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Category: Indirect Taxes

[2015] 60 taxmann.com 227 (Mumbai CESTAT) – Mineral Exploration Corporation Ltd vs. CCE, Nagpur

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Grants received from Government towards reimbursement of expenses
incurred for survey does not amount to ‘service’, if entire amount is
expended without charging any consideration and “survey report” thus
prepared is retained by assessee and not supplied to Government.

Facts:
The appellant, a 100% Government of India undertaking is engaged
in the activity of making preliminary exploration report, based on
survey and detailed exploration report of mineral deposit for which they
were paid grant-in-aid by the Government of India. The second activity
involved, providing detailed survey and exploration reports on
contractual basis to various clients. The appellant paid service tax on
the second activity. As regards the first activity, the reports were
kept by them and could be sold to private users later, on payment of
fees on which service tax was discharged. Department sought to levy
service tax on grant-in-aids received from the Government under
Scientific and Technical Consultancy Services.

Held:
The Tribunal held
that activities undertaken are primarily classifiable under the Survey
and Exploration of Mineral Service and not as Scientific & Technical
Consultancy services. It was further held that the activity undertaken
by the appellant on the basis of 100% grant received from the Government
and the grant is totally expended on the expenses involved in various
activities as reflected in the balance sheet. For any service, there has
to be a service provider, a service receiver and a consideration. Where
the records show that no consideration has been paid by the Government
to the appellant for undertaking the said work and what has been
received from the Government is only the reimbursement of the actual
expenses involved; the activity is not liable for service tax. The
Tribunal further held that it is also not a matter of dispute that the
reports prepared on the basis of Grant received were kept with them and
may be sold to clients or customers on payment of charges and service
tax is paid on such charges. Therefore, clearly there cannot be
duplication of service tax payment. Accordingly, it was held that no
service has been provided by the appellant to the Ministry of Mines.

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[2015] 60 taxmann.com 455 (Mumbai CESTAT) – CCE, Nagpur vs. Jain Kalar Samaj

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Donation received by a Mandap Keeper from decorator/caterer for grant of monopoly rights to provide decoration/catering services not taxable as business auxiliary service.

Facts:
Assessee provided Mandap Keeper’s services by leasing out its hall/lawns for ceremonial functions. Decoration and catering for the hall/lawns was carried out by a contractor. Assessee received donation of decoration tender from caterer/decorator and granted monopoly rights in its premises to a contractor. According to the department, the donation was taxable as Business Auxiliary services provided by it to the decorator.

Held:
The Tribunal considered the definition of “commission agent” as provided under Business Auxiliary service u/s. 65(19) of the Finance Act,1994 and held that commission agent must act on behalf of another person for provision of service. The Tribunal observed that the first appellate authority did not explain as to how the said definition is applicable in the present case and that he did not establish that the appellant while acting as a commission agent was actually acting on behalf of the decorator for providing or receiving service. It was held that the appellant provided the services of Mandap Keeper independently to his clients and decorator provided decoration services to his clients. The two services were independent of each other. The appellant is not acting on behalf of the decorator to provide service to his clients, nor is he acting on behalf of his clients to provide services to the decorator. Therefore, the Tribunal held that the activity of the appellant is not that of commission agent falling under the definition of business auxiliary service.

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2015 (39) STR 1034 (Tri. –Del.) Commissioner of C.Ex. Allahabad vs. Sangam Structurals Ltd.

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CBEC circular, prescribing declaration by GTA on consignment note that notification conditions are fulfilled is beyond the requirement of exemption notification.

Facts:
Notification No. 32/2004-ST dated 3rd December, 2014 conferred exemption to GTA services subject to nonavailment of CENVAT credit on inputs or capital goods by transporter and non-availment of benefit of Notification No. 12/2003-ST dated 20th June, 2003. In this context, CBEC issued clarification that the consignment note would state compliance made of conditions specified in Notification No. 32/2004. The respondents furnished declaration as per aforesaid notification from transporters before Commissioner (Appeals). Further, sample consignment notes containing required declaration were also submitted.

Held:
There was no evidence that any such credit or the benefit of 12/2003-ST was availed. Submission of declaration from transporters at the stage of commissioner (Appeal) was sufficient compliance of notification. Furthermore, conditions prescribed by the CBEC circular seemed to go beyond the requirement of the exemption notification. It is settled law that CBEC circular cannot restrict or expand the amplitude of an exemption notification nor can they add/subtract conditionalities thereto/therefrom.

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2015 (39) STR 995 (Tri.- Mumbai) Tetra Pack India Pvt. Ltd. vs. CCE, Pune-III

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Reimbursable expenses not includable while determining gross value of services.

Facts:
Department sought service tax on recovery made for reimbursable expenditure which ought to be incurred while providing output services. Reimbursable expenditure were reckoned as consideration for services rendered as per Rule 5(1) of Service Tax (Determination of Value) Rules, 2006 (Valuation Rules).

Held:
Rule 5(1) of Valuation Rules was struck down by the Hon’ble Delhi High Court in case of Intercontinental Consultants & Technocrats Pvt. Ltd. vs. Union of India 2013 (29) STR 9 (Del) on account of rule being ultra vires sections 66 and 67 of the Finance Act,1994 based on which the order was set-aside.

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[2015-TIOL-2106-CESTAT-MUM] Commissioner, Service tax-I, Mumbai vs. M/s FIL Capital Advisors India, Pvt. Ltd.

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Merely because bills are in personal name, it cannot be said that services are not used by the Respondent when the expenditure towards that bill is booked in their account and CENVAT credit on group and medical polices of employees is allowed as the same is a requirement as per the Factories Act.

Facts:
The Revenue filed an application for rectification of a mistake of the Tribunal on the ground that in Revenue’s Appeal one of the ground was that the first appellate authority while allowing the CENVAT credit did not give any finding on how the input services of group and medical policies for employees and outdoor catering had a nexus with the output service and further how the bills in personal names were admissible as credit.

Held:
The Tribunal held that the services of general insurance for group and medical policies are in respect of the employees and as per the statutory provisions under the Factory Act and therefore are allowable. Moreover, outdoor catering has been allowed in various judgments and in respect of bills in personal name, the expenditure towards that bill was booked in the Respondent’s account and thus the credit allowed by this Tribunal was maintained.

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[2015-TIOL-2081-CESTAT-MAD] M/s TV Sundram Iyenger and Sons Ltd. vs. Commissioner of Central Excise, Madurai

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Unless the CENVAT credit wrongly availed is utilised there shall be no payment of interest.

Facts:
The Appellant wrongly availed additional duty of customs as CENVAT credit and also partly utilised the same. Entire erroneously availed credit was reversed, but interest was paid only on the portion utilised and reversed. The Revenue authorities demanded interest also on the unutilised portion.

Held:
The Tribunal relying on the decision of the Supreme Court in case of Commissioner of Central Excise, Mumbai-I vs. Bombay Dyeing & Mfg. Co. Ltd [2007-TIOL-141-SC-CX], held that unless the credit is utilised there would be no payment of interest. Further, the Tribunal noted that such a proposition was not cited before the Apex Court in the matter of Ind-Swift Laboratories Ltd [2011-TIOL-21-SCCX] and thus the case is distinguishable. Accordingly the case was remitted to the adjudicating authority for the limited purpose of quantifying the credit availed and utilized to calculate the interest thereon.

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[2015-TIOL-2134-CESTAT-MUM] Bhima Sahakari Karkhana Ltd vs. CCE, Pune III

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In absence of issuance of a consignment note, mere transportation of goods in a motor vehicle is not a service provided under Goods Transport Agency service.

Facts:
The Appellant is a factory and had paid an amount as inward freight. The Revenue authorities demanded service tax as a service recipient under Rule 2(1)(d) (v) of the Service Tax Rules,1994 read with Notification No. 35/2004-ST. It was argued that it being a sugar manufacturing co-operative unit, amounts paid were for combined expenses of harvesting, loading and transportation of sugarcane and the payments were made to individual truck owners who did not issue any consignment note. The adjudicating authority as well as the first appellate authority decided the matter against the Appellant leading to the present appeal.

Held:
The Tribunal relied on the decision of Nandganj Sihori Sugar Co. Ltd. vs. CCE Lucknow [2014 (34) STR 850 (Tri.-Del)]. The said decision noted the definition of “Goods Transport Agency” provided u/s. 65(50b) of the Finance Act as any commercial concern which provides service in relation to transport of goods by road and issues consignment note. A consignment note should have the particulars as prescribed in explanation to Rule 4B of the Service Tax Rules, 1994. The transportation of goods by individual truck owners without issue of consignment note would be simple transportation and not the service of Goods Transport Agency. Accordingly the appeal was allowed.

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[2015-TIOL-1983-CESTAT-MUM] ICICI Bank Ltd vs. Commissioner of Service Tax Mumbai-I

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Without client-custodian relationship and without entrusting of securities for safe keeping, amounts received from Reserve Bank of India cannot be considered as custodial services taxable under Banking and Financial services.

Facts
The Appellant Bank acts as an “Agency Bank” for the sale of bonds to the public issued by the Reserve Bank of India. The Bank maintains the details of the subscriber, pays out interest and redeems the bond at the end of the tenor. In return, they are remunerated by the Reserve Bank of India by way of a brokerage for effecting the sales to the subscribers and a commission for the handling of sales, payment of interest and redemption value and for keeping Accounts. The Appellant has paid service tax on brokerage and commission received after 01/07/2003 under “business auxiliary service”. A Show Cause Notice was issued proposing levy of service tax under Banking and Financial services from 16/07/2001 alleging that the Bank carried out securities broking and also rendered custodial service by keeping accounts of the subscribers. The original authority confirmed the demand and the Appellant is in appeal.

Held:
The Tribunal noted that custodial services in relation to securities are primarily the safekeeping of the securities of a client and the services incidental thereto. The relationship of the Appellant with the Reserve Bank of India exists because of their potential of reaching out to a vast number of subscribers. The Reserve Bank of India is not a client as far as the securities are concerned because they are not the owners of the bonds. Further, it was also noted that a custodian for a fee performs incidental services viz. receiving the security, collecting interest or dividend on behalf of the investor and obtaining redemption value on instruction from the investor. However, in the present case the Appellant Bank itself pays the interest and the redemption value on behalf of the Reserve Bank. Thus, the bond subscriber only pays the bond price to the Bank and there is no client-beneficiary relationship with the bond subscriber. The Tribunal held that without client custodian relationship and without entrusting the securities for safekeeping, the services do not merit classification under Banking and Financial services and were liable under Business Auxiliary service only with effect from 01/07/2003.

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[2015] 61 taxmann.com 124 (Jharkhand) – Adhunik Power Transmission Ltd vs. UOI.

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Dismissal of delayed appeal by Commissioner (Appeals) for want of application for condonation of delay is valid.

Facts:
The petitioner preferred appeal against the order beyond statutory period of 90 days with a delay of 14 days. The petitioner did not file the application for condonation of delay at the time of appeal and hence appeal was rejected. The petitioner’s case is that office of the Commissioner (Appeals) did not point out this defect and therefore, petitioner did not file the condonation application. It was also contended that no opportunity to file the condonation application was given by the office of the Commissioner (Appeals).

Held:
Dismissing the petition, the Hon. High Court held that the petitioner cannot say that there ought to have been appeal defect pointed out by the office of Commissioner (Appeals), otherwise the petitioner will never file delay of condonation application. Such ‘convenient’ argument is not accepted because the petitioner is a company limited and is not an illiterate or ignorant person. Reasons cannot be presumed by the Commissioner (Appeals). Thus, everybody should know the law and should have filed the condonation application for delay, if there is delay in preferring appeal. Ignorance of law is not excuse.

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[2015] 61 taxmann.com 244 (Mumbai – CESTAT)- CESTAT, MUMBAI BENCH Racold Thermo Ltd. vs. CCE, Pune-I

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Once the payment arising out of CENVAT discrepancies pointed out in
the course of Audit is made by the assessee along with interest and
without contesting it further, the show cause notice cannot to be issued
for levy of penalty.

Facts:
In the course of Audit by
Central Excise Audit Team, it was observed that appellant was directed
to reverse the CENVAT credit pertaining to the value of certain written
off inputs for F.Y. 2009-10. The appellant paid the same along with
interest. Subsequently, during CERA Audit, similar written off inputs
were observed also during F.Y. 2007-08 and F.Y. 2008-09. The appellant
on their own calculated the credit and paid the same along with
interest. However show-cause notice was issued alleging penalty on the
said amount and demand was confirmed. The Revenue contended that at the
first occasion when audit was conducted and this discrepancy was raised,
the appellant should have reversed CENVAT credit for the period 2007-08
and 2008-09 also as they are aware about written off value of inputs
during the said period also. Therefore appellant although having
knowledge about written off value in their books of account, neither
reversed it nor intimated to the department; therefore the case was one
of suppression of facts. The Appellant contended that in the course of
first audit the same issue was discussed and it was held that no
reversal was required in respect of the said year and that the fact that
inputs were written of was evident from financial records and hence
there was no suppression.

Held:
The Tribunal held
that once the appellant paid the amount along with interest as per their
calculation immediately after the same was pointed out by CERA audit
team without any contest and intimated it to the department; the matter
is covered by sub-section (2B) of section 11A(1) according to which no
show cause notice is required to be issued. Therefore, penalty to that
extent was deleted. However as regards some differential amount
mentioned in the show cause notice which was not paid by the appellant,
demand of service tax, interest and penalty were confirmed.

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[2015] 61 taxmann.com 140 (Mumbai CESTAT) – ISMT Ltd vs. CCE Aurangabad

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CENVAT credit availed of security service p rovided to guest house
shall be admissible as input service if such guest house is used for
lodging of employees and outside auditors who perform their service to
the appellants’ factory.

Facts:
Appellant availed CENVAT
credit for security service provided to guest house located near
factory used for lodging of employees and outside auditors who performed
their service to appellant’s factory. CENVAT credit of security
services was denied on the ground that it has no nexus with production
of goods and therefore did not qualify as input service. The confirmed
demand with interest and penalty was upheld in the first appeal.

Held:
The
Tribunal allowed the credit holding that the guest house is used for
lodging of the employees and outside auditors who perform their service
to the appellant’s factory and has a direct nexus with factory which
produces excisable goods and nothing is available on record to show that
guest house is used for any other purpose.

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2015 (39) STR 964 (Bom.) Top Security Ltd. vs. CCE & ST

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Even if the assessee does not comply with the provisions of pre-deposit, the appeal cannot be dismissed without hearing on merits.

Facts:
The appeal was dismissed without hearing on merits due to non-compliance with the stay order of the Appellate Tribunal. Relying on the Hon’ble Supreme Court’s decision in case of Balaji Steel Re-Rolling Mills 2014 (310) ELT 209, it was argued that the appeal must be adjudicated on merits irrespective of such non-compliance. The department contended that the Tribunal’s order did not require any interference since it did not raise any substantial question of law. The questions of law put forth before Hon’ble High Court was that since modification of stay application was pending, financial hardship pleaded by assessee was not considered and huge service tax liability was already discharged, whether the Tribunal was right in dismissing the appeal? It was also observed that the revenue had recovered certain service tax dues from customers of the appellants. The revenue contested that there would be a recurring liability and the liability and recovery cannot be stopped since appeal for the earlier period was pending.

Held:
The Tribunal cannot dismiss the appeal without hearing on merits. The conditional stay order was complied with albeit belatedly. Further, the bank accounts of appellants were attached and certain recoveries were made from their customers directly by the revenue. For further duty liability, if there is a recovery by coercive means, it would be open for the appellants to adopt such proceedings as are permissible in law in the event they feel aggrieved by the process initiated. All contentions of both sides in that regard were kept open. Without deciding the legal issue, the appeal was restored before Tribunal to be decided on merits and in accordance with law.

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If service receiver has paid service tax to service provider, CENVAT credit can be availed by service receiver even prior to registration obtained by service provider.

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43. 2015 (40) STR 288 (Tri. –Bang) Adecco Flexione Workforce Solutions Ltd. vs. CCE, Bangalore – LTU.

If service receiver has paid service tax to service provider, CENVAT credit can be availed by service receiver even prior to registration obtained by service provider.

Facts

CENVAT credit is denied on the ground that the service provider had taken registration subsequent to availment of CENVAT credit by service receiver.Therefore, the CENVAT credit would not be available to service receiver. Accordingly, CENVAT credit of trivial amount was denied in absence of registration number on invoices.

Held

If the assessee has paid service tax to service provider, CENVAT credit is available to service receiver without finding whether service tax paid by him to service provider stands deposited in the Government treasury. Verification of the fact of payment of service tax by service provider is impossible and impractical at service receiver’s end. Even if the revenue is of the view that service tax collected by service provider is not deposited by him, remedy is available with the department to take appropriate action against service provider and not service receiver. In the present case, the revenue did not even verify the fact of non-payment by service provider. Therefore, it was held that the appellant had rightly availed CENVAT credit.

[2015] 58 taxmann.com 93 (Rajasthan High Court) – Bansal Classes vs. Commissioner of Central Excise and Service Tax, Jaipur-I

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CENVAT –Period Prior to 01-04-2011- A commercial training or coaching centre cannot take CENVAT credit of input services availed for celebration meant for successful candidates

Facts:
The assessee was providing commercial training and coaching services to students. The issue before the Court was whether assessee is entitled to CENVAT credit on input services of catering, photography, tent (mandap keeper), maintenance & repairs (motor vehicles), rent for hiring examination hall and travelling expenses. Tribunal denied the CENVAT credit except on the rent for hiring examination hall.

Held:
The High Court held that, celebrations are organized during academic sessions to encourage existing students and motivate new students. These services are used only after students pass commercial training or coaching classes/examination. Therefore, since these celebrations are held only after commercial training or coaching classes are over, said activities cannot be said to have been used to provide output service. Further, credit of repairs & maintenance expenses in motor car and travelling expenses incurred for the business tours was not allowed treating the same as not related to provision for commercial training or coaching service.

Note: There is no discussion in the order as to why services availed for student’s celebration shall not be entitled to CENVAT credit as “activity relating to business”.

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2015 (39) STR 676 (Tri.-Bang.) Abraham Pothen vs. CCE & ST, Cochin

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Service receiver may claim refund of wrong service tax paid by
service provider even when the same is not shown separately on the
invoice, provided the service provider has discharged service tax
considering receipts to be inclusive of the service tax.

Facts:
The
service provider paid service tax, treating the amount received as
inclusive of service tax and thereafter, filed a refund claim as the
services were not taxable. However, the claim was rejected on the ground
of unjust enrichment, as service tax was passed on to their customers.
Accordingly, service receiver i.e. the appellants filed a refund claim.
The refund claim was rejected on the ground that there was no evidence
of payment of service tax by them and the procedure provided under Rule
4A of Service Tax Rules, 1994 was not followed. During the appellate
proceedings, the appellants submitted the proof of payments of service
tax to service provider and claimed that since service itself was not
taxable, issue of invoice was not required under the service tax law.

Held:
The
evidences produced by appellant were sufficient to demonstrate payment
of service tax. Since service tax was not collected separately, the
payments had to be considered to be inclusive of service tax.
Non-observance of Rule 4A of Service Tax Rules, 1994 was irrelevant.
However, penalties may be levied on the service provider as against
rejection of the refund claim of the service receiver. Therefore, since
the appellants had borne the service tax brunt, the appeal was allowed.

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2015 (39) STR 684 (Tri.-Bang.) India Vision Satellite Communications Ltd. vs. CCE, C & ST, Cochin

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Service recipient need not examine the correctness of service tax paid by service provider for claiming CENVAT Credit.

Facts:
The Appellants availed services of installation and commissioning in respect of an equipment and as per the Agreement, equipment rental charges were payable as well. Service tax paid on rent was availed as CENVAT credit. However, the service provider was registered with service tax authorities only for installation and commissioning services. Without digging into the facts of the case, the department and Commissioner (Appeals) denied CENVAT credit on the grounds that equipment rent was not eligible input service and if it is considered to be installation and commissioning services, the amount cannot be paid every month for a one time activity.

Held:
It is a settled law that if service tax is paid by service provider and service receiver is eligible for CENVAT credit, responsibility to examine correctness of service tax paid by service provider is not cast upon the service receiver. Accordingly, relying on various decisions, the Tribunal allowed CENVAT Credit.

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2015 (39) STR 698 (Tri.-Del.) Ionnor Solutions Pvt. Ltd. vs. CCE & ST, Chandigarh-I

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Refund of CENVAT credit with respect to input services received during the period prior to export taking place shall be available even in subsequent period, specially for 100% exporter of services.

Facts:
The Appellants, being 100% exporter of services, claimed refund of CENVAT credit under Notification No. 5/2006-CE (NT) with respect to input services received prior to export taking place. Vide Para 4 of the Notification (supra), refund can be granted only if assessee cannot utilise CENVAT credit against the goods exported during the quarter to which the claim relates. Accordingly, it was interpreted that refund is allowed only on input services consumed during the quarter in which export took place. Since in the present case, input services were not consumed in the quarter of export, the refund claim was rejected.

Held:
CBEC Circular No. 120/1/2010-ST clarified that CENVAT credit refund of past period in subsequent quarters shall be allowed specifically for 100% exporter of services, irrespective of date of CENVAT credit taken, if otherwise in order. Relying on the above Circular and also having regard to the fact that eligibility of CENVAT credit was not disputed and that the appellants cannot utilise CENVAT credit, the refund claim was allowed.

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[2015-TIOL-1888-HC-MUM-ST] M/s S2 Infotech Pvt. Ltd vs. The Union of India & ORS

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Sitting on files for months together is not conducive to the interest of nation’s economy. The Chief Commissioners, Service Tax should file comprehensive affidavit indicating the number of files pending and the time required to dispose those cases.

Facts
The Commissioner passed an order after almost 22 months of the date of personal hearing. The Appellant relied upon various circulars issued by the CBEC on the law laid down by the Supreme Court in the case of Anil Rai vs. State of Bihar [2009 (233) ELT 13 (SC)] stating that there should not be any unreasonable delay in passing adjudication order.

Held:
The High Court held that delay in proceedings and passing of orders is contrary to public interest. The Court also stated that ordinarily it would have set aside this order on this ground alone and would have sent it back for reconsideration. However, considering the number of files and matters pending, the Court ordered the Commissioners to place on record complete data and figures of the pending cases with the time required to dispose of these cases.

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[2015-TIOL-1828-HC-MUM-ST] Tahnee Heights Co-op Housing Society Ltd vs. The Union of India & ORS

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When refund ordered is paid to the Appellant, withholding interest thereon considering that if interest is also paid, the appeal before the Supreme Court would be rendered infructuous is not the correct understanding of law.

Facts:
The Appellant is a cooperative housing society which paid service tax under protest on amounts contributed by the members. The Tribunal ruled in their favour stating that services to members of club/co-operative housing society is not a service by one to another and accordingly service tax paid was ordered to be refunded. The Respondent refunded the principal sum, but refused to pay interest thereon stating that the Tribunal order was not accepted by them and they were in the process of filing an appeal against the said order. It was also stated that the Appellant should wait till the matter is decided at the Supreme Court level.

Held:
The High Court observed that the interest was withheld on a possible realisation that if the same is awarded their proceedings before the Supreme Court would be rendered infructuous. This cannot be the legal position nor can the understanding of the parties be based on the same. Further it was also noted that if the Respondent did not intend to pay the interest amount, it could have obtained such interim orders from the Supreme Court. The Court held that the Respondent should obtain requisite orders from the Supreme Court within a period of two months of receipt of this order. In the absence of such orders, interest should be paid within four weeks of expiry of two months.

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[2015] 60 taxmann.com 181 (Allahabad High Court) – Rotomac Global (P) Ltd vs. CCE, Kanpur

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For computing time limit for filing of appeal, the day on which the order is served on assessee must be excluded.

Facts:
The
Application for refund was rejected by the adjudicating authority and
the order in that regard was served on 26th June 2013. The appellant
filed an appeal on 26th August 2013. However, the appeal was rejected by
Commissioner (Appeals) as well as the Tribunal on the ground of delay
of two days.

Held:
The High Court observed that as
per section 85(3A) of the Finance Act, 1994 the appeal has to be
presented within two months from the date of receipt of the order.
Relying upon section 35-O of the Central Excise Act,1944, it was held
that for computing the period of limitation prescribed for an appeal,
the day on which the order was served has to be excluded. Further, the
High Court held that even otherwise, the delay of two days was not too
fatal and a liberal approach should have been adopted while handling the
matter and the matter therefore, was remanded to decide the appeal on
merits, thereby quashing the order of the first appellate authority and
the order of the Tribunal.

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[2015] 60 taxmann.com 152 (Kerala HC) – Akbar Travels of India (P) Ltd. vs. CCE, Thiruvananthapuram

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Once section 80 is held applicable; all penalties u/s. 76, 77 & 78 must be waived.

Facts:
The Tribunal took a view that the Appellant is entitled to benefit of section 80 of the Finance Act 1994. However in terms of final order, the penalty u/s. 78 was deleted and only penalty u/s. 76 was retained. Therefore, a rectification application was filed before the Tribunal that penalty u/s. 76 ought to have been deleted. The application was disposed off clarifying that only penalty u/s. 78 was meant to be deleted. Aggrieved by the same, appeal was filed before the High Court.

Held:
The High Court held that section 80 opens with nonobstante clause. Once the assessee proves that there was reasonable cause for the said failure, section 80 starts to operate insulating imposition of all the penalties stated therein viz. penalties u/s. 76, 77 and 78 of the Finance Act, 1994. Allowing the appeal, High Court also held that having considered the said provisions of law and in terms of specific findings of the Tribunal in its order regarding applicability of section 80 the rectification application must succeed.

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2015 (39) STR 569 (Mad.) Bootleggers Island vs. CESTAT, Chennai

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Waiver of penalty u/s. 80 may not be available on the sole ground of financial hardship, for delayed payment of taxes. Penalty is imposable even in cases where tax is paid before issuance of show cause notice.

Facts:
Service tax was paid belatedly without interest. A show cause notice was issued for payment of service tax with interest and penalties. After various rounds of litigation, the Tribunal held that on the sole basis of financial hardship for delayed payment of service tax, the appellants cannot escape from penalties.

Held:
The Hon’ble High Court observed that the Tribunal had clearly held that it was not a case where the benefit of section 80 of the Finance Act, 1994 should be extended. In the absence of such a substantial plea and there being no bonafide justification for exemption, penalty was rightly imposed as mandated by the provisions of the Finance Act, 1994. Further, it was noted that the Madras High Court in the case of Dhandayuthapani Canteen vs. CESTAT 2015 (39) STR 386 (Mad.), had held that penalty is imposable even in cases where tax is paid before issuance of show cause notice. With respect to bar on imposition of penalty u/s. 76 when penalty was levied u/s. 78 of the Finance Act, 1994, liberty was granted to the appellants to agitate the issue before the Commissioner.

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[2015 (322) ELT 772 (S.C.) Greaves Ltd vs. Commissioner of Central Excise and Customs, Aurangabad

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Extended period cannot be invoked for the period prior to the issue of clarificatory circular by CBEC

Facts
CBEC, vide its circular dated 30/10/1996 clarified the manner of valuation of captively consumed goods. Demand was raised on the Appellants for non-inclusion of certain costs in arriving at the value for captive consumption for the period 1993-94 to 1997 invoking extended period of limitation. It was argued that since there was no misdeclaration or misstatement, the extended period was not invokable.

Held:
The Hon’ble Supreme Court relying on the decision of Commissioner of Central Excise, Ahmedabad vs. Asarwa Mills [2015 (319) ELT 216 (S.C.) held that the Appellant cannot be faulted with for adopting a valuation mechanism prior to the issuance of the clarificatory circular. Accordingly, extended period cannot be invoked. Moreover, the demand for the normal period was also set aside as the tax effect thereof was negligible.

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Disallowance of set off vis-à-vis natural justice

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Introduction
Availability of set off (input tax credit) is the backbone of the Value Added Tax (VAT ) system. A dealer is entitled to claim set off of the tax paid by him to his vendors on all such purchases which are categorised as inputs. The system works in a manner whereby there is no undue burden on the dealer. The amount of VAT payable by a dealer is the difference between the tax payable on sale price less the tax already paid on purchases (inputs). Thus, the tax paid on purchases gets set-off against the tax payable on sale. Denial of set off may cause many problems and the system of VAT will not be workable. A dealer, while selling goods, works out the sale price on the basis of the cost of goods sold. As the tax paid on purchases (inputs) are available as setoff, the same are normally not considered in the cost. But, if the set off is not allowed for any reason, the vendor will be at great risk. This will cause economic loss to vendor with added burden for interest and penalty.

Set off is subject to conditions and not absolute right
It is now well settled that availability of set off is subject to provisions under the Act. In other words, when to give set off, how to give set off and with what reductions etc. is as per the provisions made by the respective State Governments. The dealer cannot ask for the same as a right. The above position is well settled by number of judgments and under MVAT Act, the well known judgment is in case of Mahalaxmi Cotton Ginning Pressing and Oil Industries, Kolhapur vs. The State of Maharashtra & Ors. (51 VST 1)(Bom). In this case, the Hon. High Court observed that set off is not a constitutional right but a statutory right, hence it can be subject to conditions as may be prescribed.

Vital condition under MVAT Act
There are various conditions for grant of set off in the MVAT Rules. However, one very important condition is in section 48(5), which provides that the set off will be allowable if the government has received money on the same goods in the government treasury. In other words, if the vendor has paid tax on the same goods, which are purchased by the buyer, then the buying dealer is entitled to get set off. If the vendor has defaulted, then set off can be denied to the buyer. Although this is such a condition which is beyond the control of the buyer, but still it is held valid in the judgment of Mahalaxmi Cotton Ginning Pressing and Oil Industries (supra).

New Concept of Hawala/R. C. Cancellation
In addition to disallowance of set off on the ground of non-payment by vendors, the sales tax authorities in Maharashtra have found one new way of disallowing set off. Under this new method, the setoff can be denied even without assessing the vendors. The Sales Tax Department of Maharashtra has published on its own website a list of ‘suspicious dealers’ (called hawala vendors) and also a list of dealers whose Registration certificates (R.C.) have been cancelled. The assessing authorities are indiscriminately disallowing set off on all the purchases from such listed vendors.

Principles of Natural justice not followed
Under the guise of hawala vendors and R.C. cancellation, the principles of natural justices are also kept aside by the learned assessing authorities. It is said that the names of hawala dealers or retrospective cancellation of R.C. of the vendors is based on certain materials collected from such vendors and on the basis of their statements under oath or their affidavits, etc. However, these materials used for considering the vendors as defaulters as well as hawala vendors is not delivered to the concerned buyers in whose case the set off is being disallowed. Further, no cross examination opportunity is granted. Therefore, amongst others, such disallowance is against the principles of natural justice and cannot be upheld in the eyes of law.

Right of cross examination is a crystallised right
There are a number of judgments laying down the principle that when the authorities use outside material, delivery of copies of the same and cross examination of the author of such material is required to be given to the concerned opposite party. Amongst others, reference can be made to the judgment of the Madras High Court in the case of Tilagarathinam Match Works vs. Commissioner of Central Excise, Tirunelveli (295 ELT 195) (Mad.)

In this case, the Hon. High Court has held that such a cross examination opportunity is required to be given even without the same being asked for by the opposite party. Thus, this is a very settled principle of natural justice and flouting of the same will render the order invalid. However, in case of hawala and R.C. cancellation cases, the authorities in Maharashtra are having a view that what is declared on their website is the final word and no such opportunity is required to be given.

With due respect, it is submitted that this is a wrong notion.

Shree Bhairav Metal Corporation vs. State of Gujarat (Special Civil Application No. 2149 of 2015 dated 26.3.2015)(Guj. H.C.)

Now the position is also clear in respect of hawala and R.C. cancellation. In the above case before Hon. Gujarat High Court, the facts as considered by the Hon. High Court are narrated as under:

“It appears that while claiming the aforesaid ITC, the petitioner dealer showed purchases of Rs.48,12,825 alleged to have been purchased from one M/s Lucky Enterprises. The petitioner also produced the bills with respect to purchase of goods alleged to have been purchased from M/s Lucky Enterprises. Thus, the assessee dealer claimed Rs.1,92,513 out of total ITC claimed of Rs.6,49,561/- on the purchases alleged to have been made from M/s Lucky Enterprises. That the Assessing Officer passed assessment order dated 30.12.2010 allowing the ITC as claimed by the petitioner dealer including the purchases made by the petitioner alleged to have been purchased from M/s Lucky Enterprises.

It appears that the registration certificate of M/s Lucky Enterprises came to be cancelled ab initio from 22.2.2006 on the ground that M/s Lucky Enterprises is not a genuine dealer and had indulged into billing activities only and all the transactions made by M/s Lucky Enterprises were found to be bogus and non-genuine.”

Thus the set off was disallowed on the ground of hawala and R. C. cancellation. However, the copy of the R.C. cancellation was not delivered to the appellant. Noting the above facts, the Hon. High Court has remanded the matter back while observing as under:

“9.4 As observed earlier, the impugned order has been passed by the adjudicating authority denying the ITC claimed by the petitioner on the alleged purchases made by the petitioner from M/s Lucky Enterprises on the ground that the registration certificate of M/s Lucky Enterprises– seller has been cancelled ab initio on the ground that the seller had involved into the billing activities only and all the transactions by M/s Lucky Enterprises are held to be bogus. The petitioner has been denied the ITC on the ground of the aforesaid activities/alleged transactions between the petitioner and M/s Lucky Enterprises. However, as observed herein above, the petitioner was not served with the copy of the order in the case of M/s Lucky Enterprises. Now, the copy of the order passed in the case of M/s Lucky Enterprises is available with the petitioner. Therefore, after giving an opportunity to the petitioner with respect to observations made in the case of M/s Lucky Enterprises insofar as the alleged transactions between the petitioner and M/s Lucky Enterprises and after giving an opportunity to the petitioner to prove the genuineness of the transaction between them and M/s Lucky Enterprises in light of the observations made herein above, therefore, the matter is required to be remanded to the adjudicating authority to consider the claim of the petitioner for ITC on the alleged purchases made by the petitioner from M/s Lucky Enterprises.”

Thus, the Hon. High Court has reiterated the principles of natural justice and remanded the matter for allowing opportunity to buyer to substantiate its claim after delivery of copies of adverse order. The truth can be established only upon such exercise.

Conclusion

Under MVAT Act also, wherever the set off is disallowed on the basis of default of vendor including hawala allegation and R.C. cancellation, the above principle is required to be followed. Therefore, the assessments made today without following such principle cannot be said to be valid in the eyes of law.

SUPREME COURT: NO SERVICE TAX ON WORKS CONTRACT PRIOR TO 01/06/2007

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Background
In the August 2015 issue of BCAJ under the Service
tax feature, both the minority view and the majority view in the
5-member Bench’s decision in Larsen and Toubro Ltd. vs. CST, Delhi 2015
(38) STR 266 (Tri.-LB) were synopsised over the controversy of whether a
works contract was divisible and the service portion involved therein
was liable for service tax prior to June 01, 2007, when service in a
works contract was notified vide introduction of sub-clause (zzzza) in
section 65(105) of the Finance Act, 1994 (the Act). The wait and anxiety
has been put to an end by the Hon. Supreme Court’s path breaking
judgment in a bunch of appeals led by CCE & C Kerala vs. Larsen and
Toubro Ltd. 2015-TIOL-187-SCST wherein the Apex Court has allowed
appeals of the assessees by categorically holding that prior to June 01,
2007, the Act did not lay down any charge or machinery to levy and
assess service tax on indivisible composite works contracts.

THE JUDGMENT OF The HON. SUPREME COURT:
In
various revenue appeals, the substance contended was that the 46th
amendment itself divided works contract by Article 366(29A)(6) and what
remained after removing goods element was labour and service and these
were subjected to service tax by various entries in the Finance Act,
1994. Secondly, the Finance Act, 1994 itself contains both charge of
service tax as well as machinery by which only labour and service
element in indivisible contracts is taxable and the statute need not do
what the constitution amendment has already done viz. splitting of
indivisible works contract into a separate contract of transfer of
property in goods involved in execution of works contract taxable by the
States and labour and service element on the other hand is taxable by
the Central Government. As such, defining works contract in 2007 for the
first time would make no difference as the elements of works contracts
were already taxable under the Finance Act, 1994 even prior to the
introduction of the said definition. Lastly, therefore relying on
section 23 of the Contract Act and McDowell & Company Ltd. 1985 (2)
SCC-230, all indivisible contracts were made with a view to avoid/ evade
tax and this being contrary to public policy, invoking principles laid
down in the said McDowell’s case, the socalled indivisible contracts
should be taxed under the Finance Act, 1994.

As against the
above, it was pleaded for various assessees that works contract is a
separate species known to the world of commerce and law and being so, an
indivisible works contract would have to be split into constituent
parts by necessary legislation to contain a charge to service tax
together with requisite machinery provisions. Secondly, there did not
exist such charge and machinery prior to 2007 and what was taxable was
only the pure service in which no goods element was involved and thirdly
in view of this, the Delhi High Court’s judgment in G. D. Builders’
case 2013 (32) STR 673 (Del) was wholly incorrect.

