Archive for January, 2011

Import Data Into Excel – Data Connection

Sunday, January 23rd, 2011

This is a guest post by Mr. Andrew Chan. Andrew is an IT consultant who can give you accurate, consistent and timely information to make better and faster decisions. He is an Associate of Society of Actuaries with over 20 years of IT experience. Apart from strong analytical skills and proven technical background, he was also a former system director at Manulife who had extensive project management experience.

SQL Server’s Import and Export Wizard is a great tool if we need to move data among many different sources.  However, if you only want to import data into Excel, then Excel also has a great end user tool that we can use to import data without any programming.

I am going to show you how to:

  • Create Data Connection
  • Retrieve Existing Data Connections
  • Retrieve Data from Web

Data Connections

  • We can create new data connection, select existing data connections within the Data Tab


Create Data Connection

We can create a data connection by clicking From Access, From Web, From Text or From Other Sources button.  We are going to create a data connection from SQL Sever.

  • Click From Other Sources button.
  • Click From SQL Server .


  • Enter (local) in Server name.
  • Click Next > button.


  • Select AdventureWorks in Select the database that contains the data you want:
  • Select vEmployee
  • Click Next > button.


Click Finish button.


  • Click Properties… button.


We can select when data should be refreshed, e.g. every nn minutes or when file is opened.

  • Click OK button.


    Click OK button again and data is now imported to Excel workbook.


We can manually refresh the data by clicking the Refresh All button. 


Retrieve Existing Data Connections

When we start a new workbook, we can also retrieve existing connections.


We can select the same data connection that we just created or choose other existing connections.


We can also create PivotTable and PivotChart


We can combine powerful Excel analytical tools and external data to make a smarter and more efficient decision.


We used SQL Server to demonstrate how to retrieve data from external source; however, we can use the same tool to get data from OLAP cube, text file, XML file and even web.

Retrieve Data from Web

Let’s select MSN MoneyCentral Investor Currency Rates from Existing Connections.


Within a few seconds, we would be able to retrieve currency rates from MSN Money.



Even if we don’t know any programming skill, there are many tools that we can use to retrieve external data.  Some of the tools also allow us to save data from Excel back to external data sources.  So we can enjoy the benefits from both worlds without being too technical.

Service Tax on ‘Deemed Construction’

Thursday, January 20th, 2011

This is a post by CMA.V.S.DATEY

Service Tax on ‘Deemed Construction’

1 Background

The service tax provisions relating to construction services cover two types of services - (a) Commercial or industrial construction which is taxable w.e.f. 10-9-2004 and (b) Construction of complex (residential complex of more than 12 residential units) which is taxable w.e.f. 16-6-2005.

If works contract tax is payable on these construction activities, these services would get covered under ‘works contract service’ w.e.f. 1-6-2007.

Initially, there were disputes regarding services provided by a builder or a developer for construction of residential complex or commercial premises.

However, on basis of Court decisions and CBE&C circulars, it was more or less settled that a builder entering into contract for sale of flat or industrial unit (gala) or shop or a developer entering into contract for construction of an individual flat for personal residential use of client are not liable to pay service tax.

The basic reason is that the contract of customer with builder or developer is for sale of a ready flat or industrial unit or shop. It is not a construction contract i.e. it is not contract for provision of construction service.

1.1 Change made in Budget 2010

In the Finance Act, 2010, an Explanation has been added w.e.f. 1-7-2010, to the definition of ‘commercial or industrial construction’ and ‘construction of residential complex’, as follows -

Explanation.— For the purposes of this sub-clause, construction of a complex which is intended for sale, wholly or partly, by a builder or any person authorised by the builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or a person authorised by the builder before the grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer.

In case of commercial or industrial construction service, the words used are ‘construction of a new building’ in place of ‘complex’. Otherwise, the wording is identical.

Thus, by a ‘deeming provision’, an activity which is not ‘service’ as per Court decisions and CBE&C’s own earlier circulars will be a ‘deemed service’ for the purpose of levy of service tax.

Note that the Explanation being added is not a valuation provision.

1.2 Effect of the change made by the explanation

The effect of the change is that the service tax will not apply only when a builder sales a ready flat or shop or industrial unit (gala) after Building completion certificate is obtained from local authority (like Municipal Corporation, Municipality, Gram Panchayat etc.) and entire consideration is obtained only after building completion certificate is obtained.

In all other cases, the builder will be liable to pay the service tax. It is well known that in most of the cases, builder constructs buildings mainly on raising funds from prospective buyers. Further, even after building is completed and ready for occupation, there is delay in obtaining building completion certificate from the authorities.

Thus, practically in all cases, the builder/developer will be liable to pay service tax, except in case of few flats or shops or commercial galas, which he usually keeps for sale at a later date at higher prices. Even in that case, the builder/developer will not be liable only if entire transaction (including receipt of money) takes place after obtaining ‘completion certificate’ from municipal or other competent authority.

1.3 Amendment does not apply to works contract service

The amendment will not apply if the contract is covered under works contract service i.e. where Vat/Sales tax is payable on the contract.

1.4 Authority to issue building completion certificate

Government has issued MF(DR) order No. 1/2010 dated 22-6-2010 for ‘Removal of Difficulty’. The order is effective from 1-7-2010 and it clarifies that building completion certificate can be issued by Architect, Chartered Engineer or Licensed Surveyor who is authorised under any law for the time being in force, to issue a completion certificate in respect of residential or commercial or industrial complex, as a precondition for its occupation.

Comment – In most of the places, the completion certificate is issued by Municipal or Corporation authorities. In most of the cases, an Architect or a Chartered Engineer or Licensed valuer is not authoirsed by law to issue a completion certificate as precondition of occupation. Hence, practically, completion certificate issued by Architect or Chartered Engineer or Licensed Valuer will not be a valid certificate to determine whether building has been completed.

2 Transitory provisions

Issue arises in respect of projects already running on 1-7-2010. Issue is whether service tax will apply only in case of fresh bookings or will apply in case of earlier bookings also.

Really, date of booking is not relevant. Date of provision of service is relevant as provision of service is the taxable event. Hence, if construction service is provided after 1-7-2010, service tax will be payable, irrespective of date of booking.

The Explanation being added to the definition is only a ‘deemed service provision’ and not a valuation provision. It does not link payment received with tax liability.

2.1 Construction partly complete on 1-7-2010

Principally, provision of service is the ‘taxable event’, i.e. services provided after tax is imposed will be taxable. Thus, service tax will apply in respect of services provided or to be provided on or after 1-7-2010. Receipt of payment or advance is not relevant for determining tax liability. Thus, a builder/developer is not liable to pay service tax in respect of services provided upto 1-7-2010. Such bifurcation is possible only if the builder/developer keeps proper accounts and records.

It is highly advisable to issue invoices (running bills) in respect of services provided upto 1-7-2010 and/or obtain certificate from Architect/Chartered Accountant regarding stage of completion of construction as on 1-7-2010.

If construction is fully complete before 1-7-2010, no tax is payable as service tax is on provision of service which is the taxable event. Receipt of payment does not decide tax liability.

If construction is complete but application for completion certificate is not yet submitted, there is no service tax liability if you establish that construction was completed before cut off date of 1-7-2010.

2.2 Advance paid by customer irrespective of completion certificate or possession before the cut off date i.e.  1-7-2010

As a general principle, tax liability will be on the basis of construction services provided on or after 1-7-2010 and not on the basis of advance received. Thus, normally, service tax is payable if service is rendered after 1-7-2010, even if advance was received prior to 1-7-2010.

However, as per Notification No. 36/2010-ST dated 28-6-2010, in respect of service as per amended definition, if any advance payment was received prior to 1-7-2010, for service to be provided after 1-7-2010, service tax will be fully exempted This is a good transitory relief to service providers as well as customers.

Thus, if advance payment was received prior to 1-7-2010, service tax will not be payable even if service in respect of that advance is provided after 1-7-2010.

3 When service tax is payable

Service tax is payable when advance is received, even if actual service is to be provided later, but that is so only when service is a taxable service. Thus, if payment is received in respect of construction completed upto 1-7-2010 (even after 1-7-2010), service tax will not be payable.

