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Service Tax
Part B : Some Recent Judgments
I.
SUPREME COURT :
1.
Ranking of creditor and tax arrears :
Whether realisation of Central Excise duty has priority over
secured creditors :
Union of India v. SICOM Ltd., 2010 (18) STR 673
(SC) :
The respondents are State Financial Corporation and secured
creditor and the appellant, the Excise Department intended to recover arrears of
excise from the respondents. The matter involved in the case was whether
realisation of Central Excise duty has priority over secured creditors.
The appellants placed reliance on Mascon Marbles Pvt. Ltd. v.
Union of India, 2003 (158) ELT 424 (SC) wherein it was held that arrears of tax
have priority over all the other debts.
The respondents contended that Article 372 of the
Constitution of India on strict interpretation gives priority to arrears of tax
revenue above the unsecured debts only and the secured debts would prevail over
the tax arrears.
The respondents relied on cases like M/s. Builders Supply
Corporation v. Union of India & Others, [AIR 1965 SC 1061] and Bank of Bihar v.
State of Bihar & Others, [AIR 1971 SC 1210], where the Apex Court held that
arrears of tax revenue have priority over other debts but not over secured
debts.
Further reliance was placed on Sitani Textiles & Fabrics (P)
Ltd. v. Asstt. Commissioner of Customs & Central Excise, Hyderabad-I, [1999
(106) ELT 296 (AP)], where the AP High Court held that right of lien of a
secured creditor being statutory has a higher claim over tax dues even though
the property involved may have been attached or seized under other law.
The Apex Court opined that even recovery of Central Excise
duty is treated at par with recovery of arrears of land revenue. It held that on
perusal of S. 11 of the Central Excise Act, 1944 it appears that dues of Central
Excise can be treated as land revenue only when the dues are not fully recovered
from sale of excisable goods. The land revenues have priority over the dues of
unsecured creditors. However, the dues of secured creditors are in priority when
compared to arrears of land revenue. At length, decision in the case of Dena
Bank v. Bhikabhai Prabhudas Parekh & Co., 2000 (5) SCC 694 was discussed and
relied upon by the Court which observed — “It seems a Government debt in India
is not entitled to procedure and a prior security debt.”
Further relying on Periyar & Pareekanni Rubber Ltd. v. State
of Kerala, 2008 (4) SCALE 125, the Court held that non obstante clause under a
State Financial Act being statutory would not only prevail over any of the
signed contract but also over any other laws.
II. HIGH COURT :
2. Adjudication :
Can issue for determination of amount in SCN be considered in
writ proceedings ? :
Creative Infospace Pvt. Ltd. v. Additional Commissioner,
Chennai 2010 (18) STR 553 (Mad.) :
The writ petition was filed to quash a show-cause notice
issued by the Revenue as to why service tax and interest could not be demanded.
It was argued on grounds of principles of natural justice and that the authority
had already pre-decided the issue and that the tax was quantified.
The appellant relied on the case of Siemens Ltd. v. State of
Maharashtra and Others wherein it was held that writ petition is maintainable
against a show-cause notice if the respondent has already determined the
liability of the assessee.
The High Court held that quantification of tax in the
show-cause notice is a statutory requirement and cannot be stated that the
authority has pre-decided the issue. Therefore the decision cited by the
petitioner is not applicable to the present case. It was further held that the
question invoking extended period of limitation should be left to the
adjudicating authority and it could not be decided by filing a writ petition.
The appeal was dismissed.
3.
Classification :
(i) Whether del credere agent can be classified as
Clearing and Forwarding Agent :
Commissioner of Service Tax, Bangalore v. Sreenidhi
Polymers (P) Ltd., 2010 (18) STR 385 (Kar.) :
The assessee contented that it was an agent of M/s. IPCL, as
a del credere agent and not C & F agent.
A substantial question of law was raised before the High
Court whether service rendered can be classified as C & F agent.
Del credere agent is a mere surety and is liable to principal
only when purchaser defaults. Service rendered is in nature of indemnifier as
the assessee has to indemnify to the value of goods sold by the principal to its
customers and that the assessee shall ensure proper repayment of value of goods
sold.
Service rendered by del credere agent was included under
‘Business Auxiliary Service’ by way of amendment in the year 2005. By
introducing del credere agent as business auxiliary service provider, it is
implied that prior to amendment Del credere agent was not liable to pay service
tax. Therefore, service rendered by del credere agent cannot fall under
‘Clearing and Forwarding Agent service’.
Bangalore v. Raj Rajeshwari International Polymers (P) Ltd.,
2010 (18) STR 390 (Kar.) :
Following the decision in the above case of Sreenidhi
Polymers (supra), the Revenue’s appeal was dismissed in this case also holding
that Del credere agents were not C & F agents and not liable for service tax
before 16-6-2005.
(ii) If an amount is taxed under one category for an
assessee, can the same be taxed in the hands of another under another category ?
