occasioned the movement of goods from one State to another. A sale in the course of inter-State trade has three essentials: (i) there must be a sale; (ii) the goods must actually be moved from one State to another; and (iii) the sale and movement of the goods must be part the same transaction. The words ‘occasions’ is used as a verb and means to cause to be the immediate cause of. There must exist a direct nexus between the sale and the movement of the goods from one State to another. In other words, the movement should be an incident of and necessitated by the contract of sale and be inter-linked with the sale of goods. [See Kelvinator of India Ltd. v. State of Haryana, (1973) 32 STC 629 (SC)]. It is not necessary for a sale to be an interstate sale that the covenant regarding inter-State movement must be specified in the contract itself. It would be enough if the movement was ‘in pursuance of’ or ‘incidental to’ the contract of sale. Similarly, if the movement of goods is the result of contract and is an incident to the agreement between the parties, the transaction will remain an inter-State one no matter in which State the delivery of goods is taken by the purchaser. In other words, the question whether it is an inter-State sale or intra state sale, does not depend upon the circumstances as to in which state the property in the goods passes. It may pass in either State and yet the sale can be an inter-State sale. What is decisive is whether the sale is one which occasions the movement of goods from one State to another.”

English Electric Company of India Ltd. v. Deputy Commercial Tax Officer, (1976) (38 STC 475) (SC)

In this case, it was observed by Supreme Court as under:

“When the movement of goods from one State to another is an incident of the contract it is a sale in the course of inter-State sale. It does not matter in which State the property in the goods passes. What is decisive is whether the sale is one which occasions the movement of goods from one State to another. The interstate movement must be the result of a covenant, express or implied, in the contract of sale or an incident of the contract. It is not necessary that the sale must precede the interstate movement in order that the sale may be deemed to have occasioned such movement. It is also not necessary for a sale to be deemed to have taken place in the course of inter-State trade or commerce, that the covenant regarding inter-State movement must be specified in the contract itself. It will be enough if the movement is in pursuance of and incidental to the contract of sale.”

It was further observed:

…… If there  is a conceivable link between  the movement of the goods and the buyer’s contract, and if in the course of inter-State movement the goods move only to reach the buyer in satisfaction of his contract of purchase and such a nexus is otherwise inexplicable, then the sale or purchase of the specific or ascertained goods ought to be deemed to have taken place in the course of inter-State trade or commerce as such a sale or purchase occasioned the movement of the goods from one State to another . . . .

Cheeseborough Pond’s Inc. v. State of Tamil Nadu (52 STC 164)

The short  gist of the judgment is as under:

The assessee was a manufacturer and dealer in face powder, having its head office and manufacturing unit at Madras and branches at Bombay and other places. A department of the Government of India, known as Canteen Stores Department which was part of the Defence Ministry, placed orders for the purchase of the goods manufactured by the assessee with the Bombay branch of the assessee. The orders, when received by the Bombay branch, were forwarded by that branch to the head office at Madras. The head office then consigned the goods by lorry to the Bombay branch warehouse, mentioning in the lorry way-bill that the goods had been dispatched against orders passed by the Canteen Stores Department. When the goods reached Bombay, these were cleared by the Bombay branch and immediately supplied to the Canteen Stores Department, after raising invoices in terms of the orders already placed. The assessing authorities as well as the Tribunal rejected the assessee’s contention that the transactions could not be regarded as sales in the course of inter-State trade, chargeable to tax u/s.3(a) of the Central Sales Tax Act, 1956. On revision, the assessee contended that the goods moved from Madras to Bombay in what was described as stock transfers and that the Canteen Stores Department placed the orders not with the head office at Madras direct, but only with the Bombay branch:

