Archive for the ‘Datey’s Space’ Category

Legal Updates - May and June 2011

Sunday, July 24th, 2011

This is post by CMA V.S.Datey. http://dateyvs.com/gta.htm

Legal Resume May and June 2011

.Service Tax

Stay on service tax on legal consultancy

Hon. Madras High Court has granted interim stay on 24-6-2011, for recovery of service tax on legal consultancy services from members of Revenue Bar Association, Chennai.

Sub-Contractor not liable when he is providing construction service which is not taxable

Sub-contractor is liable even if main contractor is exempt from service tax – CBE&C circular No. 138/7/2011-ST dated 6-5-2011.

This circular gives an impression that all sub-contractors are liable to pay service tax. This is indeed not so.

The departmental circular is valid if the sub-contractor provides as service which falls under a different head and is not an exempt service. For examples, if the sub-contractor provides service like Architect, Consulting Engineer, Design Service, Manpower Recruitment and Supply Service, such service will be taxable even if the services provided by main contractor is not taxable.

However, if the sub-contractor provides a service which is exempt, it will continue to be exempt. For example, a contractor has received contract for construction of dam, road, tunnel or bridge which is exempt from service tax. Now, instead of doing the work himself, if he gives the work of construction of dam, road, tunnel of bridge to a sub-contractor, the service of sub-contractor will be exempt since he is himself providing service of construction of dam, road, tunnel or bridge.  

In fact, para 4 of the CBE&C circular No. 138/7/2011-ST dated 6-5-2011 specifically states that service provided by the sub-contractors/consultants and other service providers are classifiable as per section 65A of the Finance Act under respective clause of sub-clause (105) of section 65 of Finance Act, 1994.

If the construction is not commercial or is relating to road, bridges etc., or is for personal residential use of customer, the main person (builder or developer or main contractor) is not liable. The definition of ‘construction service’ refers to type of construction and not to type of contract. The exemption/exclusion depends upon type of construction. Thus, even if the work is done by contractor/sub-contractor, the nature of construction does not change and hence it would not be subjected to service tax.  Moreover, an exemption notification cannot be interpreted in a way which will defeat its very purpose

[One argument is that relation between the main person (builder/developer) and the contractor/sub-contractor is on commercial basis and hence it is commercial construction. In my view, this is not correct for the reasons stated above.].

On the same analogy, services provided by sub-contractor to contractor in SEZ should also be exempt, since ultimately the service is received by the SEZ Unit or SEZ Developer.

If the issue goes to Court, it will be interesting to know final outcome. Of course, if someone intends to take aforesaid view, it is advisable to make full disclosure to department in advance to avoid charge of suppression of facts.

Consulting Engineers to pay service tax on receipt basis

Service tax is payable on accrual basis and not on cash basis, w.e.f. 1-4-2011. Relaxation has been given to professionals like CA, ICWA, Architect, Advocates etc. can pay on receipt basis. This relaxation has also been extended to consulting engineers w.e.f. 1-7-2011.

Service tax on transport of goods by rail again deferred

Proposed service tax on transport of goods by rail (other than container) has been defereed once again upto 1-1-2012.

Central Excise

Inputs can be cleared for export on payment of duty and rebate claimed

In CCE v. Micro Inks (2011) 31 STT 144 = 10 taxmann.com 166 (Bom HC DB), assessee had obtained inputs and capital goods from domestic suppliers. These were exported on payment of duty by reversing the Cenvat credit. It was held that assessee can be treated as ‘deemed manufacturer’ and is eligible to get refund.

Putting brand of school, security agency, company, hotel, on readymade garments is not ‘branding’ of readymade garment

Uniforms (Ready-made garments) are supplied to schools, private security guards, companies, hotels, airlines etc. with their logo printed, embroidered or etched on them. Similarly, made ups like linens, quilt, blankets, towels are supplied to companies, hotels, airlines, security agencies etc., bearing their logo. In addition, name of tailor or manufacturer is affixed on such garments (for identification). Similarly, blankets are supplied to armed force, police force etc. with name of manufacturer., as per requirement of tender.

Such garments are not ‘branded garments’ and these will be eligible for SSI exemption – MF(DR) circular No. 947/8/2011-CX dated 21-6-2011.

(This is correct since there is no trade in the goods by such school, hotel, airline, armed force, police force etc. The principle should apply to other goods also, though there are some contrary decisions, even of Supreme Court, on similar issues).