Analysis:
Considering
the above rival contentions, the Hon. Apex Court examined section 64,
relevant clauses in section 65(105), charging section 66 and section 67
of the Act, Rule 2A of the Service Tax (Determination of Value) Rules,
2006 (Valuation Rules) dealing with valuation in depth and also went
into examining in detail second Gannon Dunkerley judgment (1993) 1 SCC
364, heavily relied by the assessee’s counsel and observed at para 15 of
the judgment, that unless splitting of an indivisible works contract is
done, taking into account the eight deductions elaborated in the said
judgment of Gannon Dunkerley (supra) (i.e. deductions for amount paid to
subcontractor for labour and services, planning, designing and
architect’s fees, hire charges for machineries and equipments,
consumables like water, electricity and fuel etc., other charges for
labour and services, cost of transportation to bring goods to the place
of work and cost of establishment and profit of the contractor relatable
to labour/services) the charge would transgress into forbidden
territory i.e. cost, expense and profit attributable to the transfer of
property in goods in such contract. This being the case, the Court
concurred with the case of the assessees that the charging section
itself must specify that service tax can only be on the works contracts
and the measure of tax can only be on the portion of the works contract
representing service element to be derived only by deducting value of
property in goods transferred in execution of the works contract from
the gross value of the works contract. The Court further noted that as
reflected in Bharat Sanchar Nigam Limited vs. UOI 2006-TIOL-15-
SC-CT-LB, the scheme of taxation under the constitution is such that
powers of the Centre and State are mutually exclusive. Thus, it is
important to segregate the two elements completely and in case of
transgression, the levy would be constitutionally infirm and therefore
exclusivity has to be maintained and thus the Court relying again on
Gannon & Dunkerley (supra), Kone Elevators India P. Ltd. P. Ltd. vs.
State of T. N. 2014-TIOL-57-SC-CT-LB and Larsen & Toubro vs. State
of Karnataka 2013-TIOL- 46-SC-CT-LB endorsed recognition of works
contracts as a separate species of contract and interalia cited Larsen
& Toubro 2013-TIOL-46-SC-CT-LB in approval thereof as follows:

“…..
The term “works contract” in Article 366(29A)(b) is amply wide and
cannot be confined to a particular understanding of the term or to a
particular form. The term encompasses a wide range and many varieties of
contract. The term “works contract” in Article 366(29A)(b) takes within
its fold all genre of works contract and is not restricted to one
specie of contract to provide for labour and service alone”.

The
Court also analysed and accepted the assessee’s next important plea
that there did not exist charge to tax works contract in the Finance
Act, 1994 prior to 01/06/2007 is a correct view. To arrive at the view,
reliance was interalia placed on the following:

Mathuram Agrawal vs. State of M.P. (1999) 8 SCC 667

“The
statute should clearly and unambiguously convey the three components of
the tax law i.e. the subject of the tax, the person who is liable to
pay the tax and the rate at which the tax is to be paid. If there is any
ambiguity regarding any of these ingredients in a taxation statute then
there is no tax in law. Then it is for the legislature to do the
needful in the matter.”

Govind Saran Ganga Saran vs. CST, 1985 Supp SCC 205 = 2002-TIOL-589-SC-CT

“The
components which enter into the concept of a tax are well known. The
first is the character of the imposition known by its nature which
prescribes the taxable event attracting the levy, the second is a clear
indication of the person on whom the levy is imposed and who is obliged
to pay the tax, the third is the rate at which the tax is imposed, and
the fourth is the measure or value to which the rate will be applied for
computing the tax liability. If those components are not clearly and
definitely ascertainable, it is difficult to say that the levy exists in
point of law.”

CIT vs. B. C. Srinivasa Setty (1981) 2 SCC 460

“Thus
the charging section and the computation provisions together constitute
an integrated code. When there is a case to which the computation
provisions cannot apply at all, it is evident that such a case was not
intended to fall within the charging section.”

The Court held that the five taxable services referred to the charging section 65(105) would refer only to service contracts simpliciter and not the composite works contracts which was clear from the very language defining taxable service as “any service provided”. To fortify and advance the above contention further, the Court observed that in contrast to the above, section 67 post amendment in 2006 for the first time prescribed that when the provision of service is for a consideration which is not ascertainable to be the amount as may be determined in the prescribed manner. It is also evident that Rule 2(A) of the Valuation Rules framed pursuant to the power has followed the second Gannon Dunkerley’s case (supra) while segregating the ‘service’ component from the component of ‘goods’. In consonance thereof, the Court also noted that not only the statute was amended and rules framed but a Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007 was also notified for payment of service tax at presumptive rate.

Lastly, the Court examined the Delhi High Court’s judgment in G. D. Builders (supra) holding that levy of service tax in section 65(105) sub-clauses (g), (zzd), (zzh), (zzq) and (zzzh) is good enough to tax indivisible works contract and commented as follows:

  •     Reference was made to various judgments which had no direct bearing on the point at issue and further the second Gannon Dunkerley (supra) was referred to in passing without noticing any of the key paras set out in this judgment.

Mahim Patram Private Ltd. vs. Union of India, 2007

(3)    SCC 668 was completely misread to arrive at the proposition that even when rules are not framed for computation of tax, tax would be leviable. This judgment concerned itself with works contract being taxed under the Central Sales Tax Act. In accordance with sections 9(2) and 13(3) of Central Sales Tax Act, powers are conferred on officers of various States to utilise the machinery provisions of the States sales tax statutes for levy and assessment of Central sales tax under the Central Act, so long as the said rules were not inconsistent with the provisions of the Central Act. Thus, the extracted passage from Mahim Patram’s case (supra) in G. D. Builders’ case (supra) referred to rules not being framed under the Central Act and not to the rules not being framed at all. The conclusion drawn based on such misreading was found wholly incorrect by the Court. The finding in G. D. Builders (supra) was thus contrary to the line of decisions discussed above among various others. In support thereof one such passage from para 17 of Jagannath Baksh Singh vs. State of U.P. [AIR 1962 SC 1563] was extracted from Heinz India (P) Ltd. vs. State of U.P. (2012) 5 SCC 443 which read as:

“An imposition of tax which in the absence of a prescribed machinery and the prescribed procedure would partake of the character of a purely administrative affair can, in a proper sense, be challenged as contravening Article 19(1)(f).” (emphasis supplied).

  •     In addition to the above, the Court also took note of the fact that either machinery provisions were struck down or held inadequate and therefore assessment thereunder was rendered ineffective vide the Patna High Court’s decision (affirmed by Apex Court in State of Jharkhand vs. Voltas Ltd. 2007-TIOL-86-SC-ST, Madras High Court in Larsen & Toubro Ltd. vs. State of Tamil Nadu & Ors. (1993) 88 STC 289 and Orissa High Court in Larsen & Toubro vs. State of Orissa, (2008) 012 VST 0031).

The Court concluded by holding that the Finance Act (prior to 01/06/2007) laid down no charge or machinery to levy and assess service tax on indivisible works contracts. Therefore, the revenue’s apprehension that several exemption notifications have been granted qua service tax levied by the Finance Act, 1994 was also answered emphatically that whichever judgment would be appealed against before the Supreme Apex Court, such notifications would have to be disregarded.

Conclusion:

While it is heartening to note that the controversy which began with the decision in Daelim’s case 2003(155) ELT 457 (T) at the end of over ten years has reached finality for better; nevertheless a large number of assessees who met with an adverse decision in this battle and who did not litigate for want of resources or any other reason would have certainly succumbed to the suffering of financial loss in one or the other way in different proportions for no fault of theirs but only on account of vague and unprecise legislation. The question therefore arises thus, is whether an honest assessee has any recourse under the constitution to question accountability of the law administering machinery which also encompasses drafting of laws? Many open issues of similar nature like dual taxation to the transactions of providing license to software or transfer of intellectual property etc. on a similar uncertainty have made tax payers and stakeholders suffer without having any recourse to even consider questionability. Is it the fruit that we are ‘enjoying’ in a democratic setup?

[2015] 59 taxmann.com 194 (Mumbai – CESTAT) – Rathi Daga vs. CCE, Nashik

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If assessee providing taxable and exempted services and not maintaining separate records under Rule 6(2) of CENVAT Credit Rules,2004 and also fails to follow procedure under Rule 6(3A) of the said rules, it would not mean that department is justified in invoking Rule 6(3) (i) in all cases. Procedure under Rule 6(3A) needs to be followed, but disallowance should be determined rationally avoiding undue hardship to assessee.

Facts:
The appellant paid service tax under chartered accountants service and his services also included certain exempt services. It was detected by the audit team of the department that it did not maintain separate accounts for services used in providing taxable and exempted services as required under Rule 6(2) of the CENVAT Credit Rules, 2004. Before issue of Show Cause Notice, the appellant however paid an amount equivalent to CENVAT credit based on proportionate reversal method under Rule 6(3) (ii). However, the department issued Show Cause Notice, demanding payment of CENVAT credit under Rule 6(3) (i) being an amount equal to 8% / 6% of the value of exempted services, as the conditions of Rule 6(3A) were not followed.

Held:
The Tribunal after going through Rule 6(3A) of CENVAT Credit Rules,2004 observed that submission of details to department as prescribed in the said rule such as name, address and registration number etc. are mostly factual details which are available from record. It also noted that the department has not disputed the amount paid by the assessee before issue of notice as per Rule 6(3)(ii). In such circumstances, having regard to disparity of amount of CENVAT credit under both the options, it was held that It would be too harsh to enforce payment as per Rule 6(3)(i) only because of non-payment of the due amount on time as per procedure prescribed in Rule 6(3A). The Tribunal however further held that the conditions do require that option should be exercised in writing to avail the facility and amount of CENVAT credit attributable to exempted goods must be paid provisionally for every month.

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2015 (39) STR 350 (Tri.-Bang.) CCE, Cus. & S. T., Visakhapatnam – I vs. Hindustan Petroleum Corp. Ltd.

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When completion of provision of services, payment thereof and CENVAT
credit availment is prior to the date of amendment, law prior to the
date of amendment is applicable.

Facts:
The
respondents availed health insurance services in March, 2011, payment
for which was made in March, 2011. However, the insurance was for the
period from April, 2011 to September, 2011. CENVAT credit on such
services was availed in March, 2011. Definition of input services was
substantially amended with effect from 1st April, 2011 with specific
exclusions. One such exclusion was in relation to insurance services,
when such services are used primarily for personal use or consumption of
employees. Accordingly, the department denied CENVAT credit since the
period of insurance was effective from 1st April, 2011. Commissioner
(Appeals) referred to Point of Taxation Rules, 2011 and also the
definition of Point of Taxation and concluded that CENVAT credit was
allowable to the extent of completion of provision of services prior to
1st April, 2011.

Held:
It is an undisputed fact that
services were availed prior to amendment, payment was made prior to
amendment and even CENVAT credit was taken prior to amendment.
Accordingly, provisions post amendment would not be applicable to the
activities completed prior to the date of amendment. As per the
definition, “Point of Taxation” means the point in time when a service
shall be deemed to have been provided. Accordingly, since everything was
completed in March, 2011, CENVAT credit was available.

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[2015] 59 taxmann.com 13 (New Delhi – CESTAT) R.B. Steel Services vs. CCE & ST.

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The CENVAT credit on inputs used for manufacture of final product can be used for payment of duty erroneously charged on such exempted final product.

Facts:
The adjudicating authority held that converting black rods/ bars into bright bars did not amount to manufacture during the relevant period and therefore the CENVAT credit taken on capital goods/black rods/bars used for making bright bars was not admissible. The appellant paid duty on their product, namely bright bars and the total duty paid by them was more than the amount of credit taken.

Held:
The Tribunal held that, converting black rods/bars into bright bars do not amount to manufacture as the said issue is covered by the decision of the Supreme Court against the assessee. However, relying upon various judicial pronouncements including decision of the Mumbai Tribunal in the case of Ajinkya Enterprises vs. CCE 2013 (288) ELT 247 (Tri. – Mum) which has been affirmed by the Hon’ble Bombay High Court, it held that CENVAT credit is allowed.

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2015 (39) STR 331 (Tri.-Ahmd) Memories Photography Studio vs. Commr. of C. Ex. & S. T., Vadodara

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If service recipient was unaware of nonpayment of service tax by service provider before taking CENVAT credit, the same shall be allowed.

Facts:
The limited question for consideration in the present case was whether CENVAT credit can be denied to the recipient of input services if service tax is not paid by service provider. The department contended that the appellants should have taken precaution to verify the fact of discharge of service tax liability by service provider. Since service provider had not paid service tax liability, CENVAT credit was not admissible to service recipient.

Held:
Revenue could not provide any evidence on record to prove that the appellants were aware of non-payment of service tax by service provider before taking CENVAT credit. Service recipient would only see CENVATA BLE document. It was not the case of non-existence of service provider. Therefore, CENVAT credit was correctly availed.

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2015 (39) STR 256 (Tri.-Del.) Shree Tirupati Balajee Agro vs. Commissioner of C. Ex., Indore

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If the assessee is registered under service tax law even though under a different category, penalty u/s. 77 is not warranted.

Facts:
The
appellants had got service tax registration under a different category.
Department sought to levy penalty u/s. 77 of the Finance Act, 1994 for
failure to take registration.

Held:
Even though the
appellants were registered under a different category of service, they
were recognised under service tax law. Therefore, penalty under section
77 was not warranted.

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2015 (39) STR 252 (Tri.-Del.) Bharat Electronics Ltd. vs. Commissioner of C. Ex., Ghaziabad

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Central Excise duty cannot be levied on services taxable under Service tax laws.

Facts:
The appellant manufactured a minor part which was supplied to its clients with other imported goods under two divisible contracts. Excise duty was paid on the minor part, however, department demanded excise duty on services forming part of these contracts. It was argued that service component was already under adjudication under Finance Act, 1994 and the services should be automatically excluded from Central Excise laws in the present adjudication, specifically when the items were outside the purview of Central Excise. Since, Central Excise department was not aware of adjudication proceedings initiated by service tax authorities, they had requested for extension of time to verify the fact. However, even after a long time span, department did not provide any reply to the Tribunal.

Held:
The Tribunal examined appellant’s submissions and observed that the divisible contracts were executed specifically demarcating provision of services. In view of separate contracts for supply and service and laws relating to taxation of goods and services, it was held that services cannot be taxed under Central Excise laws.

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2015 (39) STR 235 (Tri.-Mum.) CCE, Pune – III vs. Maharashtra State Bureau of Text Books Production & Curriculum Research

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Communication, determining the right of the party or likely to affect the rights, is appealable even though it may not be in the nature of an ‘order’.

Facts:
In view of centralised accounting system, the appellate authority allowed facility of centralised registration at the head office of the respondents, being the recipient of Goods Transport Agency services. Revenue argued that the rejection of centralised registration was through a letter, which cannot be appealed against and only service providers can be granted with centralised registration.

Held:
It is a well-settled law that a letter, conveying grounds of rejection and also the rejection, is an appealable order. The argument, that only service providers are eligible to obtain centralised registration, is meaningless and would defeat the objective of such registration. In Indirect tax laws, registration is linked with taxpayer, which is service recipient in the present case. Since respondents satisfied the conditions for centralised registration, centralised registration was rightly allowed.

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[2015-TIOL-1592-HC-MAD-ST] Fifth Avenue Sourcing (P) Ltd vs. Commissioner of Service Tax.

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The amendment to section 35F of the Central Excise Act, 1944 with effect from 06/08/2014 regarding mandatory pre-deposit is prospective in nature and shall not apply to assessment proceedings initiated prior to the said date.

Facts:
The Petitioner was seeking permission to file an appeal without mandatory deposit as the dispute pertains to the period prior to amendment of section 35F.

Held:
The Hon’ble High Court relying on the decision of the Kerala High Court in the case of Muthoot Finance Limited [2015-TIOL-632-HC-KERALA-ST] (refer BCAJ-April’s issue) held that the amended provisions of section 35F of the Central Excise Act, 1944 are not given retrospective effect. Since the proceedings were initiated prior to 06/08/2014, the Appeal and stay application could be filed before the CESTAT without making a pre-deposit. The High Court also noted the decision in the case of Deputy Commercial Tax Officer, Tirupur vs. Cameo Exports and others [2006 (147) STC 218 (Mad)] rendered in the matter of Tamil Nadu General Sales Tax Act, 1959 wherein it has been held that the right of appeal is vested in the assessee the moment he files his return which commences the assessment proceedings. Therefore since the amendment is not retrospective, appeals deserved to be entertained without insisting on pre deposit.

Note: A contrary decision of the Mumbai CESTAT in the case of Maneesh Export(EOU), Satish J. Khalap, Vinay R. Sapte vs. Commissioner of Central Excise, Belapur[2015-TIOL-1093- CESTAT-MUM] reported in the BCAJ-July 2015 issue holding that the amendment to section 35F of the Central Excise Act, 1944 is retrospective in nature.

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[2015-TIOL-1596-HC-KAR-ST] Mrs. Prashanthi vs. The Union of India

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Notices of recovery initiated u/s. 87 of the Finance Act, 1994 before the show cause notices are adjudicated is illegal and are required to be squashed.

Facts:
A writ petition was filed against the action of recovery initiated by the department u/s. 87 of the Finance Act, 1994 even before the show cause notices were adjudicated.

Held:
The Hon’ble High Court held that the words “amount payable by a person” used in section 87 of the Finance Act, 1994 will have to be considered in the background of section 73 of the Finance Act, 1994 inasmuch as, show cause notice issued u/s. 73(1) of the Finance Act, 1994 is required to be adjudicated after considering representation of the person if filed and thereafter determine the amount payable. Any deviation in this regard would be in violation of principles of natural justice – doctrine of Audi Alteram Partem would be attracted. Until and unless there is determination and adjudication either u/s. 72 or u/s. 73 of the Finance Act. 1994, section 87 of the Finance Act, 1994 cannot be invoked. Thus, the notices are illegal and require to be squashed.

Note: Readers may also note a similar decision of the Bombay High Court in the case of ICICI Bank Ltd vs. Union of India [2015-TIOL-1164-HC-MUM-ST] holding that law enforcers cannot be permitted to do what is not permitted within the four corners of law. Without there being adjudication, coercive steps cannot be taken for recovery of service tax, penalty or interest.

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[2015-TIOL-1602-HC-KERALA-ST] M/s Geojit BNP Paribas Financial Services Ltd vs. Commissioner of Central Excise, Customs and Service Tax, Deputy Commissioner of Central Excise

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The provisions of section 11B of the Central Excise Act, 1944 are not applicable for refund of service tax paid erroneously

Facts
The Appellant wrongly paid service tax on services qualified as export of services and hence claimed a refund. The claim was rejected since it was filed beyond one year from the relevant date as provided u/s. 11B of the Central Excise Act. Hence, a writ petition was filed.

Held:
The Hon’ble High Court relying on the decision of the Karnataka High Court in the case of KVR Construction [2012 (26) STR 195(Kar)] noted that once there is no compulsion or duty cast to pay service tax, there was no authority for the department to retain such amount and the refund is not relatable to section 11B of the Central Excise Act, 1994. Further, the decision of the Apex Court in the case of Mafatlal Industries Ltd. [(1997) 5 SCC 536] holding that refund can only be processed in terms of section 11B was also distinguished by holding that the mistake in the present case is on account of fact and not on account of law. Section 11B is attracted only when the levy has a colour of validity when it was paid and only consequent upon interpretation of law or adjudication, the levy is liable to be ordered as refund. Thus, refund is granted and writ petition is allowed.

Note: Readers may also note a similar decision in the case of M/s. Vasudha Agencies vs. Commissioner of Service Tax- Mumbai-I [2015-TIOL-1470-CESTAT-MUM] and the digest of C.K.P. Mandal vs. Commissioner of Service Tax, Mumbai- II [2015 (38) STR 73 (Tri.-Mumbai) which was reported in the BCAJ-June 2015 issue and the decision of Commissioner of Central Excise and Service Tax, Bhavnagar vs. M/s. Madhvi Procon Pvt. Ltd. [2015-TIOL-87-CESTAT-AHM] also referred in the BCAJ-February 2015 issue.

levitra

Rectification vis-à-vis Recall of the order

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Introduction
Under fiscal laws, assessment proceedings are final, subject to an appeal, revision or rectification. In other words, normally the fiscal enactments provide for rectification as one of the remedial measures, after the order is passed.

Under Bombay Sales Tax Act (BST Act) also, there was a provision for rectification by way of section 62 of the BST Act. As usual, the section provided for correction of mistakes which are apparent from record. In almost all fiscal enactments the provisions are similar, i.e. mistakes apparent from record are rectifiable.

Scope of Mistake apparent on record
The real controversy starts as to whether mistake can be said to be apparent from record. If the mistake is categorized as apparent on record, only then it will be rectifiable. There are number of judicial pronouncements under both, direct and indirect taxes, deliberating upon the scope of rectification.

Recent judgment of the Hon. Bombay High Court
Recently, the Hon. Bombay High Court had an occasion to decide such an issue. Reference is to the judgment in case of D. S. Solanki vs. The Maharashtra Sales Tax Tribunal & Ors. (W. P. No. 2779 of 2014 dt.28.4.2015). The facts in the above case, as noted by the Hon. Bombay High Court, are as under:

“3. In the present case, we are concerned with the assessment for the years 1993-94, 1994-95 and 1995-96. It is the contention of the petitioner that in the year 1999, the Revenue Authorities had initiated reassessment proceedings in respect of resale claim in respect of purchases from the vendors of the petitioner. Vide order dated 30.3.1999, re-sale claim allowed in respect of purchases from vendors was disallowed.

Similarly, vide orders dated 31.3.1999 and 29.11.1999, re-sale claim in respect of the assessment period 1994- 95 and 1995-96 was also disallowed.

Being aggrieved by the said orders, three appeals were preferred. Vide order dated 9.3.2001, the Appellate Authority dismissed the appeals and confirmed the orders passed by the first Appellate Authority. Being aggrieved thereby, three appeals were preferred before the learned Appellate Tribunal. The learned Tribunal vide order dated 29.1.2005, allowed the appeals and set aside the order passed by the Original Authority as well as the first Appellate Authority. The Revenue thereafter preferred the rectification applications, as aforesaid, which were allowed by the impugned order. Being aggrieved by the order, the present petition was filed”.

By allowing the rectification, the Tribunal recalled the original orders for fresh hearing.

Based on the zabove facts and the contentions of the parties, the Hon. Bombay High Court made observations about scope of rectification citing the judgment of the Hon. Supreme Court. The said observations are as under:

“6. Their Lordships of the Apex Court in the case of Deva Metal Powders Pvt. Ltd. (10 VST 751) (SC) (cited supra) had an occasion to consider a pari material provisions in U.P. Trade Tax Act. The Apex Court while considering the said provisions has observed thus :-

“This Court in M/s. Thungabhadra Industries Ltd. (in all the Appeals) vs. The Government of Andhra Pradesh represented by the Deputy Commissioner of Commercial Taxes, Anantapur, [AIR 1964 SC 1372] held as follows:

“There is a distinction which is real, though it might not always be capable of exposition, between a mere erroneous decision and a decision which could be characterized as vitiated by” error apparent”. A review is by no means an appeal in disguise whereby an erroneous decision is reheard and corrected, but lies only for patent error.

Where without any elaborate argument one could point to the error and say here is a substantial point of law which states one in the face and there could reasonably be no two opinions entertained about it, a clear case of error apparent on the face of the record would be made out.”

An error apparent on the face of the record for acquiring jurisdiction to effect rectification must be such an error which may strike one on a mere looking at the record and would not require any long drawn process of reasoning. The following observations in connection with an error apparent on the face of the record in the case of Satyanarayan Laxminarayan Hegde v. Mallikarjun Bhavanappa Tiruymale [ AIR 1960 SC 137] need to be noted:

“An error which has to be established by a long drawn process of reasoning on points where there may conceivably be two opinions can hardly be said to be an error apparent on the face of the record. Where an alleged error is far from self-evident and if it can be established, it has to be established, by lengthy and complicated arguments, such an error cannot be cured by a writ of certiorari according to the rule governing the powers of the superior Court to issue such a writ.”

“A bare look at Section 22 of the Act makes it clear that a mistake apparent from the record is rectifiable. In order to attract the application of Section 22, the mistake must exist and the same must be apparent from the record. The power to rectify the mistake, however, does not cover cases where a revision or review of the order is intended. “Mistake” means to take or understand wrongly or inaccurately; to make an error in interpreting; it is an error, a fault, a misunderstanding, a misconception. “Apparent” means visible; capable of being seen, obvious; plain. It means “open to view, visible, evident, appears, appearing as real and true, conspicuous, manifest, obvious, seeming.” A mistake which can be rectified under Section 22 is one which is patent, which is obvious and whose discovery is not dependent on argument or elaboration. In our view rectification of an order does not mean obliteration of the order originally passed and its substitution by a new order.

What the Revenue intends to do in the present case is precisely the substitution of the order which according to us is not permissible under the provisions of Section 22 and, therefore, the High Court was not justified in holding that there was mistake apparent on the face of the record. In order to bring an application under Section 22, the mistake must be “apparent” from the record. Section 22 does not enable an order to be reversed by revision or by review, but permits only some error which is apparent on the face of the record to be corrected. Where an error is far from self-evident, it ceases to be an apparent error. It is, no doubt, true that a mistake capable of being rectified under Section 22 is not confined to clerical or arithmetical mistake. On the other hand, it does not cover any mistake which may be discovered by a complicated process of investigation, argument or proof. As observed by this Court in Master Construction Co. (P) Ltd. v. State of Orissa [1966] 17 STC 360, an error which is apparent from record should be one which is not an error which depends for its discovery on elaborate arguments on questions of fact or law.

“Mistake” is an ordinary word but in taxation laws, it has a special significance. It is not an arithmetical error which, after a judicious probe into the record from which it is supposed to emanate is discerned. The word “mistake” is inherently indefinite in scope, as to what may be a mistake for one may not be one for another. It is mostly subjective and the dividing line in border areas is thin and indiscernible. It is something which a duly and judiciously instructed mind can find out from the record. In order to attract the power to rectify under Section 22, it is not sufficient if there is merely a mistake in the order sought to be rectified. The mistake to be rectified must be one apparent from the record. A decision on a debatable point of law or a disputed question of fact is not a mistake apparent from the record. The plain meaning of the word “apparent” is that it must be something which appears to be so ex facie and it is incapable of argument or debate. It, therefore, follows that a decision on a debatable point of law or fact or failure to apply the law to a set of facts which remains to be investigated cannot be corrected by way of rectifications.”

“In the said case, initially, the assessee was assessed for the aluminum powder treating the same as a metal and as such holding him liable to pay tax at 2.2 %. In the rectification proceedings, it was held that the relevant entry would not include aluminum powder and as such the same was assessed treating the same to be an unclassified item. In this background, the aforesaid observation is made by the Apex Court. It has been held by the Hon’ble Apex Court that in order to attract the provisions of the Act, the mistake must exist and the same must be apparent from the record. It has been held that “Mistake” “means to take or understand wrongly or inaccurately; to make an error in interpreting; it is an error, a fault, a misunderstanding, a misconception; to make an error in interpreting. It has been further held that a mistake which can be rectified u/s. 22 is one which is patent, obvious and whose discovery is not dependent on argument or elaboration. However, the Apex Court itself has held that the power u/s. 22 of the said Act is not confined to clerical or arithmetical mistake. It is further held that it does not cover any mistake which may be discovered by a complicated process of investigation, argument or proof. The Apex Court thus held that there cannot be hard and fast rule as to whether mistake is apparent or not and the same would be mostly subjective and the dividing line in border areas is thin and indiscernible. It has been further held that a decision on debatable point of law or fact or failure to apply the law to a set of facts which remain to be investigated, cannot be corrected by way of rectifications.”

After analysing the scope of rectification as above, the Hon. Bombay High Court in the case of the Petitioner observed as under :

“8. It would thus be seen that the learned Tribunal while deciding the Second Appeal proceeds on a footing that the assessment in question was made u/s. 33(3) of the said Act. However, the assessments were made in fact u/s. 33(2) of the said Act. It could further be seen that even the lawyer who was representing the petitioner before the learned Tribunal in the rectification application, himself admitted that the original assessments were made u/s. 33(2) and not u/s. 33(3) of the said Act. The learned counsel further admitted that the period for 1995-96 does not involve reassessment and the said matter had arisen from the assessment itself. The learned counsel fairly stated that the inaccuracies have crept in the order passed by the learned Tribunal, since the inaccuracies are in the first appeal itself. It could thus be seen that in the facts of the present case, though the assessments were made u/s. 33(2) and not u/s. 33(3), the Second Appeals were decided on an assumption that the assessments were done u/s. 33(3). It can thus be seen that the error which has been committed is on an erroneous assumption of fact. It is further to be noted that it is not even disputed by any of the parties that the error committed by the learned Tribunal is on an erroneous assumption of fact. These errors are such which can be seen with a naked eye. The errors are not of such a nature which would require detailed arguments to be advanced or a complicated process of investigation to be gone into, so as to unearth them. Any person with some understanding of law, can easily make out these errors. Not only that, but the learned counsel appearing on behalf of the assesesee in the rectification proceedings has also admitted that these errors have occurred in the order of which rectification is sought. In that view of the matter, we find that it cannot be said that the jurisdiction exercised by the learned Tribunal was exercised beyond the scope available to it u/s. 62.”

Thus, the Hon. High Court has confirmed that the mistakes which are of fact and the judgment is based on such mistaken facts then the judgment can be recalled for fresh decision.

Conclusion

There are a number of judgments about the above issue. Each case depends upon its own facts. However, the guidelines available are that if the issue is debatable, then rectification will not be permissible. If the mistake is clear as seen, then the rectification is possible and the effect can be either to modify the order or even recall the same.

CONTROVERSY : DIVISIBILITY OF WORKS CONTRACT

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Introduction
There has been long drawn controversy over the issue of taxability of works contract prior to the introduction of works contract service (WCS) in sub-clause (zzzza) in section 65(105) of the Finance Act, 1994 (the Act) with effect from 01/06/2007. The dispute dates back to the pronouncement of decision in Daelim Industrial Co. vs. CCE 2003 (155) ELT 457 (T). The controversy primarily relates to whether or not works contracts were taxable under the taxable services defined under the service tax law as commercial or industrial construction service (CICS)–with effect from 10/09/2004), construction of complex service (COCS) (w.e.f. 16/06/2005) or erection, commissioning or installation service (ECIS) (w.e.f. 01/07/2003). The decision in Daelim (supra) was doubted and referred to a Three Member Bench which was answered in CCE vs. BSBK Pvt. Ltd. 2010 (18) STR 555 (T) wherein it was ruled that turnkey contracts could be vivisected and service element therein could be subjected to service tax if the service was a taxable service under the Act. A contrary ruling by the Three Member Bench was however pronounced in Jyoti Ltd. vs. CCE 2008 (9) STR 373 and also in CCE vs. Indian Oil Tanking Ltd. 2010 (18) STR 577 (T). The Larger Bench in BSBK (supra) did not analyse or disagree with the operative ratio in the earlier decision of co-ordinate Benches. Therefore, BSBK (supra) could not have overruled or decided contrary to the decision by co-ordinate Benches. In this background, Larsen & Toubro while challenging an adjudication order confirming service tax demand somewhere in 2013 for execution of a turnkey contract prior to 01/06/2007, holding it as commercial or industrial service, also filed an application to refer the matter to Larger Bench in view of the above two conflicting decisions of Larger Benches. In the interim, Hon. Delhi High Court in G. D. Builders vs. Union of India 2013 (32) STR 673 (Del) ruled that after 46th Amendment to the Constitution, service portion of a composite contract could be vivisected for subjecting it to service tax by applying aspect doctrine for bifurcation of a composite contract. However, prior to this in CST vs. Turbotech Precision Engineering Pvt. Ltd. 2010 (18) STR 545 (Kar) and Strategic Engineering Pvt. Ltd. vs. CCE 2011 (24) STR 387 (Mad), it was decided that works contracts were not liable for service tax prior to 01/06/2007. Consequent upon CESTAT order referring the matter to Larger Bench, the revenue had appealed to Delhi High Court that since the issue stood resolved and decided in G. D. Builders & Others (supra) vide order dated 24/11/2013, for setting aside the order. The Delhi High Court disposed of the appeal in November, 2014 wherein consensus emerged that Five Member Bench can examine a preliminary issue whether the question raised was covered by the decision in G. D. Builders’ case (supra) and also that appropriate directions/orders could be passed after examining contrary view expressed by the Karnataka High Court and the Madras High Court in Turbotech Precision Engineering (supra) and Strategic Engineering (supra) respectively. Accordingly, the Larger Bench of five members headed by the Hon. President was constituted to look into the above limited angle. Although the reference was made for a limited purpose and applicability is confined to the period between 2004 and 2007, since the controversy over the issue is discussed at great length in approx. 220 pages interim order, the decision has assumed academic value. Various judicial precedents on the subject of works contract, taxability of sale of goods involved therein and adequacy of service tax provisions vis-à-vis works contracts vide a catena of judicial precedents have been analysed from various angles since the decision was reached in terms of majority. Discussed below are some of the key observations and views of both majority and minority members of the Hon. Larger Bench.

 Facts of The Case in Brief:
On behalf of  appellant Company, Larsen & toubro, it was pleaded that  g. d. Builders (supra) was per incuriam as it did not consider and explain several operative, relevant and binding precedents in the area and evolutionary history leading to enactment of distinct category of works contract from 01/06/2007 as several of its seminal reasons were passed sub silentio as the Appellants therein conceded that service component in a composite contract can be taxed but not as works contract per se and such other merits concerning taxability of works contract were not examined. Had the several facts of constitution limits and relevant legislative provisions, the enacting history of sub-clause (zzzza) and binding rationes been brought to the notice of the High Court, the conclusion drawn by the High Court could have been different and therefore G. D. Builders decision was based on concession by petitioners therein and did not have precedential vitality. Also, contrary decisions of Karnataka High Court in CIT vs. Turbotech Precision (supra) and Madras High Court in Strategic Engineering (supra) also need to be looked into. Revenue however contended that ruling in G. D. Builders is a binding precedent and not travelling beyond the scope of deliberations fixed by the Delhi High Court vide its order of 11th November, 2014 as contended by the Appellant. In view hereof, the facts and decision of G. D. Builders’ case (supra) as well as those of Turbotech Precision (supra) and Strategic Engineering (supra) were examined in addition to analysing the core issue of taxability of works contract prior to 01/06/2007 in terms of various judicial precedents and all the relevant provisions of service tax

Minority order: Brief Overview:
The minority order contains detailed analysis of scope of charging and valuation provision including the evolutionary history thereof and analysis and examination of a host of judicial precedents which interalia included Gannon Dunkerley & Co. and Others vs. State of Rajasthan & Others (1993) 88 STC 204 (the second Gannon Dunkerley), Larsen & Toubro vs. State of Orissa (2008) 12 VST 0031, Larsen & Toubro vs. State of Karnataka 2014 (34) STR 481 (SC) (a constitution Bench decision), K. Raheja Development Corporation vs. State of Karnataka 2006 (3) STR 337 (SC), Nagarjuna Construction P. Ltd. vs. UOI 2010 (19) STR 321 (AP). Mahim Patram (P) Ltd. vs. Union of India 2007 (7) STR 110 (SC), Bharat Sanchar Nigam Ltd. vs. UOI 2006 (2) STR 161 (SC), Kone Elevators India P. Ltd. 2014 (34) STR 641 (ST) etc. The glimpse of various inferences drawn is provided below:

In addition to examining the definitions CICS, COES and ECIS in section 65(105) and charging section 66, the scope of section 67 dealing with valuation of a service both prior to its amendment on 18/04/2006 and the amended provisions were examined and it was observed that section 67 read with the relevant clauses in section 65(105) and the charging provision leads to infer that “the gross amount charged by the service provider for providing CICS, COCS or ECIS shall be taxable value of such service.” Prior to the amendment of section 67, no exclusion was provided in section 67 on the lines of exclusion provided in Explanation 1 to section 67 that value of goods sold or deemed to have been sold in execution of works contract is excluded from the scope of taxable value referred to in section 67 as provided in clause (vii) to the said explanation for ECIS in respect of CICS or COCS.

  •    Exemption  Notifications  Nos.12/2003-ST,  15/2004-ST and 1/2006-ST attest to the fact that the Central Government was clearly of the view that value of goods sold by a service provider to the recipient thereof is included in the taxable value u/s. 67. It cannot be believed that pure sale transaction simplicitor were sought to be excluded as these were anyway beyond the scope of the Union’s residuary power. Further, these exemption notifications indicate no methodology for valuation of goods sold during execution of works contract. The 2nd Gannon Dunkerley (supra) categorically ordained to exclude value of goods at the time of incorporation, the profit margin on goods, the cost of storage, transportation etc. No Board circular also was issued hinting such exclusion. Actually, Rule 2A inserted in Valuation Rules when works contract service was brought from 01/06/2007 expressly stipulates the value of taxable service to be determined with reference to WCS provided in (zzzza) of section 65(105). Thus, on its terms, Rule 2A has no application to CICS, COCS or ECIS even after 01/06/2007 whereas after 01/06/2007, CICS, COCS and ECIS continue to be taxable services and there is neither repeal nor omission of these services.

  •     The definition of CICS, COCS and ECIS do not signal to cover works contract.

  •     The Hon. Finance Minister in the Budget 2007-08 speech categorically stated that new levy is proposed to impose service tax on works contract.
  •     Works contracts are distinct contractual arrangements and following a series of binding precedents and explicitly provided in Central and State legislations for bringing interalia works contracts within the scope of Union levy by expanding the scope of sale, defining works contracts in the Central Sales Tax Act and incorporating a specific power to make rules for computation/valuation of “deemed sale” in sales tax legislations and also introducing works contract category in the Finance Act, 1994 by expressly defining it together with complementary valuation Rules (Rule 2A) issued u/s. 94 of the Act to ensure proper valuation and confinement of levy strictly to service components also with effect from 01/06/2007. This integrated legislative and statutory landscape of the Act to the extent of works contract service in strict confirmation with constitutional limits on States and the Union taxation in this area as spelt out in second Gannon Dunkerley (supra) and all subsequent rulings including the latest Kone Elevator India Ltd. of 2014 (supra).