Service tax is payable on receipt basis and hence as you get payment for construction service from your customer, you have to pay service tax on that amount. If service tax is not shown separately in bill or amount received, the amount received should be taken as inclusive of service tax and then back calculations may be made.

As explained above, service tax in relation to advance received prior to 1-7-2010 has been exempted vide Notification No. 36/2010-ST dated 28-6-2010. Hence, service tax will not apply even if the service is provided after 1-7-2010.

4 Liability of service tax when land owner is given some flats or shops free

In some cases, land is obtained from the land owner and some flats/galas (shops) are given to him free in lieu of the land.

The nature of agreement between land owner, builder/developer and customer (service receiver) varies from State to State. In some States (in Western and Northern India), the builder first enters into agreement with landowner and gets development rights and irrevocable power of attorney. The builder then enters into ‘agreement to sale’ with prospective customers. Final sale deed is executed only after building is complete and possession is handed over.

In some States (in Southern India), two separate agreements are executed – one between land owner and customer and other between developer (service provider) and customer. The developer also has separate agreement with land owner where he agrees to give him some flats/galas (shops) free.

In both the cases, issue is whether builder/developer is providing any service to the land owner.

Section 67(1)(ii) of Finance Act, 1994, envisages consideration ‘not wholly or partly consisting of money’. Thus, ‘consideration’ need not be in money form alone.

There is a view that relation between builder and land owner is not of ‘service provider and service receiver’ but that of ‘quasi partner’ or ‘joint venture’. It is difficult to accept this view since in partnership sharing of profit and mutual agency are essential ingredients, while in joint venture, joint control and sharing of profit/loss are essential ingredients. These are totally absent in agreement between builder and land owner.

Hence, in my view, service tax will indeed be payable. In fact, as soon as the builder/developer gets possession of land from land owner, it is ‘advance received’ and service tax will become payable next month.

If we assume that agreement between builder and land owner is in nature of joint venture, liability of service tax will be on landowner if he sales flats or shops before obtaining completion certificate.

Of course, if builder/developer has already paid the service tax on that construction, the land owner can argue that all service tax on construction service has already been paid by builder/developer and there is nothing to pay now. He can also argue that he is neither builder nor a person authorised by him to sale the building or part of it.

If landowner is liable to pay service tax, valuation can be on basis of value of similar service or on cost plus reasonable profit, as provided in Rule 3 of Service Tax Valuation Rules.

5. Surrender of the booking by customer

If customer surrenders the booking and if builder/developer refunds the entire amount along with service tax to customer, then builder/developer can adjust the service tax in your subsequent payments of service tax . As per rule 6(3) of Service Tax Rules, if excess tax is paid, in respect of service which is not provided either wholly or partially for any reason, the excess service tax paid can be adjusted against service tax payable for subsequent period, if the value of services and tax thereon is refunded to the person from whom it was received.

While giving refund, cancellation charges are usually deducted. These are really in nature of liquidated damages and not on account of service provided. Hence, in my view, entire service tax can be adjusted under rule 6(3) even if cancellation charges are deducted. However, it is a litigation prone issue and one must be ready to fight it out. If quantum is less, it may be economical to pay service tax instead of entering into litigation.

6 Valuation of service

Principally, service tax is payable on value of taxable services. This is also clear from the fact that ‘preferential location and development of complex’ has been specified as a different taxable service.

Thus, if a service provider has proper costing records, it is permissible to deduct value of material and land (or calculate value of service on cost plus profit basis) and pay service tax on value of service @ 10.30%.

If this is not feasible, then tax is payable @ 10.30% on 25%/33% of entire value of contract including material (used by builder plus supplied free of cost by customer), but then Cenvat credit is not available, as explained below.

Any person providing taxable service of commercial or industrial construction or construction of residential complex (except completion and finishing services like glazing, plastering, painting, tiling, wood and metal joinery and carpentry, swimming pools, acoustic applications etc.) can opt to pay service tax as follows (w.e.f. 1-7-2010) – (a) on 33% of gross amount charged if the gross amount does not include value of land (b) on 25% of gross amount charged if the gross amount includes value of land (Till 1-7-2010, the 25% scheme was not available. Only 33% scheme was available).

This is at the option of service provider.

The ‘gross amount’ should include value of goods and materials supplied or provided or used. However, he can avail this concession only if - (a) He does not avail Cenvat of duty/service tax paid on inputs, input services and capital goods and (b) He does not avail benefit of Notification No. 12/2003-ST dated 20-6-2003. - Notification No. 1/2006-ST dated 1-3-2006 as amended w.e.f. 1-7-2010.

The partial exemption is available only if the gross amount charged includes value of goods and materials supplied or provided or used for providing such service (Explanation to Notification No. 1/2006-ST]. Thus, if the customer provides some material, its value will have to be added for purpose of payment of service tax.

As per Notification No. 12/2003-ST, no service tax is payable on value of material or goods sold to recipient of service. Thus, if a service provider avails exemption under 12/2003-ST (i.e. claims deduction of value of material or goods from gross value of contract), he cannot avail composition rate of 33%/25% of gross amount charged to customers. The service provider can have benefit either under Notification 12/2003-ST or 1/2006-ST and not both.

This method is not available in case the service provider provides only completion and finishing services (as in such cases, material content will be much less).

This method is also not applicable if service is covered under ‘works contract service’.

6.1 Charges some common services like park, common sewerage and effluent treatment, internal roads, common recreation hall etc.

Definition of residential complex covers these elements. Further, in the Budget 2010, a service termed as ‘preferential location or development of complex’ has been introduced w.e.f. 1-7-2010. The definition covers both commercial and residential complex. Thus, value of these amenities would get covered under that head (on pro rata basis), even if these are excluded from ‘construction service’.

6.2 Increase in prices as construction is nearing completion

As the construction is nearing completion, the value of flat/commercial unit/shop goes up substantially.

Really, even if value (selling price) goes up, that does not mean that cost of construction has gone up to that extent. The value goes up because of demand/supply situation and customer is willing to pay higher price when there is ready possession or construction is nearing completion.

In such cases, payment of service tax only on value of service will result is substantial reduction of service tax liability, instead of going in for composition scheme. Hence, it is advisable to calculate value of service and pay service tax on that @ 10.30%.

This can also be justified from the fact that ‘preferential location and development of complex’ has been specified as a different taxable service. Thus, any charge over and above value of construction service cannot be subjected to tax.

6.3 Valuation when a builder/developer has agreed to provide some flats/shops free of cost to the landowner

Really, the flats/shops are not given free to landowner but are in lieu of land cost. In such case, value of service will have to be found out on basis of value of service of identical or similar flat/shop or on basis of cost of construction plus reasonable profit.

Two methods are available – (a) Value of similar service (b) If value of similar service is not available, then cost plus reasonable profit [Rule 3 of Service Tax Valuation Rules].

Valuation can be on basis of value of similar service or on cost plus reasonable profit, as provided in Rule 3 of Service Tax Valuation Rules.

6.4 Choice of method of valuation

The 25%/33% scheme is simple but the liability of service tax will be high, particularly at places where land costs are very high. Further, if you are getting the work done through contractors/sub-contractors, you cannot take Cenvat credit of service tax paid by contractor/sub-contractor. This will further add to the cost.

Hence, in such cases, it is advisable to pay service tax on value of services @ 10.30%.

Value of services can be calculated either on cost plus profit basis or by reducing value of land and material from the total contract value.

If the contract is small, 25%/33% scheme may be opted since it is simple.

Each contract can be treated as separate contract and valued differently.

7 Cenvat Credit

Builder/developer can get and utilise Cenvat credit of all the input services and capital goods only if he is paying service tax on the value of services @ 10.30%. If the builder is paying service tax under simplified scheme on 25%/33% of total value, he cannot avail any Cenvat credit at all.

If service provider is providing both taxable and exempt service, then it is advisable to avail Cenvat credit only in respect of input services directly attributable to taxable services. If Cenvat credit is availed of common input services, then rigors of proportionate reversal or payment of 6% ‘amount’ on exempted services, as contained in rule 6 will apply.