Cenvat Credit

Furniture and stationary used in factory eligible for Cenvat

Goods such as furniture and stationary used in an office within the factory are goods used in the factory and are used in relation to the manufacturing business and hence the credit of same is allowed.- Para 3 of MF(DR) TRU(I) letter D.O.F. No. B-1/3/2011-TRU dated 25-3-2011.

Foreign Trade Policy

DEPB scheme extended for three months

DEPB scheme has been extended upto 30-9-2011. DEPB scheme has been in ICU and on oxygen for a very long time. No one can predict how long it will live.

Companies Act

MCA going ahead with implementing Companies Act, 2011 even though the Bill is not even tabled before Parliament

Ministry of Corporate Affairs have introduced many welcome radical reforms in implementation of Companies Act, without waiting for even presentation of new Companies Bill before Parliament.

Under the banner ‘GO GREEN’, sweeping reforms are being introduced through circulars and notifications. If so much can be done through circulars, there may not be need for new Company Law! The circulars and notifications are issued so fast that in almost all the cases, a corrigendum or amendment has to be issued later.

Major changes are summarised below.

bullet Balance sheet and Notices to members can be sent through e-mail [This has saved tons and tons of paper, as almost 80% of the balance sheets to in waste paper basket even without being opened!] (Of course, paper industry, printers, mailers and couriers are highly unhappy).
bullet Participation of members in general meeting through video conferencing allowed (Welcome step but making it compulsory to all listed companies from year 2012 is not very practical).
bullet Provision for electronic voting by members in postal ballot, if done through approved Agency (NSDL and CDSL) [This should be helpful in voting in postal ballot as presently, except promoters and their friends, hardly anyone else bothers to post the ballot papers].

bullet Directors can attend meeting through video conferencing provided they attend at least one meeting physically every year
bullet Payment of all fees to MCA only through electronic mode w.e.f. 1-10-2011.
bullet ROC will issue only certificates digitally signed. No physical certificate will be issued.

Liberilasion and Procedural simplifications in Company Law matters

bullet DIN Application to be filed electronically only. Application duly certified by practicing CA/VWA/CS will be approved by system immediately, except in case of potentially duplicate applications.
bullet Forms 2, 3, 18 and 32 will be approved automatically (Straight Through Process).
bullet LLP of CA can be appointed as Auditors
bullet Sections 108A to 108I of Companies Act no more applicable as MRTP Act abolished.
bullet All work to be attended by officers on FIFO basis, without giving any priority to any work.
bullet Section 25 companies (licensed company) to be approved by ROC and not Regional Director).
bullet Approval of Government for appointment of relative of director to office of profit required only if remuneration exceeds ` 2.50 lakhs per month.

bullet Disclosures of salaries of employees required only when salary exceeds ` 5 lakhs per month.
bullet Large companies to file balance sheet in XBRL format.

PAN must be incorporated in DIN before 30-9-2011

Quoting PAN in DIN is must now (earlier the application form did not require PAN number). Those who had filed DIN application earlier and had already obtained DIN must submit their PAN number before 30-9-2011. If they do not do so, heavy penalty will be imposed on them – MCA circular No. 32/2011 dated 31-5-2011.

Extra judicial means to ensure compliance with law

Many companies only file event based information (like appointment of directors, issue of securities, registration of charges) but do not file balance sheet and annual reports. In case of such companies, e-filing of such event based information will not be accepted by the system, except the forms 32, 20B, 21A, DIN-3, 21, 23B and 66 – MCA circular no. 33/2011 dated 1-6-2011.

Government or BIFR approval to managerial remuneration only in case of listed companies

Minimum remuneration even higher than the prescribed  limits can be paid. The company has to comply with all the five conditions specified i.e. remuneration committee, no default in debt repayment and interest, special resolution for three years and disclosure in Corporate Governance Section of Directors’ Report.

In addition, Central Government approval will be required, if the company is a listed company or subsidiary of a listed company, except where the remuneration is approved by BIFR [Amendment w.e.f. 8-2-2011 and 23-5-2011. Till 8-2-2011, Government approval was required in all the cases].