  •     In view of the exclusivity and insularity ordained in terms of legislative powers pertaining to taxation, both the federal partners (the Union or the States) are forbidden to trench upon the exclusive domain allocated to each by the constitution. Therefore a vague/overboard definition coupled with ambiguous charging and indeterminate valuation provision could not suffice in terms of First Builders Associations of India (S.C.1989), Second Gannon Dunkerley (supra) and L&T Ltd. (Orissa 2008) (supra). When the charging and/or valuation provisions on a true and fair classification fall short of this specific requirement, collection of sales tax on works contract would fall aside as per the above precedents among various others.

  •     In view thereof, Union’s intention to levy tax only on labour or service element must therefore be categorically expressed in charging provisions read with relevant taxable service and the valuation provisions. Such intention was explicated only by section 65(105)(zzzza) and not collectively through charging section, definition and valuation provisions so far as they related to CICS, COCS and ECIS.

  •     It is an established interpretation principle that where two constructions are fairly possible, the construction sustaining the legislation should be adopted instead of one which renders it invalid.

  •     In terms of revenue contentions, should it mean that insertion of WCS from 01/06/2007 and introduction of Rule 2A in the Valuation Rules were wholly unnecessary amendments in the existing legislative provisions?
  •     Neither the provision of the Act,any rule made there under or exemption notification issued under section 93 indicate how and at what point of time during execution of works contract, the value of goods and material used in execution thereof are to be valued for applying reductions. Although Notification No.12/2003-ST provides deduction towards value of goods sold on furnishing proof of such sales does not provide for computation of profits booked by builders on the goods incorporated in the contract.

  •    There  was  observation  in  Tamil  Nadu  Kalyana Mandapam Association’s case [2004 (167) ELT 3 (SC)] that it is well settled that the measure of taxation cannot affect the nature of taxation and therefore service tax levied as a percentage of the gross charge for catering cannot alter legislative competence of Parliament. This cannot be interpreted as propounding universal norm. This may be appropriate in the facts and circumstances of that case. The nexus and legislative competence tests are established by a long catena of binding authority including Constitution Benches including the second Gannon Dunkerley (supra) and K. Damodarasamy Naidu & Bros. AIR 1999 SC 3909, Tamil Nadu Kalyana Mandapam’s decision (supra) cannot be considered as having dissented or overruled entrenched principles consistently impounded and implicitly followed in a host of decisions including in to another legislation and tax such elements under the pretext of overreaching merely the measure of tax.

  •     Since binding expositions of relevant principles qua binding precedents were not brought to the notice of the Hon. High Court, G. D. Builders (supra) decision is incuriam and sub silentio.

  •     The analysis and the view concluded as: “28.  The decisions of the Karnataka and Madras High Courts, in Turbotech Precision Engineering Pvt. Ltd. and in Strategic Engineering Pvt. Ltd. have clearly concluded that a works contract is not leviable to Service Tax prior to 1-6-2007. Though, with respect there is not discernible a holistic analyses of the relevant statutory framework involved nor of the several precedents which support the conclusion recorded (in Turbotech and Strategic), as is found in the painstaking effort apparent in G.D. Builders, in our respectful view the conclusion that a works contract is defined, charged and is subject to the levy of Service Tax only w.e.f 1-6-2007 (on insertion of sub-clause (zzzza) in Section 65(105) of the Act), is consistent with the overwhelming catena of binding precedents considered and analyzed by us.”
  •    Consequently, the decision in BSBK Ltd. (supra) to the extent it rules that a works contract is a taxable service prior to 01/06/2007 was respectfully an error and stood overruled.
Majority view: Per Shri J. P. R. Chandrasekharan,

Member (T): Brief overview:

Not agreeing with the above, Hon. Member (Technical) proceeded with recording apprehension at the outset over the instant reference in view of the revenue’s pending appeals before the Supreme Court after admission in 2008 and 2010 respectively in Jyoti Ltd. (supra) and Indian Oil Tanking Ltd.’s case (supra) in the same matter. Further, the Delhi High Court having taken a view on this very issue in G. D. Builders’ case (supra) as well as in YFC Projects P. Ltd.’s case (2014) 44 GST 334/43 Taxman.com 219 (Delhi) that works contracts could be vivisected and discernible taxable services could be taxed prior to 01/06/2007 it was noted that the Tribunal being subordinate to High Court and Supreme Court would be bound by these decisions and the matter did not recur post 01/06/2007 as the dispute essentially related to the period 2004 to 2007. Besides this reservation, it was also noted that the ratio of G. D. Builders was consistently followed by the Tribunal in many cases including by Hon. President in CCE vs. Gopal Enterprises 2014 (36) STR 674, Kalpik Interiors vs. CST 2014 (36) STR 1283 and in Hindustan Aeronautics Ltd. vs. CST 2013 (32) STR783 (Tri.-LB).

    In the said case of G. D. Builders (supra), after examining at great length various decisions which among others included Gannon Dunkerley vs. State of Rajasthan [2002-TIOL-103-SC-CT], K. Raheja [2005-TIOL-77-SC-CT], Larsen & Toubro vs. State of Karnataka 2010 (34) STR 481 (SC)], Nagarjuna Construction Co. Ltd. vs. UOI 2012-TIOL-107-SC-ST, State of Kerala vs. Builders Association of India [2002-TIOL-602-SC-CT, Tamilnadu Kalyana Mandapan Association 2004 (167) ELT 3 (SC) etc. whereby the following issues in brief among others were examined:

a. Service tax is levied on taxable services as defined in section 65(105) read with definition clauses and applicable only on the service element as the Central Government does not have power to impose tax on entries under List-II of Seventh Schedule to the constitution. It cannot levy tax on goods and material used in works contract as central sales tax is levied on material used in “works contract” with effect from 11/05/2002 vide amendment of Central Sales Tax Act.

b. Composite or works contracts are not included in 65(105)(zzq) viz. CICS and (zzzh) viz. COCS as they apply to only service contracts. Therefore, the exemption of 67% under notification cannot be considered a part of main statutory provision as in terms of section 93 of the Finance Act, 1994, the exemption granted cannot relate to works contracts as they are not covered by clauses (zzq) and (zzzh) of section 65(105). Such tax is imposed only from 01/06/2007 under 65(105) (zzzza). There is conflict between these clauses and what is covered by (zzzza) cannot be covered by (zzq) and (zzzh) of section 65(105). The two cannot co-exist. Subsequent legislation shows that the earlier only did not cover composite or works contracts.

c.    Section 66 is charging section and section 67 relates to valuation. Tax can be levied on the value of service and not beyond. There is provision for notional value to substract the value of material or goods.

d.Vagueness or uncertainty makes levy invalid and illegal.

e.    Exemption Notification has to be read while keeping its objective and purpose in forefront. It may provide a convenient formula for computing the value of service in a composite contract. The Notification however is optional and an alternative. It meets the tests laid down u/s. 93 and 94 and it has not been shown that the value prescribed therein is absurd or irrational.

f.    On the strength of factual and legal analysis undertaken, conclusion summarised in para 36 in a nutshell that post 46th Amendment to the Constitution, composite contracts can be bifurcated to compute value of goods sold/ supplied in construction contracts with labour and material and the service portion of the composite contracts can be subjected to service tax by applying aspect doctrine for vivisection of the contract.

  The above decision on an identical issue was followed before another Bench of the Delhi High Court in YFC Projects P. Ltd. vs. UOI (supra). In view of the foregoing, the above decisions are binding on the Tribunal.

    In furtherance of the above and analyzing one of the main points of difference that conflicting decisions of
Karnataka and Madras High Courts as against the Delhi High Court’s decision in G. D. Builders (supra) on the same/similar issue are available, it was observed that facts of these decisions were completely different. In CST vs. Turbotech Precision (supra), the activity of development, design, installation and commissioning and technology transfer was sought to be taxed as consulting engineering service by the department.

Similarly, in Strategic Engineering’s case (supra), the contract involved erection of pipes and also connecting the laid pipes and subjecting them to carry fluids. This activity was sought to be taxed as erection commissioning and installation service wherein the Hon. High Court held that the services provided under works contract were not liable prior to 01/06/2007. However, the question whether works contract could be vivisected and subjected to service tax was not the issue for consideration before the Hon. High Court. Therefore, the said decision has no relevance to the issue considered in G. D. Builders’ case (supra). In support of this contention, the Hon. Member interalia relied upon Alnoori Tobacco Products (2004 170 ELT 135 (S.C.)]. The relevant extract read as follows:

“11. Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. Observations of Courts are neither to be read as Euclid’s theorems nor as provisions of the statute and that too taken out of their context.”

  Accordingly, it was concluded that ratio of G. D. Builders stands uncontroverted and thus binding on all subordinate Courts including the Tribunal (irrespective of the strength of the Bench).

    Next examination pertained to the main issue of DIVISIBILITY of works contract prior to 01/06/2007 including analysing section 67 dealing with measure or valuation. The proposition of lack of adequate machinery provision was found without merits on the ground that four important elements of tax law viz. taxable event, the rate of tax, measure of tax and precision liable to tax were found existing in service tax law in section 65(105), sections 66, 67 and 68 of the Act and therefore the challenge was found not sustainable. As regards the primary issue relating to exclusion of value of goods, based on judicial pronouncements including in the case of K. P. Varghese vs. ITO 1981 AIR 1922 (SC), it was found that section 67 of the Act provided measure of the levy adequately and optional exemption notifications 12/2003-ST, 15/2004-

ST and 1/2006-ST as well as CENVAT Credit Rules, 2004 provided credit mechanism to capture value of services of goods. Therefore, at practical level of implementation, there is no difficulty to determine value of service rendered.

  At the end, the concept of works contracts was analysed in detail to distinguish it from the contracts for sale. It was observed that the Apex Court in Builders Association of India vs. UOI (supra) held that “by fiction, an indivisible contract has been made a divisible contract and the values of the goods involved in the execution of contract have been subjected to tax”. Further, it is restricted to the value of goods used and not the building as a whole. The law was further elaborated by the constitution Bench of Supreme Court in the second Gannon Dunkerley & Co. (supra). The Bench noted that contract of work is inherently a contract of service. The legal fiction created by Article 366(29A) of the Constitution to hold certain types of works contracts as deemed sale of goods in order that States could levy sales tax on the value of goods supplied as part of the works contract. Similarly, the 92nd amendment to the constitution provided for a specific entry for taxes on services in the Union list under entry 92C. Prior to this, entry 97 covered taxes on services. Thus, the power of Parliament to levy tax on services was never in dispute. Reliance was placed on Tamil Nadu Kalyana Mandap Association vs. UOI 2004 (167) ELT 73 (SC) which interalia held as follows:

“45. The concept of catering admittedly includes the concept of rendering service. The fact that tax on the sale of the goods involved in the said service can be levied does not mean that a Service Tax cannot be levied on the service aspect of catering….

46. It is well settled that the measure of taxation cannot affect the nature of taxation and, therefore, the fact that Service Tax is levied as a percentage of the gross charges for catering cannot alter or affect the legislative competence of Parliament in the matter…..

58. A tax on services rendered by mandap-keepers and outdoor caterers is in pith and substance, a tax on services and not a tax on sale of goods or on hire purchase activities.”

Similar reliance was placed on Association of Leasing and Financial Services Companies vs. UOI 2010 (20) STR 417 (SC) which interalia held:

“Merely because for valuation purposes inter alia “finance/interest charges” are taken into account and merely because Service Tax is imposed on financial services with reference to “hiring/interest” charges, the impugned tax does not cease to be Service Tax and nor does it become tax on hire-purchase/leasing transactions under Article 366(29A).”

Based on the above two decisions in respect of two transactions relating to catering services and hire purchase, it was found that since service tax could be levied on these services on the value attributable to the service component of composite transactions, the issue of divisibility of an indivisible contract for the levy of service tax was confirmed. It was observed that many services entail supply of goods and many examples were cited including those of photography services, cleaning services, banking services (entailing supply of cheque books, plastic cards for ATM transactions etc.) sound recording services (entailing supply of recording medium) etc. Further citing a recent decision of Apex Court in State of Karnataka vs. Pro Lab and Others 2015-TIOL-08-SC-LB which considered the issue of levy of sales tax on processing and supply of photographs, it was observed that if by virtue of clause 29A of Article 366 of the Constitution, the State legislature is empowered to segregate goods part of works contract to levy sales tax, the same logic would apply to the Central legislation for imposing service tax and Parliament is empowered to segregate service component of the works contract to levy service tax. Precisely, this was done by the Finance Act, 1994, when service tax was levied vide CICS, COCS and ECIS. It was further observed that statutory provision should be interpreted in the manner not to create discrimination among classes of service providers by taxing supplying services alone and another set providing both supply of goods and service not liable to tax. In effect, it was concluded with, “the issue referred to the Larger Bench is fully and squarely covered by the G. D. Builders case decided by the Hon. Delhi High Court”. Consequently, it has to be held that composite works contract can be vivisected and discernible service element could be subjected to service tax even prior to 01/06/2007.

Majority view: Per R. K. Singh, Member (T): Some key observations:

  •     Concurring with the order of per Hon. Shri P. R. Chandrasekharan, it was observed that the judgments of the Karnataka and Madras High Courts did not infringe upon the ratio of the Delhi High Court in G. D. Builders as regards the subject matter covered by the latter and that the subject matter referred to the Five Member Bench was squarely covered by the decision of the Delhi High Court in G. D. Builders’ case (supra).

  •     Section 67 adequately provided machinery provisions for measure of value of taxable service and which was not arbitrary by any standard whether post its amendment from 18/04/2006 or prior thereto. Since it refers to the value of service would imply that value of goods sold in a composite contract was not to be a part of the value for the purpose of this section.

  •     Notification No.12/2003 needs to be viewed as a measure of abundant caution and care on part of the Government.

Majority view: Per Rakesh Kumar, Member (T): Some key observations:

  •    “47.3 When indivisible works contracts are those contracts involving provision of service, in which there is transfer of property in goods from the service provider to the service receiver through accretion, and this transfer of property in goods is not sale, such contracts have to be treated as service contracts as in such contracts, there is absolutely no intention of transfer of property in and delivery of the possession of, a chattel as a chattel to the service receiver. A service contract will not cease to be a service contract just because the provision of service involves use of goods, the property in which gets transferred to the service recipient through accretion. Even the Law Commission’s Reports (Chapter IA para 7) refers to the works contract as “a contract for work (of service)”.

  •     It is a well settled law that legal fiction has to be given effect to only for a limited purpose for which it was created and therefore Article 366(29A) can be employed only to enable State Governments to levy sales tax on certain contracts including specified contracts. Since works contracts are service contracts, the same would attract service tax even during period prior to 01/06/2007.
  •    Just because State Governments have the power to levy sales tax on the transfer of property in goods involved in execution of works contract by invoking Article 366(29A), the power of Central Government to levy service tax on such works contract does not get restricted so as to confine the levy only to service portion of the works contract excluding the value of goods for providing the service. An inadmissible works contract is one single service contract whose value would include value of all goods and services which contribute to emergence of the service product.

  •   Exemption Notification issued under section 93 of the Act to provide abatement of the taxable value of specified services (including ECIS, COCS and CICS) are sufficient to avoid tax on goods subjected to tax by the State Government and no machinery provision is necessary.
  •     In commercial world, transactions of sale of goods and sale of services are intermixed and therefore some overlap is inevitable which has to be ignored in the interests of smooth functioning of laws governing the levy of tax on sale of goods and service tax.

  •    Separate and specific constitutional provision together with the machinery for determining the measure is required only when State Government wants to tax goods portion in a service transaction or the Central Government wants to tax service portion of a sale transaction. However, for levying service tax on a service transaction including works contract, no machinery for exclusion of value of goods is required and for the lack of the said machinery, the levy cannot be held invalid.

Conclusion:

Since the revenue is already before Supreme Court against the order of Turbotech Precision Engineering (supra) and Strategic Engineering (supra), whether the above intellectual exercise would impact any litigation process is a question which is posed by many. Nevertheless, a threadbare analysis of technical and judicial aspects on the subject of works contract would be a worth read for a large number of professionals and other stakeholders.

Welcome GST

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Introduction
After a long wait of more than 15 years, the time has now come to welcome the most awaited reform in the taxation history of India. The introduction of Goods & Services Tax (GST) is expected to become a reality just within a few months from now. The Government of India has conveyed from time to time its intention to introduce this much awaited reform in the system of indirect taxes at central as well as at State level. Readers may recall that a committee called “Empowered Committee of State Finance Ministers” was constituted on 17th July 2000, under the directions of the then Prime Minister of India, Shri Atal Bihari Vajpayee. It was given the task of replacing the existing system of sales tax prevailing in various states all over the country, designing the GST model and overseeing the IT back-end preparedness for its rollout. The committee, under the leadership of Dr. Asim Dasgupta, the then Finance Minister of West Bengal, who was the first chairman of this committee, did wonders in bringing together all the States and the Centre to discuss and resolve their issues and concerns. Many important decisions such as Introduction of VAT at state level, setting up Tax Information Exchange System (TINXSYS) and release of First Discussion Paper on GST (on 10th November 2009), etc., were taken on the basis of recommendations of this Committee and various groups and sub-groups working under its directions. After Dr. Gupta, the Committee was headed by Shri Sushil Modi, the then Finance Minister and Dy. Chief Minister of Bihar, thereafter Abdul Rahim Rather, the then Finance Minister of Jammu & Kashmir. And at present Shri K.M. Mani, the Finance Minister of Kerala is the chairman of Empowered Committee.

Successive Union Finance Ministers, starting from Shri Yaswant Sinha, Jaswant Singh, P. Chidambaram, Pranab Mukherjee and now Arun Jaitley have given their inputs from time to time. Dr. Manmohan Singh, as Finance Minister of India, has played an important role in the overall exercise of reforms.

Evolution of the concept of VA T and its journey to India
“Added Value Tax (AVT, in the American Tax nomenclature), tax on value added (TVA, as the French and German refer to it) and value added tax (VAT , the popular English usage) is a concept which originated during the first quarter of 20th century. Dr. Wilhelm Von Siemens, a German industrialist, propounded the concept in the year 1918 as a substitute to the then newly established German Turnover Tax. However, Maurice Lauré, Joint Director of the French Tax Authority, was the first to introduce VAT, in France, on April 10, 1954.

The VAT as a system of tax, conceptually, has been of great interest among the early writers on public finance. It became a topic of public debate after European Economic Community’s (EEC) acceptance of it as an instrument of tax harmonisation. In fact, the introduction of VAT in France largely paved the way for its being accepted as a common market tax. And it became the most popular system of indirect taxes after its adoption by England in the year 1971. The European and Australian countries have contributed a lot in its transformation, improvement and continuous development. At present, the system is prevalent in more than 140 countries all over the world. Malaysia is the latest addition where the system of VAT (GST) has been adopted with effect from 1st April 2015 in place of the earlier system of sales tax and services tax. The general rate of GST adopted in Malaysia is 6%.

The VAT , in common parlance, may be described as a tax levied on the value added to a product or service each time it changes hands. The growing popularity of VAT is due to its simple tax structure, transparency and neutrality. With the widening of tax base, the rate of taxes are lower. Whether it is sale/supply of goods or rending of services, most of the commodities as well as services are taxed at one single revenue neutral rate with exception only for a few commodities and services, which may be taxed at special rates. Tax exempt commodities are listed at minimum and zero rate of tax is provided on exports and inter-branch transfers. It enhances competitiveness and removes the cascading effect of taxes and levies by providing full setoff of taxes paid on inputs. As the levy covers each stage of value chain, the impact of tax is not concentrated on one level, which in turn reduces inducement for evasion considerably.

By virtue of method of computation, the incidence of tax, under VAT, can be seen readily from the tax paid on final point of sale. This is not possible when taxes are levied on inputs or intermediate stage of sale and purchase without any relief at subsequent stages. Because of transparency under VAT , it is possible to quantify, at any stage, precisely the tax borne at the earlier stages.

Neutrality is another attribute of VAT that is non-interference with the choices of decisions of economic agents and equal treatment of products, producers and consumers. In this system, other things remain the same, the tax liability does not vary as between different classes of dealers, or between integrated or specialised units. The allocation of resources is left to be decided by the free play of market forces and competition.

Main characteristics of VAT

  • A destination based multi-point system of taxation
  • Covers goods and services both
  • Collected at each stage of supply and distribution
  • Input Tax Credit
  • Ultimate burden passed on to the consumer

Looking into various advantages of the system of VAT , most of the countries all over the world have adopted the concept in their system of taxing goods and services. Thus it is being called as Goods & Services Tax (GST).

Although most of the developed and developing countries have adopted the system of VAT , the most notable exception is USA, where still the system of sales tax – General Sales Tax or Retail Sales Tax (RST) is prevailing. The manner of levying taxes in USA varies from State to State. In general, it may be described as a single point last stage taxation wbut there are exceptions depending upon the policy of a particular State.

As far as India is concerned, being a federal country, the taxation structure is governed by its Constitution. The Centre and the States levy tax on commodities at various stages of production and distribution, utilising their powers generated from the Constitution of India, which was prepared in the year 1949-50 for adoption by all the erstwhile provinces, which were merged, converted and united as States and a Government at Central level as to have one Independent India. The Constitution provides for separate independent powers as well as combined powers of the Centre and the States and also provides for collection, distribution and sharing of taxes.

In the present setup, Central Government levies taxes such as Custom Duty, Countervailing Duty, Excise Duty, Service Tax, etc. While the States have power to levy Sales Tax (State VAT ), Entertainment Tax, Entry Tax, Luxury Tax, State Excise, Profession Tax, etc. The Central Sales Tax, under an enactment of the Centre, is also being collected by the States.

A bare look at the history of indirect taxation in our country shows that many of the taxes which were levied before independence have continued either as it is or with minor modifications from time to time, and, a few more new taxes have been introduced in the free India. Although, abolition of some of the pre-independence taxes could have been considered by Governments at both the levels, but somehow it remained a major point of debate that whether the taxation structure should continue as it is or it needs a thorough overhaul? This fact is evident from the process of setting up of various committees, groups and task forces and their reports since 1969 till date.

Some of the committees which suggested, long ago, a major overhaul of the existing system of taxation include S. Bhootlingam Committee (1969), Indirect Taxation Enquiry Committee (1976) and Jha Committee on Indirect Taxes (1977). The Jha Committee, in the year 1978, strongly recommended adoption of the system of VAT. It said:”VAT in its comprehensive form extends from mining and manufacture stages to the retails stage. It can replace all other forms of internal indirect taxes such as excise, sales tax and octroi.”

Other notable committees, which gave important suggestions on redesigning of indirect taxation system include; “Tax Reforms Committee (1991-92)” chaired by Dr. Raja J. Chelliah, “Advisory Group on Tax Policy and Tax Administration (2001)”, chaired by Dr. Parthasarathi Shome and “Task Forces on Direct and Indirect Taxes (2002)”, chaired by Dr. Vijay Kelkar. Dr. Parthasarathi Shome also led the Tax Administration Reform Commission (TARC), which submitted its report to the present Finance Minister on 30th May 2014.

It may be worthwhile to note that adoption of a comprehensive system of value added tax is being consistently suggested by various committees constituted by the Government of India since 1977. The first positive step in this direction was taken in 1986 when modified value added tax (MODVAT) was introduced in Central Excise, which was later converted to CENVAT in the year 2000. However, real credit for a committed approach to reforms goes to Dr. Manmohan Singh, as Union Finance Minister (1991-96), who took up the challenge of reforms. In his Budget speech, in 1993, Dr. Manmohan Singh, indicated that high on his agenda of economic reforms was the replacement of historical sales tax systems by a Value Added Tax system. He entrusted this issue to the National Institute of Public Finance and Policy (NIPFP) for examination and recommendations. The NIPFP set up a high-level study team, under the leadership of Dr. Amaresh Bagchi, to go into the details of the issue. The report of the Committee, published in April 1994, is the pioneering work in this field and it has identified the basic themes for the subsequent discussions and action programs relating to reform of sales tax and other forms of indirect taxes. Its comments on the prevailing system of indirect taxes are also worth noting –

“The system (of domestic trade taxes) that is operating at present is archaic, irrational and complex. According to knowledgeable experts, the most complex in the world. It interferes with the free play of market forces and competition, causes economic distortions and entails high costs of compliance and administration.”

After the introduction of MODVAT, the next step towards comprehensive VAT was introduction of Service Tax in the year 1994. The concept, started with the coverage of just 3 services, now covers almost all services, except a privileged few. The Service Tax mechanism was modified from time to time with continuous expansion of its base and the facilities like input tax credit. The integration of Excise and Service Tax ITC was another step in the same direction.

Meanwhile, after a lot of discussion and persuasion, the States agreed to replace the age old sales tax with a transparent and vibrant system of value added tax. At present, all the States as well as Union Territories of India have adopted VAT in place of sales tax and trade tax, etc.

With these developments so far, we have reached a stage of fragmented VAT, which is working either independently or jointly with one or more taxes. Both the Centre and the States continue to levy tax at various stages of production and distribution utilising their powers generated from the Constitution of India (as described in the earlier paragraphs).

It is now time to consolidate all these indirect taxes into one, whether it is a tax on sale of goods, purchase of goods, on production, movement, entry or on consumption, rendering of services, receiving of services, entertainment or enjoying the luxuries, whatever needs to be taxed must be combined together into one tax. Thereafter, it does not make any difference whether it is called comprehensive VAT or Goods &    Services Tax (GST). The administration of such a tax, whether done by the Centre or the States, has to be in such a manner so as to avoid unnecessary hassles, unwanted complications and undue favours. The system must ensure that the Government gets what is due to it, neither more nor less. The consumer must know exactly the burden of tax on him. And the dealers (traders, manufacturers, service providers, etc.), who are responsible to collect tax from the ultimate consumer and deposit the same into the Government Treasury, must be ensured that there is no burden of tax on them while performing this pious duty.


 Indian Goods and Services Tax (GST)

Introduction of a Goods and Services Tax (GST) to replace the existing multiple tax structures of Centre and State taxes is not only desirable but imperative in the emerging economic environment. Increasingly, services are used or consumed in production and distribution of goods and vice versa. Separate taxation of goods and services often requires splitting of transaction value into value of goods and services for taxation, which leads to greater complexities, administration and compliances costs. Integration of various Central and State taxes into a GST system would make it possible to give full credit for input taxes collected. GST, being a destination-based consumption tax, based on VAT principle, would also greatly help in removing economic distortions caused by the present complex tax structure and will help in the development of a common national market.

All of us are well aware through various press reports and the budget speeches of respective finance ministers since 2004, that the Government of India is committed to introduce GST in place of existing indirect taxes which are being levied by Central and State Governments. Somehow, the process got delayed, first on account of the late introduction of state level VAT and thereafter, due to various other factors. The real work on designing a suitable GST model, for India, could start from May 2007, when the Empowered Committee of State Finance Ministers (EC) appointed a Joint Working Group (JWG) to give its recommendations regarding detailed framework to be adopted for GST. The working group studied various models and their suitability in Indian conditions. Based upon JWG Report, the EC announced in November 2007 that Indian GST shall be dual GST to be levied concurrently by both levels of Government,

The original target date for introduction of GST was set as 1st April 2010. P. Chidambram, the then Finance Minister in his budget speech 2007-08 stated “I wish to record my deep appreciation of the spirit of cooperative federalism displayed by State Governments and especially their Finance Ministers. At my request, the Empowered Committee of State Finance Ministers has agreed to work with the Central Government to prepare a roadmap for introducing a national level Goods and Services Tax (GST) with effect from 1st April, 2010.” Shri Pranab Mukherjee, as Finance Minister, in his budget speech 2009-10 stated, “I have been informed that the Empowered Committee of State Finance Ministers has made considerable progress in preparing the roadmap and the design of the GST. Officials from the Central Government have also been associated in this exercise. I am glad to inform the House that, through their collaborative efforts, they have reached an agreement on the basic structure in keeping with the principles of fiscal federalism enshrined in the Constitution. I compliment the Empowered Committee of State Finance Ministers for their untiring efforts. The broad contour of the GST Model is that it will be a dual GST comprising of a Central GST and a State GST. The Centre and the States will each legislate, levy and administer the Central GST and State GST, respectively. I will reinforce the Central Government’s catalytic role to facilitate the introduction of GST by 1st April, 2010 after due consultations with all stakeholders.”

While the Empowered Committee released its ‘First Discussion Paper on Goods and Services Tax’ on 10th November 2009, the Economic Division in the Department of Economic Affairs (Ministry of Finance, Government of India) initiated a working paper series with the objective of improving economic analysis and promoting evidence based policy formulation in its mandated areas of work. Several such well-researched Working Papers were released, which were written by well known economists such as Dr. M. Govinda Rao, Satya Poddar, Ehtisham Ahmad, R. Kavita Rao and others. Kavita Rao, in her paper released in November 2008, has raised certain issues with reference to dual GST, and, Satya Poddar & Ehtisham Ahmad, in their paper released in March 2009, have discussed in detail various aspects of GST model for India based upon their studies of implementation of VAT/GST in various other countries.

However, public debate on GST started only after release of ‘First Discussion Paper’ by the Empowered Committee. Considering various aspects of points covered by the said Discussion Paper, it was felt by almost all stake holders that it would need detailed discussion and the target date of 1st April 2010 cannot be met. Various institutions and associations of trade, industries and professionals, including ICAI, FICCI and others, submitted their views and queries. It may be worth noting that immediately after the release of the First Discussion Paper, the Task Force, appointed by the 13th Finance Commission headed by Dr. Vijay Kelkar, released its own Report on ‘Goods and Service Tax’ on 15th December, 2009. The recommendations of the Task Force are significant, and, the same are at variance with the recommendations of EC on certain key issues.

Apart from EC, and Task Force, etc, the Ministry of Finance (Government of India) also appointed a Joint Working Group of Central and State Government Officers, on 30th September 2009, for identifying issues concerning amendment to the Constitution and essential features of Central and State legislation for implementation of dual GST. It also constituted three sub working groups, on 1st June 2010, to work on specific issues, such as;

(1)    To work on and propose registration, returns, payments, refunds, audit and dispute resolution mechanism for GST regime.

(2)    To work on and draft legislation on Central GST and Model State GST
(3)    To work on and finalise basic design of IT system required for GST in general and IGST in particular.

Further, to have an appropriate IT infrastructure, an ‘Empowered Group on IT Infrastructure for GST’, was constituted, on 26th July 2010, under the chairmanship of Nandan Nilekani. On the basis of the recommendations of this committee, the EC set up a company known as Goods and Services Tax Network (GSTN), incorporated on 28th March 2013, u/s. 25 of the Companies Act, 1956.

Recently, two more committees have been formed for facilitating implementation of GST from 01/04/2016. While one committee called ‘Steering Committee’ will monitor the progress of IT preparedness of GSTN/CBEC/Tax Authorities, finalisation of reports of all the Sub-Committees constituted on different aspects relating to the mechanics of GST and drafting of CGST, IGST and SGST laws/rules. This Committee shall also monitor the progress on consultations with various stakeholders like trade and industry, and training of officers. The other committee has been assigned the job of recommendation possible tax rates under GST that would be consistent with the present level of revenue collection of Centre and States. While making its recommendations, this Committee will take into account expected levels of growth of economy, different levels of compliance and broadening of tax base under GST. The Committee would also analyse the Sector-wise impact of GST on the economy.

While all these committees, sub-committees, working groups, etc, are working on their respective assignments, the parliament is ready to pass the Constitution Amendment Bill, the States will follow soon, so as to empower the Centre and the States to levy tax on goods and services concurrently, the question which is of prime importance is, what would be the final design of Indian Goods and Services Tax?

Once the final design of Indian GST is known, then only it is possible to understand the real impact thereof. How it will affect the manner of tax collection and administration thereof? Whether the trade and industry will have relief from multi-tax authorities, and, whether the ultimate tax payer i.e. the consumer, will have any tangible benefit? Several advantages, which are being publicised, whether these are real or illusionary? Several such questions are coming to mind, some of them have been discussed at various seminars, workshops and study circles and some are yet to be discussed, and, the people are anxiously waiting for the answers.

Some basic questions, being asked by people in general, are noted here as follows:-

1.    Which commodities and services will remain out of the GST network? Although some indication has been given in the Constitution Amendment Bill, but one has to wait for the final outcome.

2.    Which taxes will be subsumed in GST? Various authorities from time to time have said that all indirect taxes levied by Central and State Governments will be subsumed in GST. But there are variances in various reports circulated so far. One important question is whether Octroi, LBT, Electricity Duty, etc. will form part of GST or will continue to be levied separately? Ideally, all such taxes which are being levied at present by all Government authorities (whether Central, State or local) on any kind of transaction related to goods and services should get covered by the GST. But, whether there is consensus on this issue?

3.    Which are the commodities and services to remain tax free (zero rated) within GST? At present there is a long list of exempt commodities under the Excise law. There are separate list of items exempt under VAT laws of each State. Whether it will be a common list of exempted (tax free) goods and services for CGST and SGST or it will differ from State to State? Further, can there be a situation where an item is exempt from SGST in a particular State but liable to tax for CGST or vice versa?

4.    What will be the rate of tax on sale/supply of taxable goods and/or services? Whether it will be one single rate of GST applicable to all such goods and services or there will be a Schedule specifying different rates of tax applicable to different types of taxable supplies?

5.    Further, how the proportion of CGST and SGST will be worked out? Whether it is rate of GST which will divided in two parts i.e. CGST and SGST, or the GST rate is sum total of CGST rate and SGST rate? Thus, whether effective rate of GST may be different State to State?

6.    Whether the rate of SGST on a particular kind of goods or services can be different from one State to another?

7.    What will be the threshold limit of turnover, below which GST is not applicable to a dealer/assessee? The First Discussion paper has indicated that there will be a common threshold of Rs. 10 lakh for SGST, and, there will be a higher threshold for CGST (Rs. 1.5 crore). It also suggested that there may be appropriate higher threshold for services. As thereafter there is no official communication, the issue needs to be clarified appropriately. How these separate thresholds will work? And, if a common figure of threshold is considered for CGST and SGST, then whether it is qua each State or combined figure of annual turnover in all the States together? At present, a small dealer having both the activities i.e. selling of goods as well as providing services is not liable to any tax (whether VAT or service tax) if his annual turnover of rendering services is below Rs. 10 lakh and further, if his annual turnover of sale of goods in each State is less than Rs. 10 lakh.

8.    A related question is that, at present small manufacturing units, cottage industries, village industries, etc., are not liable for Excise Duty, how they will get necessary exemption under the GST Law? Or all such units will be treated like other big industries, and therefore liable for the same treatment? There are a large number of dealers falling under this category all over the country.

9.    Regarding registration of dealers, the First Discussion Paper has indicated that each tax payer would be allotted a PAN-linked taxpayer identification number.Whether there will be two separate such numbers i.e. one for CGST and another for SGST? The question is pertinent with reference to multi-state operations.

10.    Answer to the above question would play an important role in deciding whether a dealer would be required to file one common return or two separate returns (may be in the same format). We understand that in case of dealers having multi-state activities, for each State, there may be a separate return for SGST qua each State but what about CGST returns in such cases.

11.    Similarly, for payment of taxes, whether it will be through one common challan or two separate payments i.e. one for CGST and another for SGST and may be third for IGST?

12.    As the credit for input SGST has to be used only against SGST payable on sales i.e. output SGST, how the CGST credit has to be utilised – whether qua each State or credit in one State can be utilised for payment of CGST in any other State. Most of the large scale service providers will have such a situation. How the mechanism will work if there is one common return and if there are separate returns?

13.    Regarding administration of GST, we have been given to understand that, the Centre as well as States will have concurrent jurisdiction. The Central Government authorities will assess the amount of CGST and the State Government authorities will assess the amount of SGST. Would that mean that the same dealer/assessee will be liable to be assessed by two different authorities in respect of the same transaction? Thus, the same invoices, same set of books of account and documents will have to be produced before two different authorities. And how the situation should be tackled if the Central authority takes a different view than that of the State authority, or vice versa, on any such point of assessment, whether it is value of transaction, classification, rate of tax or the amount of input tax credit, etc.?

14.    Whether a registered dealer under GST will be eligible for full input tax credit of respective components of GST for all purchases of goods and services (including capital goods) or there will be artificial restrictions and reductions?

15.    Whether the practice of disallowing input tax credit (as being prevalent in some of the States at present) will continue in GST regime, if a duly registered supplier has not paid due taxes to the Government or has delayed the payment of taxes?

16.    Will there be any kind of ‘composition schemes’ for dealers (whether supplying goods or services) having turnover below certain limit, say Rs. 1 crore? And those dealers who are in the business of retail trade like kirana merchants, who deal in various kinds of goods but not in a position to maintain commodity wise or tax rate wise accounts. Similarly, in case of hotels, restaurants and cooked food vendors.
17.    Whether the present definition of goods (as given under the local sales tax laws) will continue as it is or will be modified for the purposes of “GST”?

18.    What would be the definition of ‘services’ and how the place of supply in case of services will be determined?

19.    What about the taxation of transactions, which are falling at present in the deemed sale category? Whether such transactions of ‘works contract’, etc., will be categorised as ‘sale of goods’ or of rendering of services? The question is pertinent when there are different rates of taxes on various kinds of goods and services.

20.    How the process of transition will take place, particularly with reference to accumulated credits, etc., as on the date immediately prior to the date of implementing the new regime?

There are several such questions, which needs to be addressed, before taking a final decision, and their appropriate solutions need to be incorporated in the final draft of the new legislation.