8 Preferential location and development of complex service

As per section 65(105)(zzzzu) of Finance Act, 1994 (inserted w.e.f. 1-7-2010), any service provided or to be provided, to a buyer, by a builder of a residential complex, or a commercial complex, or any other person authorised by such builder, for providing preferential location or development of such complex but does not include services covered under sub-clauses (zzg), (zzq), (zzzh) and in relation to parking place, is a ‘taxable service’. Explanation.— For the purposes of this sub-clause, ‘‘preferential location’’ means any location having extra advantage which attracts extra payment over and above the basic sale price.

On these services, tax is payable at full rate of 10.30% without any abatement.

CBE&C, has clarified as follows – (Annexure- A to JS (TRU-II) D.O. letter F. No.334/1/2010-TRU dated 26-2-2010)

It has been reported that in addition to these activities, the builders of residential or commercial complexes provide other facilities and charge separately for them and these charges do not form part of the taxable value for charging tax on construction. These facilities include,- (a) prime/preferential location charges for allotting a flat/commercial space according to the choice of the buyer (i.e. Direction- sea facing, park facing, corner flat; Floor- first floor, top floor, Vastu- having the bed room in a particular direction; Number- lucky numbers); (b) internal or external development charges which are collected for developing/maintaining parks, laying of sewerage and water pipelines, providing access roads and common lighting etc; (c) fire-fighting installation charges; and (d) power back up charges etc.

Since these charges are in the nature of service provided by the builder to the buyer of the property over and above the construction service, such charges are being brought under the new service. Charges for providing parking space have been specifically excluded from the scope of this service. Development charges, to the extent they are paid to State Government or local bodies, will be excluded from the taxable value levy. Further, any service provided by Resident Welfare Associations or Cooperative Group Housing Societies consisting of residents/owners as their members would not be taxable under this service.


9 Constitutional Validity of the levy

The provision of ‘deemed service’ has been challenged in various High Courts. Some High Courts have granted stay to the imposition of tax. In Maharashtra Chamber of Housing Industry v. UOI 2010-TIOL-526 [Writ Petition No. 1456 of 2010] , Hon. Mumbai High Court has granted stay on 3-72010 for coercive action for recovery of service tax on residential complex. However, it has been clarified that assessment of tax can continue. Similar order has been passed in writ petitions filed by D B Realty Ltd., Mighty Construction and Mayfair Housing. [Thus, stay is limited only for coercive action for recovery. Hence, not much can be read into the stay order, as assessment can continue, which means assessee has to register with service tax],

Tax on lands and buildings is covered in List II (State List) of Seventh Schedule to Constitution of India. The argument is that the tax on buildings can be imposed only by State Government. Really, the service tax is not directly on building but on construction of the building.

In Association of Leasing and Financial Services v. UOI (2010) 7 740 = 35 VST 549 (SC 3 member bench), the levy has been indirectly upheld (though the issue in this judgment was in respect of service tax on leasing).

Hence, most probably, the provision in respect of deemed service is likely to be finally upheld.

10 Conclusion

Whatever stated above is on present understanding of the law. It is possible that some of the views may not be accepted by department.

Hence, a builder/developer has to take policy decision on basis of his final conclusions. In service tax, full disclosure is key to safety. Thus, wherever in doubt, assessee should inform to department his view, his understanding and what he are going to do by writing a letter. Asking clarification is not generally advisable.

Full disclosure to department has following advantages – (a) Penalty cannot be imposed and (b) Demand beyond one year is not sustainable. However, interest @ 13% is mandatory if by chance your understanding is not accepted by Tribunal or High Court or Supreme Court.

Inter State Sale of goods by Transfer of Documents - Issues arising out of judgment of Supreme Court in case of A & G Projects.

Sunday, January 16th, 2011

This is a post by CMA.V.S.Datey

Ghost of ‘A & G Projects’ haunting ‘inter-state sales by transfer of documents’


Some observations of Supreme Court in case of A & G Projects, which were in nature of obiter dicta, are creating havoc in the transactions of inter-state sale by transfer of documents. Department is taking a view that the subsequent sales are exempt only if contract with ultimate buyer is executed after goods are dispatched by first seller (which s practically impossible). In this Article, author analyses the repercussions of this decision and suggests possible course of action.

1. Background

Section 3(b) of CST Act provides for Inter-State sale by transfer of documents of title to goods during the movement from one State to another.  As per section 3(b) of CS Act, a sale or purchase of goods shall be deemed to take place in the course of inter-State trade or commerce if the sale or purchase is effected by a transfer of documents of title to the goods during their movement from one State to another. Section 3(a) of CST Act requires that sale should ‘occasion movement of goods’. There is no such requirement in section 3(b) of CST Act.

This definition is important as all subsequent inter-state sales to registered dealers by transfer of documents during movement of goods are exempt from sales tax  if E-I, E-II are exchanged.

1.1 Normal trade practice

Normal practice is that when a dealer obtains an order, he selects a manufacturer/supplier who can supply the goods. The dealer places order on manufacturer/supplier and asks him to book goods by transport directly to final destination i.e. ultimate buyer who has place order on the dealer. The goods are booked marked ‘Self’. The lorry receipt or consignment note or railway receipt (which is document of title) is endorsee by manufacturer/supplier in favour of the dealer. The dealer then raises invoice on ultimate buyer and endorses the document of title in favour of ultimate buyer. This second sale s exempt if E-I/E-II forms are exchanged.

2. Case of A & G Projects

In A & G Projects and Technologies v. State of Karnataka (2009) 2 SCC 326 = 18 STT 525 = 19 VST 239 (SC), A&G Projects, Karnataka had obtained order from KPCTL in Karnataka for execution of electrical works contract. A&G Projects (from Karnataka) placed order on a Chennai dealer (Bay West) for supply of certain equipment required for the project. In turn, Bay West placed order on manufacturer in Chennai. The goods were dispatched from Chennai (Tamilnadu) to Karnataka. The Lorry Receipt clearly indicated name of the ultimate buyer i.e. KPCTL. There was no doubt that the goods were meant for KPCTL in Karnataka. 

Obviously, Chennai manufacturer raised invoice on Bay West (Chennai Dealer), Bay West raised invoice on A&G Projects and A&G Projects raised invoice on KPCTL.

First sale (from Chennai manufacturer to Chennai dealer) was obviously under section 3(a) i.e.. sale occasioned movement of goods from one State to other. Subsequent sales were really under section 3(b) i.e. effected by transfer of documents during movement of goods from one State to other. However, assessing officer in Karnataka held that all subsequent sales were also under section 3(a) and hence exemption is not available under section 6(2) and sales tax is payable in Karnataka. The Tribunal correctly held that movement of goods was not from Karnataka but into Karnataka and hence it cannot be inter-state sale in Karnataka and CST cannot be charged in State of Karnataka.

In appeal to High Court, in  State of Karnataka v. A & G Projects and Technologies (2008) 13 VST 177 = 37 MTJ 337 (Karn HC DB), it was held that goods were appropriated to buyer i.e. KPCTL even before movement commenced from Tamilnadu. It was held that in such case, subsequent sale made by A&G Projects to KPCTL will not be exempt and CST will be payable on subsequent sale in Karnataka [Really, the goods were not ‘appropriated’ to KPCTL in Chennai but only identified for the ultimate buyer. Further, section 3(b) or 6(2) of CST Act does not prescribe any such condition about appropriation of goods to ultimate buyer].

In further appeal, Supreme Court proceeded on the basis of decision of Assessing Officer that all the three sales are under section 3(a) of CST Act i.e. inter-state sales. Assessee did not challenge this view [probably because it suited him. Really, all three sales cannot be inter-state sales under section 3(a)]. His only argument was that if all these sales are inter-state sale u/s 3(a), then proviso to section 9(1) of CST Act (which deals with State which can collect tax when sale takes place during movement of goods) will not apply, since that proviso applies only when sale is by transfer of documents during movement of goods i.e. under section 3(b). Thus, Karnataka State is not the relevant State for collection of CST in such case.

This argument was accepted and demand of CST was dropped by Supreme Court.

From the judgment, it is not clear whether E-I/E-II forms were exchanged for subsequent sales. If these were indeed exchanged, then decision of Supreme Court is correct, though reasoning seems to be incorrect.

This is an interesting example how law follows a circuitous route and goes haywire when the original decision is taken on a wrong basis.