Speed and Safe Courier Service v. Commissioner, 2010 (18) STR
550 (Ker.) :
The assessee is engaged in rendering courier service which involves collection of letters, par-cels, etc. from customers and delivering to the addresses. In order to carry on this business, the assessee appointed several agents named as franchisees. The franchisees collect service charges from customers along with service tax for delivery of parcels, articles, letters, etc. The entire charges collected are passed on to the assessee and the assessee makes payment to franchisees at agreed rates. It implies that courier service operation leads to sharing substantial amount with the franchisee and assessee gets only the balance amount.
The Department assessed the net amount retained by the assessee towards value of taxable service un-der ‘Franchisee service’. In other words, the Depart-ment levied tax twice on the same amount — under courier service and under Franchisee service. The assessee had filed appeal against the Commissioner’s order, which was rejected by the Tribunal, so the assessee preferred an appeal to the High Court.
The High Court held that if a service falls under two heads, there is no provision in the Finance Act, 1994 to tax the same twice under two heads. Having regard to the definition of ‘franchise’ it is clear that under franchise agreement, franchiser gives a right to the franchisee to do business in a representative manner by using its trade mark or trade name. It was further held that agents were doing business on behalf of the assessee and as such, assessee was not rendering any service apart from accepting parcels for courier. The demand under another category being untenable the ap-peal was allowed.
4. Penalty :
Whether penalty leviable, if amount involved is meager :
Commissioner of C.Ex., Jalandhar v. Ess Ess Kay Engg. Co. Ltd., 2010 (18) STR 393 (P & H) :
Penalty was imposed by the Commissioner for failure to deposit service tax within prescribed time limit. Appeal was filed in this regard by the assessee, which was partly allowed whereby period of payment of interest was modified and penalty order was set aside.
The amount of tax was not more than Rs.30,000. As the amount of penalty was meager, appeal of the Revenue was dismissed.
5. Service tax applicability :
i) Whether service tax applicable as consulting en-gineer’s services for works contract prior to June 01, 2007 :
Commissioner of Service Tax, Bangalore v. Turbotech Precision Engineering Pvt. Ltd., 2010 (18) STR 545 (Kar.) :
The assessee was rendering services like design development, design review, installation and commissioning, technology transfer for study and design of oil-free compressor systems.
The Department contended that the above services were covered within ‘Consulting Engineer Services’ as per S. 65(13) of the Finance Act, 1994 and de-manded service tax, interest and penalty thereon and confirmed the same. The Commissioner of Central (Appeals) rejected the plea, but the CESTAT decided the case in favour of the assessee. There-fore, the revenue filed appeal in the High Court.
The High Court observed that prior to amendment in the definition of ‘Consulting Engineer’ by the Finance Act, 2006, the companies were not liable to pay service tax. Therefore, for the period prior to 1-5-2006, the assessee could not be considered as a consulting engineer.
The agreement entered into between the assessee and its employer falls under the definition of works contract. However, since the contract was for the period from 1997 to 2001, and works contract was introduced under service tax net with effect from 1-6-2007, it was held that the assessee cannot be compelled to pay service tax under the category of ‘Works Contract’.
[Note : Readers may note that the finding that the definition of consulting engineer did not cover ‘company’ prior to 1-5-2006 is in deviation from the law laid down by M. N. Dastur & Co. Ltd. v. UOI, 2002 (140) ELT 341 (Cal.) and Tata Consultancy Service v. UOI, 2001 (130) ELT 726 (Kar). The final conclusion that the contract is covered by works contract service and therefore no service tax can be demanded being on a different premise, does not give rise to much issue. However, the conclusion about the company’s exclusion cannot be relied upon, in our opinion.]
6. Valuation :
i) Whether the value of materials consumed during provision of photography services be exempted under Notification No. 12/2003 :
Commissioner of C.Ex. v. Yahoo Colour Lab, 2010 (18) STR 548 (P&H) :
The assessee was engaged in services of photo-graphy developing and printing. The Revenue contended that the assessee has not sold the material/goods to the recipient of service and therefore, it cannot claim benefit of Notification No. 12/2003–ST, dated 20-6-2003.
The respondent explained that the photography films, printing papers, chemicals, etc. consumed during provision of photography services are the essential ingredients of their developing/printing job and without their use, the photography ser-vices cannot be provided. They further claimed that the material brought and sold was liable to Sales Tax which is a State levy and Central Gov-ernment does not have any power to levy tax on purchase or sale of goods under service tax, unless the same is in the course of inter-State trade.
The Adjudicating Authority relying on clarifica-tion dated 7-4-2004, dropped the proceedings. However, the Revisional Authority reviewed the order and confirmed the demand. However, the Appellate Tribunal restored the original order of the Adjudicating Authority and therefore, the Revenue filed the present appeal.
The High Court relying on the judgment delivered in BSNL v. UOI, 2006 (2) STR 161 (SC) held that in case of composite contract where both, service and sales components are discernible, service tax could not be levied on sale portion. Therefore, the impugned order of the Tribunal was maintained and the Revenue’s appeal was rejected.
III. Tribunal :
7. Adjudication :
i) Unjust enrichment — Whether applicable when amount paid did not represent service tax :
Commissioner of Service Tax, Delhi v. Avery India Ltd., 2010 (18) STR 428 (Tri-Del.) :
The revenue demanded service tax under ‘Consult-ing Engineer Service’ for receiving services from overseas company and confirmed the same. Com-missioner (Appeals) set aside the order which was upheld by the Tribunal.