Madras  High  Court  held,

i) that if all that the stock transfers evidenced was displacement of goods from a head office to a branch, then there would be no difficulty at all in accepting the contention that there was no inter-State sale for the simple reason that the transfers from Madras to Bombay involved no sale at all; but as found by the Tribunal, the stock transfer notes relied on by the assessee themselves clearly referred to the particular orders placed by the Canteen Stores Department with the Bombay branch of the assessee against which the goods were sent in the particular consignment or consignments, by lorry. It was, therefore, not accurate to describe the movements of the goods as inter-office, or non-sale, consignments from the head office to a branch;

ii) that the fact that the head office at Madras did not dispatch the goods direct to the Canteen Sores Department which placed the orders, but sent the goods to the Bombay branch from where the goods ultimately found their way to the purchaser did not make any difference to the application of S. 3(a) of the Act. It did not matter how many stop-overs were there in the delivery State before the goods reached the purchaser’s hands. All that mattered was that the movement of the goods was in pursuance of the contract of sale or as a necessary incident to the sale itself; and

iii) that, therefore, the transaction between the assessee and the Canteen Stores Department, Bombay, was an inter-State sale liable to tax.

M/s. Tan India Ltd. v. State of Tamil Nadu, (133 STC 311) (Mad.)

The brief gist of the judgment is as under:

Identifiable ultimate buyers in Kerala State placed specific orders at the dealer’s branch office at Palghat in Kerala. The branch office at

Pal ghat informed the head office at Kumarapalayam in Tamil Nadu about the specific requirements of the ultimate customers in Kerala. It is only on the information so furnished by the branch office, the head office either effected dispatches directly to the ultimate buyers in some transactions or to its branch office in other transactions and thereafter effected delivery to those ultimate buyers. The assessing officer treated the transactions as inter-State sales and also imposed penalty at 150% of the tax due upon the dealer. The Appellate Assistant Commissioner confirmed the same. The Tamil Nadu Sales Tax Appellate Tribunal found some transactions as inter-State sales and other transactions as stock transfer to dealer’s branch. It reduced the penalty to fifty per cent of the tax due. On revision petition both by the dealer and the Revenue:

Madras High Court held, (i) that whether the dispatches were effected from the head office to the ultimate buyers directly at Kerala or whether the deliveries were effected to the ultimate buyers outside the State through the branch make no difference in the eyes of law. The goods moved from the State of Tamil Nadu to the State of Kerala, pursuant to or incident of a contract of sale entered into by the dealer with the identifiable ultimate buyers. Further from the orders placed at the branch located at a different State and the order subsequently having been communicated to the head office in the State of Tamil Nadu, no legal consequence was likely to flow for the simple reason that the head office and the branch office were offices of the same company and they did not possess separate juridical personalities. The movement of goods from the head office was occasioned by the order placed by the customers and was an incident of the contract and therefore from the very beginning from Kumarapalayam in the State of Tamil Nadu, all the way until delivery to customers in Kerala State, it was an inter-State movement. Therefore, the transactions were inter-State sales u/ s.3(a) of the Central Sales Tax Act, 1956. [Sahney Steel and Press Works Ltd. v. Commercial Tax Officer, (1985) 60 STC 301 (SC) followed.]

Thus, the legal position is very clear. If the move-ment from transferring branch is without reference to any pre-existing sale, it will be a case of branch transfer. The sale by transferee branch to customer will be a local sale. On the other hand, if the en-marked (ascertained) goods are sent to branch for a particular customer, it will be an inter-State sale from the transferring branch, whether delivery is given through the transferee branch or directly given by the transferor branch. On the other hand, movement without reference to pre existing sale agree-ment, will amount to branch transfer.

PTEC & PTRC not applicable to Mathadi Mandal, Mathadi Kamdar — Trade Circular 12T of 2011, dated 3-8-2011.

By this Circular it is clarified that Profession Tax is not applicable to Mathadi Mandal, Mathadi Kamdar and Hamal.

Import of services whether liability of recipient prior to 18-4-2006 existed? Charging section i.e., section 66A of the Finance Act, 1994 introduced w.e.f. 18-4-2006, demand prior to 18-4-2006, relying on Rule 2(1)(d)(iv) of the Service Tax Rules, wholly impermissible.

(2011) 23 STR 15 (Guj.) — Commr., Service Tax v. Quintiles Data Processing Centre (I) P. Ltd.