2.1 Contract for subsequent sale should be after commencement of movement of goods?

The aforesaid decision itself would not have created uncertainty and litigation, as it could have been argued that the decision was on the basis of facts of the case. However, problems have been created by following observation in the decision by Supreme Court .

In A & G Projects and Technologies (supra), (background explained above), it was observed by Hon. Supreme Court, ‘Dividing line between sale and purchase under section  3(a) and those falling under section 3(b) of CST Act is that in former case, the movement is under  a contract while in the latter case, the contract comes into existence only after the commencement and before termination of movement of goods

[really section 3(b) of CST Act makes no reference to ‘contract’. It only makes reference to ‘sale is effected during movement of goods’. Thus, ‘contract for sale’ can be earlier also. Hence, these observations of Supreme Court can be said to be obiter dicta, since subsequently, final judgment was given on entirely different basis, as discussed above].

2.2 Decision correctly analysed in trade circular of Commissioner, WB

The decision of Supreme Court has been very nicely analysed in Trade Circular No. 11/2010 dated 4-10-2010 issued by Commissioner, Commercial Taxes, 14, Bellaghata Road, Kolkata – 700 015,West Bengal [see (2010) 35 VST 28 (Journal section) and  Sales Tax Review Vol 57 November 2010 page 67]

The circular clearly and correctly states that in commercial world, substantial number of transactions of subsequent sales take place particularly for specially made goods where a dealer first collects order from his outside State customer and thereafter places his corresponding purchase order either to inside State supplier or to outside State supplier. Therefore, there exists one pre-existing order or pre-determined party at the hands of a subsequent seller when he is making agreement of purchase/sale with the inside arty or outside State supplier.

The circular notes that the confusion is because of the following para of SC judgment in A&G Projects, ‘The dividing line between sales or purchases under section 3(a) and those falling under section 3(b) is that in former case the movement is under the contract whereas in the later case the contract comes into existence only after the commencement and before termination of the inter-State movement of the goods’.

After analyzing earlier decisions of Supreme Court, the circular finally states that in effect the term ‘contract comes into existence’ used in A&G Projects,  means ‘sale is effected by transfer of documents’ – the term used in Tata Iron and Steel Co. (TISCO) v. S R Sarkar - (1960) 11 STC 655 (SC) = AIR 1961 SC 65 = (1961) 1 SCR 379.

The circular finally clarifies that ‘Contract for sale’ and ‘sale itself’ are altogether different in case of inter-state sale, pre-existing order or pre-determined parties will not negate any section 3(b) sale, if other requirements are found fulfilled, i.e. physical or constructive transfer of documents of title to the goods is made.

Really, it is a very good and legally correct circular and congratulations to Commissioner, Commercial Taxes, West Bengal for issuing such clear circular.

However, scene in Tamil Nadu is opposite, as explained below.

2.3 Transactions between three States required, as per Accountant-General, Audit, Tamil Nadu

Some fuel has been added to the fire by Accountant-General (Audit), Tamil Nadu, who has expressed view that transactions under section 6(2) are required between three States to qualify for exemption. The Accountant-General (Audit) has suggested revision of assessments [see (2010) 35 VST 44 (Mag)].

 It seems the basis for the view is the following observation of Supreme Court – ‘In order to attract section 6(2), it is essential that the concerned sale must be a subsequent inter-state sale effected by transfer of documents of title to the goods during the movement of goods from one State to other and it must be preceded by a prior inter-State sale’.

This again is ‘obiter dicta’ and even this statement does not imply that there the transaction should be between three states.

I is true that the original manufacturer/supplier and final buyer must be in different States, since there has to be physical movement of goods from one State to other. However, the intermediate dealer can be either in State of manufacturer/supplier or in State of ultimate buyer. He can also be in some entirely different State.

3. Binding Nature of decision of Supreme Court

The whole confusion is because of the some observations made during the decision. These observations were not directly relevant to the decision since finally the judgment was on entirely different basis.

Under Article 141 of Constitution of India, law declared by Supreme Court is binding on all courts within the territory of India. Thus, really, ‘obiter dicta‘ is not a ‘law declared by Supreme Court’ and hence not binding. Similarly, each and every sentence in judgment is not a binding precedent.

3.1 ‘Obiter dicta’ of SC should be normally followed but is not binding

An ‘Obitum dictum’, as distinguished from a ratio decidendi is an observation by Court on legal question suggested in a case before it but not arising in such a manner as to require a decision. Such an obiter may not have a binding precedent as the observation was unnecessary for the decision pronounced, but even though obiter may not have binding effect as a precedent, it cannot be denied that it is of considerable weight. – Director of Settlements v. M R Apparao 2002 AIR SCW 1504 = AIR 2002 SC 1598 = (2002) 4 SCC 638 (SC 3 member bench).

In Divisional Controller, KSRTC v. Mahadeva Shetty 2003 AIR SCW 3797 = AIR 2003 SC 4172 = (2003) 7 SCC 197, it was observed, ‘Statements which are not part of the ‘ratio decidendi’ are distinguishable as obiter dicta and are not authoritative. Mere casual expression carry no weight at all. Nor every passing expression of a Judge, however eminent, can be treated as an ex cathedra statement having the weight of authority’.

An observation made by a superior court is not binding. What would be binding is the ratio of the decision. Such ratio should be arrived at upon entering into the merit of the issues involved in the case – Dadu Dayalu Mahasabha v. Mahant Ram Niwas AIR 2008 SC 2187.

In Sreenivasa General Traders v. State of AP -  (1983) 3 SCR 843 = AIR 1983 SC 1246 = (1983) 4 SCC 353 also, it was held that obiter only has persuasive value.

In Mohandas Issardas v. AN Sattanathan 2000(125) ELT 206 (Bom HC DB), it was observed, ‘It would be incorrect to say that every opinion of the Supreme Court would be binding upon the High Courts in India. The only opinion which would be binding would be an opinion expressed on a question that arose for the determination of Supreme court and when though ultimately it might be found that the particular question was not necessary for the decision of the case, even so, if an opinion was expressed by Supreme Court on that question, then the opinion would be binding on High Court’. - - Statements which are not necessary to the decision have no binding authority on another Court, though they may have some merely persuasive efficacy.

In Municipal Corpn. v. Gurnam Kaur - (1989) 1 SCC 101 = AIR 1989 SC 38, it was observed, ‘Pronouncements of law, which are not part of the ratio decidendi are classed as obiter dicta and are not authoritative.’  - same view in United Riceland v. State of Haryana (1997) 104 STC 362 (P&H HC FB).

In Municipal Committee v. Hazara Singh 1975(1) SCC 793 = AIR 1975 SC 1087  (SC 3 member bench), it was held that even obiter dictum of Supreme Court should be accepted. Declaration of law by that Court even if be only by the way has to be respected. However, statements on matters other than law have no binding force. Several decisions are on facts and as on facts no two decisions could be similar, Supreme Court decisions which were essentially question of fact could not be relied upon as precedents for decision of other cases.

3.1 How a judgment is binding

Each judgment is based on its own context and background. It is neither desirable nor permissible to pick out a word or sentence from the judgment, divorced from the context of the question under consideration, and treat it as a ‘law’ declared by the Court. The judgment must be read as a whole and observations in the judgment have to be considered in light of questions which were placed before the Court. - . - . - While applying the decision (of Supreme Court ) to a later case, the Courts must try to ascertain the true principle laid down by the decision of this (Supreme Court) - CIT v. Sun Engineering Works (P.) Ltd. 198 ITR 297 = AIR 1993 SC 43 = (1992) 4 SCC 363 =  64 Taxman 442 = 1992 AIR SCW 2600 - quoted and approved in TM Jacob v. C Poulose  1999 AIR SCW 1156 = AIR 1999 SC 1385 (SC 5 member bench) * State of Punjab v. Baldev Singh 1999 AIR SCW 2494  = (1999) 6 SCC 172 (SC 5 member Constitution Bench) * ICICI Bank v. Municipal Corporation of Greater Bombay (2006) 4 STT 20 (SC).