The assessee filed claim for refund of service tax and interest paid. The original authority passed an order for refund claim, but ordered to be depos-ited to Consumer Welfare Fund under principles of unjust enrichment. The Commissioner (Appeals) held that unjust enrichment did not apply and or-dered for cash refund. The Department preferred an appeal against the order of the Commissioner (Appeals).
The Department argued that the assessee availed credit and service tax factor was added to cost of goods manufactured and thus burden of tax was passed on to the customers.
The assessee contended that he being a recipient of service, paid service tax out of his own pocket and the credit taken was also reversed before is-sue of show-cause notice. It was argued that as a recipient of service, the question of passing the burden of service tax did not arise.
The Commissioner (Appeals) found that the prin-ciple of unjust enrichment and the burden of proving that service tax has not been passed does not arise as the service tax was not payable on technical know-how and the assessee paid service tax out of its own pocket. Further, after taking the credit on payment of tax, the assessee reversed the same, so it can be said that no unjust enrich-ment took place.
The Tribunal held that service tax was not appli-cable, therefore whatever amount was collected did not represent service tax. Therefore, provi-sions relating to refund of service tax, and unjust enrichment could not be made applicable and the refund was held admissible.
ii) Delay in filing appeal : Whether condonable ?
Indo Colochem Ltd. v. Commissioner of Service Tax, Ahmedabad, 2010 (18) STR 615 (Tri-Ahmd.) :
The application for condonation for delay of 84 days was filed with the Commissioner (Appeals) was rejected. The application was delayed as the manager of the company was on leave and later he left the organisation, and therefore the appeal was filed by the Director of the company. The as-sessee filed stay application against this order.
The counsel of the assessee submitted that the Commissioner (Appeals) did not pass the order on merit but rejected the appeal as the delay was not condoned.
The Tribunal held that there being genuine reason for the delay, the Commissioner (Appeals) was directed to consider the appeal and stay applica-tion and pass the order on merit.
iii) Extended period of limitation — Whether invokable in absence of suppression ?
Commissioner of C.Ex., Surat -II v. Haryana Sheet Glass Ltd., 2010 (18) STR 640 (Tri-Ahmd.) :
The assessee paid service tax on outdoor catering service. The Commissioner (Appeals) held that the assessee was eligible for credit by relying on the judgment of M/s. GTC Industries 2008 (12) STR 468 (Tri-Lb.) and that extended period of limitation was not invokable when there was no suppression of fact with intent to evade payment of duty.
According to the Department, in the case of GTC Industries (supra) it was held that credit of service tax would be admissible if cost of such service is included in assessable value of final product, whereas in the present case there was no evidence to show that value of catering service was included in assessable value of final product.
The assessee submitted chartered accountant’s certificate to prove that the value of cater-ing service was included in assessable value of the final product. The Tribunal agreed with the documents submitted by the assessee that the value of catering service was included in the value of the final product and held that since two views were possible, extended period of limitation could not be invoked.
8. CENVAT Credit :
i) Whether credit of additional tax paid by input service provider admissible :
L. G. Balakrishnan & Bros. Ltd. v. Commission-er of Central Excise, Trichy, 2010 (18) STR 432 (Tri- Chennai) :
The assessee took credit of additional tax paid by input service provider and subsequently recovered from the input service provider. Further, the al-legation of suppression of facts was established on input service provider. The credit of tax to the assessee was disallowed under Rule 9(1)(b) of the CENVAT Credit Rules, 2004.
The Tribunal held that Rule 9(1)(b) which relates to supplementary invoices, there is no mention of additional amount of service tax and there being no provisions to invoke provisions of Rule 9(1)(b), the demand was held unsustainable.
ii) Whether credit admissible on plant housekeep-ing, factory garden maintenance, insurance and tours and travels expenses :
Balkrishna Industries Ltd. v. Commissioner of C.Ex., Aurangabad, 2010 (18) STR 600 (Tri-Mumbai) :
The assessee filed appeal to the Tribunal on denial of credit by lower authority on factory garden maintenance, plant housekeeping services. As regards insurance and tours and travels credit, it was denied on the grounds of non-availability of records.
The assessee pleaded that the case was covered by the decision of ISMT Ltd. v. CCE & Cus., Aurangabad (Tri-Mum.) with regard to plant house-keeping and garden maintenance service, where it was held that credit of such expenses was admissible. With regard to other two services, copies of invoices and records which were not placed before the lower authority were submitted and plea was made to remand the case to the adjudicating authority.
Based on the case of Chemplast Sanmar Ltd. v. CCE, Salem which stated that the definition of input services which includes activities in relation to business cannot be interpreted to include post-manufacturing activity, it was argued by the Revenue that credit was not admissible.