In case of subsidiary of a listed company, such Government approval is not required if (a) the remuneration committee and Board of Directors of holding company give their consent for the amount of remuneration (b) Remuneration is approved in general meeting of holding company (c) The remuneration of applicant is deemed to be remuneration paid by holding company and (d) all members of the subsidiary are bodies corporate – Fifth proviso to section 2(C) in part II Schedule XIII inserted w.e.f. 23-5-2011.

Cost Accounting and Cost Audit

Vast expansion in scope of cost accounting record Rules

Companies (Cost Accounting Records) Rules, 2011 have been notified. These rules shall apply to every company, including a foreign company as defined under section 591 of the Act, which is engaged in the production, processing, manufacturing, or mining activities. Even service sector has been covered. The definition of ‘manufacture’ and ‘product’ are so wide that practically, except trading activity, the Rules will apply to all activities.

These Rules apply where (a) the aggregate value of net worth as on the last date of the immediately preceding financial year exceeds five crores of rupees; or (b) wherein the aggregate value of the turnover made by the company from sale or supply of all products or activities during the immediately preceding financial year exceeds twenty crores of rupees; or (c) wherein the company’s equity or debt securities are listed or are in the process of listing on any stock exchange, whether in India or outside India.

However, these rules shall not apply to a company which is a body corporate governed by any special Act (e.g. Banking and Insurance).

Industry-wise Cost Audit Ordered

So far, Cost Audit orders were issued to individual companies. Now, industry-wise orders have been issued for the first time. General orders have been issued as follows –

(a) Order No. 52/26/CAB-2010 dated 2-5-2011 in respect of specified products where net-worth of company is more than ` five crores or turnover of company is more than ` 20 crore or where the equity or debt instrument of company is listed on stock exchange. The order covers Bulk Drugs, Electricity Industry, Fertilizers, Formulations, Industrial Alcohol, Petroleum Industry, Sugar and Telecommunications.

(b) Order No. 52/26/CAB-2010 dated 3-5-2011 in respect of specified products where turnover of company is more than ` 100 crore or where the equity or debt instrument of company is listed on stock exchange. The order covers Cement, Tyres and Tubes, Steel Plant, Steel Tubes and Pipes, Paper and insecticides.

Simplified procedure for appointment of Cost Auditor

The procedure as applicable w.e.f. 1-4-2011 is as follows –

Audit Committee of Board of Directors of company shall consider appointment of cost auditor. It will ensure that cost auditor is not disqualified and does not exceed prescribed limit under section 224(1B) of the 1956 Act. It will obtain certificate from cost auditor about his/its independence and arm’s length relationship with the company. Then appointment will be confirmed by Board of company.

The company will file application electronically in form 23C within 90 days from commencement of each financial year, along with prescribed fees with copy of Board resolution and copy of certificate from cost auditor regarding compliance of section 224(1B) of Companies Act.

On filing application, the same shall be deemed to have been approved by Central Government, unless contrary is heard within 30 days of filing such application. If within 30 days, Central Government directs the company to re-submit application with additional information, the 30 days period shall be deemed to be from date of re-submission by the company.

After 30 days, company shall formally appoint Cost Auditor by a formal letter. Then, the cost auditor shall inform Central Government of his appointment in e-form.

Full particulars of cost auditor, along with due date and actual filing of cost audit report by cost auditor shall be disclosed by company in its annual report – MCA circular No. 15/2011 dated 11-4-2011.

Labour Laws

Fresh charge sheet to be issued in case of de novo proceedings

Disciplinary proceedings commence only when a Charge sheet is issued the delinquent employee - Valuation rules to be applied sequentially –- Chairman, Coal India  v. Anitha Saha  (2011) 5 SCC 142 (In this case, it was held that if High Court had ordered de novo enquiry, fresh charge sheet is required to be served).

Back wages not automatic even if workman is reinstated

Even after punishment is quashed by the Court or Tribunal, the payment of back wages still remains discretionary, No straight jacket formula can be evolved, nor a rule of universal application can be laid for such cases. Approach of Court or Tribunal should not be rigid or mechanical but flexible and realistic - Chairman, Coal India  v. Ananta Saha  (2011) 5 SCC 142.

Other Corporate Laws

Competition Act made fully operational

Provisions in Competition Act relating to ‘combinations’ have been made effective from 1-6-2011.

The value of assets and turnover as indicated in section 5 of the Competition Act for purpose of combination stand enhanced by 50% - Notification No. S.O. 480(E) dated 4-3-2011.