In UOI v. Dhanwati Devi (1996) 6 SCC 44 (SC 3 member bench), it was observed - ‘A judgment is only an authority for what it actually decides. - . - . - Every judgment must be read as applicable to the particular facts proved or assumed to be proved. - . - . - It is only the principle laid down in the judgment is binding law under Article 141 of the Constitution. - . - . - . -Abstract ratio decidendi alone has force of law and is binding. - . - . - The essence of the decision is its ratio and not every observation found therein - . - . - No judgment can be read as if it is a statute. A word or a clause or a sentence in the judgment cannot be regarded as a full exposition of law.’ – same view in State of Rajasthan v. Ganeshi Lal AIR 2008 SC 690 * Government of Karnataka v. Gowramma AIR 2008 SC 863.

The essence of decision is its ratio and not every observation found therein - Lalu Prasad Yadav v. State of Bihar (2010) 5 SCC 12.

In Madhav Rao Jivaji Rao Scindia v. UOI - AIR 1971 SC 530 = (1971) 1 SCC 85 = (1971) 3 SCR 9, it was observed - ‘It is not proper to regard a word, a clause or a sentence occurring in a judgment of Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment’.

3.2 Judgment should not be read as a statute

In Amarnath Om Parkash v. State of Punjab (1985) 1 SCC 345 = 1985 SCC (Tax) 92 SC = AIR 1985 SC 218 (SC 3 member bench), it was observed, ‘Judgments of courts are not to be construed as statutes. Judges interpret statutes, they do not interpret judgments. They interpret the statutes: their words are not to be interpreted as statutes’.  – same view in UOI v. Amrit Lal Manchanda (2004) 51 SCL 488 (SC) * Escorts Ltd. v. CCE (2004) 8 SCC 335 = 173 ELT 113 (SC) * UOI v. Major Bahadur Singh (2006) 1 SCC 368 *   Ashwani Kumar Singh v. UPPSC 2003 AIR SCW 3387.

Judgment should be read with facts of the case - In Padmasundara Rao v. State of TN 2002 AIR SCW 1156 = (2002) 3 SCC 533 = AIR 2002 SC 1334 = 37 SCL 425 = 255 ITR 147 (SC 5 member bench), it was observed [quoting from Herrington v. British Parliamentary Board (1972) 2 WLR 537], ‘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. There is always peril in treating the words of a speech or judgment as though they are words in a legislative enactment and it is to be remembered that judicial utterances are made in the setting of facts of a particular case. Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases.

3.3 Only decision binding - not the reasons

In Krishena Kumar v. UOI AIR 1990 SC 1782 = (1990) 4 SCC 207, it was observed -’The doctrine of precedent, that is being bound by a previous decision is limited to the decision itself and as to what is necessarily involved therein. - . - . - It does not mean that the court is bound by the various reasons given in support of it, especially when they contain propositions wider than the case itself required. - . - . - The enunciation of the reason or principle upon which a question before a Court has been decided is alone a precedent. The ratio decidendi is the underlying principle, namely, the general reasons or the general grounds upon which the decision is based. - . - . - If it (ratio decidendi) is not clear, it is not duty of Court to spell it out with difficulty in order to be bound by it’.  – similar view in Dalbir Singh v. UOI (1990) 4 SCC 207. Ratio of the decision is binding and not the conclusion arrived at. - S P Gupta v. President of India 1981 (Suppl) SCC 87 = AIR 1982 SC 149.

4 Precautions to be taken BY DEALER IN VIEW OF  SC decision in A & G Projects  

It is a fact that in all cases of E-I and E-II transactions, the ultimate buyer is known even before goods are dispatched by original manufacturer/supplier. It is also fact that at least at lower level, the Supreme Court’s observation is likely to be mechanically followed.

In CTT v. Dalu Ram Ganpat Ram (2010) 33 VST 433 (All HC), goods were booked by rail for transport from UP State to other State. The railway receipt was obtained by UP State seller in his own name (i.e. self). The seller than transferred the railway receipt in name of buyer (who was from the same State i.e. UP). It was held that this is inter-State sale covered under section 3(b) of CST Act – relying on CST v. Mewalal Kewal (1976) 38 STC 551 (All HC DB).

In Cinezac Technical Services v. State of Kerala (2009) 25 VST 165 (Ker HC DB), the Lorry Receipt was in name of ultimate purchaser. Hence, it was held that it was a pre-arranged sale and second sale by agent in the State will not be treated as subsequent inter-state sale.

Hence, to minimize the risk, it has to be ensured that property in goods passes during movement of goods and not before movement of goods. In case of A & G Projects, the Lorry Receipt was directly in name of ultimate buyer and hence it was held that property in goods passed to buyer before movement of goods commenced.

The transport document should be marked as ‘Self’ and than transport document (LR) should be transferred by endorsement in favour of first buyer and then from first buyer to ultimate customer. If thee precautions are taken, in my view, a dealer can distinguish his case from A & G Projects and can establish that the sale is by transfer of documents during movement of goods from one State to other.

The dealer can of course depend on the case law discussed above and state that the observation made by Supreme Court is not a binding precedent, particularly when the statutory provision as contained in section 3(b) of CST Act is entirely different.

Let us hope some clarification s issued by Central Government to clarify the matter.

Input Service - A Jigsaw Puzzle

Thursday, January 13th, 2011

 This is a post by CMA. V.S.Datey

Input Service - A Jigsaw Puzzle

Numerous disputes are going on, on the issue of interpretation of ‘input service’ under Cenvat Credit Rules. Courts and Tribunals are taking contrary views and assessees are confused [Of course, there is no confusion on department side and they are convinced that no Cenvat credit is available on almost any input service). In this article, the author discusses major case law on this issue as the legal position stands today.

1. Background

Since the introduction of eligibility of Cenvat credit on input services, there is no respite to the disputes on the definition. The definition of input service is a classic example how a provision should not be drafted.  Draftsman of this definition is surely responsible for most of the litigation on this issue.

Supreme Court, in ICAI v. Price Waterhouse 1997 AIR SCW 4023 = 1997(6) SCC 312 = 90 Comp Cas 113 = AIR 1998 SC 74 = (1997) 93 Taxman 588 (SC) has observed - “Statute being an edict of the Legislature, it is necessary that it is expressed in clear and unambiguous language. In spite of Courts saying so innumerable times, the draftsmen (of statutes) have paid little attention and they still boast of the old British Jungle - “I am the Parliamentary draftsman. I compose the country’s laws. And of half the litigation, I am undoubtedly the cause” .

In Kirby v. Leather (1965) 2 ALL ER 441, the Draftsmen were severely criticised in regard to section 22(2)(b) of the UK Limitation Act, 1939, as it was said that the section was so obscure that the draftsman must have been of unsound mind”.

2.  Definition of input service

Rule 2(l) of Cenvat Credit Rules reads as follows–

Rule 2(l) - “Input service” means any service –

(i)                   used by a provider of taxable service for providing an output service; or

(ii)                 used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products, upto the place of removal;

and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal.

Main and inclusive part of definition - The definition of ‘input service’ is broadly in two parts – first i.e. main part and second i.e. inclusive part. First part of the definition is restrictive in scope as it covers input services directly or indirectly used for providing output service or used in relation to manufacture or clearance of final product. However, second i.e. inclusive part of the definition expands the scope much beyond the coverage of first part.

Meaning of ‘such as’ - The inclusive part itself is of two sub-parts. The first sub-part gives some illustrations of input services while second part covers all services used in relation to ‘activities relating to business, such as - -‘. Some illustrations are given in second sub-part of the definition, but these are preceded by the term ‘such as’. It means these are only illustrations. Any service in relation to business would be ‘input service’.

The expression ‘such as’ is purely illustrative. ‘Such as’ means ‘for example’ or ‘of a kind that’ (Concise Oxford Dictionary). ‘For example’ (Chambers Dictionary) – Coca Cola India v. CCE (2009) 22 STT 130  = 25 VST 473 = 242 ELT 168 (Bom HC DB) * ABB Ltd. v. CCE (2009) 21 STT 77 = 15 STR 23 (CESTAT 3 member bench).

Meaning of ‘includes’ and ‘in relation to’ - It is well settled that inclusive part expands the scope of main definition. The inclusive part can cover items which are not getting covered in main part of definition. It is also well settled that ‘in relation to’ widens the scope of definition. It is not restrictive. There is ample case law on this issue, but I am not burdening this article with that case law.