Note from the indirect tax committee of BCAS: It is said by renowned tax experts that GST would free India from the shackles of archaic indirect tax laws and usher in a new era of growth and prosperity. GST may affect all industries, irrespective of the sector. It will impact the entire value chain of operations namely procurement, manufacturing, warehousing, distribution and sale. Some of the business models may need appropriate changes. The Indirect Taxes Committee of BCAS has taken an initiative to maintain a question bank on the proposed design of GST. We feel that the readers of BCAJ. They may have many questions to ask, particularly with reference to specific sector/s with which they are associated. And there may be general questions and suggestions which may be of immense importance. The BCAS is also preparing for providing a platform for dialogue amongst its readers on various issues of concern. All pertinent questions and suggestions are proposed to be submitted to the respective authorities who are responsible for drafting and finalising the Act and Rules concerning implementation of Goods and Services Tax. We would, therefore, like to invite all our readers to send their queries on GST, via e-mail to (to be informed), marking the subject as “GST Question Bank”. Our intention is to let our readers to take an active part in the framing of the law itself. We also propose to publish articles on best practices followed in some of the selected countries where GST has already been implemented successfully. Please look forward for the next issue of BCAJ.

2015 (38) STR 143 (Tri.-Bang.) Commr. of C.Ex. & ST., Tirupati. vs. Gimpex Ltd

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The date of filing refund claim even though filed before wrong authority would be taken as date of filing for determining period of limitation.

Facts:
The Assessee filed refund claim of input service before the Assistant Commissioner of Service Tax, Chennai. The claim however was returned stating that the application was to be filed with the jurisdictional Assistant Commissioner of service tax. Consequently, the Assessee filed the claim accordingly. Thereafter, the claim was rejected on ground of time-bar. The first appellate authority granted relief by holding that the refund claim cannot be rejected on the ground of limitation when the claim was originally filed in time but before wrong authority, relying on the Tribunal’s decision in case of Gujarat Tea Processors and Packers Ltd [2010 (17) STR 489 (Tri-Ahmd)]. Hence, the revenue filed the appeal.

Held:
The Tribunal held that the decision of the first appellate authority was appropriate and took the view that the date of filing of refund claim before the wrong authority to be taken as the date of filing for determining limitation and rejected the department’s appeal.

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[2015] 59 taxmann.com 402 (Madras) V.N.K. Menon & Co vs. CEST

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There cannot be said to be any suppression after the activity comes to the knowledge of the department. Hence, demand of service tax under extended period of limitation is held invalid to the extent it related to the period after statements of appellant company’s officials were recorded.

Facts:
The assessee was manufacturing on job-work basis for his principal and also collected a fixed amount as service charges towards certain services provided to the principal. The department was of the view that these expenses incurred for providing the services were in the nature of overheads essential for manufacturing activity and therefore were required to be reckoned while the assessable value of the finished goods was calculated for payment of duty. In August 1996, the department recorded statement from the officials of the assessee-company. A show cause notice was issued in October 1998 for the period 1995-96 to November 1997. The Tribunal upheld the intention of evasion for the receipt of service charges from their principal as the activities of the assessee came to light subsequent to an investigation by the department. However, it also held that, as the department was aware of the activities of the assessee after recording the statement, demand under extended period is valid only to the extent it pertains to the period prior to August 1996. Before the High Court, assessee contended that if there is no suppression post August, 1996, no extended period could be invoked post August, 1996 and, therefore, the same analogy will have to be applied for the period prior to August, 1996 as well.

Held:
The High Court affirmed the order of the Tribunal on the ground that, findings recorded by the Tribunal in so far as the period prior to August, 1996 and post August, 1996 stems from strong judicial reasoning and there is no error on record warranting interference with the well considered finding of the Tribunal.

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[2015] 59 taxmann.com 252 (Andhra Pradesh) K.V. Narayana Reddy vs. Addl. Commissioner.

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Where appeals filed against the order-inoriginal are rejected by lower appellate authorities as barred by limitation, the said order cannot be entertained by the Court under writ jurisdiction.

Facts:
The assessee filed writ petition before the High Court as both the lower appellate authorities did not entertain the appeals filed by the petitioner on the ground that it was time barred and beyond permissible period for condonation. The contention of the petitioner was that attempt to prefer appeal unsuccessfully before the appellate authority does not preclude him from maintaining the writ as at present he is remediless.

Held:
Relying upon decision of the Court in the case of Resolute Electronics (P.) Ltd. vs. Union of India [WP No.1409 of 2015] and quoting judgment of Supreme Court in the case of Singh Enterprises vs. CCE [2008] 12 STT 21 (SC), the Court held that it is not legally permissible to accept the challenge to the order in writ jurisdiction when Appellant has unsuccessfully pursued other remedies for if it is done, the writ Court will unsettle a legally settled position. Thus, where appellate authority has already decided the matter against the petitioner, the writ Court is debarred from doing so as the same binds the writ Court applying the principle of res judicata, particularly, when the appellate authority’s orders are not challenged in the writ jurisdiction. Accordingly, the writ petition was dismissed as not maintainable.

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[2015] 59 taxmann.com 195 (Madras) – CCE vs. Integral Coach Factory

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Even if assessee pays duty on clearance of final products which are exempted under Exemption Notification, goods continue to remain “exempted goods” and do not become “other than exempted goods” for the purpose of Notification No.89/95-CE dated 18/05/1995.

Facts:
The assessee manufactures excisable goods falling under Chapter 86. During the disputed period, though it was entitled for exemption under Notification No.62/95- CE dated 16/03/1995, it cleared the exempted goods on payment of duty. It however did not pay duty on ferrous and non-ferrous scrap since as per Notification No.89/95- CE dated 18/05/1995, waste parings and scrap arising in the course of manufacture of exempted goods and falling within the schedule to the Central Excise Tariff Act, 1985, were exempted from the whole of excise duty. Department issued show cause notice demanding duty on the ground that as per the proviso to the said notification, such exemption would not be applicable if waste parings and scrap cleared from a factory in which any other excisable goods other than exempted goods are also manufactured. The case of the department was that since assessee cleared the goods after payment of duty and did not avail benefit of exemption notification No.62/95- CE, the goods cleared from factory cease to be exempted goods and hence benefit of notification No.89/95-CE is also not allowed to assessee. The Tribunal decided in favour of assessee

Held:
The High Court observed that erroneous payment of duty caused the department to hold that the goods are other than exempted goods and therefore demand was made. Affirming the Tribunal’s order it was held that proviso to this Notification would not apply to the facts of the case and the erroneous payment of duty would not render the goods other than exempted goods. Hence, so long as the goods manufactured are exempted goods, waste parings, scrap arising in the course of the manufacture of exempted goods would be entitled for the exemption.

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[2015] 59 taxmann.com 196 (Karnataka) – CCE vs. Federal Mogul TPR India Ltd.

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Notification No.8/2005-ST dated 01/03/2005 is not an absolute exemption notification. Further, unlike section 5A of Central Excise Act, 1944 exemption notifications u/s. 93 of the Act are optional.

Facts:
The assessee manufacturer sent goods to their sister concern for Chrome Plating on job work basis. After completion of the process of chrome plating, the sister concern returned the said goods to the assessee under cover of an invoice on payment of service tax on the value of job work charges and subsequently on receipt of such job worked goods, the assessee availed CENVAT credit of service tax so passed on by its sister concern. The job worked goods thereafter passed through various manufacturing processes at the assessee’s factory and then were cleared on payment of duty. As per department’s contention, the process of chrome plating does not amount to manufacture in terms of section 2(f) of the Central Excise Act, 1944 but is a “business auxiliary service” liable for payment of service tax. However an exemption is granted under Notification No. 8/2005- ST dated 01/03/2005 to taxable service of production of goods on behalf of the client on which appropriate duty is paid by the principal manufacturer. According to the department the said exemption notification is an unconditional notification and section 5A(1A) of the Central Excise Act, 1944 which mandates the assessee to avail the exemption notification is applicable to the facts of the case. Therefore, service tax has been charged wrongly in order to pass on service tax credit to assessee. The Tribunal decided in favour of assessee and the revenue is in appeal.

Held:
The High Court observed that, the said Exemption Notification applies only in cases where such goods are produced using raw materials or semi-finished goods supplied by the client i.e. the principal manufacturer and goods so produced are returned to the said client for use in or in relation to the manufacture of the goods on which appropriate duty of excise is paid.

Therefore the High Court held that the conditions stipulated in the notification establish that it is a conditional notification. As regards applicability of section 5A of the Central Excise Act, 1944 it was held that the mandatory requirement on the manufacturer of such excisable goods of not to pay the duty of excise on such goods in respect of which an exemption u/s 5A(1A) has been granted absolutely is not found in section 93 of the Finance Act, 1994. Further, absence of section 5A of Central Excise Act, in section 83 of the Finance Act, 1994, which provides for application of certain provisions of the Central Excise Act,1944 in relation to service tax, indicates that the provisions of section 5A of Central Excise Act, are not applicable to the Finance Act, 1994. Accordingly, the Tribunal order was upheld and CENVAT credit of the service tax paid by the job worker was allowed to the assessee.

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2015 (39) STR 24 (Mad.) V. Sathyamoorthy & Co. vs. CESTAT Chennai.

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A Tribunal can grant three adjournments in an appeal and if Tribunal decides the stay application ex-parte before granting three adjournments on the ground that Appellants have adopted dilatory tactics by not appearing and thereby abusing the law, the action of the Tribunal would be too harsh.

Facts:
The department during the adjudication passed an ex-parte order confirming the demand on Appellants. Appellants filed appeal and stay petition before Tribunal. Before the date of hearing on stay application, Appellants sought adjournment by filing request letter. Tribunal granted an adjournment without even taking into account the said request letter on record. Before the next date, Advocate of Appellant requested an adjournment vide a request letter. Tribunal on that occasion overlooked the letter and passed an ex-parte stay order stating that since no plea of financial hardship was taken, Appellant was directed to pre-deposit Rs.4 crore and also recorded that the Appellants had not cooperated during the adjudication process and also in the present appeal proceedings which amounted to abuse of the process of law.

Held:
Appellants challenged the said ex-parte order before the High Court stating that the Tribunal is entitled to grant three adjournments to a particular party as per proviso to section 35C of the Central Excise Act. The High Court observed that the Tribunal’s action of deciding the stay petition ex-parte on second adjournment and that too ignoring the Appellants request for an adjournment terming non-appearance as abuse to process of law is too harsh. Accordingly, the case was remanded to Tribunal for reconsideration and directed Appellants not to seek adjournment on the next date.

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2015 (39) STR 22 (Kar.) Atharva Associates vs. Union of India

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If the appeal has been filed along with stay application and neither stay application nor appeal has been disposed of, then recovery cannot be initiated.

Facts:
An Order was passed confirming demand proposed in the Show Cause Notice. Appellants preferred an appeal before first appellate authority along with stay application which was not disposed of. Meantime, the department initiated recovery proceedings by issuing notice for recovery. Appellants filed writ petition challenging the said recovery notice.

Held:
The High Court held that since the right of appeal has been exercised by the Appellants as per applicable provisions and since first appellate authority has yet to decide the stay application, the recovery notices though executable, could not be enforced or else the appeal will be infructuous or lead to multiplicity of proceedings. Enforcement of recovery was thus stayed till disposal of the stay petition by the first appellate authority.

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Free supply vis-a-vis Sale and Sale Price

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Under the Sales Tax Law, transaction of sale can be taxed as per sale price of that transaction.

A ‘sale’ can take place if the transaction fulfills certain criteria. The term ‘sale’ is defined in Sales Tax Laws and it has also been defined in (MVAT Act,2002). The said definition is given in section 2(24) of MVAT Act,2002 and it is reproduced below for ready reference.

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

The transaction, to be ‘sale’, should be for consideration.

The above term ‘sale’ has also been subject matter of interpretation by various courts. A reference can be made to the landmark judgment in case of Gannon Dunkerly and Co.(9 STC 353)(SC). In this judgment about ‘sale’, it is 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’ following criteria should be fulfilled.

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

Thus, to consider the transaction as ‘sale’, consideration in money terms is necessary. Without consideration, no sale can take place.

In number of cases, the customer i.e. buyer may supply certain goods to its vendor which are to be incorporated in the finished goods to be supplied by vendor to the said buyer. Similarly there may be cases, where contractee may be supplying some goods to be used in contract to be executed for it by contractor appointed by it. Both above issues are common and the tax position of same can be analysed as under:

The supply of such goods by buyer to the vendor will be free supply, as it is to be incorporated in goods to be supplied to it. It is also possible that for the purpose of Excise etc. the vendor may be required to include value of such goods in its sale price and after calculating Excise on such total value, the value of free supply by buyer will be deducted again and in fact the net amount is only charged to the buyer.

The issue arises whether such value of free supply is part of sale price of vendor for which it will be required to discharge sales tax on the same.

There is a be possibility of considering above value as sale price, if, first there is sale by buyer of said goods to the vendor and thereafter vendor again selling the said goods along with its finished goods to the buyer. Therefore, it will be required to be seen whether there is sale by buyer of the free supply made by it to the vendor.

There are instances where supply made by customer to supplier has been considered as sale and accordingly liable to tax in the hands of customer as well as supplier. Reference can be made to the judgment of Supreme Court in case of M/s. N. M. Goel (72 STC 368)(SC). In this case, the facts were that the contractee has given certain materials to contractor for use in the contract executed for the said contractee. As per terms in contract the goods to be supplied were to be valued as per the prices mentioned in the contract. It is under the above circumstances, the Supreme Court held that the transaction of supply of goods by contractee fulfills the requirements of a transaction being ‘sale’. There are two parties i.e. contractee and contractor, supply of moveable goods and consideration. The Supreme Court also held that when the possession of the goods is given to the contractor there is transfer of property and hence, the sale transaction from contractee to contractor gets complete. The Supreme Court further held that when contractor uses these goods in the contract for contractee, there is again fresh transfer of property from contractor to contractee and hence one more sale transaction from contractor to contractee. In fact, the Supreme Court has noted facts of case as under.

“The appellant, a dealer registered under the Madhya Pradesh General Sales Tax Act, 1958, made an item rate tender to the PWD for construction of food grain godowns and ancillary buildings. In that tender, prices of the materials used for the construction including cost of iron, steel and cement were included. The PWD had, however, agreed to supply from its stores the iron, steel and cement and to deduct the prices of the materials so supplied and consumed in the construction, from the final bill of the appellant. Clause (10) of the contract provided: “. . . . . if it is required that the contractor shall use certain stores to be provided by the Engineer-in-Charge as shown in the Schedule of materials hereto annexed, the contractor shall be bound to procure and shall be supplied such material and stores as are from time to time required to be used by him for the purposes of the contract only, and the value of the full quantity of materials and stores supplied at the rates specified in the said Schedule of materials may be set-off or deducted from any sums then due or thereafter to become due to the contractor under the contract or otherwise, or against or from the security deposit, or the proceeds or sale thereof if the same is held in Government securities, the same or a sufficient portion thereof being in this case sold for the purpose. All the materials so supplied to the contractor shall remain the absolute property of the Government and shall not be removed on any account from the site of the work, and shall be at all times open to inspection by the Engineer-in- Charge.” For the construction, the appellant was supplied iron, steel and cement by the PWD and the appellant purchased other materials from the market. The prices of iron, steel and cement supplied to the appellant for the work were deducted from its final bill. The Sales Tax Officer assessed the appellant to entry tax for iron, steel and cement u/s. 6(c) of the Madhya Pradesh Sthaniya Kshetra Me Mal Ke Pravesh Par Kar Adhiniyam, 1976, on the ground that their entry had been effected by the PWD, which was not a registered dealer, at the instance of the appellant, because the appellant had ultimately used the materials for the construction work; and the Deputy Commissioner affirmed the assessments on revision. A writ petition filed by the appellant challenging the assessments to entry tax was dismissed by the High Court. On appeal to the Supreme Court:

Based on the above, the Supreme Court has held as under:

“On these set of facts, while dismissing the appeal, (i) that since the PWD was not a registered dealer the presumption u/s. 6(c) applied, that the entry of the goods had been effected by the appellant into the local area before they were purchased by the appellant; that in order to attract entry tax not only the property in the goods had to pass from the PWD to the appellant but there had to be an independent contract-separate and distinct-apart from the mere passing of the property: mere passing of property from the PWD to the appellant would not suffice; that, in this case, for the performance of the contract, the appellant was bound to procure the materials; but in order to ensure that quality materials were procured, the PWD undertook to supply such materials and stores as from time to time were required by the appellant to be used for the purpose of performing the contract only. The value of such quantity of materials and stores so supplied was specified at a rate and got set-off or deducted from any sum due or to become due thereafter to the appellant. Clause (10) of the contract read in proper light indicated that a sale inhered from the transaction. By the use or consumption of materials in the work of construction, there was passing of the property in the goods to the appellant from the PWD. By appropriation and by the agreement, there was a sale from the PWD to the appellant as envisaged in terms of clause (10); and that, therefore, the appellant was liable to pay entry tax on the materials supplied by the PWD.”

Based on above judgment of Supreme Court there are number of other judgments where the supply of goods by contractee to contractor has been held as ‘sale’, if such supply is against pre agreed price. In such cases, normally the contractor bills for gross value and gives deduction for the material value as arrived at as per the prices agreed and claims net amount from the contractee. Thus, if such is the mode of billing by the contractor it gives sufficient indication that the supply by the contractee is as per agreed price and hence will be considered to be ‘sale’. In such cases, even if, the supply is referred to as free supply, it will be a misnomer and in reality it will be a ‘sale’ from contractee to contractor and again from contractor to contractee.

However, if there is no such situation i.e. no prices are given for the materials supplied by contractee/buyer as well as no deduction for any value for same is made in the bills of contractor, then there is no sale/purchase of such materials. This position is also clear from judgment of the Hon. Tribunal in case of CIDCO Ltd. (M.A. No.122 of 2005 in S.A. no. 1707 of 1999 DT.6.10.2007).

In this case, the appellant has purchased cement from other state and given free to contractor. In assessment, tax was levied but in first appeal the same was deleted. When the appellant was in second appeal, the Department filed Misc. Application for levy of the tax on cement. The Hon. Tribunal held that when the supply is free of cost there is no question of levy and the Misc. Appl. was rejected. This covers up the legal position. The net result is that if in the contract there are no terms giving price to the goods to be supplied to contractor, and accordingly the same is also not considered in the bills prepared by the contractor, there is no question of any sale transaction involved in such supply. In other words, there is no question of attraction of any tax under Sales Tax Laws on such free supply on either side.

The other situation is consideration of value of such supply for Excise purpose.

For purpose of paying Excise duty the vendor may consider the value of goods supplied by buyer and may be mentioned on the invoice also.

However mentioning the value of goods for payment of Excise duty cannot amount to sale/purchase and cannot bring it in fold of sale price/purchase price.

This position is clear from judgment of the Hon. Tribunal in case of Ghadge Patil Ind. Ltd. & others (S. A. 320 to 327 of 2002 dt.30.3.2007). The short gist of judgment is as under:

The facts of the case relating to year 1994-95 and others are that appellant received an order for supply of certain manufactured parts. The buyer gave certain parts as free issue to be incorporated in the manufactured goods. In purchase order there was no term about creditor particular price to be considered for the said free issues. In its sale bill appellant added the cost of such free issues in his price to calculate excise duty. The cost so added was then given deduction. On above facts lower authorities considered the cost of such supplies as part of sale price and levied tax on the same. Before the Tribunal, appellant explained the facts. The Tribunal observed that in this case the supplies are not made with any particular consideration. There was no intention on part of buyer or seller to sale/ purchase above goods nor agreed for any consideration. Therefore, there cannot be sale from appellant to buyer. The addition in price was with sole purpose of calculating duty, as it was attracted even on free supply cost, as per Excise laws. The Tribunal distinguished the judgment in case of N. M. Goyal (72 STC 368) on above facts. The Tribunal made reference to judgment in case of Gannon Dunkerley & Co. (9 STC 353), Indian Coffee & Tea Distributors Co. (6 STC 47), Indian Alluminium Cables (115 STC 161), Hindustan Aeronautical Ltd. (55 STC 314) and Auto Comp Corpn. (S.A.1083 of 99 dt.26.9.2003). The Tribunal directed to delete the addition.

Thus, it is held that for considering the free supply value as sale/purchase there should be conscious decision on the same which can be ascertained from the fact of giving prices for such supply and billing mode by supplier. Simply mentioning value for Excise duty calculation cannot make it sale/purchase, and cannot be part of price of transaction, nor can it be included in sale price.

Conclusion

Whether free supply by buyer/contractee to the vendor/ contractor will amount to sale/purchase depends upon intention of the parties coupled with underlying documents. To make the intention clear, in documents it should be specifically mentioned that the supply is free to the vendor but the value may be considered for excise payment. If the documents are not clear, then the dispute may arise and the sales tax department will certainly try to claim tax on the same.

RECENT AMENDMENTS: INTEREST ON CENVA T CREDIT WRONGLY TAKEN

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Preliminary
The issue whether interest is leviable at the point of time when CENVAT credit is wrongly taken or at the point of utilization has been a matter of extensive judicial examination. An important amendment was made in Rule 14 of CENVAT Rules through Notification dated 17/03/2012 and further a significant amendment has been made vide Notification dated. 01/3/2015. Hence, the implication of the latest amendment in the backdrop of the earlier judicial controversies, are discussed hereafter.

Background
Relevant Statutory Provisions – [Rule 14 of CENVAT Credit Rules, 2004 (“CCR”)]

“Where CENVAT credit has been taken or utilized wrongly or has been erroneously refunded, the same along with the interest shall be recovered from the manufacturer or provider of the output service and the provisions of the sections 11A and 11AB of the Excise Act, or sections 73 and 75 of the Finance Act, shall apply mutatis mutandis for effecting such recoveries.”

[Note – The words “taken or utilized wrongly” have been substituted by the words “taken and utilized wrongly” vide Notification No. 18/2012 – CE(NT) dated 17/03/2012].

Supreme Court Ruling overruling High Court Ruling

Attention is particularly drawn to the ruling of the Punjab & Haryana High Court in the case of Ind – Swift Laboratories Ltd. vs. UOI (2009) 240 ELT 328 (P & H) (which was subsequently set aside by the Supreme Court), relevant extracts from which, are reproduced hereafter for reference :

Para 9

“The Scheme of the Act and the CENVAT credit Rules framed thereunder permit a manufacturer or producer of final products or a provider of taxable service to take CENVAT credit in respect of duty of excise and such other duties as specified. The conditions for allowing CENVAT credit are contained in Rule 4 of the Credit Rules contemplating that CENVAT credit can be taken immediately on receipt of the inputs in the factory of the manufacturer or in the premises of the provider of output service. Such CENVAT credit can be utilized in terms of Rule 3(4) of Credit Rules for payment of any duty of excise on any final product and as contemplated in the aforesaid sub-rule. It, thus, transpires that CENVAT credit is the benefit of duties leviable or paid as specified in Rule 3(1) used in the manufacture of intermediate products etc. In other words, it is a credit of the duties already leviable or paid. Such credit in respect of duties already paid can be adjusted for payment of duties payable under the Act and the Rules framed thereunder. Under section 11AB of the Act, liability to pay interest arises in respect of any duty of excise has not been levied or paid or has been short levied or short paid or erroneously refunded from the first day of the month in which the duty ought to have been paid. Interest is leviable if duty of excise has not been levied or paid. Interest can be claimed or levied for the reason that there is delay in the payment of duties. The interest is compensatory in nature as the penalty is chargeable separately.”

Para 10

“In Pratibha Processors vs. Union of India, 1996 (88) ELT 12 (SC) = (1996) 11 SCC 101, it was held that interest is compensatory in character and is imposed on an assessee who has withheld payment of any tax as and when it is due and payable. Similarly, in Commissioner of Customs vs. Jayathi Krishna & Co. – 2000 (119) ELT 4(SC) (2000) 9 SCC 402, it was held that interest on warehoused goods is merely an accessory to the principal and if principal is not payable, so is it for interest on it. In view of the aforesaid principle, we are of the opinion that no liability of payment of any excise duty arises when the petitioner availed CENVAT credit. The liability to pay duty arises only at the time of utilization. Even if CENVAT credit has been wrongly taken, that does not lead to levy of interest as liability of payment of excise duty does not arise with such availment of CENVAT credit by an assessee. Therefore, interest is not payable on the amount of CENVAT credit availed of and not utilized.”

Para 11

“Reliance of respondents on Rule 14 of the Credit Rules that interest under section 11AB of the Act is payable even if CENVAT credit has been taken. In our view, said clause has to be read down to mean that where CENVAT credit taken and utilized wrongly, interest cannot be claimed simply for the reason that the CENVAT credit has been wrongly taken as such availment by itself does not create any liability of payment of excise duty. On a conjoint reading of section 11AB of the Act and that of Rules 3 and 4 of the Credit Rules, we hold that interest cannot be claimed from the date of wrong availment of CENVAT credit. The interest shall be payable from the date CENVAT credit is wrongly utilized.”

In an important ruling the Supreme Court, in the case of Ind-Swift Laboratories Ltd. (2011) 265 ELT 3 (S.C.)], set aside the order passed by the Punjab & Haryana High Court (2009) 240 ELT 328 (P & H)] on the question of charging interest on CENVAT credit wrongly taken but not utilised. By interpreting the expressions and words used in the provisions of Rule 14 of CCR, the Supreme Court concluded that interest is payable on CENVAT credit wrongly taken even if such credit has not been utilised.

The issue for consideration was whether an assessee can be made liable to pay interest for taking wrong credit if such credit has not been utilised in as much as he has not derived any benefit out of his wrong action.

The more important observations of the Supreme Court are reproduced hereafter for ready reference:

Para 17

“…………….. In our considered opinion, the High Court misread and misinterprets the aforesaid Rule 14 and wrongly read it down without properly appreciating the scope and limitation thereof. A statutory provision is generally read down in order to save the said provision from being declared unconstitutional or illegal. Rule 14 specifically provides that where CENVAT credit has been taken or utilized would be recovered from the manufacturer or the provider of the output service. The issue is as to whether the aforesaid word “OR” appearing in Rule 14, twice, could be read as “AND” by way of reading it down as has been done by the High Court. If the aforesaid provision is read as a whole we find no reason to read the word ‘OR’ in between the expression ‘taken’ or “utilized wrongly” or has been erroneously refunded’ as the word ‘AND’. On the happening of any of the three aforesaid circumstances such credit becomes recoverable along with interest.”

Para 18

“We do not feel that any other harmonious construction is required to be given to the aforesaid expression / provision which is clear and unambiguous as it exists all by itself. So far as section 11AB is concerned, the same becomes relevant and applicable for the purpose of making recovery of the amount due and payable. Therefore, the High Court erroneously held that interest cannot be claimed from the date of wrong availment of CENVAT credit and that it should only be payable from the date when CENVAT credit is wrongly utilized. Besides, the rule of reading down is in itself a rule of harmonious construction in a different name. It is generally utilized to straighten the crudities or ironing out the creases to make a statue workable. This Court has repeatedly laid down that in the garb of reading down a provision it is not open to read words and expressions not found in the provision statute and thus venture into a kind of judicial legislation. It is also held by this Court that the Rule of reading down is to be used for the limited purpose of making a particular provision workable and to bring it in harmony with other provisions of the statute.”

The interpretation made by the Honorable Supreme Court considering the specific circumstances of a case involving evasion of duty, has been a matter of extensive deliberation by experts and rightly so in as much as if the same is applied generally, it would mean unsettling the settled law.

Important Ruling of Karnataka High Court in CCE & ST vs. Bill Forge Pvt. Ltd. (2012) 26 STR 204 (KAR) [Bill Forge Case]

    The observations of the Karnataka High Court in the Bill Forge case are very important, in as much as not only has it distinguished facts of the case of UOI vs. Ind-Swift Laboratories Ltd. (2011) 265 ELT 3 (SC) but it has made fine distinction between making an entry in the register and credit being ‘taken’ to drive home the point that interest is payable only from the date when duty is legally payable to the Government and the Government would sustain loss to that extent.

“It is also to be noticed that in the aforesaid Rule, the word ‘avail’ is not used. The words used are ‘taken’ or “utilized wrongly”. Further the said provision makes it clear that the interest shall be recovered in terms of sections 11A and 11B of the Act………”

Para 20

“From the aforesaid discussion what emerges is that the credit of excise duty in the register maintained for the said purpose is only a book entry. It might be utilized later for payment of excise duty on the excisable product………Before utilization of such credit, the entry has been reversed, it amounts to not taking credit.”

Para 22

“Therefore interest is payable from that date though in fact by such entry the Revenue is not put to any loss at all. When once the wrong entry was pointed out, being convinced, the assessee has promptly reversed the entry. In other words, he did not take the advantage of wrong entry. He did not take the CENVAT credit or utilized the CENVAT credit. It is in those circumstances the Tribunal was justified in holding that when the assessee has not taken the benefit of the CENVAT credit, there is no liability to pay interest. Before it can be taken, it had been reversed. In other words, once the entry was reversed, it is as if that the CENVAT credit was not available. Therefore, the said judgment of the Apex Court has no application to the facts of this case. It is only when the assessee had taken the credit, in other words, by taking such credit, if he had not paid the duty which is legally due to the Government, the Government would have sustained loss to that extent. Then the liability to pay interest from the date the amount became due arises under section 11AB, in order to compensate the Government which was deprived of the duty on the date it became due.”

  •     The ruling in Bill Forge case has been followed in a large number of subsequently decided cases. For example:

    CCE vs. Pearl Insulation Ltd. (2012) 27 STR 337 (KAR)

    CCE vs. Gokuldas Images (P) Ltd (2012) 28 STR 214 (KAR)

    CCE vs. Strategic Engineering (P) Ltd (2014) 45 GST 662 (MAD)

    Sharvathy Conductors Pvt. Ltd. vs. CCE (2013) 31 STR 47 (Tri – Bang)

    CCE vs. Sharda Energy & Minerals Ltd. (2013) 291 ELT 404 (Tri – Del)

    Gary Pharmaceuticals (P) Ltd vs. CCE (2013) 297 ELT 391 (Tri – Del)

    CCE vs. Balrampur Chinni Mills Ltd (2014) 300 ELT 449 (Tri – Del)

    Gurmehar Construction vs. CCE (2014) 36 STR 545 (Tri – Del)

  •     However, in many cases, Bill Forge case has not been followed and instead the position held by the Supreme Court in the Ind Swift case has been followed. For example:

    Dr Reddy Laboratories Ltd vs. CCE (2013) 293 ELT 89 (Tri)

    Bharat Heavy Electricals Ltd vs. CC & CCE (2014) 303 ELT 139 (Tri – Bang)

    CCE vs. Sundaram Fasteners Limited (2014) 304 ELT 7 (MAD)

    Balmer Lawrie & Co. Ltd vs. CCE (2014) 301 ELT 573 (Tri – Mumbai)

Important amendment in Rule 14 of CCR

In a very significant amendment in Rule 14 of CCR, with effect from 17/03/2012, the words CENVAT credit has been “taken or utilized wrongly” have been substituted by the words “taken and utilized wrongly”.

This amendment strongly reinforces the interpretation placed by the Punjab & Haryana High Court in Maruti Udyog Ind Swift Laboratories and Karnataka High Court in Bill Forge case to the effect that, no interest can be recovered in cases where CENVAT credit has been wrongly taken but not utilized by an assessee.

    Recent Amendment: Analysis

In the recent Budget, Rule 14 of CCR has been amended vide Notification No. 6/2015-Central Excise (NT) dated 01/03/2015. The amended Rule 14 reads as under:

“14. Recovery of CENVAT credit wrongly taken or erroneously refunded. –

“(1) (i) Where the CENVAT credit has been taken wrongly but not utilized, the same shall be recovered from the manufacturer or the provider of output service, as the case may be and the provisions of section 11A of the Excise Act or section 73 of the Finance Act, 1994 (32 of 1994), as the case may be, shall apply mutatis mutandis for effecting such recoveries;

(ii) Where the CENVAT credit has been taken and utilized wrongly or has been erroneously refunded, the same shall be recovered along with interest from the manufacturer or the provider of output service, as the case may be and the provisions of sections 11A and 11AA of the Excise Act or sections 73 and 75 of the Finance Act, 1994, as the case may be, shall apply mutatis mutandis for effecting such recoveries.

    For the purposes of sub-rule (1), all credits taken during a month shall be deemed to have been taken on the last day of the month and the utilization thereof shall be deemed to have occurred in the following manner, namely: –

    i)the opening balance of the month has been utilized first;
    ii)credit admissible in terms of these rules taken during the month has been utilized next;
    iii)credit inadmissible in terms of these rules taken during the month has been utilized thereafter.”
The amended Rule 14(1) of CCR deals with two distinct situations viz.

  •     one where credit has been wrongly taken but not utilised and
  •     the other where credit has been wrongly taken and also utilised.

Further, to deal with a scenario, where credit has been utilised, a deeming provision has been brought in through new sub-rule 14(2), to lay down the manner in which the utilisation shall be deemed to have occurred.

  •     Prior to the introduction of this sub-rule, the assessee used to avail CENVAT credit even where the eligibility of CENVAT credit was in dispute. As long as the balance of CENVAT credit in the books of the assessee was more than the amount of the disputed CENVAT credit, it was construed that the disputed amount of CENVAT credit availed by the assessee had not been utilised and consequently, the proceedings under Rule 14 of CCR for recovery of credit and interest thereon could not be initiated against it.

However, after the above amendment, the manner prescribed therein will have to be applied to determine the utilisation of ineligible credit or otherwise.

  •     The larger view of trade & industry and tax payers generally is that the amended Rule 14 of CCR continues to be in line with Government’s consistent view to the effect that:

  •     recovery of interest along with CENVAT credit would be applicable only in those situations where the assessee takes credit and also utilises the same; and

  •     in those cases, where the assessee takes CENVAT credit but does not utilise such credit for specified reasons, recovery would be only of credit wrongly taken and the question of any recovery towards interest does not arise at all.

  •     A better view which may be adopted while interpreting Rule 14(2) of CCR is that the opening balance of CENVAT credit should only include the admissible amount of CENVAT credit and the inadmissible amount of CENVAT credit should be recorded separately. In such a case, while computing the amount of CENVAT credit utilized in a particular month, the total admissible amount of CENVAT credit available with the assessee will have to be taken into account first and the inadmissible amount of CENVAT credit will be said to be utilised only after the admissible CENVAT credit is exhausted. In such a case, an assessee will become liable to pay interest only in those cases where the balance of inadmissible CENVAT credit available with it is less than the credit utilised in a month.

This view can be supported by the following reasons :

  •     the earlier rule was silent regarding manner of utilisation, the amendment in the said rule has been made as a matter of trade facilitation exercise.
  •     it is consistent with the leniency shown in the past when the provision of Rule 14 was amended to overcome the adverse impact of Supreme Court decision in case of Ind-Swift.

It is a need of every business and tax payer to keep some amount of CENVAT credit on hold without utilizing the same for excise duty payment or payment of service tax.

Eligibility to CENVAT credit is prone to extensive litigations. Hence, in many cases where credit eligibility is of a doubtful and disputable nature and could often involve substantially high amount, tax payers often opt to avail credits to protect their rights but choose not to utilize the credits pending clarity & judicial evolvement, so as to avoid any interest liability in case the matter is decided adversely.

However, in the amended Rule 14 (2) of CCR, due to employment of the words “For the purposes of sub-rule
(1)”, there is an apprehension that the field formations may erroneously interpret that the deeming provisions laid down in Rule 14(2) would also apply to the cases covered under Rule 14 (1) (i).

Further, to arrive at the due date for interest payable the Rule 14(2) is creating a deeming fiction that all the credits taken during a month shall be deemed to have been taken on the last day of the month and the utilisation thereof shall be deemed to have occurred in the following manner, namely:-

    the opening balance of the month has been utilised first;
    ………………..

    ………………..
It is apprehended by trade and industry that credits kept on hold during any month form part of the opening balance of the next month, the field formations may interpret the same to be deemed utilised and thus liable for interest. This could result in unnecessary litigations and hardships to trade and industry and tax payers generally.

Conclusion:

The amendment in Rule 14 of CCR vide Notification dated 01/03/2015 needs to be understood, in the backdrop of introduction of time limits for availment of credit under CCR, for the first time with effect from 01/09/2014. In cases where availment of CENVAT credits was of a doubtful nature/under litigations, substantial amounts of credits were availed by tax payers prior to 01/09/2014 (but kept unutilised) in order to protect their interest in a scenario where matter gets decided in their favour at a future point of time and at the same time, avoiding any interest liability in case the matter is decided against them.

Further, in the absence of specific provisions under CCR or clarification by CBEC, in practice, no systematic records are maintained by assessees with regard to CENVAT credits utilised but not availed. This would create practical difficulties for the audit team/field formations to ascertain correctness of credit utilisation and interest liability on wrong utilisation. It appears that though legislative intent behind the amendment is laudable, there is a clear disconnect in the fine print that has emerged. This leaves room for doubts and possible hardships to trade and industry and tax payers from the field formations.

Suggestions:

Appropriate amendment should be made in Rule 14(2) of CCR to avoid unnecessary litigations.

Alternatively, CBEC should issue suitable clarifications / instructions to the effect that :

the deeming provisions in Rule 14(2) would apply only in those cases where inadmissible credit has been taken and also utilised; and

On lines with Instructions under erstwhile MODVAT Rules, [Ref – Circular No. 4/91 – Cx 8 dated 14/02/91 (File No. 263/5/91-CX – 8)] lay down detailed procedure to be followed by assessees who desire not to utilise the credit taken by them in order to ensure that they are covered under Rule 14(1)(i) of CCR.