Following transactions have been exempted from provisions relating to Combination for a period of five years –

* Group exercising less than 50% of voting rights in other enterprise [S O No. 481(E) dated 4-3-2011].

* Acquiring control, shares, voting rights or asset of an enterprise which either has assets not more than ` 250 crores in India or has turnover not more that ` 750 crores in India [S O No. 482(E) dated 4-3-2011 as amended].

FCRA notified and made effective

Foreign Contribution (Regulation) Act, 2010 have been notified and made effective from 1-5-2011.

The Act has been notified and has been made effective from 1-5-2011.

Foreign Contribution (Regulation) Rules, 2011 have been notified prescribing forms and other provisions.

Limitations of Arbitral Tribunals

In Booz Allen and Hamilton INC v. SBI Home Finance Ltd. (2011) 5 SCC 532, it has been held as follows – (a) All rights relating to rights in rem are required to be adjudicated by Courts and public Tribunals as these are not suited for private arbitration. Private arbitration can decide rights in personam. (b) Criminal offenses, matrimonial disputes, guardianship matters, insolvency and winding up, testamentary matters (grant of probate, letter of administration, succession matters), tenancy matters governed by special statutes.

In this case, it was held that a suit for sale, foreclosure or redemption of a mortgaged property should only be tried by Court and not by Arbitral Tribunal. However, specific performance of right like agreement to sale or mortgage does not involve any transfer of rights in rem. It creates only personal obligation and hence is arbitrable.

New taxable services and expansion of scope of services w.e.f. 1-5-2011

Saturday, May 14th, 2011

New taxable services and expansion of scope of services w.e.f. 1-5-2011


V S DATEY

Two new services were added and expansion of scope of some existing services was proposed while resenting Budget 2011 on 28-2-2011. Now, tax on these services has been made effective from 1-5-2011. The scope of new services and expansion of scope has been discussed in this Article.

Short Term Accommodation Service

1. The service has become taxable w.e.f. 1-5-2011. Accounting Code - Service Tax : 00441070. Payment of interest, penalty, etc. : 00441071.

Relevant Definition - Any service provided or to be provided to any person, by a hotel, inn, guest house, club or campsite, by whatever name called, for providing of accommodation for a continuous period of less than three months, is a taxable service [section 65(105)(zzzzw) of Finance Act, 1994 inserted w.e.f. 1-5-2011]

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Value for purpose of service tax on short term accommodation

1.2 The words used in the definition are ‘for providing of accommodation’ and not ‘in relation to providing of accommodation’. Hence, in my view, service tax is payable only on charges relating to accommodation, if assessee does not avail any abatement (as explained below).

Service tax should not be payable on other charges like laundry, telephones, internet facility etc, as they may be in relation to accommodation but not ‘for accommodation’.

Even profit earned on such extra activities should not be includible in value for service tax purposes. In Bax Global India v. CST [2008] 13 STT 263 (Bang. - CESTAT), it was held that if the service provider earns profit on extra charges which is not part of the service, it is not includible in value of his services – relying on Baroda Electric Meters Ltd. v. CCE 1997 (94) ELT 13 (SC).

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Full Exemption if declared tariff is less than ‘ 1,000 per day

1.4 Service tax on short term accommodation is fully exempt if ‘declared tariff’ is less than ` 1,000 per day. “Declared tariff” includes charges for all amenities provided in the unit of accommodation like furniture, air-conditioner, refrigerators etc., but does not include any discount offered on the published charges for such unit – Notification No. 31/2011-ST dated 25-4-2011.

Thus, service tax would be payable even if actual amount charged is less than ‘ 1,000 per month, if the ‘declared tariff’ is ‘ 1,000 or more.

It has been clarified that cost of extra bed will not form part of the declared tariff. However, deduction in respect of complimentary breakfast or any meal whose cost is included in the declared tariff is not allowable. Similarly, if any discount is given, it will not be deducted for purpose of ‘declared tariff’ – MF(DR) TRU DOF No. 334/3/2011-TRU dated 25-4-2011.

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Restaurant Service

2. Service tax on the service is effective from 1-5-2011. Accounting Code - Service Tax : 00441067. Payment of interest, penalty, etc. : 00441068.