The Tribunal remanded the case back to adjudicat-ing authority in respect of Insurance service and tours and travels service. With regard to garden maintenance service, it was held that the garden creates better environment which increases work-ing efficiency of the factory and therefore credit is admissible.
iii) Whether refund admissible when input service provider fails to deposit service tax :
Lason India Pvt. Ltd. v. Commissioner of Service Tax, Chennai, 2010 (18) STR 626 (Tri-Chennai) :
The assessee availed several input services which remained unutilised as services were exported. The original authority allowed refund of unutilised CEN-VAT credit. However, revision orders were passed disallowing part of the refund on the ground that input service provider did not deposit the amount to the Government. Rule 4(7) of the CENVAT Credit Rules, 2004 provides that credit in respect of input services shall be allowed on making payment of value of input service and service tax as indicated in the invoice. Based on Rule 4(7) (supra), it was held that credit was admissible.
9. Classification :
i) Whether repairs and maintenance done on job work taxable under ‘Management, maintenance, or repairs’ service :
Crimpson Electronics v. Commissioner of Central Excise, Kanpur, 2010 (18) STR 450 (Tri-Del.) :
The assessee registered under the Central Ex-cise Act, 1944 carried on the business as a job worker. The consideration received was towards job work and there were no records to show the consideration was received towards repairs and maintenance. The assessee challenged the order of the first Appellate Authority wherein it was held that assessee was providing service of repairs and maintenance. The Department argued that the activity carried out by the assessee was repairs and maintenance in guise of job work. The Com-missioner (Appeals) held that the activity was job work and not repairs and maintenance. As there was no records to prove the existence of service and in the absence of any contract, it was held that the activity was not liable to service tax.
ii) Whether freight paid to owners is exigible to service tax under ‘Goods Transport agency service’ :
Bellary Iron & Ores Pvt. Ltd. v. Commissioner of C.Ex., Belgaum, 2010 (18) STR (Tri-Bang.) :
The assessee incurred freight for transportation of iron ore by trucks in private mines during 1-1-2005 to 31-3 -2006 and did not pay service tax under Goods Transport Agency (GTA) service. The Revenue confirmed the demand attracted in such cases and benefit of 75% abatement.
The assessee contended that the owners of trucks were not GTA and movement of iron ore within the mine during the processing or production or iron ore was not by ‘road’ as was commonly understood and hence the movement was not covered by GTA. Reference was made to CBEC Circular No. 232/02/2006–CX. 4 where it was clari-fied that the activity of handling and transportation of iron ore was liable to service tax under ‘Cargo handling service’ and export cargo was excluded from its definition. The supply of trucks by own-ers without transferring legal right of possession was taxable under ‘supply of tangible goods’. The amount paid was less than Rs.1,500 per trip and hence exemption was available.
The Minister of Finance while presenting the budget speech stated that there was no inten-tion to levy service tax on truck owners or truck operators.
The Commissioner held that the definition of GTA taxes only service provided in relation to transport of goods by road, mere transportation was not a taxable service. The owner of the goods carriage could not be said to be ‘goods transport agent of the owner.
In order to constitute service as GTA, there must be transport of goods by road. Here road is in-terpreted to mean as public road. As there were no roads in mines, provision of GTA service was held as not applicable.
10. Export of Services :
i) Whether conditions of Export of Services Rules fulfilled, if benefit accrues outside India :
KSH International Pvt. Ltd. v. Commissioner of C.Ex., Belapur, 2010 (18) STR 404 (Tri-Mumbai) :
The assessee procured purchase orders in India for suppliers of goods located abroad and transmit-ted the same by courier or electronic means to the said suppliers. Based on the purchase orders, the suppliers exported goods to buyers in India and directly collected payments from them. On receipt of sales proceeds, commission was paid to the assessee in convertible foreign exchange. Service tax was paid by the assessee on commis-sion income. Subsequently, claim for rebate was filed by the assessee under the Export Rules. The service rendered was classified under ‘Business Auxiliary Service’.
The lower authorities refused to accept the con-tention of the assessee that services provided by them to foreign suppliers were delivered outside India. Thus, the claim for rebate was rejected.
It was held that denial of refund of service tax was contrary to the express provisions of law as clarified in CBEC Circular No. 111/5/2009 where the phrase ‘delivery and use outside India’ is in-terpreted to mean that the benefit of the service should accrue outside India. Accordingly, since all the conditions of Export Rules were satisfied, the claim of rebate was held admissible.
ii) Whether delivery of report outside India can be construed as part performance of service outside India :
Commissioner of Service Tax, Ahmedabad v. B. A Re-search India Ltd., 2010 (18) STR 439 (Tri-Ahmd.)
The assessee was engaged in the business of conducting clinical trial for clients in India and outside India which are classified under ‘Technical Testing and Analysis’. The assessee claimed exemp-tion under Export of Services Rules, 2005 when the report was delivered to the client outside India. The Department raised demand by issuing show-cause notice as the services were wholly performed in India. The assessee preferred an ap-peal with the Commissioner (Appeals) which set aside the demands and penalties imposed.
The Department argued that testing and analysis were performed wholly within India and report sent outside India is secondary aspect. Thus entire services were performed wholly within India and accordingly such services cannot be termed as ‘export outside India’.