Import of services whether liability of recipient prior to 18-4-2006 existed? Charging section i.e., section 66A of the Finance Act, 1994 introduced w.e.f. 18-4-2006, demand prior to 18-4-2006, relying on Rule 2(1)(d)(iv) of the Service Tax Rules, wholly impermissible.

Facts:

The assessee received management consultant’s service from the service provider stationed outside India. The Department relied on Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 to recover service tax from the assessee on the premise that the service was provided by a person from a country other than India but the service was received by the assessee in India. The Tribunal relying on the decisions in the case of Indian National Shipowners Association v. Union of India, 2009 (13) STR 235 held that the assessee was not liable to pay any service tax for the period prior to 18-4-2006, the date with effect from which section 66A was introduced in the Finance Act, 1994. The Revenue contended that the facts in the aforementioned case were different and that in the present case the management consultant service was received in India. The respondent contended that in absence of any charging section prior to 18-4-2006, reliance could not be placed on Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 to levy service tax from the recipient.

Held:

Following the judgments in the case of Laghu Udyog Bharti v. Union of India, 2006 (2) STR 276 SC and Indian National Shipowners Association v. Union of India, 2009 (13) STR 235, the Court held that any demand of service tax in absence of the charging section prior to 18-4-2006 by merely rely-ing on Rule 2(1)(d)(iv) was wholly impermissible.

2013 (32) STR 735 (Tri-Del.) Suvidha Engineers India Ltd. vs. CCEs, Noida

77. 2013 (32) STR 735 (Tri-Del.) Suvidha Engineers India Ltd. vs. CCEs, Noida

Whether activity of installation of heating, ventilation or air-conditioning including related pipe & duct work was exigible to service tax before 16-06-2005?

Facts:

Appellant engaged in the execution of various HVAC projects on turnkey including activities of fabrication, installation and commissioning, obtained service tax registration and started paying service tax and filing of returns from 16-06-2005 onwards. Revenue demanded service tax for HVAC work done from 01-07-2003 to 15-06-2005 after 2 years of submission of details. They challenged the said SCN on the ground that the activity of installation of heating, ventilation, air-conditioning (HVAC) along with related pipe & duct work was included first time in the definition of “erection, commissioning or installation” service with effect from 16-06-2005 onwards and therefore the same was not covered under the definition of erstwhile service and also challenged the demand on the ground of limitation. Respondent confirmed the service tax demand rejecting both the arguments.

Held:

Referring to the definition of “erection, commissioning & installation” service as existed in the statue before and after 15-06-2005 it was held that, though the heating, ventilation, air–conditioning (HVAC) is specifically included in the definition after 15/06/2005, the earlier definition used to cover within its purview ‘installation of plant, machinery or equipment’ and HVAC is nothing but a plant which provides heating, ventilation & air-conditioning and therefore the same gets covered from earlier period and therefore the service tax is applicable on the HVAC installation. However, on the ground of limitation, Tribunal observed that, Appellant had submitted the details pertaining to period 2003 to 2005 on 05-09-2005 and therefore Respondent should have issued SCN within 1 year from this date. The Tribunal held that the SCN was time-barred and demand unsustainable on the limitation ground.

2014 (33) STR 137 (Mad) Commissioner of S.T., Chennai vs. Sangamitra Agency Services

76. 2014 (33) STR 137 (Mad) Commissioner of S.T., Chennai vs. Sangamitra Agency Services

Reimbursable expenses not to be included in the taxable value related to Clearing & Forwarding agents service.

Facts:

The revenue was in appeal against the order of the Hon. Tribunal holding that reimbursable expenses received by the assessee was not includible in the taxable value and that only the amounts received as remuneration / commission from their principals was assessable to tax and referred to the decision of Sri Sastha Agencies Pvt. Ltd. vs. Asst. Commissioner 2007 (6) STR 185 (Tri-Bang).

Held:

Upholding the Tribunal’s view, the Hon. High Court stated that in the absence of any material to show the understanding between the principal and the client that the commission payable was all inclusive, it was difficult to hold that the gross amount of remuneration/commission would include expenditure incurred by the assessee and that all incidental expenses would also form part of the assessable value.