Any service in relation to business is input service - Input services which have only remote or no nexus with output services or manufacture of goods can get covered so long as these are related to activities of business. This is also clear from the fact that service tax paid at Head Office and branches/depots can be utilised as Cenvat credit through the mechanism of ‘input service distributor’.

In CCE v. Shariff Motors (2009) 22 STT 419 (CESTAT), assessee was dealer in two wheelers and also was providing service to old vehicles as authorised service station. He paid service tax on GTA service in respect of inward transport of new vehicles. He availed Cenvat credit on the GTA service. The credit was utilised for payment of service tax on servicing of vehicles which included even old vehicles. It was held that definition of input service is wide enough to cover input service availed by assessee.

2.1 Purpose of wide definition of ‘input service’

The purpose of wide definition of ‘input service’ has been stated by Finance Minister in para 148 of his budget speech on 8-7-2004 as follows, ‘I propose to take a major step towards integrating the tax on goods and services. Accordingly, I propose to extend credit of service tax and excise duty across goods and services’ – quoted in Coca Cola India v. CCE (2009) 22 STT 130  = 25 VST 473 = 242 ELT 168 (Bom HC DB).

Thus, the purpose is to move toward GST (Goods and Service tax).  Another basic purpose of Cenvat credit is to avoid cascading effect.  These purposes cannot be ignored while interpreting the definition of ‘input service’.

2.2 Press Note dated 12-8-2004

Ministry of Finance, prior to introduction of Cenvat Credit Rules, 2004 circulated the draft rules inviting comments from the trade and industry. A Press Note dated 12-8-2004 was issued along with the draft rules which highlighted the salient features of Cenvat Credit Rules. The relevant extract is as under :—

(iii) In principle, credit of tax on those taxable services would be allowed that go to form a part of the assessable value on which excise duty is charged. This would include certain services which are received prior to commencement of manufacture but the value of which gets absorbed in the value of goods. As regards services received after the clearances of the goods from the factory, the credit would be extended on services received up to the stage of place of removal (as per section 4 of the Central Excise Act). In addition to this, services like advertising, market research etc. which are not directly related to manufacture but are related to the sale of manufactured goods would also be permitted for credit.

(iv) Full credit of service tax on services (such as telephone, security, construction, advertising service, market research etc.) which are received in relation to the offices pertaining to a manufacturer or service provider would also be allowed.’

[Noted and quoted in Coca Cola India v. CCE (2009) 22 STT 130 = 25 VST 473  = 242 ELT 168 (Bom HC DB) and CCE v. GTC Industries (2008) 17 STT 63 = 12 STR 468 = 89 RLT 197 = 2008 TIOL 1634 (CESTAT 3 member large bench)].

3 Decision in Coca Cola and ABB analysing  definition of ‘input service’

Decisions of division bench of Mumbai high Court in case of Coca Cola  and of 3 member large bench of Tribunal in case of ABB has cleared the mist and has brought out true interpretation of the term ‘input service’.

In Coca Cola India v. CCE (2009) 22 STT 130  = 25 VST 473 = 242 ELT 168 (Bom HC DB) and ABB Ltd. v. CCE (2009) 21 STT 77 = 15 STR 23 (CESTAT 3 member bench), various aspects of definition of ‘input service’ have been clarified. These are summarised below.

These views have been upheld and reiterated in CCE v. Ultratech Cement (2010) 8 20 = 2010-TIOL-745 (Bom HC DB) [contrary view has been held in CCE v. Manikgarh Cement (2010) 7 115 = 2010-TIOL-720 (Bom HC DB)].

Inclusive part expands scope of definition – The word ‘includes’ is generally used to enlarge the meaning of the preceding words and it is by way of extension, and not restriction [para 23 of decision of Bombay High Court and para 16 of decision of Tribunal in ABB]

Five parts of definition of ‘input service’ are independent of each other - The definition of ‘input service’ can be conveniently divided into following five categories, so far as the manufacturers are concerned -

(a) Any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products.

(b) Any service used by the manufacturer, whether directly or indirectly, in or in relation to clearance of final products, from the place of removal (now it is ‘upto the place of removal’ but that does not change the conclusion of decisions of Bombay HC and Tribunal).

(c) Services used in relation to setting up, modernization, renovation or repairs of a factory, or an office relating to such factory (or premises in case of service provider).

(d) Services used in relation to advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs.

(e) Services used in relation to activities relating to business and outward transportation upto the place of removal.

Both Bombay High Court (in case of Coca Cola) and Large bench of Tribunal (in ABB) have held that each of the limb of above definition is an independent benefit/concession. If an assessee can satisfy anyone of above, the credit of input service would be admissible even if the assessee does not satisfy the other limbs – quoted and followed in Semco Electrical v. CCE (2010) 24 STT 508 (CESTAT SMB) * Rashtriya Ispat Nigam v. CCE (2010) 26 STT 405 (CESTAT).

[Note - In case of service provider, clauses (a) and (b) above change but there is no change in clauses (c), (d) and (e) above and in any case, the basic principle is same].

Any activity relating to business is ‘input service’ - There is no qualification to the word ‘activities’. There is no restriction that activities relating to business should be relating to only main activities or essential activities [para 27 of Coca cola and para 13 ABB decision]. All activities relating to business fall within the definition of ‘input service’ – same view in Semco Electrical v. CCE (2010) 24 STT 508 (CESTAT SMB).

‘Valuation’ and ‘Cenvat Credit’ are independent of each other – Hon. Tribunal held that the two issues namely valuation and Cenvat credit are independent of each other and have no relevance to each other. The submission of revenue that Cenvat credit cannot be allowed for services if value thereof does not form part of value subjected to excise duty is clearly against the fundamental concept laid down by Supreme Court in All India Federation of Tax Practitioners and the OECD guidelines [para 21 of decision of Tribunal in case of ABB].

There is additional reason for holding that Cenvat credit is admissible on services even if the value thereof is not part of value subjected to duty. This is because the interpretation of the expression ‘input services’ cannot fluctuate with the change in definition of value in section 4 of Central Excise Act and cannot vary depending on whether goods are levied to duty under section 4A of Central Excise Act or tariff value under section 3(2) of Central Excise Act or the product attracts specific rate of duty [para 22 of decision of Tribunal in case of ABB].

Definition of ‘input service’ is not confined to ‘manufacture’ but has to be interpreted on basis of requirements of business - The definition of ‘input service’ has to be interpreted in the light of the requirements of business and cannot be read restrictively so as to confine only upto the factory or only upto depot of manufacturers.

3.1 Dilution of aforesaid decisions

Just when we thought the issue relating to ‘input service’ has been settled, Karnataka High Court has granted stay against operation of CESTAT large bench decision in case of ABB on 10-12-2009 (244 ELT A91). In India Cement Ltd. v. CCE (2010) 249 ELT 530 (CESTAT), the bench did not agree with decision in case of ABB and the matter regarding Cenvat credit of service tax on outward freight was adjourned awaiting decision of Karnataka High Court on stay petition filed by department.

There are two decisions of Bombay High Court favouring liberal view of interpretation of ‘input service’, but Nagpur bench of same High Court in CCE v. Manikgarh Cement (2010) 7 115 = 2010-TIOL-720 (Bom HC DB) took restricted view and held that relation with manufacture is required for eligibility of a service as ‘input service’.

3.2 Other decisions taking liberal view of ‘input service’

Any input service required to maintain quality and efficiency of output service is input service - If absence of the input service adversely impacts quality and efficiency of output service, it (input service) should be considered as eligible input or input service - para 3.1.2 of CBE&C circular No. 120/01/2010-ST dated 19-1-2010.

Any service whose cost included in assessable value eligible for Cenvat credit - In CCE v. GTC Industries (2008) 17 STT 63 = 12 STR 468 = 89 RLT 197 = 2008 TIOL 1634 (CESTAT 3 member large bench), it has been held that, in principle, credit of service tax paid on those taxable services would be allowed that go to form a part of the assessable value on which excise is charged [Really, as stated in case of ABB Ltd., valuation and Cenvat credit are independent issues. However, in ABB’s case, it was observed that ‘question of denial of Cenvat credit does not arise if cost of (outward) freight is included in the transaction value’. Thus, if a cost is included in assessable value, its Cenvat credit will be certainly eligible] – followed in CCE v. CCL Products (2009) 22 STT 36 (CESTAT) * CCE v. Vikram Cement (2009) 22 STT 492 (CESTAT SMB) * Hindustan Coca-Cola Beverages v. CCE (2010) 24 STT 208 (CESTAT) – same view in Korea Plant Service v. CCE (2010) 25 STT 400 (CESTAT SMB).