On examining Export Rules, it was found that technical testing and analysis service is classified under Category II, wherein in order to constitute export, the service must be necessarily partly or fully performed outside India. The performance of service is not complete unless report is submitted to foreign clients, so it can be construed that service is partly performed outside India. Further, delivery of report is essential part of service and it is not complete unless report is delivered outside India. Accordingly, it was held that such service is not taxable and benefit under Export Rules is available.
11. Refund :
Whether the Department was right in recovering refund granted erroneously without initiating re-view proceedings or filing an appeal :
Ogilvy & Mather Pvt. Ltd. v. Commissioner of Service Tax, Bangalore, 2010 (18) STR 502 (Tri-Bang.) :
The appellant paid excess service tax and had issued credit note to clients for extra service tax recovered and then filed a claim for refund. The Assistant Commissioner rejected the claim on the ground of limitation, but held that refund would not entail unjust enrichment. The said order was upheld by the Commissioner (appeals). However, the Tribunal allowed the assessee’s appeal by re-manding it back to the adjudicating authority in de novo proceedings. The Assistant Commissioner found that the refund claim was barred by limita-tion, but held that doctrine of unjust enrichment was not applicable.
The Commissioner (Appeals) held that the refund claim was filed in time. However, to examine the aspect of unjust enrichment the case was directed to the lower authorities who held that there was no unjust enrichment and the refund was granted to the assessee.
Subsequently, the Assistant Commissioner issued a show-cause notice u/s.11A to recover the refund sanctioned erroneously. The said order was confirmed and affirmed by the Commissioner (Appeals) and therefore, the present appeal by the appellant on the following grounds :
- The adjudication order was appealable and legal course open to the Department was to file an appeal.
- Since no review was undertaken, the order is illegal.
- Since refund claims were sanctioned by the Revenue, reopening of matter by issue of a show-cause notice without filing an appeal is not maintainable.
- The Commissioner passed such order relying on cases having dissimilar facts.
- The Tribunal in the case of Jindal Aluminium Ltd. [Order-In-Appeal No. 160/2002-CE of Com-missioner (Appeals), Bangalore] had held that refund should be granted if credit note was issued to the clients for excess service tax re-covered. The said decision was not challenged and therefore, the Department cannot take a different stand in the present case.
- The refund sanctioned could not be demanded as erroneous refund invoking S. 11A of the Central Excise Act without simultaneously invoking S. 35E of the Act. The quasi-judicial authority cannot review its own order, unless the power of review is expressly conferred by the statute.
- A refund made pursuant to an Appellate order could not be said to have been made erroneously.
- The High Court judgment relied by the Department was distinguishable and was not squarely applicable to the present case.
The Department’s grounds were as under :
- Reliance was placed on the Tribunal’s decision in CCE v. Addison & Co., 1997 (93) ELT 429(T).
- Duty erroneously refunded could be validly recovered u/s.11A of the Central Excise Act, 1944 without filing an appeal against such order.
- The Apex Court in the case of M/s. Sangam Processors had held that if credit notes issued to customers after collecting excess amounts of duty at the time of clearance of goods, the assessee cannot validly claim refund and doc-trine of unjust enrichment was still attracted.
The Tribunal made the following observations :
- S. 73 of the Finance Act, 1994 deals with re-covery of service tax erroneously refunded and S. 11A of the Central Excise Act, 1944 are pari materia and therefore both the parties have relied on cases pertaining to S. 11A.
- Relying on the ratio laid by the Supreme Court in Indian Dyestuff Industries Ltd. v. Union of India, recovery of erroneous refund can be made u/s.11A of the Central Excise Act, 1944 without firstly filing an appeal against such an order.
- Principle of unjust enrichment is fully appli-cable in the present case as once the duty incidence is passed on to the customers at the time of clearance of goods, the assessee would not be entitled for refund.
- S. 11A and S. 11B are independent provisions and their effect cannot be taken away by resorting to the provisions of S. 356A or S. 35E.
- There being substantive provisions of S. 11A of the Central Excise Act, 1944, the argument that quasi-judicial authority cannot review its own order does not merit any stand. It was held that the order being in accordance with law, the appeal was dismissed.
12. Service tax applicability :
i) Whether manufacture of alcohol-based perfumes and pharmaceutical products liable to service tax :
SPA Pharmaceutical Pvt. Ltd. v. Commissioner of C.Ex. & S.T., Aurangabad, 2010 (18) STR 421 (Tri-Mumbai) :
The assessee undertook activity of manufacturing alcohol on job work basis for various input sup-pliers and contended that it was excluded from the purview of ‘business auxiliary service’ as it amounted to manufacture.
The legal position being covered under Circular F. No. 249/1/2006–CX.4, dated 27-10-2008 and also that the issue was decided by the Tribunal in the case of Rubicon Formulations Pvt. Ltd. v. Commis-sioner of Central Excise, Aurangabad Final order No. A/281/2009-WZB/C-II/CSTB of 19/11/2009 wherein it was held that the appellants were not liable to service tax for this activity.