Koyo Tech Electro (P) Ltd, [2013] 60 VST 235 (WBTT)

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Cancellation VAT- Registration of Dealer – Rented Place of Business – Whether Landlord Holds legal Ownership of Building Complete or Incomplete- Not For Department to Consider – Carrying on Business and Filing of Returns and Paying of Tax – Sufficient Enough For Grant of Registration, section 29 of The West Bengal Value Added Tax Act, 2003.

FACTS
The dealer company had rented the office premises on monthly rent and had obtained registration certificate under The West Bengal VAT Act, and, filed periodical returns and paid taxes. Subsequently the company received order from VAT department cancelling registration certificate. The company applied to the Joint Commissioner, for restoration of registration which was rejected after taking report from the lower authority who cancelled the registration certificate on the ground of incomplete construction of building, non- confirmation of ownership of the owner, etc. The company filed an application before The West Bengal Taxation Tribunal against the aforesaid cancellation of registration certificate as well as the confirmation thereof by the Joint Commissioner.

HELD
The fact that building in which office of the dealer was situated was in an incomplete stage could not be considered in framing opinion that business could not be carried out from such premises. Business can be carried on from makeshift room. Such office-cum-godown does not require to be housed in a well furnished room. Further, in rejecting the prayer for restoration of certificate of registration, the Joint Commissioner had viewed that the landlord from whom the dealer had claimed tenancy, failed to establish her ownership of the building. In making such observation, the concerned authority sought to assume the role of a civil court. This is totally unwarranted. The landlady in question was not under any obligation to prove her legal ownership in respect of the building at the time of inspection conducted by the respondents. The Tribunal after considering fact of carrying on business, filing of return and payment of tax by the dealer, allowed the application and restored the registration certificate granted to the dealer.

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State of Karnataka vs. Vasavamba Stores, [2013] 60 VST 19 (Karn).

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VAT – Rate of Tax – ‘Fryums’ are “Pappad”- Exempt From Payment of Tax, section 4(1)(b) and Entry 40 of Schedule 1 of The Karnataka Value Added Tax Act, 2004.

FACTS
The respondent Company, the manufacturer, sold ‘Fryums’ and claimed exemption from payment of tax under Entry 40 of Schedule 1 of The KVAT Act being covered by the term ‘Pappad’. The respondent company was reassessed and the authority levied tax under residuary entry by treating ‘Fryums’ as Sandige. The VAT Tribunal allowed appeal. VAT department filed revision petition before The Karnataka High Court against the order of the Tribunal. The High Court held in favour of the respondent company.

HELD
The High Court, following judgement of SC in case of Shiv Shakti Gold Finger [1996] 9 SCC544, held that the shape of the “Pappad” is not a relevant consideration when the ingredients are the same. Accordingly, the High Court dismissed the revision Petition filed by the State Government and confirmed the order of Tribunal holding ‘Fryums’ are “Pappad” hence exempt from payment of tax under the KVAT Act.

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[2015] 59 taxmann.com 128 (New Delhi – CESTAT) Uniworth Ltd vs. CCEST

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100% EOU are entitled to avail and utilise the CENVAT credit in respect of duty paid on inputs, even if other inputs are procured duty free under CT-3 procedure. The assessee can exercise both the options simultaneously.

Facts:
The Appellant is a 100% EOU and procured goods duty free. They also procured furnace oil on payment of duty and took CENVAT credit thereof. The adjudicating authority was of the view that the Appellant is allowed only one of the two options i.e. either to procure goods duty free or to pay duty and avail CENVAT credit. Therefore CENVAT credit taken of duty paid on furnace oil was disallowed.

Held:
The Tribunal observed that as per Rule 3 of the CENVAT Credit Rules,2004, 100% EOUs are fully eligible to take CENVAT credit of duty paid on inputs used in or in relation to the manufacture of final products because this rule does not make any exception as regards 100% EOUs. It held that Notification No. 18/2004-C.E. (N.T.) dated 06/09/2004 did not in any way affect the eligibility of the EOU from taking CENVAT credit; it only allowed them the facility to pay duty either by debit to the PLA or by debit to the CENVAT credit account. Reproducing Para 4 of Circular No. 54/2004-Cus., dated 13/10/2004 and decision In the case of Tata Tea Ltd. vs. CCE 2006 taxmann.com 1952 (Bang. – CESTAT), the Tribunal further held that the legal position is clear that the 100% EOUs are eligible to take CENVAT credit of duty paid on the raw material procured by them for use in or in relation to the manufacture of their final product. Accordingly the appeal was allowed.

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[2015] 59 taxmann.com 321 (Mumbai – CESTAT) CESTAT, MUMBAI BENCH-Inox Air Products Ltd. vs. Commissioner of Central Excise, Raigad

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CENVAT credit cannot be denied just because invoices are in the name
of Head Office/ another unit not registered as Input Service Distributor
(ISD).

Facts:
The assessee was engaged in the
manufacture of natural gases having units at various places. Assessee’s
one unit took credit of Customs House Agent (CHA) services where invoice
was in the name of Head Office; and also of machine repair services
where invoice was in name of another Unit. The demand of duty was raised
because the invoices under which the credit was availed were in name of
Head Office/other units and assessee was not registered as Input
Service Distributor.

Held:
Tribunal held that since
assessee had nine units manufacturing the same product, the doubt of
nexus of input and output products would never arise. It is quite
natural that the service provided by a CHA would be in the name of the
Head Office as the clearance of goods through customs is centralized.
The only basis for denying credit has been that invoices are either in
the name of another unit of the appellant or in the name of their Head
Office. Since doubt has never been raised regarding actual receipt of
services, credit cannot be denied.

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[2015 (39) STR 210 (Tri.-Mumbai) Commissioner of Service Tax, Mumbai-I vs. N.V. Advisory Pvt. Ltd

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Recipient of Services located outside India – Money received in convertible foreign exchange – fact that advice resulted in investment in India not relevant.

Facts:
The Respondent is providing services in the nature of advice on investment opportunities and is also providing back office operation support to the firms situated outside India. The payments are received in convertible foreign exchange. A refund claim was filed in respect of service tax paid on the input services used and consumed by them in the course of providing output services which were exported. The Adjudicating Authority rejected the claim. The Commissioner (Appeals) allowed the refund claim citing the CBEC Circular No. 111/5/2009-ST dated 24/02/2009 clarifying the term “used outside India” to mean that the benefit of the service accrues outside India. Therefore, revenue has preferred the present Appeal.

Held:
The Tribunal held that Rule 3(i)(iii) and Rule 3(2) of the Export of Services Rules, 2005 is satisfied as the recipient is located outside India and the payment is received in convertible foreign exchange. Relying on the Larger Bench decision of Paul Merchants Ltd vs. Commissioner of Central Excise, Chandigarh [2013(29) STR 257 (Tri. Del) the Tribunal allowed the refund claim. Accordingly, the plea of the revenue that the services were used for making investment in India and therefore cannot be treated as export, was dismissed. Further in the matter of back office support operations, relying upon the decision of Commissioner of Central Excise, Hyderabad vs. Deloitte Tax Services India Pvt. Ltd [2008 (11) STR 266 (Tri.-Bang)] the Tribunal held that since the client was situated outside India, it is an export of service.

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[2015-TIOL-1719-CESTAT-DEL] Commissioner of Service Tax-Delhi vs. Ishida India Pvt. Ltd.

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Effective use and enjoyment of service of procuring purchase orders is abroad and therefore the services are exported.

Facts:
The Respondent, a wholly owned subsidiary of a foreign company is engaged in procuring purchase orders from Indian customers on behalf of the foreign company. Goods are supplied in India and they receive “indent commission” in convertible foreign exchange at a predetermined percentage. A refund claim was filed for the service tax wrongly paid by them on the export of services. Adjudicating authority rejected the claim stating that the condition of export of services was not satisfied. Commissioner (Appeals) allowed the refund, therefore revenue is in Appeal.

Held:
The Tribunal noted that if the respondents did not canvass the purchase orders and sent it to the foreign company, there would be no supply of goods or use of goods in India at all. Therefore the service is definitely utilized/benefited by the foreign company. Merely because the goods supplied were ultimately used in India, cannot be a reason to hold that there was no export of the output service. Accordingly, it was held that the effective use and enjoyment of the service is by the foreign company and therefore refund is allowable as the services were exported.

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[2015-TIOL-1602-CESTAT-MUM] Commissioner of Central Excise, Nagpur vs. M/s Shri K. M. Sharma

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Charges levied on the basis of activities and material involved and not on the basis of number/nature or scope of manpower cannot fall under the category of “Manpower Supply and Recruitment Services”.

Facts:
Respondents undertook work as incidental to fabrication of Iron Steel Products supplied by the manufacturer. Department alleged that they provided services of Supply of Manpower. It was argued that the consideration is received and charged on per metric ton of output and is done on a job basis which was supported by the invoices. The First Appellate authority cancelled the demand, against which revenue is in appeal.

Held:
The Tribunal concurred with the views of the first appellate authority who noted that the charges do not have any nexus with the number/nature/scope of manpower supply and charges pertained to various types of activities and quantity of material involved. Further, the activity was with respect to goods which were still on the production line of the manufacturer, therefore the respondents were entitled to the benefit of exemption notification no. 8/2005-ST which exempts the taxable service of production of goods on behalf of the client. Relying on the decision of M/s. Ritish Enterprises vs. CCE, Bangalore [2010 (18) STR 17 (Tri.-Bang) the order of the first appellate authority was confirmed. A similar decision was also rendered in the case of Commissioner of Central Excise, Nagpur vs. Shri GM Mate, Shri Babulal Ladse [2015-TIOL-1663- CESTAT-MUM].

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[2015-TIOL-1593-CESTAT-DEL] M/s. Ambedkar Institute of Hotel Management vs. Commissioner of Central Excise and Service Tax, Chandigarh.

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Meals prepared at one’s own premises and simply supplied at pre-determined rates without getting involved in serving of meals in any manner would not be covered by the definition of outdoor caterer.

Facts:
Appellant is an institute providing mid-day meal to the schools under the Government Scheme. The institute prepares food as per the fixed menu and supplies to the schools and is neither supplying any crockery etc. nor is involved in serving the meal at the school. The department sought to levy service tax under outdoor catering service. Besides, the space in the institute was also made available to various persons for their functions. The Commissioner confirmed both the demands under outdoor catering and mandap keeper services respectively. Aggrieved by the same, the present appeal is filed.

Held:
The Tribunal noted that the Appellant was neither preparing the meals at the school nor serving them and the meals were only supplied at pre-determined rates. Accordingly, it was held that the activity was not a taxable service of outdoor catering. Though the Appellant was a ‘caterer’ within the meaning of section 65(24) of the Finance Act, 1994, the Tribunal stated that the service covered u/s 65(105)(zzt) of the Finance Act, 1994 was that of an “outdoor caterer” and not by a ‘caterer’. Further in respect of the second matter, it was confirmed that mandap keeper service was provided by them, however since the turnover was below the threshold limit, they were exempted from the service tax.

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[2015-TIOL-1453-CESTAT-MUM] Larsen and Toubro Ltd vs. Commissioner of Service Tax, Mumbai.

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A works contract can be vivisected prior to 01/06/2007 and be subjected to levy of service tax under “erection, installation and commissioning service”. Also, longer period of limitation invokable.

Facts
The Appellant had entered into six lumpsum turnkey contracts prior to 01/06/2007 each having three parts and a consideration for each of the parts viz. designing, procurement of various capital goods and thereafter installation of such goods was ascertainable. They were discharging service tax in respect of designing under “consulting engineer service”. No service tax was discharged in respect of the third part considering it to be an indivisible works contract comprising of both goods and services on the basis of the decision of the Tribunal in the case of Daelim Industrial Co. Ltd vs. CCE, Vadodara [2006(3) STR 124(T)]. Member (Judicial) and member (technical) had divergent views both in respect of taxability as well as invocation of extended period and therefore the matter was placed before the third member.

Held:
The third member distinguished the decision in the case of Daelim Industrial Co. Ltd (supra) by stating that the said decision has not taken into account the 46th constitutional amendment which inserted clause (29A) in Article 366 of the constitution mandating that the indivisible contracts could be split up and a part of it could be subject to tax. The member relying on the decision of the five member Bench reported in 2015-TIOL-527-CESTAT-DEL-LB held that works contract can be vivisected prior to 01/06/2007 and the service portion can be subjected to levy of service tax. In respect of extended period, the member noted that the same is a question of facts and law and stated that if the Appellant had a bonafide belief, they would have reflected the transaction as an exempted service in the service tax return and by not doing so, they had suppressed the material fact from the department. Further, it was also stated that though there are divergent views of various forums, a large number of them are based on Daelim Industrial Co. Ltd. (supra) which is irrelevant to the issue and the remaining are expressed after 2007. Thus, when tax was rightfully discharged in respect of designing activities it ought to have been discharged on the installation activity being the dominant service in these contracts and accordingly extended period invokable.

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[2015-TIOL-2225-HC-MAN-ST] Suprasesh General Insurance Services & Brokers Pvt. Ltd. vs. The Commissioner of Service Tax & CESTAT, Chennai

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Services of a re-insurance broker involves more than mere receiving and transmitting the premium to the re-insurer.

Facts:
The Appellant, an Insurance broker as well as a reinsurance broker paid service tax under “Insurance Auxiliary service” in respect of broking activity. However no service tax was paid for brokerage retained from the net premium remitted to the overseas re-insurer on evidencing it as export of service. The revenue demanded service tax on the said brokerage retained. The demand was confirmed holding that the services were rendered to the Indian insurance company by way of identifying re-insurer rendering consultancy and risk management services for re-insurance negotiation on behalf of the insurance company. The only service rendered to the overseas reinsurer is remittance of premia for reinsurance for which the commission is retained. So the service is rendered and consumed in India and not exported. It was further held that retention of brokerage cannot be termed as payment received in convertible foreign exchange. The Tribunal restricting the demand to the normal period of limitation confirmed the demand. Accordingly, the present appeal is filed.

Held:
The High Court relying on the decision of JB Boda and Co. Pvt. Ltd. vs. Central Board of Direct Taxes [1997- 223-ITR-271 (SC)] held that the Appellant is not merely receiving and transmitting the amounts to the overseas insurer but much more is done by the Insurance broker even as per the IRDA (Insurance Brokers) Regulations. He is required to furnish all the details about the risk involved, the premium payable, the period of coverage and the portion of the risk which is sought to be reinsured and thus serves the overseas insurer in the course of business. Accordingly it was held that the services are exported. Further, the Court noted the CBEC circular No. 56/5/2003 dated 25/04/2003 which clarified that service tax is a destination based consumption tax and is not applicable to export of service. Further, even under the Export of Service Rules, 2005, the proviso of receipt in foreign exchange applies only in respect of a recipient having a commercial or a business establishment in India and thus does not apply to the present case. Accordingly, it was held that the question of receiving the payment in convertible foreign exchange does not arise and thus the appeal is allowed.

[Note: Readers may note that sub-rule 3(2) of the Export of Service Rules, 2005 inserted with effect from 19/04/2006 provides that any service will be treated as export only if the amount is received in convertible foreign exchange. Further with effect from 01/07/2012, Rule 6A of the Service Tax Rules mandates receipt in foreign exchange to qualify as an export of service. However, the Apex Court in the case of JB Boda (supra) has held that retention of the amount would qualify as a receipt in foreign exchange to avoid the unnecessary two-way traffic which is an empty formality and a meaningless ritual. Accordingly post the amendment in the Rules, the retention of amounts from the payments to be remitted in foreign currency should qualify as a receipt in foreign exchange.]

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Software – sale vis-a-vis service

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Introduction
The menace of double taxation (i.e. VAT and Service Tax both on the same transaction) is increasing day by day. Both the authorities are trying to extract maximum out of the confused and unsettled legal position about attraction of VAT and Service Tax on certain type of transactions.

In relation to software, we come across sale/purchase transactions wherein both Service Tax and VAT are being levied. This is on account of uncertainty of legal position. There are different judgments from various Tribunals and High Courts.

Copyright in software
In relation to software, the sale/purchase transactions can take place on the premises that there is sale/purchase of copyright in the concerned software. However, whether there is sale/purchase of copyright either outright or by way of transfer of right to use goods is to be decided on the facts of each case. There can be certain guidelines based on decided cases.

Reference can be made to the judgment of the Hon’ble Karnataka High Court in the case of Sasken Communication Technologies Ltd. (55 VST 89) Karnataka.

In this judgment, it was observed that if the copyright is in regard to software developed for customer, firstly it belongs to the developer and thereafter if transferred to the customer for a consideration then it will be sale of software. There can be another situation, where the software is developed, wherein copyright from the inception belongs to the customer. In such circumstances, the software so developed belongs to customer only. The developer in such a case is rendering services. In such a situation, VAT is not applicable. Relevant observations of the High Court can be noted as under;

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

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

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

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

Uncertainty prevails
In spite of the above judgments, the disputes are still arising about attraction of both the taxes. Recently, there was a controversy before the Hon’ble Karnataka High Court, where three separate transactions about software were involved. The reference is to the latest judgment of the Hon’ble Karnataka High Court in case of Infosys Ltd. (Writ Petition no. 57023-57070/2013 dated 9.2.2015.

The facts in this case are that the appellant M/s Infosys was having 3 separate transactions. One for sale of ready software like “Finacle”, another transaction was that it could be customised as per requirement of the customer. Both these transactions were considered as sale and VAT on the same was charged.

The third transaction was about implementation of the software supplied to the customer. Appellant was contending that this is a separate transaction for only rendering services and cannot be made liable to VAT . However, the sales tax authorities considered such implementation part also as part of the total transaction of supply and customisation. So, VAT was levied on the full implementation charges also.

High Court’s observations
So far as implementation part is concerned, the Hon’ble High Court did not agree with the understanding of the authorities. The relevant observations of the Hon’ble High Court are as under;
“52. The understanding of the authorities is that the assessee has developed a software viz., ‘Finacle software’ which is a basic software relating to banking activities and is the copyright holder for the same. Whenever customer namely a bank approaches the assessee to develop software for their business activities, the assessee will take steps to develop the said software as per the requirement of the customers. In this activity, the assessee will make changes to the Finacle software held by it by customising the same to the requirement of the customers and will deliver the improved/modified version of the Finacle software to them. Here, what is transferred is the software with all modifications as per the request and the proposal made by the customers. This implementation process is nothing but value addition to the Finacle software, but the dealer while declaring the turnover, splits the said transaction into two parts namely, sale part and service part. This act of the dealer in splitting the contract as one for sale and the other for implementation of finacle software, thereby claiming exemption on the latter part is not correct because in almost all the instances, what is supplied by the assessee to the customers is the software as per the requirements and the amount received towards the whole process of customisation has to be considered as the amount received for the supply of customised Finacle software.

53.    From the aforesaid findings, it is clear that the Assessing Authority is of the view that the customisation is equivalent to implementation. During customisation when scripting or code writing is done in order to make the standard or package software useful to the client, the consideration paid for customisation constitutes the consideration for transfer of goods. The said aspect is not disputed by the assessee.

54.    What the assessee contends is that the assessee has the packaged software ‘Finacle’ a banking solution. If the said software cannot be used as such by the banks, then they make known their requirements to be incorporated in the said packaged software either by way of modifications, additions and so as to make it customer specific, which is called as customisation. What is sold by the assessee to the bank is the customised software and not the packaged software. It is clear from the invoice that for the consideration received for this customised software, the assessee has paid VAT because the assessee has copyright not only in the packaged software but also in the customised software and what is transferred to the bank is only the right to use the said software which is a deemed sale. After this customised software is installed in the premises of the bank, before bank starts using it, the process of integration with other systems has to be carried out. It is for that purpose a separate contract called service contract is entered into. The terms of the said contract as set out above involves only rendering service and rendering training to the employees of the bank, so that the installed software starts functioning. The terms of the agreement makes it clear that it is not obligatory for the bank/customer to have the services rendered only by the assessee as a part of contract of sale or a condition of sale. It is open to the customers to have the services rendered by any other competent agency. Therefore, the Assessing Authority has misconstrued this implementation to that of customisation of the software and erred in holding that the customisation involves transfer of goods and the assessee cannot avoid payment of VAT by describing the same as implementation.”

Thus, the Hon’ble High Court has appreciated that the transactions were independent. Further, where there is no transfer of copy right and only services are involved, no VAT can be levied.

Conclusion

The issue about dual taxation of VAT and Service Tax is a burning issue. The customers are suffering due to double levy by the vendors. The clarity of law is therefore very much required. We hope that with the help of above judgments both the concepts i.e. about independent nature of transactions and nature of transactions involving sale/purchase of software will become clear. Therefore, there will be some certainty and correct tax will be levied. We hope that authorities from both the departments will follow the judgment in the spirit of Law so as to overcome the problem of double taxation.

SOME BURNING ISSUES

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I Utilisation of education cess & secondary higher education cess for payment of excise duty & service tax.

Background
Education Cess (EC) was first introduced through the Finance Bill in 2004 as a surcharge with a purpose to fund basic education. Similarly, Secondary Higher Education Cess (SHEC) was introduced through the Finance Bill, 2007 as a surcharge with a purpose to fund secondary and higher education. In terms of sub-clauses (vi) (via) & (x) & (xa) of Rule 3(1) of the CENVAT Credit Rules, 2004 (CCR 04) a manufacturer of final products (MFP) or provider of output service (OSP) is allowed to avail CENVAT Credit on EC and SHEC. Further Rule 3(7) of CCR 04 provides that EC/SHEC on excisable goods and services can be utilised either towards payment of EC/SHEC on excisable goods or for payment of EC/ SHEC on taxable services. However, in view of specific restrictions provided under CCR 04, EC and SHEC on goods and services cannot be utilised towards payment of basic excise duty (CENVAT ) or service tax

Exemption from EC & SHEC
In a significant move, the EC levied u/s. 91 read with section 93 of the Finance Act, 2004 on excise duty is fully exempted vide Notification No. 14/2015-CE dated 1st March, 2015. Similarly, SHEC leviable u/s. 136 read with section 138 of the Finance Act, 2007 on excise duty is also fully exempted vide Notification no. 15/2015-CE dated 1st March, 2015.

Consequently, section 91 read with section 95 of the Finance (No.2) Act, 2004 and section 136 read with section 140 of the Finance Act, 2007 levying EC and SHEC respectively on taxable services have ceased to have effect from June 01, 2015 in terms of the said Notification No.14/2015- Service tax, dated 19th May, 2015.

Notification allowing utilisation of CENVAT credit on EC and SHEC towards payment of basic excise duty

Consequent upon exemption of EC and SHEC on excise duty, the government issued Notification No. 12/2015 – CE (NT) dated 4th April, 2015 allowing utilisation of CENVAT credit on EC / SHEC towards payment of basic excise duty. The Notification is reproduced below for ready reference:

“2. In the CENVAT Credit Rules, 2004 (hereinafter referred to as the said rules), in rule 3, in sub-rule (7), in clause (b), after the second proviso, the following shall be substituted, namely:- “Provided also that the credit of EC and SHEC paid on inputs or capital goods received in the factory of manufacture of final product on or after the 1st day of March, 2015 can be utilized for payment of the duty of excise leviable under the First Schedule to the Excise Tariff Act:

Provided also that the credit of balance fifty per cent EC and SHEC paid on capital goods received in the factory of manufacture of final product in the financial year 2014-15 can be utilized for payment of the duty of excise specified in the First Schedule to the Excise Tariff Act:

Provided also that the credit of EC and SHEC paid on input services received by the manufacturer of final product on or after the 1st day of March, 2015 can be utilized for payment of the duty of excise specified in the First Schedule to the Excise Tariff Act.” [emphasis supplied]

Issues not addressed in the Notification
Although the above Notification has addressed some issues of the trade & industry, their primary concern remains unaddressed. Even after the amendment of Rule 3(7)(b) of CCR 04 utilisation of EC & SHEC towards payment of basic excise duty is not possible under various scenarios described below:

Unutilized balance of EC & SHEC of inputs, capital goods and input services as on 28th February, 2015.

EC & SHEC paid on inputs & input services received prior to 1st March, 2015 and CENVAT credit availed after 1st March, 2015.

Availment of first 50% credit of EC & SHEC paid on capital goods received prior to 1st March, 2015 and CENVAT credit availed after this date.

EC & SHEC credit availed on inputs and capital goods reversed prior to 1st March, 2015 in terms of Rule 4(5)(a) of CCR 04 and re-credits taken on or after this date.

EC & SHEC credit on input services reversed prior to March 01, 2015 and re-credit taken in terms of Rule 4(7) of CCR 04 on and after 1st March, 2015.

Re-credit taken of EC & SHEC on or after 1st March, 2015 in pursuance of any order of adjudicating authorities.

No Notification issued so far to allow utilisation of CENVAT credit on EC & SHEC for payment of service tax.

a) Effective 1st June 2015, the levy of EC & SHEC on services has been done away with. Although CBEC has issued Notification providing mechanism for utilisation of EC and SHEC for payment of excise duty on clearance of final products, corresponding provision for service tax on taxable output services is not provided for. Thus, differential treatment is provided to OSP compared to MFP, without any sound reasoning.

b) For the service providers, there could be a scenario wherein a service provider has availed credit on EC & SHEC on goods and services but not started providing any output services before 1st June 2015. Under such circumstances, there will be huge unutilised credit balance of EC & SHEC in the CENVAT credit account which cannot be utilised by such service provider unless the government allows such unutilised credit by issuing necessary clarification/amendment in CCR 04.

c) Since CCR 04 treats MFP & OSP at par for the purpose of utilisation of CENVAT credit, differential treatment will defeat the legislative intent of the government, to provide CENVAT credit benefit to the assessees across goods and services. Hence, an equal benefit needs to be extended also to service providers.

Suggestion
The Union Budget for 2015-16 has focused at making India an easier place to do business and has unveiled a number of facilitation measures to advance the said cause. In line with the said vision, the government should come out with an amendment in CCR 04 to mitigate the hardships faced by the trade & industry, so as to address primary concerns of the MFP & OSP. It is suggested that:

The government should amend sub Rule 7 of Rule 3 of CCR 04, by deleting the restriction imposed with reference to utilisation of CENVAT credit on EC & SHEC.

Further, the proviso recently incorporated under Rule 3(7) of CCR 04 vide Notification No. 12/2015 – CE (NT) dated 30th April, 2015 also requires to be deleted being restrictive in nature for the reasons explained above as it is creating hardship to industry due to large amount of CENVAT credit relating to EC & SHEC remaining unutilised.

II Services provided by agents/distributors of mutual fund or asset management companies.

Background
Prior to 1st April 2015, the following services were exempted from service tax under Mega Exemption Notification No. 25/2012 – ST dated 20th June, 2013 (as amended) :

Entry No. 29 – Services in relation to Mutual Fund or Asset Management Company by

i) Mutual Fund agent to a Mutual Fund or Assets Management Company

ii) Distributor to a Mutual Fund or Asset Management Company. With effect from 1st April, 2015, these exemptions have been withdrawn and consequent thereto an amendment is made vide Notification No. 7/2015 dated 1st March, 2015 in Reverse Charge Mechanism (RCM) contained in Notification No. 30/2012 – ST dated 20th June, 2012 (as amended), whereby 100% service tax on services provided by a MF Agent / Distributor to a MF/AMC is required to be paid by the recipient of service (viz. MF / AMC) as it used to be under the law prevailing till 30th June, 2012 in case of services of mutual fund agents or distributors.

Issue:

  •     Post 1st April, 2015, it is understood that MF/AMC discharge their service tax obligations and make payment of commission to agents or distributors of MF/ AMC after deducting the service tax paid by them under RCM. However, it is a well-known fact that the chain of MF/AMC intermediaries is not limited to merely agents or distributors but often goes up to three to four layers of sub–agents or sub–distributors.

In the scenario, relevant provision of Rule 2(p) of CCR 04 defining “output service” is examined below :

“Output service” means any service provided by a provider of service located in the taxable territory but shall not include a service –

………..

1    ……..

2    Where the whole of service tax is liable to be paid by the recipient of service”.

  •     Due to the above specific provision, agents and distributors of MF or AMC cannot avail CENVAT credit of service tax that may be paid by sub-agents /distributors in the chain and hence are unable to reimburse service tax to them inasmuch as they have already suffered tax through reduced commission (net of service tax) paid to them by Mutual Funds and/or AMCs.

This is resulting in a severe burden on the large section of MF and AMC intermediaries whereby there is a service tax incidence of 14% at every stage in the chain rendering the business model almost unviable The given scenario also is against the principle of value addition. This needs to be urgently addressed inasmuch as it could result in large number of MF/AMC intermediaries going out of business.

Suggestion

Rule 2(p) of CCR 04 defining output service needs to be amended whereby sub-clause (2) reproduced above is deleted. Alternatively, RCM provisions made applicable to services provided by agents/distributors of MF/AMC be done away with and instead service providers should be made liable to discharge service tax obligations so as to ensure that CENVAT chain is not broken. Another alternative is to provide exemption to sub-distributors/sub-agents under entry 29(a) of Mega Notification No. 25/2012-ST along with the exemption provided to sub-brokers of stockbrokers as sub-brokers of stock brokers and those of mutual funds are at par on this issue.

III    Commission received from overseas principals in convertible foreign exchange by business intermediaries in India

Background

  •     Business establishments in the country includes business intermediaries/agents who act as essential support link to the smooth running of small and medium businesses by ensuring stable supplies and in particular keeping overseas suppliers’ unbroken engagement in Indian markets at reasonable prices through regular marketing and other support services.In addition to providing employment in a sizeable measure, the said business intermediaries earn valuable foreign exchange for the country.

  •     Some recent amendment in service tax law has adversely impacted stated business intermediaries receiving commission from overseas principals in convertible foreign exchange. For the period prior to 1st July, 2012, commission received in convertible foreign exchange for services provided from India by intermediaries/agents (for goods and services) to overseas principals was considered as “exported services” Hence, the said commission was exempted from payment of service tax. However, post 1st July, 2012 a new concept of ‘Intermediaries’ is introduced in Place of Provision of Services Rules, 2012 (POP Rules), whereby intermediaries (for services) providing services from India to overseas principals were made liable to pay service tax despite the fact that commission is received by the said intermediaries in convertible foreign exchange in India.

  •     Further, vide Notification No.14/2014 dated 11th July, 2014 an amendment was made in Rule 9 of POP Rules whereby, even intermediaries/agents for goods have been made liable for service tax with effect from 1st October, 2014, despite the fact that they receive commission from overseas principals in convertible foreign exchange in India.

Issue:

  •     The principal concern of trade & industry is that the stated policy of the government is, “we need to export our goods & services and not our taxes”. Hence, levying service tax on commission received by intermediaries in convertible foreign exchange in India from overseas principals is contrary to this policy and also contrary to taxation practice prevalent in VAT/ GST systems worldwide.

  •     The service tax amendments made with effect from 1st July, 2012 and 1st October, 2014 has resulted in an unprecedented scenario, whereby an intermediary receiving commission in convertible foreign exchange in India is taxed whereas an intermediary based outside India to whom commission is paid from India (other than for exports) in convertible foreign exchange would not be liable for service tax under reverse charge mechanism.

  •    It is impossible for the business intermediaries to pass on service tax of 14% to the overseas suppliers, unlike other service providers. Hence, this has resulted in a huge cost burden for the business intermediaries in India. It is apprehended by the trade & industry that the total tax incidence (Central & States) under GST regime could be as high as 27% based on report presented by a Sub-Committee to the Empowered Committee of State Finance Ministers. This would be in addition to the peak income tax of 33%(+). The same would have a cumulative impact of rendering the business of intermediaries in India commercially unviable. There is an imminent prospect of thousands of small & medium sized intermediaries existing across the country going out of business resulting in loss of livelihood and creating unemployment as well.

Suggestion

In order to ensure that there is consistency vis-a-vis stated policy of the government for the exports and also adherence to taxation practices followed worldwide with an objective of keeping costs of exports minimal to achieve global competitiveness, due encouragement is required to be provided to businesses carried out by thousands of self-employed individuals or small and medium enterprises and earning foreign exchange. In order that their businesses are not rendered unviable, the following is suggested:

Appropriate amendment be carried out in Rule 9 of POP Rules, whereby concept of ‘Intermediary’ is done away with, in cases where recipient of service is located outside India and commission is received in convertible foreign exchange by Intermediaries (for goods & services) in India. Alternatively, Rule 9 of POP Rules be amended with immediate effect, to restore exemption hitherto available to commission received by intermediaries for goods in India from overseas principals in convertible foreign exchange. If the objective of the government was to provide relief to exporters of goods paying commission to overseas intermediaries, the same can be extended by granting exemption in the same manner as provided prior to 01/07/2012.

Welcome GST – Part II VA T (GST) in Australia & New Zealand

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Preface
In continuation of our discussion on evolution of VAT and its journey to India, while Indian GST is still to be legislated, let’s try to understand in brief the practices being followed in some of the leading countries the world over.

VAT (GST) in Australia

Introduction
The Federal Government of Australia introduced the system of Goods and Services Tax (GST), throughout the country, with effect from 1st July 2000. GST has replaced the age old system of Wholesale Sales Tax, (which was prevalent in Australia) and many other taxes, duties and levies such as banking taxes, stamp duties etc., (which were being levied by various States and Territorial Governments).

Threshold
Business Enterprises : T urnover of GST supplies Australian Dollar (A$) 75,000 Non-profit
Non-profit Organisations : Turnover of GST supplies Australian Dollar (A$)1,50,000
Provider of Taxi Travel : Nil

Business Enterprises/charitable organisation having annual turnover below the threshold may opt for voluntary registration.

Business Enterprises are defined as follows:
An enterprise includes a business. It also includes other commercial activities but does not include:

• Private recreational pursuits and hobbies,
• Activities carried on as an employee, labour-hire worker, director or office holder,
• Activities carried on by individuals (other than trustees of charitable funds) or partnerships (in which all or most of the partners are individuals) without a reasonable expectation of profit. It however includes the activities of entities such as charities, deductible gift recipients, religious and government organisations, and certain non-profit organisations.

The term ‘sales’ (supplies) includes: Sale of goods or services, leasing of premises, hiring of equipments, providing advice, exporting goods, etc. However, a sale (supply) will fall in one of these three categories:

1. Taxable Sale
2. Input Taxed Sale
3. GST Free Sale

Registration:
There is very simple procedure for registration. Once a business enterprise or an organisation is liable to register on the basis of crossing the threshold, it needs to apply for registration [to obtain Australian Business Number (ABN)], within 21 days, to the Australian Tax Office (ATO) either online via the Business Portal External Link, or by phone (by calling on a given number) or through a registered tax agent or BAS agent. On satisfactory submission of necessary details, the registering authority will notify the ABN to the applicant.

Similarly, a business enterprise or an organisation may apply for voluntary registration any time as it may desire.

Coverage
GST is levied on all taxable sale/supply of goods, properties and services. It is to be paid by a taxable person, who sells/supplies such goods, properties and/or services for a consideration.

The consideration may be monetary or otherwise. The non-monetary considerations may be such as barter transactions or payment in the form of refraining from doing something, etc.

Certain kind of transactions in land and buildings are covered under taxable sale/services. The term ‘property’ includes; an interest or right over land, a personal right to call for or be granted any interest in or right over land, and a licence to occupy land or any other contractual right exercisable over or in relation to land. Sale of newly constructed premises (whether commercial or residential) are included in the category of ‘taxable sales’.

Exemptions (Tax free sales)
1. Exports
2. GST free products and services
3. Sale of a business as a going concern

Exports:
Export of goods and services from Australia to any foreign destination are generally tax free (zero rated). Thus, no tax is levied on exports but full input tax credit is available to the exporters.

It may be noted that exported goods are generally tax free (zero rated) if they are exported from Australia within 60 days from one of the following, whichever occurs earlier:

(1) The supplier receives any payment for the goods,
(2)  The supplier issues an invoice for the goods so exported

And in case of services – broadly the supply of service/s are GST free (zero rated) if the recipient of service is outside Australia.

There is also a Tourist Refund Scheme whereby a receipt for goods with a combined total over A$ 300 is eligible for a refund of any GST paid upon exiting the country with refunds claimed at a TRS (Tourist Refund Scheme) counter at the airport. The advantage of this arrangement is that goods purchased 60 days prior to departure may be freely used within Australia prior to departure as long as they are carried in hand luggage and presented when making a refund claim, or shown to customs officials before being checked in as baggage.

GST free products and services
Certain goods and services are tax free (zero rated). The sale/supply of such goods and services are not liable for GST but full input tax credit is available to the seller/supplier. The list of GST free products and services includes:

Most of the items of food and beverages, some medical and health care services, specified medicines, medical aids & equipments, educational courses, course material, child care services, religious services, some of the charitable activities, supply of accommodation and meals to residents of retirement villages, cars for disabled people, water sewerage & drainage services, precious metals (such as Gold, Silver, etc.), sale of goods through duty free shops, farm land, grant of land by Government, international mail, specified tele-communication services, etc.

Sale of a business as a going concern
The Sale of a business as a going concern is GST free (zero rated) if all of the following conditions are satisfied:

(1) Everything necessary for the business’s continued operation is supplied to the buyer,
(2) The seller carries on the business until the day it is sold, that is, until settlement,
(3) The buyer is registered or required to be registered for GST, and
(4) Before the sale, the buyer and seller agree in writing that the sale is as a ‘going concern’.

Input Taxed Sales
Certain types of transactions of sale/supply of goods and/ or services are categorised as Input Taxed Sale. No tax (GST) is levied on the sale/supply of such goods and/or services as the case may be, but such transactions are not eligible for input tax credit, These include; banking and financial services, and supply of residential premises by way of rent or sale.

Financial sales (supplies) are defined under the GST Regulation. Examples include: Lending or borrowing money, buying or selling shares or other securities, creating, transferring, assigning or receiving an interest in, or a right under a super fund.