4. Decision in Maruti Suzuki restricting scope of ‘includes’ doubted and issue referred to large bench

Definition of ‘input’ in Cenvat Credit Rules is similar to definition of ‘input service’. The definition of ‘input’ also has an inclusive clause.  There is ample case law that ‘includes’ expands scope of a definition.

In Corporation of City of Nagpur v. Its Employees AIR 1960 SC 675, it was held : ‘The inclusive definition is a well recognised devise to enlarge the meaning of the word defined, and, therefore, the word defined must be construed as comprehending not only such things as it signifies according to its natural import but also those things the definition declares that it should include’ - similar views in RD, ESIC v. Highland Coffee Works - (1991) 3 SCC 617 = AIR 1991 SC 129 = 1991 AIR SCW 2821 (3 member bench) * CIT v. Taj Mahal Hotel - (1971) 3 SCC 550 = AIR 1972 SC 168 = (1971) 82 ITR 44 (SC) * Narmada Bachao Andolan v. UOI AIR 2005 SC 2994 (SC 3 member bench).

However, in Maruti Suzuki Ltd. v. CCE (2009) 9 SCC 193 = 22 STT 54 = 240 ELT 641 (SC), restricted meaning to word ‘includes’ in definition of ‘input’ under Cenvat Credit Rules was given and it was held that even in respect of second i.e. inclusive part of definition of ‘input’, relation with ‘manufacture’ is required.

Interestingly, this view has been doubted and the matter has been referred to a large bench in Ramala Sahkari Chini Mills v. CCE (2010) 8 122 (SC).

5. Conclusion

The majority of decisions are in favour of liberal construction of the definition that any service in relation to business of assessee is his input service and any relation with manufacture or provision of output service is not required. The recent decision of Supreme Court in Ramala Sahkari Chini Mills also supports view that inclusive part of definition of input service expands the scope being manufacture or provision of output service.

However, there are contrary decisions also.

Disclosure to department advisable - In my view, the liberal interpretation is correct for reasons discussed above. It is advisable to inform department about the input services on which you are taking Cenvat credit. This will avoid charge of suppression of facts. It will save demands beyond one year and penalty will also e saved.

Let is hope that final decision comes from Supreme Court soon. Really, eligibility or non-eligibility of Cenvat credit is less important but certainty and clarity in law is much more important.

Theory of Consumption of Economics needs to be re-looked and reviewed.

Tuesday, January 11th, 2011

 This is a post by CMA.Ananda Mohapatra.

Theory of Consumption of Economics needs to be re-looked and reviewed.


The theory of Consumption of elementary economics began long ago with birth of mankind. During the beginning period of human civilisation, it was there but not explored, later on eminent Philosophers of the World gave it a name and derived other connective theory of economics. So consumption theory of economics is the route of other theories of economics. During mid 19th Century Philosophers like Dr. Alfred Marshall stated many things about consumption and developed different theories.    


Today State of Odisha so also Nation and world is running through a crucial period in connection with growth and development. The situation of World economy is worsen and facing recession and depression. Several countries of world including USA, UK, France and Russia is searching for alternative ways of growth while global warming and pollution become very serious and has become dangerous to humane civilisation. India and State of Odisha is of no excuse of above problems. Besides, Corruption in the Society beginning from households to national level has found prominence. This has made serious concerns in the part of Leaders and administrator of the State and Nation.


Corruption in the society is now at full swing and common as is evident from the daily news of print and electronics media. 2G Spectrum Scam, Adarsa Housing Scam of Maharashtra, land scam case of Karnataka, Vedanta, mining, coal and energy scam of Odisha etc. have proved the depth and route of the level of corruption in governance and administration. So in this crucial period, I would like to request to Leaders of the State, Nation and World to have a view on the following submissions of corrections and review, so that a path can be made out today for a better tomorrow.


Elementary Economics is a topic read by all streams of students, may be Arts, Commerce, Science, Engineering, Management etc. The Theory of Consumption constitutes the basic and fundamental element of economics and from which the Demand and supply theory have been derived along with others. Every students of higher education have read this basic law and concept of economics that “HUMANE WANTS ARE UN-LIMITED”. From this formula several other theories have been developed.


Humane wants are Unlimited. Whether this is true? In my view this not true in the present state of affairs. Let us I would like to put forth some examples. In our society, while we wake up in the morning, we plan for daily work with the limited resources and then as the day passes we achieve something or do not achieve the same due to constraints. This phenomenon of humane beings is common to all. The intelligent people are like to set realistic target with their resources available and perform necessary works for its achievement. If the plans and targets are un-realistic, then there is failure. So to conclude, the aforesaid behaviour of humane beings are based on limited wants.


We may take the case of the man with unlimited wants. If wants in the part of man becomes un-limited, then he will face confusion, counterfeiting, unattainable and pessimistic problems during the time of planning and fixing targets for the day to come. So while the wants of a man becomes unlimited, it will be very difficult in his part to work and to achieve results. The life of a man with un-limited wants is very difficult in an age of competition. With unlimited wants, people want to full fill their desires by hook or crook. Due to unlimited wants or we may rename it as huge desire, humane beings are self concentric and forego its responsibility towards society. He earns money in the cost of society; he even dares to earn money in unfair means. The ecology and environment becomes meaningless to him. While he earns money, he least thinks about its externalities.


We may relook our past. We born and brought up in an atmosphere of un-limited wants. Every student of Odisha so also India and world have read elementary economics because it is a common and compulsory subject for all and are taught and learnt that “Humane wants are unlimited. This concept of economics has born during the time of great man of economics Dr. Alfred Marshall and it has become a draconian law of economics. There after other great economist derived other theories of economics from this draconian law. All beginners of economics subject are started with this consumption theory, i.e., Humane wants are unlimited.


As time passes by with this faulty theory, we come across several events and happenings. Competition born in society followed by free trade then forced Philosophers to think reform in functioning and governance. In the other side of the coin corruption expanded its area without any attention like a disease neglecting the good ecology and environment. There was least scope to be realistic and people became materialistic and neglected the philosophical idea and run around the circular way. They did not escape even today. The Leaders and Administrators are not excused from the said circle. People ran on their way of life individually along with their family without looking to anybody, even neglecting the god gifted environment.


Favouring so also promoting to the theory of limited wants of economics, I would like to state about the Law of diminishing marginal utility. In this theory, when a man consumes commodity, his satisfaction level changes as he consumes the additional commodity. His satisfaction level of consumption becomes less and less while he consumes more and more. This is very much true in consumption behaviour of every man, being realistic in approach. This law of economics is contradicting to the Un-Limited wants law of consumption. In reality, had humane wants are unlimited, then there would be the law of increasing marginal utility instead of law of diminishing marginal utility. But the law of increasing marginal utility is not practical and possible. So, humane wants are limited and it can not be unlimited.


The above law of un-limited wants of economics is being impulsed in the past when the subjects like information/technology, deep corruption and sustainable development of economy had not in the society. Further it is being imported to India, a continent of hot and black from west, continents of cool and fair. While the latter continents have felt its necessity at a time of negative growth and economic crisis, the former is murmuring in the vicious circle of sustainable development and is not escaping. So time has come now to relook and review the basic theory of economics on priority: Consumption Theory, Humane wants are limited and make necessary arrangements for its propagation and regularisation in society, Schools, Collages, Universities and Institutes, so that the mind set of work force/manpower of the nation will be reset for attaining sustainable development of the economy.  


Humane wants can not be unlimited. This has been wrongly propagated in the past as unlimited at a time when idea of economic development was at premature state & there was poor environment of IT. So we have already come across that period and time has come now what is to be prescribed?  Considering the present socio-economic scenario of the State and nation, it is submitted that “Humane wants are limited and can not be unlimited”. At least we are to be alerted and prompted to regularise the above notion, may not be able to get result shortly but the direction of development shall be properly oriented without any doubt.