Based on this ratio, it was held that manufactur-ing was excluded from the purview of ‘business auxiliary service’ and as such, demand and penalty were not sustainable.
ii) Whether Explanation given to a Section to be given retrospective effect :
B. A. Research India Ltd. v. Commissioner of Service Tax, Ahmedabad, 2010 (18) STR 604 (Tri-Ahmd.) :
The assessee was engaged in the activity of clinical research/testing and analysis for various phar-maceutical companies. The category of technical testing and analysis service was made taxable w.e.f. 1-7-2003. Explanation was introduced in the definition on 1-5-2006 by which testing and analysis for the purpose of determination of the nature of diseased condition, identification of disease, prevention of disease or disorder in human beings or animals was included.
A show-cause notice was issued to the assessee for recovering service tax for the period 1-7-2003 to 1-5-2006. The issue which arose was whether Explanation was to be given retrospective effect. Relying on the case of Sedco Forex International Drill Inc. v. Commissioner of Income-tax, 2005 (12) SCC 717 and several other cases, the assessee contended that it could not be retrospective.
Citing the case of Epco India Pvt. Ltd., 2008 (84) RLT 428 (Tri.), the Department argued that since the explanation starts with ‘For removal of doubts’ it had retrospective effect.
The Tribunal held that the Explanation introduced by way of amendment was to make clear that the definition included testing and analysis undertaken for the purpose of clinical testing of drugs and formulations were earlier excluded in the original definition. The amendment expanded the scope of definition and therefore could not be given retrospective effect.
iii) Whether turnkey contracts can be vivi-sected and service tax be levied on service portion involved in execution of such turnkey contracts :
Commissioner of Central Excise, Raipur v. BSBK Pvt. Ltd., 2010 (18) STR 555 (Tri-LB) :
The company entered into one single contract involving handing over of the plant in running condition to the principal, after completing vari-ous works including designing and engineering, civil works, steel structures, erection, testing and commissioning of the plant, etc. They contended that the dominant nature test should be applied for determining type of contract and only divis-ibility of contract cannot be a relevant consid-eration for taxing service tax on service part of such contract.
The Referring Bench had the following views :
- Daelim case is not in consonance with the BSNL case delivered by the Supreme Court, wherein it was held that a turnkey contract cannot be vivisected. However, the Revenue had filed appeal in the Supreme Court which was dismissed. However, the Bench observed that summary rejection of the SLP or appeal cannot be construed as affirmation of the judg-ment. It only means that the Supreme Court declined to interfere with the judgment.
- By 46th amendment to the Constitution of India, Article 366(29A) was inserted, to con-sider the following three kinds of composite contracts to be ‘deemed sale’ :
Works contract
Hire purchase contract and
Catering contract
Of these three, first and third involve service and sale at the same time and splitting is permitted constitutionally. However, there is no other kinds of contract for which splitting is permitted, say, hospital services.
- In the case of ‘turnkey contract’, if sale portion is leviable to sales tax, the remaining portion constituting taxable service cannot go untaxed and the same would be liable to service tax.
- The test for composite contracts other than those mentioned in Article 366(29A) continues to be as per the ratio elucidated in Gannon Dunkerley’s case. i.e., to say, did the parties have in mind or intend separate rights arising out of the sale of goods ? If there was no such intention, there is no sale even if the contract could be disintegrated.
- It would thus follow that the dominant nature test cannot be applied in the case of works contract falling under clause (b) of Article 366(29-A). If ‘works contract’ can be split into sale contract and service contract, a different treatment may not be given to any works contract simply because the contract is on a turnkey basis.
The arguments put forward by the Revenue were as under :
- If taxable services are involved in a composite contract and such element can be discerned, then it is liable to service tax. The reason being service is service whether provided independently or in combination with other activities.
- After 46th Constitutional amendment, every con-tract whether indivisible, composite or turnkey involving goods and services are made divisible and would be leviable to sales tax on sale element and service tax on service element.
- There are no express provisions of law to exclude turnkey contracts from service tax levy and therefore, service tax should be levied on service element of such contracts.
- Daelim’s case had not followed the ratio laid down by the Supreme Court in BSNL and 46th amendment to the Constitution of India.
- The aspect theory would not apply to enable the value of services to be included in the sale of goods or price of goods in value of the service.
- In case of turnkey contracts, irrespective of percentage of service element involved, such element shall be taxable by the provisions of the Finance Act, 1994.
- In the judgment of BSNL v. Union of India, 2006 (2) STR-2006 (2) STR 161 (SC), the Supreme Court has held that if there is a composite contract and the transaction in truth represents two distinct and separate contracts and is discernible as such, it has become per-missible to separate agreement to sale from the agreement to render service.
The respondent argued as follows :
- Since the original order of the Tribunal was passed ex parte and when the case was referred to Larger Bench, the findings in ex parte order are baseless and the Larger Bench should not rely on the same.
- A turnkey contract is a contract which is indivisible and cannot be vivisected to determine the service tax liability due to dominant intention theory.
- Works contract is liable to service tax from June 2007 and therefore, prior to that, turnkey contract cannot be divided to determine the value of service if separate consideration is not paid for such service.
- The ratio of BSNL case is not practical to severe turnkey contract into supply contract and service contract to levy tax on minor portion of services involved, which is not dominant object.
- Fiction of law in Article 366(29-A) of the Constitution is application to only sale of goods and not to service elements involved in such a composite contract.