Charitable institutions (non-profit organisations) are permitted to have input taxed sales of food by school tuck shops and canteens, etc.

Taxable Sale
Sale of goods and services, that must have GST included in their price, are referred to as ‘taxable sales’. The term ‘taxable sale’ does not include sale/supplies which are described as (1) GST Free Sales and (2) Input Taxed Sales. Thus sale/supply of all goods and services (other than GST Free and Input Taxed Sale) are taxable sale, if such sale/supplies are made by a taxable person (i.e. a business enterprise or an organisation registered or liable for registration), and such sales/supplies are made;
1. for a consideration,
2. in the course of furtherance of business (enterprise), and
3. the sale is connected with Australia

It may be noted that:

1.    Consideration may be monetary or non-monetary such as barter or refraining from doing something.
2.    Only those goods and services are considered as taxable sales which are sold/supplied as part of conducting business. It will also include sale of business assets such as machinery, equipments, vehicles, etc. And it also includes things done during the course of setting up or winding down the business.

3.    A sale of goods is connected with Australia if the goods are any of followings:-
(i)    Delivered or made available to the purchaser in Australia
(ii)    Removed from Australia (however exports of goods and services, as described above, are generally tax free)

(iii)    Brought to Australia – provided the seller either imports the goods or installs or assembles the goods in Australia.

4.    A sale of property is connected with Australia if the property is situated in Australia.
5.    A sale/supply of something other than goods and property is connected with Australia if any of the following applies:

(i)    The thing is done in Australia

(ii)    The seller makes the sale/supply of thing through a business which is carried on in Australia
(iii)    The sale/supply is a right or option to purchase something that would be connected with Australia.

Rate of  Tax

Australia has adopted the single rate of GST @ 10% on sale/supply of all taxable goods, properties and services.

Input Tax Credit (ITC)

A registered tax payer as well as a required to register tax payer is entitled to claim input tax credit of GST paid on goods and services acquired for the purposes of its business (except in case of input taxed sales).

There are provisions to work out input tax credit in case of mixed sale such as ‘taxable sale’ and ‘input taxed sale’, and, in case of mixed purchases (acquisitions) i.e. purchases for the purposes of business and for personal use.

The only document required, for the purposes of claiming Input Tax Credit, is the possession of ‘Tax Invoice’ issued by the supplier. Input tax credit in respect of any purchases (acquisitions) of the value exceeding A$ 82.50 can be claimed only on the basis of ‘tax invoice’ issued by the seller/supplier. However, ITC on small purchases having value up to A$ 82.50 can be claimed even without a ‘tax invoice’ (i.e. on the basis of records maintained by the purchaser).

There is a four years time limit to claim input tax credit.

Tax Invoice

It is necessary for a ‘tax payer’ (seller/suppler of taxable goods/services) to issue ‘tax invoice’ to its customer for sales/supplies exceeding A$ 82.5 (including GST). The time limit for issuing tax invoice is 28 days from the date of supply. A purchaser can claim input tax credit only after receiving ‘tax invoice’ from its supplier. If the supplier fails to issue a tax invoice within the prescribed period of 28 days, the purchaser can seek permission from the concerned GST authorities for claiming input tax credit on such purchases (acquisitions).

For sales/supplies of up to A$ 82.50, the supplier can either issue a ‘tax invoice’ or ‘invoice’ or ‘cash docket’ or a ‘receipt’. The purchaser can claim input tax credit on the basis of such ‘invoice’ or ‘cash docket’ or a ‘receipt’, etc., as the case may be.

In absence of any such document (from the supplier), the purchaser still can claim input tax credit of such small purchases on the basis of his own books/diary having full particulars of such purchases such as description of purchases, quantity, date, price paid and the ABN of the supplier. There is also a provision for Recipient Created Tax Invoice.

Essential Ingredients of a Tax Invoice

Tax invoices for taxable sales of less than A$1,000 must include enough information to clearly determine the following seven details:

1.    that the document is intended to be a tax invoice

2.    the seller’s identity

3.    the seller’s Australian business number (ABN)

4.    the date of issuing tax invoice

5.    a brief description of the items sold, including the quantity (if applicable) and the price
6.    the GST amount (if any) payable – this can be shown separately or, if the GST amount is exactly one-eleventh of the total price, as a statement such as ‘Total price includes GST’

7.    the extent to which each sale on the invoice is a taxable sale (that is, the extent to which each sale includes GST).
In addition to above, a ‘tax invoice’ of A$ 1000 and above must contain ABN of the purchaser, Interstate sales/ supplies

All taxable sales/supplies within Australia are liable to single rate GST (whether sold within a particular state or inter-state).

It may be noted that Australia is having federal structure. There is a Central Parliament called ‘common wealth parliament’, six states and two major territories, each having a separate parliament. The states are sovereign entities, subject to certain powers of the Commonwealth as defined by the Constitution. Australian Constitution governs the rights of Federal Legislative Powers and States Legislative Powers.

As far as GST is concerned, it is collected and administered by the Federal Parliament and the revenue is distributed to the States under a set system.

Sales/supplies within the Group Enterprises There are provisions whereby related entities may form a single group for GST purposes.

An entity may separately register a branch for GST purposes if this suits its management and accounting structure. Two or more related entities may form a GST group if they satisfy certain membership requirements.

GST groups are treated as a single entity. Generally, transactions between group members are ignored for GST purposes. So, there is no tax on inter-group supplies and so no input tax credit to the receiver.

One entity, known as the representative member, manages the group’s GST affairs. The representative member is responsible for the GST payable and can claim the GST credits on transactions undertaken by group members (except transactions between group members).

The representative member is the only group member who must complete the GST component of an activity statement. In doing this, the representative member will effectively be accounting for the group’s total GST liability. However, if an entity opts to register separately a branch for GST purposes, the branch operates as a distinct entity for reporting purposes, accounting for GST separately from its parent entity. Thus, unlike GST groups, transactions between the branch and the parent entity will be taxable and GST credits can be claimed accordingly.

Filing of Returns & Payment of Taxes

A ‘Taxable Person’ is required to submit Business Activity Statement (BAS) generally quarterly and the taxes are required to be paid accordingly within 28 days from the end of reporting period. But, certain dealers (tax payers) have to submit their statement on monthly basis, within 21 day from the end of month, such as those dealers whose annual GST turnover is A$ 20 million or more. Small dealers are permitted to submit BAS annually.

There are also provisions whereby a dealer (having annual turnover of less than A$ 20 million) can be permitted to make payment of GST quarterly and the BAS is submitted annually. There is also an easy installment payment scheme for small dealers having turnover up to A$ 2 million. The Financial Year in Australia is from 1st July to 30th June.

For payment of taxes, there are various options such as internet banking, credit/debit card, direct transfers, through cheque/money orders, and, also through cash payment at post offices (up to A$ 3,000). The monthly/quarterly or annual BAS to be submitted mainly electronically either through ATO’s business portal or directly from business software enabled for Standard Business Reporting (SBR) or through myGov account linked to Australian Tax Office (ATO). However, there is also a facility to submit paper return by post (in specific circumstances). And, if there is no activity to report during the period i.e. if it is a ‘NIL turnover return’, it can be just reported on phone to the ATO.

There are prescribed provisions regarding accounting for GST purposes for different classes of tax payer such as accounting on cash basis, normal mercantile basis and there are also separate provisions regarding sale of goods made under ‘lay by sale agreement’ (i.e. goods identified by the purchaser, initial payment made, the balance payable in installments and the delivery of goods on receipt of final payment).

There are also provisions for simplified accounting methods to make calculating GST easier for the retailers such as bakeries, milk bars, convenience stores, etc.

Assessment

Australia has adopted Self Assessment System since 1st July 2012. The periodic Activity Statement submitted by the tax payer is treated as notice (order) of assessment.

Refunds

Refunds, if any, due to the tax payer as per periodic Business Activity Statement submitted by the tax payer, are granted within prescribed time limit of 14 days from the date of submitting return, and, the same is directly sent to the nominated bank account of the tax payer (unless withheld for any further enquiry or investigation or for adjusting against earlier dues). No separate application is required for claiming refund.

VAT (GST) in New Zealand

GST in New Zealand was introduced much earlier i.e. with effect from 1st October 1986. Its introduction represented a major change in New Zealand’s taxation policy as until this point almost all revenue had been raised via direct taxes. It is administered by the Inland Revenue Department of Government of New Zealand.

Most of the provisions under New Zealand GST Law are similar to those as discussed in Australian GST, with a few exceptions. One major notable difference is the rate of GST. It was 10% at the time of introduction in the year 1986. But, since then it has undergone two changes; first in the year 1989, it was raised to 12.5% (on 1st July 1989) and thereafter in 2010 it was raised to 15%. At present, it is 15%, effective from 1st October 2010.

However, there is no departure from the concept of single rate GST. It is the same rate applicable to all taxable goods and services. Overall, the broad scheme of taxation is the same in Australia and New Zealand.

Some minor differences in procedures may be such as the registration threshold is 60,000 New Zealand Dollars. Application for registration is to be made within 21 days from the date of liability, etc.

A registered tax payer is liable to pay GST (under the same value added tax system i.e. Output Tax – Input tax credit), either on monthly, two monthly or six monthly basis, within 28 days from the end of reporting period. Periodic returns can be filed either online or in paper form Taxes to be paid generally online but cheque payment facility is available to small tax payers. The refunds are granted within 15 working days from the date of submission of periodic return in which refund is claimed by the tax payer.

(To be continued – GST in Singapore, Malaysia, EU countries.)

[2015] 61 taxmann.com 238 (Bombay) – Anurag Kashyap vs. UOI.

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High Court refused to interfere with adjudication proceeding which covered the period for which application was filed by the Petitioner under VCES. Held that, Petitioner can take all the arguments and contentions possible in law before adjudicating authority, including inviting his attention to relevant paragraphs in the said scheme.

Facts:
The petitioner filed declaration under Service Tax Voluntary Compliance Scheme (VCES) for the period July 2012 to December 2012. While the due date for filing of application was 31/12/2013, in August 2013, department issued order for attaching bank accounts of the petitioner and recovered certain amount from the petitioner under recovery proceedings u/s. 87(b). The petitioner filed a letter with the department for adjusting the amount so recovered against 50% of the amount declared under VCES. However no certificate of discharge (VCES-3) was issued to the petitioner. Subsequently, show cause notice was issued by the department in June 2014 for the period July 2012 to August 2013. The petitioner expressed apprehension in the course of hearing before the Court that since the proceedings under VCES are not closed by Designated Authority under the Scheme by issuing VCES-3 in terms of section 107(7) of the Scheme, the show cause notice which is issued and required to be adjudicated proceeds on a wrong and incorrect assumption and that adjudication (including for the period covered under VCES), will take place before a distinct adjudicating officer, who is not a designated authority under the Scheme. The petitioner also submitted that in absence of such a declaration as required under the scheme, the adjudicating authority will proceed to recover not only the duty amount but also interest and penalty in respect of period covered under the Scheme. The petitioner also clarified that the object of writ was not to interfere with the ongoing proceeding but prayed for issuing direction to the Designated Authority for issuing necessary VCES-3 in terms of section 107(7) of the Scheme.

Held:
The High Court observed that the basis of determination of service tax demand and the period and the liability declared by the petitioner under the VCES are clearly brought out in the show cause notice. Therefore, the Court disposed of the application expressing a view that the submissions made by the petitioner before the Court can also be made before the adjudicating authority in the course of adjudication and if VCES-3 has not been issued, it would be open for the petitioner to urge that failure on the part of the authority to issue such a declaration should not visit him with any tax demand including of interest and penalty. It further held that merely because the show cause notice is going to be adjudicated by a distinct authority does not mean that the petitioner is prevented from canvassing appropriate pleas and therefore, the petitioner can always raise such pleas as are permissible in law including by inviting the attention of the authority to the Scheme and its clauses or paragraphs and sub-paragraphs.

[Note: Readers may note that the issue whether the period covered under VCES can also be adjudicated by any authority other than Designated Authority under different show cause proceedings is left open by the Hon. Court.]

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[2015] 61 taxmann.com 423 (Madras High Court) – Southern Properties & Promoters vs. CCE.

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High Court refused to interfere with Tribunal’s order directing
pre-deposit in respect of flats constructed by developer for landowner
under a development agreement, adopting the valuation based on price
charged by assessee builder on flats sold to other flat owners – No view
as to appropriate valuation rule is expressed.

Facts:
The
Appellant entered into a joint venture agreement with a land owner for
construction of flats according to which the appellant owned 48 flats
and land owner owned 24 flats as his share equivalent to the land. The
appellant paid service tax only in respect of 48 flats. Department
contended that construction of flats allotted to landowner would also
attract service tax. The adjudicating authority held that the
construction of flats for landowner constitutes a taxable service under
the category of “construction of residential complex” u/s. 65(105)(zzh)
and liable to service tax.

Before the Tribunal, the Appellant
contended that the appellant had not received any consideration in the
form of money in respect of 24 flats handed over to the landowner and
therefore tax should be demanded on the basis of the cost of land.
However, the Tribunal directed pre-deposit relying upon Rule 3 of the
Service Tax (Determination of Value) Rules, 2006, holding that the value
of taxable service should be equivalent to the value of taxable service
rendered in relation to the flats sold to independent persons.
Aggrieved by the said order of predeposit, the Appellant filed appeal
before High Court.

Held:
The High Court observed that
the Appellant has made specific admission before adjudicating authority
that its services would fall under the category of “construction of
residential complex service”’. Even otherwise, a prima facie view was
taken that the nature of the services provided by the appellant is
construction of flat to the land owner and the transfer of land is only
for the purpose of providing such taxable service. It further held that
where there is no monetary consideration in the transaction; then
section 65 of the Finance Act, 1994 provides for various methods for
valuation and it is for the appellant to establish its plea before the
Tribunal as to why the cost of land is to be considered for the purpose
of valuation. The High Court categorically refused to express any view
as to whether the transaction would fall under Rule 2 or Rule 3 of
Valuation Rules and left the matter open for consideration by the
Tribunal. The Appeal was accordingly dismissed without interfering with
the order of Tribunal ordering pre-deposit.

[Note:
Readers may note that in this appeal, it appears that dispute is only
with respect to the adoption of taxable value and not as to whether
allotment of flats by developer to landowner constitutes a taxable
service or not. The issue of taxability of service has not been
considered either by the High Court or by Tribunal in the present case.
For analysis of the Tribunal’s judgment, readers may refer to BCAJ April
2015 issue.]

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CENVAT credit of construction services and lease rental service can be availed against payment of duty or manufacture of final product for period prior to amendment of definition of input service under Rule 2(l).

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34. 2015 (40) STR 41 (P & H) Commissioner of C. Ex. Delhi III vs. Bellsonica Auto Companies India Pvt Ltd

CENVAT credit of construction services and lease rental service can be availed against payment of duty or manufacture of final product for period prior to amendment of definition of input service under Rule 2(l).

Facts

The Respondent had taken land on lease on which it had constructed the factory for manufacturing metal components. Respondent accumulated the credit of service tax paid on lease rent for land as well as on erection, commissioning and installation engineer’s services. The department contended that credit of the said services cannot be availed as the words “directly or indirectly” and “in or in relation to” in the “input service” definition, should be interpreted strictly. It was also contended that the lease rental service has no nexus with manufacturing of metal components. The respondent’s contention is that it is covered under both ‘includes part’ and ‘means part’ of the definition of “input service” as defined under Rule 2(l) of CENVAT Credit Rules, 2004. The said rule specifically includes services in relation to setting up of factory. Further the amended input service definition (effective from April 01, 2011) specifically excluded the service related to construction and therefore prior to the said date, the same was eligible as the amendment was not retrospective in nature.

Held

The High Court held that service used for setting up immovable property is connected with manufacturing activity and therefore the CENVAT credit is allowed.

The adjudicating authority has to follow the order of Larger Bench unless the factual situation of the case calls for different interpretation of law.

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33. 2015 (40) STR 26 (Ker) Muthoot Finance Ltd. vs. Union of India.

The adjudicating authority has to follow the order of Larger Bench unless the factual situation of the case calls for different interpretation of law.

Facts

The Appellant is engaged in providing service on behalf of Western Union, a company having its operation outside India. A similar issue arose earlier, which was settled by Larger Bench of the Tribunal in case of Muthoot Finance Ltd vs. Commissioner of C. Ex, Chandigarh, 2013(29) STR (257) (Tri-Delhi) in Appellant’s favour. It was contended that the department should follow the order of the Tribunal before raising demand against them when the facts of the case were similar. However, no cognisance was taken of the said order and demand was confirmed.

Held

The High Court observed that no distinction on facts is made in the Order-In-Original. Therefore, it is held that the order already passed by the Larger Bench of the Tribunal is binding on adjudicating authority to follow unless the factual situation calls for different interpretation. Accordingly, quashing the demand, the department was directed to consider matter afresh.

Service tax is leviable on all lease rent whether of short tenure or of more than 90 years. The service provided by assesse is not sovereign service and no statutory fees are levied on the same, thus it is a taxable service.

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32. 2015 (40) STR 95 (All.) Greater Noida Industrial Dev. Authority vs. Comm. Of C., C. Ex.

Service tax is leviable on all lease rent whether of short tenure or of more than 90 years. The service provided by assesse is not sovereign service and no statutory fees are levied on the same, thus it is a taxable service.

Facts

The appellant took plots on long term lease for construction of commercial and business premises. The Tribunal held against the Appellant holding that the nature of lease, whether short term or perpetuity, did not make any difference to meaning of expression “leasing of immovable property” and also, the Act did not make any difference between a juristic person and an individual and therefore, the leasing of land was liable for service tax irrespective of the tenure. Aggrieved by the same, the present appeal is filed.

Held

The High Court upheld the Tribunal decision and confirmed that leasing of land for business/commercial purpose was taxable event and such amount charged was leviable under service tax under “leasing/renting of immovable property”.

VAT on Service Tax collected separately

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Under MVAT Act, 2002, the tax is payable on ‘sale price’. The term ‘sale price’ is defined in section 2(25) of the MVAT Act, 2002 as under;

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

Explanation I — The amount of duties levied or leviable on goods under the Central Excise Act, 1944 (1 of 1944) or the Customs Act, 1962 (52 of 1962) or the Bombay Prohibition Act, 1949 (Bom. 25 of 1949), shall be deemed to be part of the sale price of such goods, whether such duties are paid or payable by or on behalf of, the seller or the purchaser or any other person. Explanation IA: Sale price shall not include the amount of service tax levied or leviable under the Finance Act, 1994 and collected separately from the purchaser. (w.e.f.1.4.2015),

Explanation II — Sale price shall not include tax paid or payable to a 16[seller] in respect of such sale.

Explanation III — Sale price shall include the amount received by the seller by way of deposit, whether refundable or not, which has been received whether by way of a separate agreement or not, in connection with or incidental or ancillary to, the said sale of goods;

Thus, the amount received from the buyer is considered as sale price. In addition, the statutory levies like Excise etc. are also deemed to be part of sale price .

What is the amount received from buyer? It has numerous interpretations. In the present controversy, the issue is about Service Tax collected separately, wherever, it is applicable. For example, in case of works contract, there is composite contract for supply of goods and services. Under such circumstances, the dealer may be liable to pay VAT on the supply part and Service Tax on labour portion. On the applicable labour portion, the dealer may collect Service Tax as inclusive in price i.e. without showing Service Tax separately or, on other hand, the dealer may charge Service Tax separately in the invoice.

In case, Service Tax is charged as inclusive (subject to facts of each case) it can be said that there is not much debate about ‘sale price’ and the whole amount of sale price without exclusion of Service Tax will be considered as sale price for levy of VAT .

However, the controversy arises when the Service Tax is collected separately in the invoices.

A possible argument is that the Service Tax is a tax allowed or to be collected from the customers under the provisions of Service Tax and hence it is an amount collected for and on behalf and to be paid to the Central Government. Therefore, it can be argued that it does not form part of the money of the dealer, it is a separate collection.

Recent judgment and amendment

In fact, in case of Sujata Printers (VAT A.No.18 of 2013 dt. 9.3.2015), Hon’ble MSST (Maharashtra Tribunal) has already held that the Service Tax collected separately does not form part of sale price. Further, there is amendment dated 18.4.2015 in the definition of ‘sale price’ by which Service Tax collected separately is excluded from the amount of sale price, shown above by Explanation 1A.

After above judgment and above referred amendment, there is circular from the Commissioner of Sales Tax, bearing no. 6T of 2015 dated 14.5.2015 in which the implications of above judgment and amendment are explained. It is stated in the Circular that the judgment will remain operative from 1.4.2005 till 31.3.2015. From 1.4.2015 the situation will be covered by the amendment. The net effect is that on Service Tax collected separately, no VAT will be applicable.

Controversy regarding Service Tax in case of Composition Schemes

In the above circular, the learned Commissioner of Sales Tax has made distinction between the works contracts. The Commissioner of Sales Tax has stated that the above exclusion of Service Tax collected separately will apply in case where the liability on works contract or other transactions is discharged under regular method like, in case of works contract, if the liability is discharged under rule 58 of MVAT Rules. However, in relation to discharging of tax under composition schemes, it is specifically mentioned that the above exclusion will not apply. In other words, the circular interprets that in case the liability is discharged under composition scheme than even if Service Tax is collected separately, it will be considered as part of contract price and on such whole amount (including Service Tax), the composition will be payable. It appears that the Commissioner of Sales Tax has kept in mind that under composition schemes, the dealer has to forgo its legal claim and has to abide by the terms of the composition scheme. Therefore, the assessing authorities are levying VAT on Service Tax collected separately, where the contractors discharge their tax liability under works contract composition scheme.

Recent judgment of the Hon’ble Tribunal

However, now the legal position has become absolute clear. The issue has been resolved by the Hon’ble Tribunal vide its judgment in case of Technocraft Engineers (VAT SA No.237 of 2014 dt.3.11.2015). In this case, the issue was same. VAT was levied on the Service Tax collected separately on the works contract and the dealer was discharging liability under composition scheme. The Hon’ble Tribunal has referred to arguments from both the sides. There was also earlier judgment in the 0case of Nikhil Comforts (SA No.30 of 2010 dated 31.3.2012) in which a contrary view was taken.

However, in this judgment, the Hon’ble Tribunal has held that no VAT can be levied on Service Tax collected separately, even if the tax is discharged under composition scheme. The reasoning of learned Tribunal is noted as under; “(iii) In the impugned matter, assessment order for the year was passed on 26/12/2012, for the interior designing the appellant had received total amount of Rs.4,35,43,472/- on which 8% composition amount was charged and with interest u/s. 30(2) and 30(3) of the MVAT Act total demand was raised at Rs.27,10,949/- Appellant challenged the said order on the ground of incorrect determination of turnover, levy of tax on service tax and set-off claim and on interest. The First Appellate Authority confirmed the levy of tax on service tax amount saying that, it is part of contract price but he allowed other grounds. Hence, VAT payable amount is changed from Rs.27,10,949/- to Rs.2,24,831/- with part payment made in appeal, the appellant got refund of Rs.1,82,109/- on which no interest u/s. 52 of the MVAT Act was calculated. In total consideration, the service charges amount will become the part of total receipt by the Contractor but service tax amount on service charges will not become part of total receipt, because appellant contractor wants to pay the said amount to the Central Excise Department. Although, the definition of sale price is later on amended with effect from 01/04/2015, and the separate Explanation IA is added clarifying that, service tax levied and collected separately shall not be included in sale price. It is the revenue’s contention that, the said amendment is not retrospective, and it has effect from 01/04/2015. So, upto 31/03/2015 total receipt should be considered including service tax. However, we made it clear that, in the definition of sale price u/s. 2(25) service tax was not incorporated as deemed sale price. In the instant case, sale means a valuable consideration of the goods involved in the works contract, the consideration must be received by the contractor. Even though he had collected service tax separately he has to deposit it with the Central Government. Therefore, it will not become part of his receipt. The revenue had cited most of the case laws on agreement for composition.

Appellant is not denying that, he had not agreed for composition. He is ready to pay 8% tax on the valuable consideration received by him which he can utilise in his business, and the tax amount against service charges incurred by him, he cannot keep with him as consideration for receipt of works contract. In total contract receipt, the sale price of the goods, service charges shown etc. are includible. In Sub–clause (a) and (b) of sub–section (3) of section 42, the wording is used “equal to 5% , of total contract value of the works contract in case of construction contract and 8% of total contract value of work contract of any other case.” Here, the meaning of total contract value is to be determined appropriately. By way of allotment of any works if assesse is receiving some amount against the property transferred in the goods and against the labour charges utilised in the said work, it will become a contract value. The various taxes levied separately, and those are to be deposited with the Govt. authorities will not constitute the total receipt against the said contract value hence element of service tax will not be a part of sale prices before amendment also. One can understand total expenses required to be paid for any particular work in which amount of taxes are also to be in total turnover but when a turnover for levy of tax is to be taken into consideration, the element shown separately in sale invoice It may be against sales tax VAT tax and service tax which cannot be included.” Thus, the Hon’ble Tribunal has put to rest all controversy in this regard. Most of the dealers (contractors) have not collected VAT on Service Tax collected separately and hence the above judgment will be a big relief.

Conclusion

To avoid future litigation, it is expected that the department will bring out one more circular to accept the above judgment. The finality to the subject is important, so that dealers can predict their liability correctly and a controversy is avoided.

MANDATORY PRE-DEPOSIT UNDER SECtION 35F

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Background Section 35F of the Central Excise Act, 1944 (the Act) was amended by the Finance Act (No.2) 2014 with effect from 6th August, 2014 whereby prior to filing an appeal before Commissioner (Appeals) or Appellate Tribunal, an amount of 7.5% duty or penalty in dispute in case of first appeal and a further amount of 10% of the duty or penalty in dispute is required to be paid by way of mandatory pre-deposit. The amount of pre-deposit is restricted to an upper limit of Rs. 10 crore by way of a proviso in the said section. Further, by way of a second proviso, it is provided that the provision would not apply to pending stay applications and appeals filed before any appellate authority prior to 6th August, 2014. Therefore, post the said date of 6th August, 2014, various appeals filed with different jurisdictional Benches of Appellate Tribunals without payment of pre-deposit amount were either not accepted or rejected. Consequently, writ petitions were filed in various High Courts. As a result thereof, the Andhra Pradesh High Court in Rama Mohanrao & Co. 2015-TIOL- 511-HC-AP-CX in an interim order and the Kerala High Court in Muthoot Finance Ltd. vs. Union of India and Others 2015-TIOL-632-HC-Kerala-ST and a couple of other cases as well as the Madras High Court in Fifth Avenue Sourcing (P) Ltd. vs. Commissioner of Service Tax 2015-TIOL-1592- HC-MAD-ST decided that amended provisions relating to mandatory pre-deposit of 7.5% of duty or penalty was not applicable to the cases wherein the cause of action had already commenced prior to the date of amendment of 6th August, 2014 and that the amendment was prospective and therefore would not affect assessment proceedings initiated prior to the amendment date.

As against these decisions, a Division Bench of the Allahabad High Court on the very same issue in Ganesh Yadav vs. UOI and Others 2015-TIOL-1490-HC-ALL-ST distinguished the above decision in Muthoot Finance Ltd. (supra) and K. Rama Mohanrao (supra) and dismissing the petitions held that in terms of express language used in the amended provisions of section 35F(1) of the Act, the constitutional challenge was not vested and all appeals filed post the amendment would be governed by the requirement of pre-deposit. Amidst the controversy, recently the Hon. Karnataka High Court also in a learned Single Judge decision has made detailed analysis and observations on the subject matter and dismissed a bunch of petitions. The said decision is summarised below:

Karnataka High Court: 2015-TIOL- 2637-HC-KAR-CX

The Hon. Karnataka High Court in various writ petitions led by Hindustan Petroleum Corporation Ltd. vs. Union of India reported at 2015-TIOL-2637-HC-KAR-CX and others considered mainly the following two issues:

  • Whether section 35F of the Central Excise Act, 1944 (the Act) as amended is a piece of substantive or procedural law prescribing mandatory pre-deposit at the time of filing an appeal, is an unreasonable condition?
  • Whether amendment made to section 35F of the Act has a retrospective operation?

The petitioner in this case also on the same issue as involved in various earlier decisions, contended that the requirement of the pre-deposit is violative of Article 14, 19(1)(g) and 265 of the Constitution of India and therefore sought to declare the Circular 984/08/2014-CX and similar Circular F. No.15/ CESTAT /General/2013-14 dated 06/08/2014 issued by the CBEC as ultra vires the constitution and also sought directions to enable petitioners to file their appeals without monetary pre-deposit of 7.5% since lis or the cause of action in the case of petitioner commenced before 06/08/2014, the date of amendment.

Right to Appeal

The Hon. Bench examined section 35 and 35B of the Act providing for Appellate remedy before Commissioner (Appeals) and Appellate Tribunal respectively and also examined section 35F and the amendment made therein effected from 6th August, 2014 as regards mandatory monetary pre-deposit and noted and analysed the concept Right of Appeal as the petitioners claimed that it was adversely affected by the impugned amendment. For this, the Hon. Bench found it expedient to primarily distinguish between substantive law and procedural law and rulings of the Hon’ble Supreme Court in this regard while considering the principles of statutory interpretation. Relying heavily on the ratio of Hoosein Kasam Dada (India) Ltd. vs. State of Madhya Pradesh & Others 2002-TIOL-363-SC-CT, the petitioners claimed that the cause of action in their cases commenced prior to the date of amendment viz. 06/08/2014 and therefore their right to be heard before the Tribunal without the mandatory pre-deposit was not destroyed and denial of such right affected their vested right to file appeal. The Revenue contended that all that was done by the amendment was prescribing the conditions of pre-deposit to file the appeal. This had no nexus with the right to file the appeal as a mere condition of mandatory deposit is provided of 7.5% of the duty or penalty levied at the time of filing appeal and only the discretion vested in the Tribunal with regard to pre-deposit was taken away. The Court therefore decided to consider the applicability of the principles stated in Hoosein Kasam Dada (supra) in the present matter, however only after drawing distinction between substantive law and procedural law.

Substantive law and Procedural law

The petitioners contended that the right to appeal is a substantial right which is pre-vested in the parties on the date, the cause of action commenced. Thus, even when the conditions to file an appeal are altered, it would affect their right to file an appeal. The Court therefore examined meanings of these terms as per Black’s Law Dictionary as provided below:

“Substantive law (seb-sten-tiv). (18c) The part of the law that creates, defines, and regulates the rights, duties and powers of parties.

‘So far as the administration of justice is concerned with the application of remedies to violated rights, we may say that the substantive law defines the remedy and the right, while the law of procedure defines the modes and conditions of the application of the one to the other.” John Salmond, Jurisprudence 476 (Glanville L. Williams ed., 10th ed. 1947)’.

Procedural law:

The rules that prescribe the steps for having a right or duty judicially enforced, as opposed to the law that defines the specific rights or duties themselves.- Also termed adjective law.” Further, on going through the Supreme Court rulings in Hitendra Vishnu Thakur vs. State of Maharashtra [(1994) 4 SCC 602 and Shyam Sunder vs. Ramkumar [(2001)8 SCC 24, it was noted that if a piece of substantive law is amended, such a law would have prospective operation unless made retrospective operation by necessary intendment whereas in the case of amendment of a procedural law, the amendment is always retrospective in operation unless indicated otherwise. On noting the above, it was observed that the right to file an appeal is required to be distinguished from the procedure necessary to follow while exercising the said right to appeal. Section 35A, 35C and 35D of the Act deal with the procedures to be followed by Commissioner (Appeals) or the Appellate Tribunal while considering the appeal filed by an aggrieved party whereas the right to file an appeal before the Commissioner (Appeals) and the appellate authority is prescribed in section 35 ad 35B of the Act respectively. Therefore, the conditions to be followed for exercising the substantive right as prescribed in section 35F of the Act prescribing the pre-deposit to be made by the aggrieved party is a piece of procedural law. Further a litigant has a vested right in substantive law but no such right is available in procedural law. To support these observations, Hon. Court interalia, relied on The Anant Mills Co. Ltd. vs. State of Gujarat & Others 1975 (2) SCC 175, Sheth Nand Lal & Another vs. State of Haryana and Others 1980 (Supp) SCC 574, Vijay Prakash D. Mehta and Another vs. Collector of Customs (Preventive), Mumbai 2002-TIOL-427-SC-CUS, Laxmi Rathan Engineering Works Limited vs. CST [AIR 1968 SC 488], Ganga Bai vs. Vijay Kumar [(1974) 2 SCC 393], Narayan Chandra Ghosh vs. UCO Bank and Others [(2011) 4 SCC 548 and concluded that appeal is a creature of statute and there is no reason why the legislature while granting that right cannot impose conditions for exercising that right. Thus, what emerges from dicta in various cited decisions is that requirement regarding deposit of amount as condition precedent to entertainment of appeal is a means of regulating the exercise of the right of appeal and is not in the realm of right to file an appeal and thus not a piece of substantial law. The said requirement is not an onerous condition precedent for the filing of an appeal particularly when there is a cap on the pre-deposit amount where amount exceeds Rs.10 crore. Thus, the first issue is answered that the amended provisions of section 35F of the Act do not adversely affect the right of appeal before the Commissioner (Appeals) and the appellate authority of the aggrieved party.

Whether the Amendment has Retrospective Application

The Finance Act 2014, which amended section 35F of the Act repealed the existing provision by way of substitution and thus when an existing provision is substituted by a fresh enactment, it is a case of express repeal. In this context, interalia relying on the decision was Zile Singh vs. State of Haryana 2004 (8) SCC 1, it was observed: “13. It is a cardinal principle of construction that every statute is prima facie prospective operation. But the rule in general is applicable where the object of the statute is to affect vested rights or to impose new burdens or to impair existing obligations.”

However, in the matters of procedures, the Court cited Maxwell: “Interpretation of Statutes” 11th edition, page 216 that “No person has a vested right in any course of procedure. He has only the right of prosecution or defence in the manner prescribed for the time being by or for the Court in which the case is pending and if by an act of Parliament the mode of procedure is altered, he has no other right than to proceed according to the altered mode”.

In the backdrop of these principles, the claim of the petitioners that the amendment to section 35F of the Act was not retrospective was examined and in particular second proviso to the said section 35F was taken note of. The proviso provides that section 35F would not apply to stay applications and appeals pending before the appellate authority filed prior to the commencement of 2014 Act therefrom implying that appeals filed and pending as on 06/08/2014, the earlier provision would apply. While interpreting the said proviso, it was noted that the proviso could not be so construed or interpreted to make it otiose. By virtue of the second proviso, the intendment of the Parliament is clear and therefore to interpret otherwise than the intendment would be to render it redundant. In view thereof but for the circumstances mentioned in the proviso it was held that the main amended provision would apply. The proviso was meant to serve as a saving clause to prevent the pending stay applications from becoming infructuous on account of the amendment. Relying on a number of judicial precedents including in Ishverlal Thakorelal Almaula vs. Motibhai Nagjibhai (AIR 1966 SC 459), S. Sundaram Pillai etc. vs. R. Pattabiraman [AIR 1985 SC 582] which in turn among others relied on Govt. of West Bengal vs. Abani Maity [AIR 1979 SC 1029], conclusion was reached that the right to file an appeal granted u/s. 35 and 35B of the Act remained unaltered and therefore available to an aggrieved party even after the amendment to section 35F of the Act. Whereas these sections constitute substantive law not forming the realm of procedure, on the examination of section 35F it was found that this section is procedural in nature and the amendment of the same was found to be having a retrospective operation and particularly the second proviso. Since the real intention of the Parliament is discernible, it was held that the retrospective effect is provided in respect of pending applications before appellate authorities. However, if no appeal was filed prior to 06/08/2014, it was held that the amended section 35F would apply. The amendment thus has no bearing on the date on which the particular lis commenced. It was observed that the lis in each case would have commenced on a different date. In order to ensure the object of certainty and uniformity as to the applicability of the amendment, the Parliament enacted the second proviso. Considering the Hon. Supreme Court’s rulings on the fine distinction between substantive law and procedural law in decisions subsequent to Hoosein Kasam Dada (supra), wherein it was held that amendment made to procedural law can have retrospective operation, the decision in Hoosein Kasam Dada (supra) was distinguished. It was further noted that in the said decision, the fine distinction between substantive and procedural law and that amendment made in the procedural law could have retrospective operation did not come up for consideration in the manner decided in the later decisions and therefore observations made in Hoosein Kasam Dada (supra) were held as not applicable to the present bunch of petitions.

Lastly, the judgments referred above viz. of the Madras High Court in Deputy Commercial Tax Officer Tirupur vs. Cameo Experts [(2006)147 STC 218 (Mad)], Fifth Avenue Sourcing (P) Ltd. vs. Commissioner of Service Tax Chennai (supra), Kerala High Court in Muthoot Finance Ltd. vs. Union of India (supra) and Andhra Pradesh High Court in K. Rama Mohanrao & Co. vs. Union of India (interim order) (supra) were found as not applicable although they are rendered on section 35F or on similar provisions as those judgments followed the reasoning in Hoosein Kasam Dada (supra) which has been distinguished herein and held to be not applicable to the present cases. Writ Petitions were dismissed accordingly.

Conclusion

Although the applicability of the above may be for a limited time frame, it is to be noted that High Courts of the three States viz. Kerala, Andhra Pradesh and Madras have decided that the cases wherein the lis commenced prior to 06/08/2014, the amendment was not applicable and the Tribunal was bound to entertain such appeals without mandatory predeposit whereas Allahabad High Court in M/s. Ganesh Yadav (supra) and the present decision of Karnataka High Court have held that pre-deposit requirement cannot be dispensed with except in case of appeals and stay applications already filed prior to 6th August, 2014. Therefore, it remains to be seen whether the round of controversy ends with the ruling of Karnataka High Court or litigation continues on the issue before reaching finality.