So, to maintain sustainable growth/development of economy of Odisha, India so also World, I would like to request the State Leaders and national Leaders including Hon’ble Chief Minister of Odisha, his Excellency Governor, Govt of Odisha, Mr. Kapil Sibal, Union HRD Minister, Prime Minister and President of Union Govt, President of UPA Madam Sonia Gandhi to look into the matter and direct the State and Nation to regularise in educational institution the above consumption law of economics, i.e., Humane wants are limited and to arrest the corrupted functionaries of governance and administration so that the good environment and ecology can be saved and preserved. I would also like to draw the kind attentions of economist of Odisha, India so also World to have a comment on the above changed law of economics and it is solicited/appreciated.




Energy Economics.


Shared Service Costs using Activity Based Costing (ABC)

Wednesday, January 5th, 2011
Specialist in Activity Based Management and Corporate Performance Management consulting, implementation and training


First of all, I wish you and your family a very happy and prosperous new year.

A shared service is an operational philosophy that involves centralizing administrative functions that were once performed in separate divisions or locations. Services that can be shared among the various business units of a company include finance, purchasing, HR and information technology. Shared Services is a service model designed to gain efficiencies in routine processing by leveraging common practices and enabling technology. In the earlier days the costs were not significant, but because of the IT services it has gone up. In some of the financial services companies or telecom companies the cost of IT function contributes more than 25% of the costs.

The primary objective of forming the share service departments is to leverage the economies of scale to improve the cost as well as the productivity of the departments. Some of the other drivers for moving to shared service model are a) Process standardization b) Process improvements c) headcount reduction d) Improve service levels e) Increase control f) in case of mergers it is used to capture the synergies. All these objectives look logical as well as moving towards the improved performance. But still the recipients of the services do not seem to be happy with the costs. This is generally because there is not transparency in the calculation of the cost of the services. There is also no relationship seen between the volume demand from the business units and the cost of the services.

The typical method of allocating these costs to the business units is headcount, capital employed, revenue, area occupied, # of users, # of workstations etc. These statistical keys may not always relate to the volume of the services received by the business unit. The planning of the shared services is also not in line with the business volume planning of the units. With this situation the utilization of the shared services is not in line with the business units’ volume requirements.

The chargeback system for the shared services should be

a) Equitable – It should be fair to all the recipients. There should not be any kind of cross-subsidization among the business units. This may generally happen when the basis of distribution of cost is ‘Revenue’ or ‘Headcount’. The business units should pay for the capacity of the resources they use. The underutilization of the shared service department should be charged to the business units. This overcapacity can result as there is no relation between the requirement for the business units and the resource planning by the shared service departments.

b) Repeatable and Accurate – The cost of the service should be the same irrespective of the time. It should cost the same across the year for the same volume requirements. Assuming the same input it should consume the same level of resources every time.

c) Understandable – Both the service provided and the business units should understand the methodology of charging the costs.

d) Predictable – The business units must be able to predict the costs of the services. They can plan for the higher volumes if required. In turn the service provider can plan the resources as per the requirement of the business units.

Activity Based Costing (ABC) can be the answer to reduce the conflicts between the service provider and the business units and also fulfill the requirements for the good cost allocation method. In ABC the model for shared service cost calculation can consider various shared service departments like IT, HR, Procurement, Facilities management and define their services (as activities) and business units as the Cost Objects. Sometimes the services provided can be defined as the ‘Services’ in the Cost Object and Business units as the ‘Customers’. In that case the activities are the various steps for completing the services. Some of the consultants create a separate model for the shared service cost calculation only. The final model starts with the resource costs as per the cost center accounting plus costs from the shared service model.

Let us consider the various services that can be defined for the departments.

a) Accounts payable – Vendor payment, employee reimbursements

b) Accounts receivable – Billing, accounting for receipts, ageing reports

c) HR – Recruitment, training, grievance management, performance measurement, payroll

d) IT – Application management, infrastructure management, help desk – applications, help desk – hardware

e) Corporate services – Travel management, facilities management, internal functions management

In the first step the demand for various services is collected from the various business units. Based on this demand and the various activities required and the time taken by various activities the total resource requirement is calculated. In this way the resources of the shared service departments can match with the business plan of the business units and they can plan for the resources for themselves. This in turn saves the business units being charged for the unutilized capacity of the shared service departments.

Once this demand is converted into the resource requirement and the same is planned for, the second step is calculating the cost of those services. For the all the costs for the shared service department is accumulated as a cost center. Care should be taken that these shared service department as providing services to the other are also receiving services. For example as IT department is providing services to HR, it is also services from HR department. This ‘reciprocal’ assignment of cost should be modeled properly. Once all those costs are collected, they flow through the ABC model and calculate the unit costs for each of the service. Then based upon the volume of services availed by the business units the cost is allocated to them. In this way even if there is any excessive capacity in the shared service department, it is not transferred as cost to the business units.

In this way the business units can see the unit cost of the shared services and they can either question the shared service departments for the same or if allowed they can avail the services from the third party. Sometimes the ‘Employee self service’ program is also taken by the business units. In this program the employees perform the services for themselves. This reduces the cost of the organization and the satisfaction levels can be matched. The performance of the shared service departments can be improved by creating the ‘Service level agreements (SLAs)’ and/or defining the performance indicators for the services. At least three types of performance indicators can be defined.

1) Productivity type – Cost per service

2) Cycle time type – Time taken to perform the service

3) Quality type - % of times the service is provided with required quality

Activity Based Costing (ABC) models for shared service departments help the organization to achieve their goals for the initiative as well as provides transparency in allocating costs and utilization of resources of the shared service departments. The planning of the shared service departments can happen in line with that of the business units.

Why Does Shaken Confidence Reinforce One’s Advocacy?

Sunday, January 2nd, 2011
 Gary Cokins, CPIM is Global Product Marketing Manager for Performance Management at SAS,the world’s leader in business intelligence, and analytical software.  He is an internationally recognized expert, speaker, and author.

These last few years I have been mystified as to why the adoption rate of proven and valuable managerial methods and techniques are taking so long to be applied in organizations. Examples are business analytics, the balanced scorecard, and activity-based costing. Organizations that use them proclaim improved performance and better decision making. There is even empirical evidence in terms of financial results from Dr. David Norton, co-author with Professor Robert S. Kaplan of the Balanced Scorecard book series, that companies that have implemented their methods achieve superior results compared to their competitors.

My unscientific research has revealed explanations including:
• Insufficient or poor quality data.
• Misperceptions that the techniques are too complex.
• Initial failures with prior pilot projects.
• Human nature’s resistance to change.
• Not wanting to be held accountable.
• Not wanting to be measured (or measured without involvement selecting the measures).
• Fear of knowing the truth.
• Lack of executive sponsorship or a willing and passionate champion.

Note that solving the last few “excuses” deals with behavior modification and change management. A problem is none of us have been trained in change management. We are typically specialists.

Related to this, I have recently read some disturbing research of psychology. It deals with why people actually hang on stronger to their ideas even after they learn their ideas are proven wrong. The research was conducted by two faculty members, David Gal and Derek Rucker, of Northwestern University’s Kellogg School of Management. Using tests with a control group, they revealed that the more that people doubt their own beliefs, then paradoxically the more they are inclined to support and lobby for them. Their research paper’s title “When in Doubt, Shout” (Psychological Research; November, 2010) summarizes their research findings. The test subjects who were confronted with evidence that challenged and disproved their beliefs subsequently advocated them even more aggressively compared to the control group.

This both bothers me and confirms some of my own observations. I often attempt to persuade managers and executives that applying fact-based quantitative statistics and logical methodologies is far superior than making decisions based on intuition and gut feel or than using inappropriate key performance indicators (KPIs) or flawed and misleading cost allocation methods. Too often, I get stone-walled or told about the obstacles I listed above. How can we transform a “Dr. No” into a “Dr. Know”?

I can accept resistance to change and judgment up to a point. But maybe there is pride of ownership (and perhaps some ego) that explains why, despite strong business cases for adopting the methods I described, managers and executives remain hesitant to march forward. Wouldn’t they like to gain insights or know something about the future before their organization gets there? How valuable should it be to them to know things that their competitors do not know? Perhaps Gal and Rucker’s research gives a clue.