- Execution of turnkey contract is not complete until the assessee carries out its entire obligation imposed upon it under such contract.
- Circular No. 334/4/2006-TRU, dated 28-2-2006 has clarified that when a composite service, even if it consists of more than one service, should be treated as a single service based on the main or principal service and accordingly classified. Therefore it is impracticable to classify various services involved in turnkey contract. Accordingly predominant test does not bring services of turnkey contract into tax net.
- In case of Larsen & Toubro Ltd., 2006 (4) STR 63 (Tri-Mumbai) it was held that rendering of engineering and designing service in a turnkey contract is not covered under the category of ‘consulting engineering services’.
The observations of the Larger Bench are summarised hereunder :
- The validity of levy of service tax constitutionally may be decided only on the basis of laws laid down by the Apex Court in various decisions. Accordingly, it was observed that a new Entry 92C was introduced in the Union List for the levy of service tax.
- As held by the Apex Court in All India Federa-tion of Tax Practitioners, there is no difference between production or manufacture of sale-able goods and production of marketable/ saleable services.
- According to the aspect theory, there might be overlapping of taxes, but such overlapping must be in law and it is open to a Legislature or more than one Legislature to impose a tax on that particular ‘aspect’ of the transaction which is within its legislative competence.
- In case of divisible contract, after 46th amend-ment, it is possible to levy Sales Tax on goods price.
- Rule 2A of Service Tax (Determination of Val-ue) Rules, 2006 was introduced w.e.f. 1-6-2007 to precisely value service elements involved in contracts involving goods and services.
- For the purpose of interpretation of a taxing statute, principle of purposive construction should be applied to find out object of the Act and to seek reasonable result and it should not to be interpreted in a manner to defeat its spirit.
- Severability of composite and turnkey contract permitted by Article 366(29-A)(b) cannot be said to have been for the mere purpose of levy of sales tax.
- Turnkey contracts can be vivisected and dis-cernible service elements involved therein can be segregated and classifiable as well as valued for levy service tax under the Finance Act, 1994.
[Note : Since this decision overrules Daelim’s decision 2006 (4) STR 63 (Tribunal), there would be widespread implications on litigation process as Daelim’s decision (supra) has been followed by Tribunals in several cases.]
iv) Whether once designs and drawings are imported and considered goods for customs purposes, can they be treated as service ? :
Mitsui & Co. Ltd. v. Commissioner of Central Excise, Jamshedpur, 2010 (18) STR 632 (Tri-Kolkata) :
The appellant entered into contract for supply of imported designs and drawings, provision of foreign technician’s services for supervision of detailed engineering in India, manufacture of indigenous equipment, erection, start-up, commissioning, demonstration of performance guarantee tests and training at supplier’s works.
The appellant contended that at the time of im-port, designs and drawings were assessed to the Customs Act as goods and therefore, the value of these cannot be taken into consideration for the purpose of service tax. Similarly, the drawings and designs originating in India are also considered as goods under the Central Excise Tariff and with respect to commissioning and erection services, it was introduced under the scope of service tax w.e.f. 1-7-2003. However, the present contract was for the period from April 1999 to November 2001.
The Department contended that supply of designs and drawings was a service liable to service tax under the category of ‘Consulting Engineering Services’ and though erection and commissioning service was made taxable w.e.f. 2004, the same was to be treated as part of consulting engineering service as this service included not only advisory consultative assistance but also implementation of such advice.
Finding that the designs and drawings as services not sustainable, the order was set aside and the matter was remanded to the adjudicating authority for de novo adjudication.
v) Whether service tax could be levied on a works contract after 46th amendment but prior to introduction of ‘works contract’ under service tax net :
Commissioner of Central Excise, Raigad v. Indian Oil Tanking Ltd., 2010 (18) STR 577 (Tri-Mumbai) :
The assessee claimed refund of service tax paid under the category of ‘commissioning and instal-lation’ services for the month of September and October, 2003 on the ground that lump sum turn-key works contract could not be vivisected and part of it subjected to tax, the decision of which was delivered by the Tribunal in Daelim Industrial Company v. CCE, 2006 (3) STR 124 and upheld by the Apex Court and also in Larsen & Toubro Ltd. v. CCE, 2006 (3) STR 223 (Tri.-Del.).
On scrutiny, it was observed by the Department that the prices were separately quoted on ac-ceptance letter for detailed engineering, supply portion and construction and erection portion. However, the assessee claimed that the separation was made only for breaking up billing schedules and hardly 3% of the total contract value may be considered as price for detailed engineering and the assessee had carried out only certain residual process designs.
The Tribunal observed :
- The Daelim’s case held that the contract en-tered was a works contract on turnkey basis and not a consultancy contract and that the works contract could not be vivisected for a part of it to be subjected to service tax.
- The Tribunal consistently held as above.
- The Daelim’s case is not per incuriam and is binding on the Tribunal as the Apex Court while dismissing the Special Leave Petition (SLP) passed the order that ‘we see no reason to interfere the SLP is dismissed’. This order indicates that the merits of the Tribunal’s judg-ment were examined by the Supreme Court.