Welcome GST – Part 3 GST in Singapore and Malaysia

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Singapore and Malaysia are considered as the two most important countries which have introduced fair GST law. While Singapore is under GST regime since 1994 and Malaysia has just introduced GST from 1st April 2015, there is striking similarity in the provisions.

GST in Singapore:

GST was implemented at a single rate of 3% on 1st April 1994, with an assurance that it would not be raised for at least five years. To cushion the impact of GST on Singaporean households, an offset package was also introduced. Simultaneously, corporate tax rate was cut by 3% to 27%, and the top marginal personal income tax rate was cut by 3%. The initial GST rate of 3% was among the lowest in the world. The GST rate was increased from 3% to 4% in 2003 and to 5% in 2004. Each increase was accompanied by an offset package that was designed to make the average Singaporean household overall better off. The rate was further increased to 7% with effect from 1st July 2007. At present, the rate of GST is 7% applicable to all taxable (standard rated) goods and services.

The threshold for registration is S$ 1million (one million Singapore dollars). Businesses having turnover of taxable supplies during a period of 12 months (four quarters) less than 1 million may opt for voluntary registration.

It may be noted that in Singapore, GST is a tax imposed on the importation of goods (collected by Singapore Customs) and the supplies of nearly all goods and services made in Singapore by a taxable person in the course or furtherance of any business carried on by him. The tax is administered by the Inland Revenue Authority of Singapore (IRAS). The Tax Department has issued GST guides for various industries which provide specific information on how GST affects each sector.

‘Taxable person’ is defined as a person who is registered or is required to be registered under the GST Act. The term ‘business’ includes any: (a) Trade (for example, manufacturing, wholesale, service, retail, mechanics, carpentry); (b) Profession (for example, doctors, lawyers, accountants with their own business practice); or (c) Vocation (for example, taxi drivers, hawkers, freelance fitness instructors, freelance book-keepers, insurance agents, multi-level marketing agents). In addition, the following activities are also deemed to constitute business: (a) The provision by a club, association, society, management corporation or organisation of the facilities or advantages available to its members or subsidiary proprietors, as the case may be; and (b) The admission, for a consideration, of persons to any premises.

Taxable Turnover, for the purposes of registration, refers to the total value (excluding GST) of all taxable supplies made in Singapore. It includes the value of all standardrated and zero-rated supplies but excludes exempt supplies, out-of-scope supplies and sale of capital assets.

Zero-rated supply: Zero-rated supply refers to an export of goods from Singapore by a taxable person to a country outside Singapore or a supply of international services. GST is charged at 0% for theses supplies. However full input tax credit is available to the supplier.

Exempt Supply: Exempt supply refers to the following three broad categories of supplies, where no GST is chargeable: (a) the sale and lease of residential properties; (b) the provision of financial services; and (c) the supply of investment precious metals. A supplier of exempt supplies is not eligible for input tax credit.

Out-of-scope Supply: An out-of-scope supply is a supply which is not made in Singapore and no GST needs to be charged. For example the sale of goods from China to India, where the goods do not enter Singapore.

A registered tax payer is required to e-file quarterly returns within one month from the end of each quarter. (Facility of monthly and six monthly returns is also available to certain classes of tax payers subject to approval from the Comptroller). Extension of due date, up to one month, is granted on application in genuine cases. The tax due, as per return, is required to be deposited within the same due date as for filing of returns. Payments can be made either online or through money orders or telegraphic transfers or through A/c payee cheques drawn in favour of “Comptroller of Goods & Services Tax”. Refund due, if any, as per periodic return is granted automatically within one month/three months/six months as the case may be (unless withheld for specified reasons).

GST in Malaysia: Malaysia has adopted GST from 1st April 2015. Before that there was a system of sales tax on sale of goods (introduced from 29th February 1972) and Service Tax on supply of services (introduced from 1st March 1975). It may be noted that Excise Duty, in Malaysia, is levied on certain luxury and sin products only such as automobiles, liquor, beer and tobacco products. Sales Tax was levied under the system of single point first stage taxation at four different rates of 5, 10. 20 and 25 %0, and, Service Tax was levied at a flat rate of 5% on certain specified services. The GST has replaced both these taxes i.e. Sales Tax and Service Tax. The rate of GST is 6% on all taxable (standard rated) goods and services.

GST, in Malaysia is administered by Royal Malaysian Customs Department (RMCD) – Goods and Services Tax Division. Persons having businesses with annual turnover of taxable supplies exceeding RM 5,00,000 (Five lakh Malaysian Ringgit) are liable to be registered under GST. ‘Persons’ include an individual, sole proprietor, partnership, company, trust, estate, society, union, club, association or any other organization including a government department or a local authority which is involved in the business of making taxable supplies in Malaysia. Application for registration has to be made in prescribed form within 30 days from the date of liability. There is a facility of voluntary registration for businesses having annual turnover less than the prescribed limit, and, there is also a facility of Group Registration whereby more than one business organisation, within the same group, can have one single registration.

Annual Turnover of ‘Taxable Supplies’, for the purposes of registration, includes all taxable supplies whether standard rated or zero rated. But excludes the value of (a) supplies outside the GST scope, (b) disposal of capital assets, (c) imported services, (d) disregarded supplies made in relation to Approved Toll Manufacturer Scheme, Warehousing Scheme and supplies made within or between the designated areas.

The GST registered person is liable to pay tax on all taxable supplies (standard rated) and can claim input tax credit of whatever amount of GST paid on the business inputs by offsetting against the output tax. Suppliers of zero rated goods and services are also entitled to claim full input tax credit. However, ITC (input Tax Credit) can be claimed only on the basis of ‘Tax Invoice’ issued by the supplier. The supplier has to issue Tax Invoice within 21 days of supply. There are provisions for Simplified Tax Iinvoice as well as self made Tax Invoice in certain circumstances.

GST returns are generally required to be filed quarterly by all GST registered persons within one month from the end of each quarter. However, there are provisions to grant permission to file returns on monthly or six monthly basis subject to certain conditions. The returns can be filed either online through internet or manual through paper returns.

Payment of taxes, as per return, has to be made within the same time limit as for filing return. Payment can be made either online or through money order or a/c payee cheques or bank drafts drawn in the name of specified authority.

Refunds, if any, as per periodic returns are granted automatically within 14 days from the date of submitting return (in case of electronic return) and within 28 days (in case of manual return).

Some Important Aspects:

There are few important aspects of GST that one needs to study, they include,

  • Transitional provisions: from existing indirect tax laws to one integrated tax without loss of input credits that is lying unutilised and also embedded in stock in trade or work – in – progress.
  • M eaning of ‘supply’ as a most important term replacing the terms, ‘sale of goods’ and ‘provision of service’.
  • Place of Supply Rules
  • Seamless flow of credit till the supply reaches to the destination
  • Point of Taxation
  • Uniform revenue neutral rate for different kind of goods and servicesExempt goods and services
  • Special kind of supplies
  • Procedural issues like registration, payment of tax, filing of returns, assessments, dispute resolution mechanism and robust network infrastructure 

In this article, attempt is made to evaluate the meaning of term supply, transitional provisions, time of supply and input tax credit mechanism in the context of Singapore and Malaysian GST law.

I. Meaning of term “Supply”:

Under Malaysian law:

  • ‘Supply’ means all forms of supply, sale, barter or exchange including import, for a consideration. Land and transfer of any right in land including tenancy rights and immovable properties are covered in GST as goods. Further, supply of goods includes any activity or transaction under hire purchase or finance lease agreement.
  • Anything which is not a supply of goods but is done for a consideration is a supply of services. “Services” mean anything done or to be done including the granting, assignment or surrender of any right or making available any facility or advantage for a consideration. This would include, license, rental, lease and right to use of the immovable properties and transfer of possession of goods without transferring the ownership.

However, the following are not regarded as supply:

  • Transfer of business undertaking as a going concern.
  • Supplies not in the course of furtherance of business.
  • Supply by any society or similar registered organisation to its members in conformity of the aims and objectives, without any payment other than subscription and where the value of supply is nominal.
  • Contribution to pension, provident or social security fund.
  • Supply of services between an insurer and insured
  • Supply of money or investment article

Under Singapore law:

‘Supply’ includes anything done for a consideration. The following shall be treated as ‘supply’ for the purposes of GST:

  • Possession transferred under an agreement
  • Treatment of process
  • Supply of utility
  • Grant assignment or surrender of any interest or right over land
  • Transfer or disposal of business assets.

The following shall not be treated as supply of goods:

  • Financial services including financial products like equity, debts equity, derivative, life insurance, annuities, commodity features, mutual fund units, exchange of currency
  • I mport of precious metal
  • Grant assignment or surrender of any interest or right over land, license to occupy such land, residential properties, land used for residential purpose or for condominium development, vacant land supplied for public or statutory authority of residential or condominium residence
  • Land or building or part thereof used principally for residential purpose.

II. Transitional provisions

A. In case of supply of goods under Malaysian/ Singapore law:

1. I f the dealer has supplied the goods (under Malaysian law) or removal of goods or made available to the purchaser (under Singapore law) before the effective date and invoice is issued or payment is received for that supply on or after effective date, the supply of goods would be covered under the existing law prior to implementation of GST and the invoice issued or payment received on or after the appointed day for those supplies shall be regarded as inclusive of Sales Tax. However, if the invoice is issued for the supply made after the appointed day, the dealer would not be required to charge GST to the extent the supply is covered by Sales Tax.

2. I f supplies are made before the appointed day and ends on or after the appointed day where the invoice is issued or the payment is received before the appointed day, the consideration for supply shall be deemed to be inclusive of GST, appointed day or effective date is the date when GST comes into force for the portion of supplies made on or after the appointed day.

3. For all goods held in stock on effective date, including the exempted goods or service, are liable to be taxed under the old law.

4. The dealer is required to file his return under the old law covering all the supplies prior to effective date and discharge the liability thereon.

5. I n a case where tax is required to be paid under GST on above supplies, refund can be claimed of the tax paid under existing law.

6. Credit notes issued for return of goods after the appointed day shall be dealt with under the existing law and refund of sales tax paid can be claimed.

7. T he person registered under the GST and in the old law will have no further liability under GST to account for tax on such goods in respect of which the last return under the old law is submitted.

8. A window of five years of zero rating is provided in case a non-taxable supply under the existing law when it becomes taxable under GST and the contract is not renewed to effectuate the tax element in the price. (This means that the existing contracts can be reworked to include GST in the price till five years and would be zero rated till such period, imposing no tax liability and still allowing imput tax credit. Really a very wholesome measure for long term infrastructure projects and government contracts which are normally of “all inclusive” nature.)

B. Exempt supplies under Singapore law –

GST would not be chargeable if the person making the supply, made after appointed day, receives a payment in respect of the supply of goods or services before the appointed day, and the supply of goods or services shall be treated as taking place before that date. However, if no such payment is received before the appointed day but the invoice for a taxable supply of goods or services is issued before that date, that supply made in post GST regime shall be treated as taking place after the appointed day and accordingly tax shall be chargeable on the supply.

C. In case of Services under Malaysian/ Singapore law:

In case of supply of services when the service is performed or payment received prior to introduction of GST, the provisions of old law would apply. In case supply is made on or after the appointed day, the service provider is not required to charge GST on supplies to the extent covered by the invoice before the appointed day or payment received.

D. In case of goods or services not subject to sales tax or service tax but subject to GST Malaysia:

In such a case, the GST liability would be as follows:

  • If such supplies are made before 1st April 2015 where the invoice is issued or payment is received on or after 1st April 2015, the consideration for the supplies is not subject to GST.
  • If such supplies are made before 1st April 2015 and ends on or after 1st April 2015 (spanning 1st April 2015) where the invoice is issued or payment is received on or after 1st April 2015, the portion of supplies made on or after 1st April 2015 is subject to GST.
  • If such supplies are made on or after 1st April 2015 where the invoice is issued or payment is made before 1st April 2015, the consideration for the supplies is deemed as inclusive of GST.
  • If such supplies are made before 1st April 2015 and ends on or after 1st April 2015 (spanning 1st April 2015) where the invoice is issued or payment is received before 1st April 2015, the consideration for the supplies is deemed as inclusive of GST for the portion of supplies made on or after 1st April 2015.

E. Transitional provision as regards to input tax credit Singapore:

In case of dealer having accumulated credit prior to GST regime, the same is allowed to be carried forward to the extent the credit attributable to the taxable supplies made in post GST regime. Special relief is granted to allow businesses to claim GST incurred before GST regime in first return form. This would also apply to a dealer who is partially exempt if he makes both exempt and taxable supplies. In case where input tax cannot be directly indentified with income in the making of either taxable or exempt supplies, the input tax known as residual input tax is required to be apportioned. Taxable supplies would include zero-rated supplies. In case of capital goods, the same is allowed subject to certain exceptions on period based proportions.

Malaysia: A registered person is entitled to a special refund of sales tax of taxable goods (subject to certain percentage of the value of goods) held on hand on (stock) appointed day for making a taxable supply provided the goods were taxable under the sales tax law and the sales tax has been charged and paid by the claimant dealer. A special refund shall not be granted when,

a) goods have been capitalised
b) have been used partially or incorporated into some other goods
c) held for hire d) good held for use other than in business
e) goods not held for sale or exchange
f) where a claim of drawback of sales tax paid is made on subsequent export after the appointed day
g) on such goods on which the claimant is allowed to claim the deduction of service tax under the relevant rules

Where the claim for special refund is made, the goods shall be deemed to have been given credit for the input tax the unpaid taxes be off-setted against the special refund.

(No such provision exists in Singapore)

III. I nput Tax Credit Mechanism :
A. Singapore/Malaysia (conditions for grant of input credit)

  • The business has to be GST registered
  • The goods or services must have been supplied or imported by the business which must be supported by import permits which show the business as importer of goods
  • For local purchase the input tax claim must be supported by tax invoices addressed to the business
  • The goods or services are used or will be used for the furtherance of the business within the country or export which would be regarded as taxable supplies if made in the exporting country
  • The input tax claim is not otherwise disallowable as per specific exclusions.

 It is not necessary to match the input tax claim with output tax charged in the same accounting period, meaning that input tax can be claimed even before supply of goods or service is actually made.

Supply of goods without consideration for a community project may be treated as a supply made in the course or furtherance of the business. Any asset acquired which is taxable may be treated as attributable to the business’s taxable supply and any input tax incurred for any supply made for a community project by the business is claimable. (Above provision exists only in Malaysia)

B. Input tax claim on tripartite arrangement

  • When a taxable person makes taxable supplies of goods or services to a recipient who is a registered person, the recipient is able to claim input tax for an acquisition he makes in the course of his business. However, in a tripartite arrangement, the recipient is not the person who makes the payment for the supply.
  • For a supply made to a third party, there must be a binding agreement or a link between the supplier and the person who makes payment for the supply. Any agreement which does not bind the parties does not amount to a supply unless there is a supply of goods or services between the parties. The person who has an agreement with a supplier for a supply is the recipient of that supply (even if that supply is provided to a third party). The documentation (terms of the contract) is the logical starting point in determining the supplies that have been made.
  • In this regard, the person who makes payment will be entitled to claim input tax on the acquisition of the goods since it is a taxable supply made by the supplier to the person who makes the payment of the supply. (Above provision exists only in Malaysia)

C. Time Limit to claim input tax credit

If input tax is not claimed in the taxable period in which he is supposed to claim, then such input tax can be claimed within six years after the date of the supply to or importation by the taxable person.

D. Refund of Input Tax

A refund will be made to the claimant if the amount of input tax is more than the amount of output tax. Any refund of input tax credit may be offset against unpaid GST, excise duty, import and export duties.

Time When Refund is Made

A registered person can claim refund of input tax in the GST return furnished to the concerned authority. If the amount of input tax exceeds the amount of output tax, the balance will be refunded. The refund of input tax will be made within 14 working days after the return to which the refund relates is received for online submission and 28 working days after the return to which the refund relates is received for manual submission. (Malaysia)

E. Bad Debt relief

Bad debt is amount owed that cannot be collected and all reasonable efforts to collect it have been done. A person is entitled for a bad debt relief subject to the following conditions:
(a) GST is already paid;
(b) The person has not received any payment or part payment within 6 months (12 months in case of Singapore GST) from date of supply or debtor has become insolvent (bankrupt, wound up or receivership) before that period has elapsed; and
(c) Sufficient efforts have been made to recover the debt.

If the person has not received any payment in respect of the taxable supply, he can make a deduction or claim for the whole of the tax paid. However, if he has received part of the payment he can deduct or claim on pro-rata basis of the receipt. In the event where the bad debt relief is granted but subsequently the payment is received by the claimant he is required to repay the amount.

F. Input Tax credit in relation to registration

Credit pertaining to pre-incorporation is not allowed. Input credit on services prior to registration is also not eligible. However, in case of capital goods, the registered person is entitled to claim input tax credit on the goods he holds at the time of registration. Input tax on any asset held on hand (stock) can be claimed on book value within 6 years from the date of registration irrespective of date when the asset is acquired. In case of land and building, input tax can be claimed in on open market value of the asset or the book value whichever is lower. Where a person registers on a date later than the date he becomes liable to be registered, he is entitled to claim input tax incurred on, a) goods held on hand at the time he is liable to be registered; and b) goods or services used in making taxable supplies during the period he became liable to be registered.

IV. Time of supply:

Malaysia:

For goods:
a) when the goods are removed; or
b) when the goods are made available to the person to whom the goods are supplied if the goods are not to be removed.
c) I n the case of supply of goods sent, taken on approval, sale or returned, the time of supply is when it becomes certain that a taxable supply has taken place or twelve months after the removal whichever is the earlier.

For Services:

For services, the time of supply is treated as taken place at the time when the services are performed.

Singapore

The time of supply is based on the earliest of the events:
a) Issuance of invoice
b) Receipt of payment
c) Removal of goods or making it available to the customer.

In case of services, the time of performance In any case, the business is required to issue a tax invoice within 30 days from the time of supply. If the supply is before GST registration date, GST cannot be charged to the customers.

Conclusion: It can be seen that the Malaysian GST, being the latest one, has been carefully crafted, as the law which is lucid with examples and appropriate guidance notes, leaves almost no room for ambiguity and litigation. It even has the provisions for refund of excess claim of input credit if not utilised within six years which is seamlessly granted within a short time of Fourteen days as provided in the law. The term ‘supply’ invokes the liability only in case of consideration. The transitional provisions ushering from exempt to taxable regime are also drafted in a fair manner. In case of exempt product or services becoming taxable under GST, a window of five years for re-working of contract is granted and zero rating is provided for intervening period allowing input tax credits. Provisions are made for allowance of tax credit when the supply results into a bad debt. Input credit is allowed in case of asset acquired for a community project which is regarded in the course of furtherance of business. Tax on import of goods and service is available as input tax credit. The Malaysian GST has more or less adopted the Singaporean model which is taxpayer friendly. The rate of tax in both the countries is minimum in the world, however still GST is blamed in Malaysia as inflationary. India should take a clue from the GST regime in both these countries in drafting its GST legislation.

Bombay High Court judgment in the case of Tata Sons Ltd., Writ Petition No. 2818 of 2012 decided on 20.1.2015

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Trade Circular 11T of 2015 dated 13.7.2015

In this Circular, the Sales Tax Commissioner has explained the judgement in case of Tata Sons Ltd., that VAT can be levied on transfer of right to use goods of intangible nature i.e. trade mark, technical knowhow ,copy right and other intangible goods even if transferred to multiple users.

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Online Grant of Registration under the Maharashtra Value Added Tax Act , 2002 and Central Sales Tax Act, 1956

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Trade Circular 10T of 2015 dated 7.7.2015

For online application under MVAT or CST Act, if officer finds all the documents are complete & correct TIN number will be allotted within a day of allocation of application.

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Providing E Payment facility for the Maharashtra Tax on Entry of Goods into Local Areas Act, 2002

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Trade Circular 9T of 2015 dated 1.7.2015

With effect from 1.7.2015 payment under the Maharashtra Tax on Entry of Goods into Local Area Act, 2002 can be made optionally electronically through GRAS. The detailed procedure has been explained in this Circular.

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M/s. Jinsasan Distributors vs. Commercial Tax Officer (CT), [2013] 59 VST 256(Mad)

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VA T-Input Tax Credit – Allowed in Assessment – Subsequent Cancellation of Registration Certificate of Selling Dealer – Can Not Affect Right of Purchasing Dealer – ITC cannot be Reversed, Section 19 of The Tamil Nadu Value Added Tax Act, 2006.

FACTS
The petitioners had claimed input tax credit of tax paid on purchase of goods from registered dealer u/s. 19 of The TNVAT Act. Subsequently, department took action against the selling dealers, who sold the goods to the petitioners for one or other reason and cancelled registration certificates of selling dealers from retrospective effect. Based on this, the VAT department issued notices in some cases calling upon petitioners to show cause as why input tax credit should not be reversed, in some cases passed revised assessment orders reversing input tax credit availed. All the affected petitioners filed writ petition before the Madras High Court challenging the notices, revised assessment orders and provisional assessment orders.

HELD
It was not is dispute that the registration certificates of the selling dealers were cancelled with retrospective effect and, therefore, to reverse the input tax credit on the plea that registration certificates have been cancelled with retrospective effect cannot be countenanced. Whatever benefits that accrued to the petitioners based on valid documents in the course of sale and purchase of goods, for which tax was paid cannot be declined. The transaction that took place when the registration certificates of selling dealers were in force cannot be denied to the petitioners on the above plea. Accordingly, the High Court allowed the writ petition filed by petitioners and all the notices revised assessment orders and the provisional assessment orders, in so far they sought to deny the benefit of the input tax credit on the above ground were set aside.

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Amendment in Notification No. VAT 1509/CR 89/Taxation-1, dt. 5.11.2009 (Consulate general Notification) addition of Russian Federation

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VAT 1515/CR11/Taxation 1.dtd. 29 05 2015

Notification regarding refund to Diplomatic Authorities amended by adding “Russian Federation” under Other Organisations.

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Non Acceptance of correspondence and letters Trade Circular 8 of 2015 dated 16.6.2015

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Commissioner of Sales Tax has instructed all officers and authorities of department to accept the correspondence and letters marked and addressed to them and also instructed to accept application u/s 23(11) for cancellation of assessment orders be accepted and thereafter considering the facts & merits of the individual cases officer should decide whether the cancellation be effected or not. If any instances of refusal of correspondence arise then the matter may be brought to the notice of higher authority and simultaneously the complaints may be addressed to the Commissioner of Sales Tax at cst@mahavat.gov.in .

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Clarification on rate of service tax on restaurant service Circular No. 184/3/2015-St dated 03 06 2015

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The CBEC vide Circular No. 184/3/2015-ST dated June 3, 2015 has clarified that Pursuant to increase in rate of Service tax from 12.36% to 14% effective from June 1, 2015, effective rate of service tax on services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, having the facility of air-conditioning or central air-heating in any part of the establishment would be 5.6% (i.e. 40% of 14%) of total amount charged. It is further clarified that exemption from service tax still continues to services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, not having the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year.

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M/S. Malbar Gold Pvt. Ltd vs. Commercial Tax Officer and Others, [2013] 58 VST 191 ( Ker)

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VAT- Franchisee Agreement for Use of Trade Mark –Is Transfer of Right to Use Goods- Deemed Sales- Liable to VAT, s/s. 2(xx),(xliii) of The Kerala Value Added Tax Act, 2003

Facts
The petitioner company engaged in marketing, trading, export and import of jewellery, diamond ornaments, platinum ornaments, watches, etc., was the sole proprietor of the trade mark, ‘Malabar Gold’. The company had entered into franchisee agreements with several companies, situated inside and outside the State of Kerala and also abroad, as per which, on mutually agreed terms and conditions, these companies were allowed to use the trade mark owned by the petitioner. Franchisee services, being an activity attracting service tax under the Finance Act, 1994, the petitioner had obtained registration under section 69 of the Finance Act. For the year 2008-09, the petitioner received royalty of Rs. 3,27,68,607 from its franchisee companies for use of its trademark and for sharing business know-how and on this amount, they paid service tax. While so, the assessing authority issued notice stating that transfer of right to use any goods is taxable u/s. 6(1) of the Act and that, royalty received by the petitioner from its franchisees for use of its trade mark would attract VAT under entry 68 of the Third Schedule to the Act. On receipt of the notice, the petitioner contended that the transaction in question attracted service tax and payments of service tax and VAT are mutually exclusive and hence VAT is not payable.

Thereafter, the assessing authority passed the assessment order confirming the demand for Rs. 13,10,744 along with interest of Rs. 2,78,009 and also imposed penalty by a separate order. The petitioner company filed writ petition before the Kerala High Court to quash the assessment order as well as penalty order.

Held
From the constitutional and statutory provisions, it is clear that a transfer of right to use any goods for any purpose, for cash, deferred payment or other valuable consideration is deemed to be a sale for the purposes of the Act. In the pleadings in the writ petition itself, the petitioner company admitted that by virtue of the agreements entered into with their franchisees, the franchisees were authorised to use their trade mark and that in consideration thereof, they were receiving the agreed royalty. In such circumstances, it can be concluded that the trade mark of the petitioner is transferred to the franchisees for their use and the consideration received is the royalty paid to the petitioner. Such a transaction is a “deemed sale” as defined in section 2(xliii) of the Act read with Explanation V thereof.

The High Court further observed that as far as the requirement that transfer of trade mark to the transferees should be to the exclusion of the transferor is concerned, if the petitioner had a case that the franchisee has no exclusive right within the territory allotted to it, it was for them to plead and prove this contention. There was no such plea before the High Court and copy of the agreements were not even been produced before the Court. Further, the specimen franchisee agreement, made available by the counsel for petitioners before the Court, showed that the franchisee had undertaken not to use the showroom for any purpose or activity other than that were provided in the agreement and to stock only products authorised by the petitioner. In such circumstances, the High Court held that even according to the petitioner, the trade mark had been transferred for the use of their franchisees for royalty paid on terms which are agreed between the parties. Therefore, the contention with respect to nonexclusive transfer of right was not accepted by the Court.

The High Court further held that royalty received is liable to be taxed under the Act and the court was not called upon to decide the legality of the levy of service tax on the royalty received by the petitioner. Therefore, if the petitioner had a case that levy of service tax is illegal for any reason; it is up to them to challenge the levy in appropriate proceedings. Accordingly, the High Court dismissed the writ petition filed by the petitioner company.

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Commercial Tax Officer vs. Whirlpool India Ltd [2013] 58 VST 177 (Raj)

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Sales Tax Act- Collection of Optional Warranty Charges- At The Time of Sale of Goods-Does not Form Part of Sale Price- Not Liable to Tax, The Rajasthan Sales Tax Act, 1994.

Facts
The department challenged the orders of Rajasthan Tax Board, passed on December 5, 2002 holding that optional service/warranty charges were not included in the price of the goods sold (refrigerators) as they do not constitute a part of the sale price. The Rajasthan Tax Board has held that such charges paid by a customer to a dealer would not be liable to attract levy of tax under the Rajasthan Sales Tax Act, 1994.

Held
The Tax Board has held that the charges levied on account of after sales service/warranty were optional. There was enough material before the Tax Board to hold that the charge levied by the assessee towards service/warranty charges at the time of the sale was not universal but optional. Following this finding the legal consequences would be inexorable and entail exclusion of such charges from the ambit of sale price of the goods being post sale. Accordingly, the High Court dismissed the petition filed by the department.

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M/S. National Mineral Development Corporation Ltd. vs. State of AP, [2013] 58 VST 136 (AP)

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Sales Tax- Surrender of Exim Scrip- Not a Sale – Not Liable to Tax, section 2(1)(n) of The Andhra Pradesh Sales Tax Act,1957.

Facts
The appellants had REP licences/ exim scrips which they surrendered to the Government and received 20 per cent premium as provided in circular No. 11/93 dated May 5, 1993. The assessing authorities took the view that the amounts received by them towards the premium/price on the surrender of the REP licences/exim scrips is liable to tax as they are “goods” within the meaning of section 2(h) of the Andhra Pradesh General Sales Tax Act,1957. The appellants however contended that they surrendered the REP licences/ exim scrips and received premium as incentive and therefore the surrender value of the scrips cannot be subjected to tax. The appellants filed petition before the AP High Court against the judgment of tribunal holding it as sale liable to tax.

Held
Admittedly, the policy and system under which REP licences/ exim scrips were issued was discontinued with effect from March 1, 1992 and the Director-General of Foreign Trade issued the circular No. 11/93 dated May 5, 1993 announcing that unutilised exim scrips could be surrendered and authorised the Joint Director-General of Foreign Trade to pay 20 per cent premium to the exporters through State Bank of India and its subsidiaries. After the expiry of the period of validity, these REP licences/ exim scrips became valueless and holders of such REP licences/ exim scrips could neither import goods duty-free nor sell them for value. Thus, they ceased to be items which could be freely traded in the open market and on their surrender to the Government of India, even the Government of India cannot use them for trading in the open market and they would stand cancelled and were valueless. By no stretch of imagination can it be said that such surrender by an exporter of REP licences/ exim scrips is in the course of trade or business. The premium paid by the Government to the exporters on the surrender of the REP licences/ exim scrips is only a solatium for the inability of the exporters to avail of the benefit of the incentives and cannot be treated as price or valuable consideration.

Therefore, the transaction of surrender of REP licences/ exim scrips is not a “sale” within the meaning of section 2(1)(n) of the Act and also would not constitute “turnover” within the meaning of section 2(1)(s) of the Act. Accordingly, the High Court allowed the petition filed by the appellants.

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[2015-TIOL-1184-CESTAT-MUM] Alfa Laval (India) Ltd. Employees Co-operative Consumers Society vs. Commissioner of Central Excise, Pune-I

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A cooperative society of members being employees of a company engaged in preparation and serving of food to the employees are a provider of catering service.

Facts:
Appellant is a co-operative society of employees of a company and is engaged in making food and serving the same to its members being the employees of the company. All the items required for preparation of food, utensils, space, water and electricity is provided by the company and the payments for the expenses incurred were received from the company. Revenue contended that the services qualify under the category of “Outdoor Catering services”

Held:
The Tribunal stated that it is undisputed that the Appellant is a separate entity in the eyes of law and is engaging persons for preparation and serving food though in the premises of their client being the company. Further, the agreement with the company specified rendering of specialized services for their employees. Hence, the contention that the services are provided by them to their own employees is not correct as they are under a contractual obligation to provide catering services to the company and accordingly the appeal is rejected.

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[2015-TIOL-1182-CESTAT-MUM] State Bank of India vs. Commissioner of Central Excise, Nashik

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Since Rule 5(1) of the valuation rule is already struck down, order placing reliance on the same is liable to be set aside.

Facts:
The Appellant collects from their customers the amounts paid by them towards postage charges, courier charges etc. The Revenue is of the opinion that these charges are collected in course of rendering “Banking and Financial Services”.

Held:
Relying on the decision in the case of Intercontinental Consultants & Technocrats P. Ltd. [2013] (29) STR 9 (Del) wherein Rule 5(1) of the Valuation Rule, 2006 had been struck down by the Hon’ble Delhi High Court. The Tribunal held that since the provisions on which reliance has been placed have been struck down, the order is unsustainable and is liable to be set aside.

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[2015-TIOL-1065-CESTAT-MUM] Mahindra & Mahindra Ltd vs. Commissioner of Central Excise

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Services relating to residential colony of
employees and the clubs are welfare activities having no nexus with the
business of manufacturing of final product.

Facts:
The
Appellant has a residential colony and club room attached to its
manufacturing unit. CENVAT Credit is availed on service tax paid on
security service provided at the colony, repairs of mixer used in the
canteen, civil work done at the colony, furniture/wooden partition for
VIP rooms and telephone lines installed at the residence of officer/club
rooms.

Held:
Relying on the decision in the case of
Manikgarh Cement [2010-TIOL-720-HC-MUM] and para 34 of the decision in
the case of Ultra Tech Cement Ltd. – 2010-TIOL-745- HC-MUM-ST, the
Tribunal held that services which are integrally connected with the
manufacture of final product are eligible input services. Residential
colony and club are welfare activities for the staff and have no nexus
with the business of manufacturing the final product and therefore are
not allowable. However, considering the disputes on the issue and the
different interpretations, penalty u/s. 11AC of the Central Excise Act,
1944 read with Rule 15(2) of CENVAT Credit Rules,2004 was set aside.

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[2015-TIOL-956-CESTAT-MUM] Sun-Area Real Estate Pvt. Ltd vs. Commissioner of Service Tax, Mumbai-i

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In view of the FEMA notifications issued by RB I, payment received in
Indian rupees is deemed to be convertible foreign exchange.

Facts:
The
Appellant received Indian rupees against export of services. The
Commissioner (Appeals) rejected the refund claims filed on the ground
that payment is not received in convertible foreign exchange. Further,
the second issue involved is whether the security and air travel
services can be considered as input service for providing output
service.

Held:
The Tribunal observed that when a
person receives in India payment in rupees from the account of a bank
situated in any country outside India maintained with an authorised
dealer, the payment in rupees shall be deemed to have repatriated the
realised foreign exchange in India as per Regulation 3 made u/s. 47 of
the Foreign Exchange Management Act, 1999. Further, FIRCs were produced
which are statutorily provided in the case of receipt or remittance of
foreign exchange specifically certifying that the payment is in
convertible foreign exchange. Further, relying on the decision of J.B.
Boda and Company Private Ltd., vs. Central Board of Direct Taxes AIR
1997SC 1543, the refund claims were sanctioned. In respect of input
services the Tribunal noted that they had direct nexus with the output
services and are considered eligible input services.

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[2015-TIOL-1093-CESTAT-MUM] Maneesh Export(eou), Satish J. Khalap, Vinay R. Sapte vs. Commissioner of Central Excise, Belapur

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Date of Show Cause Notice and period involved is not
relevant-substituted section 35F will be applicable to all the appeals
filed after the commencement of the Finance Act, 2014.

Facts:
The
Appellants did not deposit 7.5% of the duty confirmed as per amended
section 35F of the Central Excise Act, 1994 with effect from 06/08/2014.
The question before the Tribunal was relating to maintainability of the
appeals.

Held:
The Hon’ble Tribunal while dismissing
the case of the Appellants noted the decision of Hossein Kasam Dada
(India) Ltd. vs. State of Madhya Pradesh 1983 (13) ELT 1277 (SC) and
observed that the pre-existing right of appeal is not destroyed by the
amendment if the amendment is not made retrospective by express words or
necessary intendment. The said decision was distinguished to state that
the second proviso of section 35F of the Central Excise Act,1944 makes
it very clear that the amended provisions would not apply to the stay
applications and appeals pending before any appellate authority prior to
the commencement of the Finance (No.2) Act, 2014 which in turn would
imply that in respect of the stay applications and appeals filed before
any appellate authority after the commencement of the Finance (No. 2)
Act, 2014 the new provisions will apply irrespective of the date when
the order-in-original/order-in-appeal or the show Cause Notice was
issued or the period of dispute thus making the amendment retrospective
to which the principles laid down by Hossein Kasam Dada(supra) do not
apply as it dealt with an amendment that is prospective in nature.
Further the decision in the case of K. Rama Mohana Rao
[2015-TIOL-511-HC-AP-CX] was also disregarded by stating that the order
was an interim order and no final judgement has been taken by the
Hon’ble High Court and further the decision of the Kerala High Court in
the case of A.M. Motors [2015-TIOL-1069-HC-Kerala-ST] was also
disregarded. A similar decision as reported was also expressed in the
case of Shri Nand Kishore Sharma vs. CC [2015-TIOL-1190-CESTAT-MUM]

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VAT – Works Contract – Goods Involved in Execution of Works Contract – Rate of Tax Applicable to The Goods Deemed to be Sold, section 4(1)(c)of The Karnataka Value Added Tax Act, 2003

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10. M/S Durga Projects Inc vs. State of Karnataka and Another, [2013] 62 VSTs 482 (Karn)

VAT – Works Contract – Goods Involved in Execution of Works Contract – Rate of Tax Applicable to The Goods Deemed to be Sold, section 4(1)(c)of The Karnataka Value Added Tax Act, 2003

Facts
The appellant, a partnership firm, engaged in the business of civil works contract, purchased necessary building materials, hardware, etc., the goods falling under Schedule III, certain items of ‘declared goods’ falling u/s. 15 of the CST Act and other non-scheduled goods from within and outside the State as well as from unregistered dealers. The appellant made an application u/s. 60 of the KVAT Act before the Authority for Clarifications and Advance Rulings (ACAR for short) seeking for clarification in respect of: a) A pplicability of the rate of tax on execution of civil works contract under the Act; and b) Whether input tax credit can be availed out of output tax paid by the contractor. The ACAR, after examining the matter in detail, by its order dated 2-8-2006 came to the conclusion that there is no specific entry providing rate of tax on works contract under the KVAT Act, up to 31-3-2006 and therefore, tax should be levied as per the rate applicable on the value of each class of goods involved in the execution of works contract i.e. if the goods involved are taxable at the rate of 4%, then works contract rate would be at 4% and if the rate is 12.5%, the works contract rate would also be at 12.5%. With regard to the clarification of input tax credit is concerned, no finding was given. The appellant subsequently sought for rectification of the order dated 2-8-2006 before the ACAR. The ACAR further clarified on 7-12-2006 stating that iron and steel is one of the commodities specified u/s. 14 of the CST Act 1956, as goods of special importance and therefore, the iron and steel are to be subjected to works contract tax at 4%, when it was used in the same form and if they are used in manufacture or fabrication of product, it would no longer qualify as iron and steel and would have to be subjected to works contract tax at 12.5%.The Commissioner for Commercial Taxes after noticing the clarification order passed by the ACAR found that the order passed by the ACAR is erroneous and prejudice to the interest of the revenue and issued notice u/s. 64(2) of the Act on 25- 8-2010. The Commissioner for Commercial Taxes, after considering the objections filed by the appellant, by its order dated 12-10-2010 set aside the order passed by the ACAR in exercise of its suo-motu revisionary power and held that the goods used in the works contract cannot be treated on par with the normal sale of goods for the purpose of arriving at the rate for the period prior to 1-4- 2006. Further, the iron and steel or any other declared goods used for executing the works contract would be liable to be taxed as per the State Law. The appellant, being aggrieved by the order dated 12-10-2010 passed by the Commissioner of Commercial Taxes, filed appeal before the Karnataka High Court.