- In the case of Diebold Systems (P) Ltd., 2008 (9) STR 546 (T), it was held that there was no taxable event defined under the Finance Act, 1994 for levy of service tax in respect of indivisible works contract prior to 1-6-2007. The same was approved by the High Court and therefore, such decision has a binding effect on this Bench of the Tribunal.
- The Tribunal’s decision in BSBK Pvt. Ltd. v. CCE, 2007 (5) STR 124 has been set aside by the Apex Court on the ground that it was an ex parte order.
- The 46th amendment, in respect of Entry 54 of List II of the Seventh Schedule to the Constitution, is for levy of Sales Tax. However, there was no provision of law during the period in dispute for levy of service tax on deeming fiction since such a provision is introduced only w.e.f. 1-6-2007 under ‘works contract’ service.
- The High Court in the case of Indian National Shipowners Association (INSA) has held that the introduction of new Entry and inclusion of certain services in that Entry would pre-suppose that there was no earlier Entry covering the said services.
- The Builders’ Association case delivered by the Apex Court has been considered by the Tribunal. However, the same being in the context of sales tax, does not have any effect on the present case.
- The Apex Court in the case of Associated Cement Companies Ltd. v. CC, 2001 (128) ELT 21 (SC) has held that subsequent to 46th amendment, the State would be empowered to levy sales tax on materials used in a contract of designs, drawings, manuals, etc.
- In the case of BSNL v. UOI, 2006 (2) STR 161(SC), it was held that the ratio of decision delivered in Associated Cement would not be applicable in respect of a composite contract and that the 46th amendment was to over-come the earlier decision of the Apex Court for transactions relating to deemed sales only.
- The intention of the Legislature was to tax only the labour portion under ‘Works Contract’ Service as envisaged under Rule 2A of the Service Tax (Determination of Valuation) Rules, 2006 and therefore, service tax cannot be levied on entire contract value.
- The Revenue’s contention that the activities are akin to ‘consulting engineering’ services does not hold good as it was clarified that charges for erection, installation and commissioning are not covered under the category of consulting engineering services and the same would be taxed separately.
It was held that there was no direct decision in favour of the Revenue for levy of service tax on service component of a works contract prior to 1-6-2007. On the contrary, the High Court decision in the case of Indian National Shipowners Associa-tion (supra) is directly against the Revenue and it has a binding effect on the Bench of the Tribunal, therefore, the appeal of the Revenue is rejected.
[Note : This decision and the above-cited reported Larger Bench decision in the case of BSBK at 12(iii) being contradictory would make the litigation process murkier on the subject matter].
13. Valuation :
Whether value of free supplies is includible ?
Jaihind Projects Ltd. v. Commissioner of Service Tax, Ahmedabad, 2010 (18) STR 650 (Tri- Ahmd.)
The appellant, engaged in laying of pipelines, is covered by ‘Commercial or Industrial Construction Service’ availed abatement of 67% vide Notifica-tion No. 15/2004 and paid service tax on balance amount excluding value of free supplies. The abate-ment was denied on the ground of non-inclusion of value of free supplies of pipes by the service recipient used in construction services. Penalty also was levied u/s.76 and u/s.78. The appellant contested that the value of free supplies is not includible in gross amount charged, as appellants have not charged anything for free supplies.
Based on the decision in the case of Oblum Electri-cal Industries Private Limited v. CC, Bombay, 1997 ELT 449 (SC), the appellant contended that explanation cannot expand the scope of main operative part of Notification. The main operative part of Notification No. 15/2004 provides that tax will be charged on 33% of gross amount charged and its explanation reads ‘gross amount charged shall include the value of goods and services sup-plied or provided or used by the service provider for providing such service’. As such, the words, ‘supplied or provided’ given in the notification are to be read in context with supply of goods by service provider and not the service receiver. They also referred the decision of P. Chandran v. CCE, 2008 (12) STR 33 where CESTAT has held that the word ‘used’ is to be read as supplied and used by service provider and so the value of free supplies is to be excluded from gross amount charged. They also referred to Notification No. 12/2003 stating that it applied to goods sold to service recipient and did not cover free supplies by service recipient.
The CESTAT opined that the case was covered by Rule 3 of the Service Tax (Determination of Value Rules), 2006 providing for valuation of services. The said Rule provides that value of consideration would be the gross amount charged inclusive of monetary and non-monetary consideration and where such valuation is not possible, the gross amount charged would be money equivalent to consider-ation charged and in no case it would be less than the cost of provision of service. It also states that proviso to the Notification only explains when and how the benefit of this Notification can be taken. The explanation in current case is only explaining actual meaning of ‘gross amount charged’ and does not expand the scope of main operative part of Notification. So, the value of free supplies is to be included in the gross amount charged.
The Tribunal held that the case of P. Chandran (referred supra) was only a stay order and the matter would not have been considered in depth. So for the interpretation of word ‘used’, the case cannot be relied upon and the value of all supplies is to be included in the gross amount charged, irrespective of the source of supply if the goods are used in providing the service.
The Tribunal waived the penalty u/s.78 stating that the matter involved was of interpretation of law. However, the matter was remanded back to the adjudicating authority to revise the duty demanded and the penalty u/s.76 was also left to be decided by him.