Held

Section 4(1)(c) was inserted by Act No.4 of 2006 w.e.f. 1-4-2006 thereby levying tax on the works contract by specifying the rate of tax under the Sixth Schedule. Prior to the amendment, the tax was being collected on the rate applicable to sale of each class of goods under Section 3(1) of the Act. Section 3(1) of the Act provides for levy of tax on sale of goods. Section 4 prescribes the rate of tax. Neither section 3 nor section 4 of the Act seeks or intend to levy or prescribe different rate of tax for the goods involved in the normal sale and for the goods involved in the deemed sale. Both normal sale as well as the deemed sale should be treated as one and the same with respect to levy of tax on sale of goods. Admittedly, prior to 1-4- 2006 insertion of clause (c) to section 4, the rate of tax was not prescribed in respect of transfer of the property in goods, (whether as goods or in any other form) involved in the execution of works contract. Hence, the tax has to be levied as per section 3(1) of the Act. The sale under the works contract is a deemed sale of transfer of the goods alone and it is not different from the normal sale. Hence, the tax has to be levied on the price of the goods and material used in the works contract as if there was a sale of goods and materials. The property in the goods used in the work contract will be deemed to have been passed over to the buyer as soon as the goods or material used are incorporated to the moveable property by principle of accretion to the moveable property. For the period prior to 1-4-2006, tax has to be levied as per section 3(1) of the Act and for the period subsequent to 1-4-2006, tax has to be levied as per section 4(1)(c) of the Act. Accordingly, the High Court allowed the appeal filed by the firm. The order passed by the Commissioner was set aside and the order passed by the ACAR was restored.

Value Added Tax – Providing Passive Infrastructure Service and Related Operations and Maintenance Services – To Telecommunication Operators – on a Share Basis – Not a Transfer of Right to Use Goods – Not Taxable, Section 2(1)(2c) (vi) of The Delhi Value Added Tax Act, 2004.

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9. M/S. Indus Tower Ltd vs. Union of India, [2013] by VST 422 (Delhi)

Value Added Tax – Providing Passive Infrastructure Service and Related Operations and Maintenance Services – To Telecommunication Operators – on a Share Basis – Not a Transfer of Right to Use Goods – Not Taxable, Section 2(1)(2c) (vi) of The Delhi Value Added Tax Act, 2004.

Facts

Indus, the petitioner company, registered with the Department of Telecommunication for providing passive infrastructure services and related operations and maintenance services to various telecommunications operators in India on a sharing basis. It is the policy of the Government of India to encourage extensive infrastructure sharing and in pursuance with the policy, the telecom operators were required to create a high quality, rapid and wide coverage of mobile telecommunications network in India. The passive infrastructure facilities or services could be shared by several telecom operators so that it becomes cost effective.

Accordingly, it put up passive infrastructure facilities at several places. The arrangement worked this way. Indus would put up the towers and a shelter which is a construction in which the telecom operators are permitted to keep and maintain their base terminal stations (BTS), associated antenna, back-haul connectivity to the network of the sharing telecom operator and associated civil and electrical works required to provide telecom services. The telecom tower and shelter, both put up by the petitioner, is called “the passive infrastructure”. In addition to the tower and shelter, Indus also provided diesel generator sets, air-conditioners, electrical and civil works, DC power system, battery bank, etc. All these were known as passive infrastructure. The “active infrastructure” consists of the BTS, associated antenna, back-haul connectivity and other requisite equipment and associated civil and electrical works required to provide the telecommunication services by the telecom operator at a telecom and telecommunication site other than the passive infrastructure. The active infrastructure was owned and operated by the sharing telecom operator, passive infrastructure was owned by Indus. There could be several operators who may use the tower and shelter which are parts of the passive infrastructure by keeping their BTS, etc., therein and sharing the entire passive infrastructure on an agreed basis. The antennae belonging to the sharing telecom provider may be put up or installed at different heights in the tower as per the requirements of the sharing telecom operators. The working of the telecom network basically involves the process of receiving and transmitting the telecom signals. The active infrastructure which is owned and put up by the sharing telecom operators needs certain conditions for proper functioning and uninterrupted telecom network/ signals. These conditions are maintenance of a particular temperature, humidity level, safety, etc. These conditions are ensured by the passive infrastructure made available by the petitioner to the sharing telecom operators. The Indus Company filed application before the Commissioner of Vat u/s. 84 of the Delhi Value Added Tax Act, 2004 (DVAT ) and posed following question to be determined by him;- “Whether, in the facts and circumstances, the provision of passive infrastructure services by the applicant to sharing operators would tantamount to ‘Transfer of right to use goods’ as per section 2(1)(zc)(vi) of the DVAT Act, 2004 and therefore become liable to tax under the DVAT Act? If yes, then how should the sale price as per section 9(1) (zd) of the DVAT Act be determined for the purpose of discharging the liability under the DVAT Act ?” The Commissioner, on an examination of the agreement entered into between the petitioner and M/s. Sistema Shyam Tele Services Ltd., which was taken as representative of the agreements entered into by the petitioner with various telecom operators, held that the entire amount of consideration received from the sharing telecom operators for providing access to the passive infrastructure would amount to consideration for the “transfer of the right to use goods” as defined in section 2(1)(zc)(vi) of the DVAT Act and was exigible to tax under the said Act. He however held that since a separate bill was being raised for consumption of energy by each sharing operator as per actual consumption as detailed in the contract, the charges collected by the petitioner on this account shall be exempt from the levy of value added tax. The Company filed writ petition before the Delhi High Court against the impugned order of the Commissioner.

Held

The ‘right to use goods’ – in this case the right to use the passive infrastructure can be said to have been transferred by Indus to the sharing telecom operators only if the possession of the said infrastructure had been transferred to them. They would have the right to use the passive infrastructure if they were in lawful possession of it. There has to be, in that case, an act demonstrating the intention to part with the possession of the passive infrastructure. There is none in the present case. The passive infrastructure is an indispensable requirement for the proper functioning of the active infrastructure which is owned and operated by the sharing telecom operators. The passive infrastructure is shared by several telecom operators and that is why they are referred to as sharing telecom operators in the MSA. The MSA merely permits access to the sharing telecom operators to the passive infrastructure to the extent it is necessary for the proper functioning of the active infrastructure. It was the responsibility of Indus to ensure that the passive infrastructure functions to its full efficiency and potential, which in turn means that it had to be in possession of the passive infrastructure and cannot part with the same in favour of the sharing telecom operators. With several such restrictions and curtailment of the access made available to the sharing telecom operators to the passive infrastructure and with severe penalties prescribed for failure on the part of the Indus to ensure uninterrupted and high quality service provided by the passive infrastructure, it is difficult to imagine how Indus could have intended to part with the possession of part of the infrastructure. That would have been a major impediment in the discharge of its responsibilities assumed under the MSA. The limited access made available to the sharing telecom operators is inconsistent with the notion of a “right to use” the passive infrastructure in the fullest sense of the expression. At best it can only be termed as a permissive use of the passive infrastructure for very limited purposes with very limited and strictly regulated access. It is therefore difficult to see how the arrangement could be understood as a transfer of the right to use the passive infrastructure. When Indus has not transferred the possession of the passive infrastructure to the sharing telecom operators in the manner understood in law, the limited access provided to them can only be regarded as a permissive use or a limited license to use the same. The possession of the passive infrastructure always remained with Indus. The sharing telecom operators did not therefore, have any right to use the passive infrastructure. Accordingly, the High Court allowed the writ petition filed by the Indus and quashed the order passed by the Commissioner holding the Indus liable to pay vat.

Sales Tax – Pulp based Drink – Known as “Slice” – Predominantly Contained Water – Not a Food Article Within the Meaning of Entry 47 of Schedule I, Section – 4(1)(a)(d) and Entry 47 of Schedule I of The Delhi Sales Tax Act, 1975

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8. M/S. Varun Beverages Ltd vs. Commissioner of Vat, [2003] 62 VST 388 (Delhi)

Sales Tax – Pulp based Drink – Known as “Slice” – Predominantly Contained Water – Not a Food Article Within the Meaning of Entry 47 of Schedule I, Section – 4(1)(a)(d) and Entry 47 of Schedule I of The Delhi Sales Tax Act, 1975

FACTS

The appellant trades in aerated drinks, mineral water and fruit pulp based drink known as “slice”. It sought to deposit sales tax at 8% under residual entry on the basis that “slice” is not a preserved food article thus not covered by entry 47 of Schedule I of the Act. The department on the other hand treated it as food article and levied tax @12% under entry 47 of Schedule I of the Act. The appellant filed appeal up to Tribunal without any success. The appellant thereafter filed appeal before The Delhi High Court against the decision of the Tribunal rejecting the appeal filed by it.

HELD

There is no reference under the Delhi Sales Tax Act imposing definition contained in The Prevention of Food Adulteration Act and reliance by the Tribunal on it was misplaced. The predominant content of the Mango Pulp Drink is water i.e. 70 % and the Mango Pulp content is 17%. This product does not claimed to be a fruit juice and therefore the revenue cannot urge that it has even a minimum modicum of nutritive properties. Arguably, if the product was entirely milk based, the consideration might have been different. However, the mango pulp based drink, at best an instant energy giver and in all cases a thirst quencher; by no stretch of imagination can it be called a “food article” at least not within the contemplation of the statute, by an application of the common parlance test. Accordingly, the High Court allowed the appeal filed by the company and held that the impugned product is not covered by entry 47 of Schedule I of the Act as “preserved food article” and taxable at 8% under residual entry.

VAT – Levy of VAT on MRP – Not Permissible, Section 4(5) of The Karnataka Value Added Tax Act, 2004.

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7. M/S. ITC Limited vs. State of Karnataka and Others, [ 2013] 62 VST 320 (Karn)

VAT – Levy of VAT on MRP – Not Permissible, Section 4(5) of The Karnataka Value Added Tax Act, 2004.

FACTS

The Petitioner filed a Writ Petition before the Karnataka High Court challenging the constitutional validity of section 4(5) of the Act, inserted by Karnataka Value Added Tax (Amendment) Act, 2004 for levy of tax on sale of Cigars, Gutkha and other manufactured tobacco, on the maximum retail price (MRP) indicated on the label of the container or packing thereof.

HELD

The Supreme Court, in Rajasthan Chemist Association [2006] 147 STC 542, while considering the validity of a provision similar to the one impugned herein had upheld view of the Rajasthan High Court that it is not permissible for the legislature of a State to levy tax on sale of goods by adopting a notional price as a measure of tax; such a legislative measure has to be outside the ambit of entry 54 of List II of the Seventh Schedule to the Constitution of India. The same reasoning applies to the provision impugned herein as both are similar. Accordingly, the High Court allowed the writ petition filed by the company and sub-section (5) of section 4 of the Act providing levy of tax on sale of cigars, tobacco etc. on the MRP as unconstitutional on the ground that such a taxing provision is beyond the legislative competence of the State under entry 54 of List II of the seventh Schedule to the Constitution of India.

Contribution to expenses cannot by any stretch be deemed to be a consideration for any identified service rendered to members by access to the facilities or advantage by a club or association. However, if the payments are specifically attributable to such facility, advantage or service, the subscription will be taxable.

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45. [2015] 62 taxmann.com 2 (Mumbai – CESTAT) Cricket Club of India Ltd vs. Commissioner of Service Tax

Contribution to expenses cannot by any stretch be deemed to be a consideration for any identified service rendered to members by access to the facilities or advantage by a club or association. However, if the payments are specifically attributable to such facility, advantage or service, the subscription will be taxable.

Facts

The Assessee is a members’ club providing various facilities to its members. Service tax was paid on the entrance fees under protest under Club or Association service. A refund was sought of the amount paid on account of principle of mutuality and on the ground that entrance fees is not a consideration for any service. The department denied refund and the same was upheld by the Commissioner (Appeals), accordingly the present appeal is filed.

Held

The Tribunal noted that Clubs or Associations need funds to exist. Wages of employees, energy charges, maintenance and repairs etc. are necessary expenses for sustenance. Implicit in membership of clubs and associations is the obligation to share in such expenses for maintaining the assets of the club and the contributing members are not the direct beneficiaries of such services. Contribution to expenses cannot, by any stretch, be deemed to be consideration for any identified service rendered to individual members by access to the facilities or advantage that is within the wherewithal of the “club or association”. However, to the extent that it is possible to identify the facilities, advantage or services without further payments specifically attributable to such facility, advantage or service, the subscription will be taxable. It was also observed that without an identified recipient who compensates the identified provider with appropriate consideration for an identified service, a service cannot be held to have been provided. Further, relying on the decision of the Sports Club of Gujarat [2013] 40 STT 486/35 taxmann.com 557 (Guj.), the principle of mutuality was upheld and the appeal was allowed.

[2015-TIOL-1085-CESTAT-MUM] Commissioner of Service Tax, Mumbai-ii vs. Syntel Sterling Bestshores Solutions Pvt. Ltd

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Input services without which the quality and efficiency of output services exported cannot be achieved are eligible for refund.

Facts:
The
Respondent is a BPO rendering services to the clients based abroad. A
refund claim was filed in respect of service tax paid on rent-a-cab
service, telephone service and rent. Adjudicating authority denied the
claim. On appeal, the first appellate authority allowed the refund
claim, aggrieved by which revenue is in appeal.

Held:
The
Tribunal relied upon the CBEC’s Circular No. 120/01/2010-ST dated
19/01/2010 which specifically provides that essential services used by
Call Centres for provision of their output service would qualify as
input services eligible for taking CENVAT credit as well as refund. It
further held that the expression ‘used in’ in the CENVAT Credit Rules
should be interpreted in a harmonious manner and accordingly as the
input services disallowed were essential to provide quality output
services, the refund should be granted.

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2015 (38) STR 673 (Del.) Delhi Transport Corporation vs. CST

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A service provider is statutorily liable to pay service tax even
though based on contractual arrangement, service tax liability can be
recovered from the service receiver. Though liability can be transferred
to third party, revenue cannot be asked to recover the same from third
party or asked to wait till its recovery

Facts:
The
Appellants provided space to various contractors/ advertisers for
display of advertisement. The terms of contract clearly stated that the
contractors were responsible for paying tax to the concerned authorities
in addition to the license fees payable to them. The department issued
various letters followed by a Show Cause Notice to the Appellants for
discharge of service tax liability on such sale of space for
advertisement along with penalties. The Appellants argued that they were
autonomous body of Delhi Government and they had no intention to evade
service tax. Inadvertently, they did not obtain registration. As per
contractual arrangement, all the contractors paid service tax which was
duly deposited except 2 of the contractors. In spite of directions of
High Court u/s. 9 of Arbitration and Conciliation Act, 1996, these 2
contractors did not abide the contract. Accordingly, they were intending
to institute contempt proceedings. The department invoked extended
period of limitation on the grounds of suppression of facts. It was
argued that they were under a bonafide belief that liability was
transferred to contractors in view of the Agreements. However, the
argument of bonafide belief was rejected by CESTAT on the grounds that
the Appellants should have taken efforts to find out who was liable to
pay service tax and there was no ambiguity in provisions of service tax
law.

Held:
The Hon’ble High Court observed that
though service tax burden can be transferred by way of contractual
arrangement, statutorily service provider is required to discharge
service tax liability and the assessee cannot ask revenue to recover tax
dues from a third party or wait till recovery of such tax dues from a
third party. In view of the orders under Arbitration and Conciliation
Act, 1996, the Appellants can recover service tax paid. However, these
orders would not affect recovery by department from the Appellants.
Accordingly, service tax liability with interest and penalties were
confirmed. Though the Appellants took a stand to discharge service tax
liability only after receipt thereof from contractors, there were no
malafide intentions. Further, in absence of support of facts and also in
view of poor financial position, penalty u/s. 78 of the Finance Act,
1994 was waived vide section 80 of the Finance Act, 1994.

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2015 (38) STR 458 (All.)Daurala Sugar Works vs. UOI

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Department cannot take any action on the basis of an advisory notice merely asking the assessee to pay service tax to avoid penal consequences.

Facts:
Department issued an advisory notice, which stated that the petitioner should pay service tax to avoid penal consequences. The legality of such advisory notice was questioned in this Writ Petition. The revenue also stated that the notice was merely advisory and if authority wishes to take any action, they can issue a Show Cause Notice.

Held:
There was no need to make any observation since no Show Cause Notice was issued. Accordingly, the writ Petition was disposed off.

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2015] 57 taxmann.com 72 (Bom H C) – Commissioner of Central Excise, Goa vs. Hindustan Coca Cola Beverages (P) Ltd.

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CENVAT – Definition of “input service” post 01- 04-2011 – Service tax paid on mobile phones which are used by employees/staff of manufacturer are eligible as input service credit.

Facts:
The Assessee availed CENVAT credit of service tax paid on mobile phones used by its employees/ staff. Department relied upon CENVAT credit circular dated 20th June 2003 and denied the credit. Assessee argued that input services were not defined in Service Tax Credit Rules, 2002 and so circular not applicable under CENVAT Credit Rules, 2004.

Held:
The High Court held that ‘saving’ provision as per Rule 16 of CENVAT Credit Rules, 2004 provides that circulars prior to these rules shall be applicable only if they are consistent with it. Since, “input services” was not defined in Service Tax Credit Rules, 2002; it cannot be said that there is any corresponding Rule in Rules of 2004 which can be said to have been saved. The High Court further held that, as per definition of “Input Services” in Rule 2(l) of CCR, any expenditure incurred in manufacturing activity would be entitled for credit facility. It is undisputed that mobile phones are in connection with manufacturing process of the respondent. Thus CENVAT credit would be allowed thereby rejecting the appeal.

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[2015] 57 taxmann.com 402 (SC)-Coal Handlers (P) Ltd vs. Commissioner of Central Excise Range Kolkata-I

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Supervising and liaisoning with coal companies and railways for verification of material as per requirement of cement companies cannot be termed as a clearing and forwarding agent’s service as they are not connected with clearing and forwarding operations.

Facts:
The assessee is providing services to various cement companies under agency agreement for following up allotment of coal rakes by railways, expediting and supervising loading and labeling of rail wagons, drawing samples of coal loaded on wagons, paying freight to railways and dispatching rail receipts to cement companies. Department contended that the said services amount to Clearing and Forwarding Agent’s Service. The Tribunal decided against the assessee relying upon the decision of Prabhat Zarda Factory (India) Ltd [2002 taxmann.com 1307 (CEGAT – Kolkata)].

Held:
The Supreme Court observed that Prabhat Zarda’s case relied upon by the Tribunal has been overruled by the Larger Bench of the Tribunal in Larsen & Toubro Ltd.’s case 2006 (3) STR 321 (Tri- LB) and that, department has accepted the decision of Larger Bench and did not file appeal against the same. The Court also considered definition of “clearing and forwarding agent” under erstwhile section 65(25) of the Finance Act, 1994 and also dictionary meaning of the word forwarding agent and its characteristics and held that in order to qualify as a C&F Agent, such a person is to be found to be engaged in providing any service connected with “clearing and forwarding operations”. Of course, once it is found that such a person is providing the services which are connected with the “clearing and forwarding operations”, then whether such services are provided directly or indirectly would be of no significance and such a person would be covered by the definition.

As regards what constitutes “clearing and forwarding operations”, the Court held that, it would cover those activities which pertain to clearing of the goods and thereafter forwarding those goods to a particular destination, at the instance and on the directions of the principal. In the context of present appeals it would essentially include getting the coal cleared as an agent on behalf of the principal from the supplier of the coal (i.e. collieries) and thereafter dispatching/ forwarding the said coal to different destinations as per the instructions of the principal. In the process, it may include warehousing of the goods so cleared, receiving dispatch orders from the principal, arranging dispatch of the goods as per the instructions of the principal by engaging transport on his own or through the transporters of the principal, maintaining records of the receipt and dispatch of the goods and the stock available on the warehouses and preparing invoices on behalf of the principal.

Having explained the scope of clearing and forwarding operations, the Apex Court held that, that assessee did not play a role of getting coal cleared from collieries. Movement of coal is under contract of sale between coal company and cement companies. Even the coal is loaded on to the railway wagons by the coal company. There is no occasion for cement companies to instruct the appellant to dispatch/forward the goods to a particular destination which is already fixed as per the contract between the coal company and the cement companies. The railway rakes are placed by the coal company for the said destinations. The appellant does not even undertake any loading operation as the primary job, as per the contract, is of supervising and liasoning with the coal company as well as the railways to see that the material required by cement companies is loaded as per the schedule. At no stage the custody of the coal is taken by the appellant or transportation of the coal, as forwarders, is arranged by them. In these circumstances, Apex Court held that, the services would not qualify as C&F Agent within the meaning of section 65(25) of the Finance Act, 1994.

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Builders’ plight continues

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Introduction Whether builders and developers are works contractors, under sales tax/VAT laws, has chequered history. In the late 1980s when works contract was introduced, there were determination orders passed by the learned Commissioner of Sales Tax, determining that builders were not liable to sales tax (works contract) when they were selling premises to prospective buyers. After the judgment of the Hon’ble Supreme Court in case of K. Raheja (141 STC 168), the Sales Tax Department of Maharashtra took a view that builders were also ‘works contractors’ and liable to tax accordingly. The above position was challenged by preferring writ petitions in the Hon’ble Bombay The High Court. Hon’ble Bombay High Court decided the issue vide judgment in MCHI (51 VST 168) and held that in certain circumstances the builders were also works contractors. This decision was challenged before the Hon’ble Supreme Court. The Supreme Court, along with other matters, decided that the above issue, vide its judgment in case of Larsen & Toubro and others (65 VST 1). In above judgment, the Hon’ble Larger Bench of the Supreme Court confirmed the judgment of the Hon’ble Bombay High Court that builders and developers were works contractors. However, while deciding the issues before it, the Hon’ble Supreme Court also observed that the contract starts from the date of agreement with the prospective buyer and the completed portion prior to the date of such agreement would amount to sale of immovable property, thus such portion could be subjected to sales tax/VAT. Supreme Court also advised for necessary changes in the provisions. ? Amendments made in Rules vide notification dtd. 29.01.2014 To comply with the directions of the Hon’ble Supreme Court in above judgment, Government of Maharashtra amended the rules particularly rule 58(1A) was amended, and, further rules 58(1B) and 58(1C) were inserted. The sum and substance of above amendments was that if the dealer (builder/ developer) claimed deduction for cost of land, it should be allowed as per ready reckoner rate of the concerned land and if higher deduction is claimed, it should be supported by determination of value of land by Department of Town Planning & Valuation. Similarly, for deduction towards constructed portion prior to date of agreement, the rules 58(1B) & (1C) provided a table about stages for deduction and also cast an obligation to support the construction of the said portion by certificate from Local or Planning Authority. For sake of brevity the above rules are not discussed elaborately here.

Fresh Writ Petition challenging the validity of the above rules

Confederation of Real Estates Developers’ Association of India – Maharashtra & others filed writ petition in the Bombay High Court. The said writ petitions are decided vide Writ Petition no. 4520 of 2014 & others dated 30.4.2015. The challenges were to the above rules. The challenges as recorded by the Hon’ble Bombay High Court are reproduced below: –

“5. Grounds of challenge are that the impugned notification and the trade circulars are in express conflict with the observations of the Supreme Court in the case of “Larsen and Toubro Limited vs. State of Karnataka and Another” (2014) 1 SCC 708 and other pronouncements of this High Court and the Supreme Court. It is being submitted that amended Rule 58 fails to arrive at true and correct value of goods at the time of incorporation in the works contract and tends to indirectly tax immovable property and along with goods. Though Rule 58 (1A) makes allowance for deduction of cost of land, it compels determination in accordance with guidelines appended to Annual Statement of Rates, prepared under the provisions of Bombay Stamp (Determination of True Market Value of Property) Rules, 1995 (Hereinafter referred to as Bombay TMV Rules, 1995), as would be applicable on 1st January of calendar year in which agreement of sale is to be registered, and as such, profit relatable to transfer of land would not be deductible from the total contract value. The Amended Rule 58 (1A) of the MVAT Rules also does not give allowance to deductions on account of consideration for acquisition of FSI/TDR, payments towards eviction of tenants, clearance of encroachment on land. While Rule 58 (1) (h) permits deduction of profit relatable to supply of labour and service, amended rule does not provide for profit relatable to third element, namely, the land and the object of taxing of value of goods at the time of incorporation, as such, gets blurred. Trade Circular dated 21st February, 2014 restricts options to only one from the four methods given and no other option such as, ‘cost plus gross profit’ is admissible. Various other arguments have been advanced to contend that the Rule is deficient to provide for many things involved. Arguments are also advanced contending that Trade Circulars tend to be ambiguous and do not clarify many issues while they purport to answer the questions. According to the petitioners cost plus gross profit method is viable and practicable.

6. The petitioners further contend that Rule 58 (1B) of the MVAT Rules, seeks to enact a wide and arbitrary categorisation. Stage wise percentage provided under rule 58 (1B) has no basis, either for stage or for percentage of construction. According to them, percentage of material on which taxes are sought to be levied is on higher side and it is unfair and unconstitutional. The percentage prescribed is not in tune with ground realities and technical considerations. According to the petitioners, though prescription of table has been modelled on recommendations of Public Works Department, the same is insufficient and would not be applicable to the cases of developers. There is huge difference in the contracts with the Public Works Department and the nature of work of the developer, viz., Public Works Department contract provides for escalation, which is not the case with the developer. It is further contended that presumptions underlying the table under rule 58 (1B) that work is done on site as per stage given, yet it would not necessarily represent the way construction is carried out, in stages and in the sequences, for, it may be combination of various stages or activities may be simultaneous and as such, the table would not be able to give correct determination of value of work done at the time of entering into an agreement.”

There were elaborate arguments, which were considered by the Hon’ble Bombay High Court. Assuming that there may be some chances that valuation of goods may not be correct or some portion of immovable property may get taxed, the overall view of the Hon’ble High Court is that the rules are for uniformity and hence cannot be said to be invalid or unconstitutional. The Hon’ble High Court recorded its reasons, amongst others in following words:- “62. This Court is to consider validity of provisions valuing taxable goods for the purpose of charging duty. While enacting a measure to serve as a standard as levy, the legislation may not contour it along with the lines which spell out the character of the levy itself. Viewed from this standpoint, it is not possible to accept the contention that because the levy of MVAT is a levy on transfer of goods in a works contract, the value of goods must be limited to cost plus profit. The broader based standard may be adopted and would be within authority and power of legislation. A standard which maintains a nexus with the essential character of the levy can be regarded as a valid basis for assessing the measure of levy.

63.    There is further consideration that the value shall be arrived at, assessed and ascertained  on the modality  as has been referred to under Rule 58 (1) (1A)and (1B) of the MVAT Rules. The value is a measure of tax and Rule 58 provides for determination of value of goods to be arrived at after deductions therefrom, referred under the rules/formulae. Values and items as referred to  under Rule 58 (1), 58 (1A) and 58 (1B) are criteria for computing value of subject of tax at various stages as have been referred to under the Rules. Table under Rule 58 (1B) specifies the stages and value at the stages. The computation of value is to be done in accordance with the terms of the same. It is intended to determine value of goods and provides basis for determining such value.

The value has to be ascertained and determined in such a manner as is prescribed and shall be value of the subject of tax for the purpose of charging MVAT. The legislature, while enacting amended rules, did not intend to create a scheme materially different from the one in the previous rule 58 (1A) of the MVAT Rules. The object and purpose remained the same and so did original principle at the core of the scheme, and has been made more flexible and wider.

64.    The first essential characteristic of MVAT is it is a tax on transfer of property in goods, secondly, uniformity of incidence is also a characteristic of the tax and thirdly the collection of tax. MVAT can be imposed on assessable value determined with reference to transfer of goods at the stage as referred to in the table. It is legislature’s power to legislate in respect of the basis for determining the measure of tax. The computation being made strictly in accordance with the express provisions under the rules, there is no warrant for confining the value as sought to be submitted by the assessee. It is open for the legislature to adopt any basis for determining the value of a taxable article. The measure for assessing the levy need not correspond completely to the nature of levy, and no fault can be found with the measure so long as it bears nexus with the charge. ……

67. The amended provisions define a measure of  charge and the standard adopted by the legislature for determining value which may require/press for broader base than that on which the charging proceeds. By now, it is well settled that stage of collection need not in point of time synchronise with the transfer of property in goods
for as is being a long standing position that in our country levy has status of constitutional concept while the point of collection is to be located where the statute declares it. Taking into account this, the valuation of tax being made at the stages is a convenient mode for point of collection. It would not be necessarily confused with the nature of tax. Rule 58 (1B) envisages a method of valuation of   tax at the stages as have been referred to under the Table for collection of the same. In order to overcome various difficulties, to have the value of taxable articles for the purpose of MVAT, the legislature or its delegate has prescribed table giving stages for the purpose of computation of value of subject of tax. This appears to have been provided in order to have uniformity and to avoid vagaries, disparity or inconvenience from case to case. The same has been incorporated after deliberation and consultation with concerned departments and would not be liable to be termed as arbitrary.”

Conclusion
Ultimately, the Hon’ble High Court has rejected the writ petitions. Therefore, the builders and developers will be required to follow the rules 58(1A), (1B) & (1C) as they are. There are chances that due to their inability to bring required certificates, there will be higher taxation. Though such taxation is on consonance with the above judgment, there would be certainly injustice to the builders and developers, who were otherwise also in the doldrums and also further burdened by way of interest, etc. The legislature should devising a practical/convenient procedure for certifying /supporting the deductions claimed. Till then, the plight of builders would continue.

Architect Services, Consulting Engineers Services, Management Consultancy Services etc. used for construction are eligible input services against the output service of Renting of Immovable Property.

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44. [2015-TIOL-2418-CESTAT-MUM] Maharashtra Cricket Association vs. Commissioner of Central Excise, Pune-III.

Architect Services, Consulting Engineers Services, Management Consultancy Services etc. used for construction are eligible input services against the output service of Renting of Immovable Property.

Facts

The assessee, an association, constructed a stadium and availed the services of Architect, Consulting Engineering and Management Consultancy and availed CENVAT credit of the service tax paid thereon. The department contended that vide Circular No. 98/01/2008-ST, the credit of service tax paid on commercial or industrial construction or works contract service used for construction of immovable property is not eligible to a person providing renting of immovable property service and accordingly the input services availed being in relation to construction are inadmissible for credit.

Held

The Tribunal observed that the definition of input service provided under Rule 2(l) of the CENVAT credit Rules, 2004 specifically includes services “in relation to setting up, premises of provider of output service or an office relating to such premises”. Accordingly, the services used for setting up the stadium are eligible input services. The Tribunal also noted that the circular being contrary to the definition of input service is not tenable. Further, relying on the decision of Navratna S.G. Highway Prop. Pvt. Ltd vs. Commr. of ST, Ahmedabad-2011-TIOL-1703- CESTAT-AHM, the appeal was allowed.

[2015-TIOL-375-CESTAT-MUM] Commissioner of Central Excise, Nagpur vs. Media World Enterprises.

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Kaldarshika is an Almanac, meaning a book, is excluded from the purview of taxable service of sale of space for advertisement being “print media”.

Facts:
The Assessee is engaged in printing and publishing calendar ‘KALDARSHIKA’ on which there are advertisements and department has sought levy of service tax under sale of space for advertisement. The first appellate authority allowed the appeal and the revenue has appealed before the Tribunal.

Held:
Kaldarshika gives the readers a host of information in respect of religions, cultural and historical events, as also the panchang and thus it cannot be considered as a calendar, business directory, yellow pages or a trade catalogue. It is a book excluded from the definition of “sale of space for advertisement”.

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[2015] 54 taxmann.com 153 (New Delhi – CESTAT) Commissioner of Central Excise vs. Sharp Menthol (India) Ltd.

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Pre-deposit – Prima Facie, the value of flats allotted to the land owner by the assesseebuilder to be determined based on the gross amount charged by the service provider to provide similar service to any other person – Rule 3 of Valuation Rules is applicable.

Facts:
The applicant provided taxable service under the category of “Construction of Residential Complex Service”. It entered into joint venture with land owner for construction of 72 flats out of which 48 flats belonged to assessee and service tax was paid on consideration received thereon and 24 flats belonged to land owner and no service tax was paid thereon. A show cause notice was issued proposing service tax on the 24 flats of the land owner’s share on the ground that they failed to pay service tax for the taxable service provided by them to the land owners for construction of 24 flats in consideration of land value. The applicant submitted that the consideration is the value of the land and hence it is liable to pay tax only on the land value and not on the value determined as per Rule 3(A) of (Determination of Value) Rules, 2006.

Held:
Tribunal held that it is undisputed that the consideration received for the service rendered to land owner in respect of 24 Flats is not wholly or partly consisting of money and therefore, Rule 3 of (Determination of Value) Rules, 2006, would be invoked. As per Rule 3(a), where consideration received is not wholly or partly consisting of money then the value of such taxable service shall be equivalent to the gross amount charged by the service provider to provide similar service to any other person. Since the tax is assessed on the basis of the value of similar flats and therefore, prima facie, the tax was determined properly. Pre-deposit was ordered

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[2015] 54 taxmann.com 244 (New Delhi- CESTAT)-National Building Construction Corporation Ltd. vs. Commissioner of Central Excise & Service Tax, Raipur.

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Service Tax- Service portion in works contract –liable to service tax prior to 01-06-2007- abatement cannot be denied merely because value of free supplies are not included in the gross value of services.

Facts:
Assessee received work order for the work of Engineering Procurement & Construction of Civil Structural and Architectural Work of Main Power Plant wherein the steel required for construction was supplied to it free of cost by service receiver and remaining material such as cement, sand aggregates, bricks, etc. and equipment, tools, spares, etc. were procured by the assessee and used in the said construction work. Department demanded service tax on full value and denied abatement of 67 % on the ground that value of free supplies was not included in the value of services. The assessee contended that activities were not liable to tax prior to 01-06-2007 and that if services are taxable then, the benefit of abatement cannot be denied.

Held:
It was held that the classification of service has to be determined as per definition of the taxable service applicable for the relevant period and merely because the classification changes with the introduction of a taxable service under which an existing service gets more specifically covered, it no way means that the said service was not taxable during the period prior thereto. However, as regards entitlement of abatement, relying upon the law laid down by Bhayana Builders (P.) Ltd. vs. CST [2013] 38 taxmann.com 221 (New Delhi – CESTAT), it was held, the denial of abatement on the grounds of non-inclusion of free supplies in the gross amount is unsustainable in law.

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[2015] 54 taxmann.com 206 (Ahmedabad)- Arvind Ltd. vs. Commissioner of Central Excise, Ahmedabad-II.

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CENVAT Credit- supply of electricity to sister concern – merely a book adjustment is also a form of payment- assessee liable to reverse prorata CENVAT credit of inputs used in generation of electricity.

Facts:
The assessee manufacturer used Naphtha fuel for generation of electricity. A part of electricity so generated was captively consumed in manufacture of final product and remaining was supplied to its sister concern. Department denied pro-rata credit for electricity supplied to sister concern. Tribunal decided in favour of the assessee. On Revenue’s appeal, Supreme Court remanded the matter back to revenue to quantify denial of credit, considering electricity was wheeled out / cleared for a price to sister concern. Assessee argued that reversal was not warranted as it did not charge any price to sister concern and department erroneously proceeded only on the basis of book adjustment entries and interest could not be demanded as there was sufficient balance in the CENVAT credit account which remained unutilized to the extent of demand raised by the assessee.

Held:
Relying upon the decision of Collector of CE vs. Modern Food Industries (India) Ltd. 1988 taxmann.com 190 (CEGAT – New Delhi) (SB), Tribunal held that the transfer of amount by the sister unit by book adjustment would be treated as amount charged to the other unit. It was also observed that the adjudicating authority calculated the demand based on Chartered Engineer’s Certificate and therefore Tribunal upheld the adjudication order to the extent of recovery of CENVAT credit. As regards non-charging of interest, it was held that assessee had wrongly availed CENVAT credit but did not utilise the credit against any liability. However, in view of the fact that there are judgments in favour of both assessee as well as revenue in this regard, the matter was remanded back to the adjudicating authority to analyse whether assessee had factually utilised the CENVAT credit to decide the case afresh in the light of such decisions.

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[2015] 54 taxmann.com 275 (Bangalore)-Apotex Research (P.) Ltd. vs. Commissioner of Central Excise, Customs & Service Tax, Bangalore.

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CENVAT Credit- Two adjacent units with common service tax registration – CENVAT credit can be availed irrespective of invoice addressed to head office or to any of the adjacent units.

Facts:
Assessee had two adjacent units under a common service tax registration. They availed service tax credit without considering whether the invoice was addressed to the head office or to units. Department denied credit based on the grounds that Central Excise registrations were different and since there was another sister concern adjacent to the two units, there was also a possibility that input service could have been utilied by the said sister concern unit.

Held:
Tribunal allowing the appeal held that when the service tax registration is common and both the units are located adjacent to each other, insisting that the service tax also should be segregated may not be relevant.

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