Relevant Definition - Any service provided or to be provided; to any person, by a restaurant, by whatever name called, having the facility of air-conditioning in any part of the establishment, at any time during the financial year, which has licence to serve alcoholic beverages, in relation to serving of food or beverage, including alcoholic beverages or both, in its premises, is a ‘taxable service’ [section 65(105)(zzzzv) inserted w.e.f. 1-5-2011]

Scope of service tax on restaurant service

2.1 It has been clarified by department as follows [Refer Annexure A of Ministry of Finance, Department of Revenue TRU II DOF No. 334/3/2011-TRU dated 28-2-2011]

1.1 Restaurants provide a number of services normally in combination with the meal and/or beverage for a consolidated charge. These services relate to the use of restaurant space and furniture, air-conditioning, well-trained waiters, linen, cutlery and crockery, music, live or otherwise, or a dance floor. The customer also has the benefit of personalized service by indicating his preference for certain ingredients e.g. salt, chilies, onion, garlic or oil. The extent and quality of services available in a restaurant is directly reflected in the margin charged over the direct costs. It is thus not uncommon to notice even packaged products being sold at prices far in excess of the MRP.

1.2 In certain restaurants the owners get into revenue-sharing arrangements with another person, who takes the responsibility of preparation of food, with his own materials and ingredients, while the owner takes responsibility for making the space available, its decoration, furniture, cutlery, crockery and music etc. The total bill, which is composite, is shared between the two parties in terms of the contract. Here the consideration for services provided by the restaurants is more clearly demarcated.

1.3 Another arrangement is whereby the restaurant separates a certain portion of the bill as service charge. This amount is meant to be shared amongst the staff who attend the customers. Though this amount is exclusively for the services it does not represent the full of value of all services rendered by the restaurants.

1.4 The new levy is directed at services provided by high-end restaurants that are air-conditioned and have license to serve liquor. Such restaurants provide conditions and ambience in a manner that service provided may assume predominance over the food in many situations. It should not be confused with mere sale of food at any eating house, where such services are materially absent or so minimal that it will be difficult to establish that any service in any meaningful way is being provided.

1.5 It is not necessary that the facility of air-conditioning is available round the year. If the facility is available at any time during the financial year the conditions for the levy shall be met.

1.6 The levy is intended to be confined to the value of services contained in the composite contract and shall not cover either the meal portion in the composite contract or mere sale of food by way of pick-up or home delivery, as also goods sold at MRP. Finance Minister has announced in his budget speech 70% abatement on this service, which is, inter-alia, meant to separate such portion of the bill as relates to the deemed sale of meals and beverages. The relevant notification will be issued when the levy is operationalized after the enactment of the Finance Bill.

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Export/Import Service

2.4 Restaurant has been classified under rule 3(i) of Export of Service Rules and Import of Service Rules. Thus, the service will be ‘export’ only if the immovable property is situated outside India. It will be ‘import’ only if immovable property is situated in India.

Thus, mere receipt of payment in foreign exchange will not qualify this service to be treated as ‘export of service’. Similarly, if this service is availed outside India, service tax will not be payable under reverse charge mechanism under ‘Import of service’.

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Scope of taxable Services w.e.f. 1-5-2011

3.1 Scope of taxable services has been expanded w.e.f. 1-5-2011. Now representational services before any Court, Tribunal or authority would be taxable, if provided to a legal entity even by an individual.

Arbitration services will also be subject to tax.

As per para 3.6 of TRU (II) DOF letter No. 334/3/2011-TRU dated 28-2-2011, the scope of existing service is expanded to include – (i) Services of advice, consultancy or assistance provided by a business entity to individuals as well (ii) Representational services provided by any person to a business entity; and (iii) Services provided by arbitrators to business entities. Services provided by individuals to other individual will remain outside the levy.

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Representational services provided by practising CA/CWA/CS taxable w.e.f. 1-5-2011

4. Earlier, services of Practicing CA/CWA/CS relating to representing before any statutory authority in the course of proceedings initiated under any law were exempt, vide Notification No. 25/2006-ST dated 13-7-2006. This notification has been rescinded w.e.f. 1-5-2011. Hence, all services provided in professional capacity will be taxable, including representational service.

It may be noted that services like authorship, directorship, teaching, preparation of electricity bills etc. which are not provided in professional capacity will not be taxable even after 1-5-2011, unless they fall in some other head of taxable service.

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Operational or administrative assistance in any manner is now taxable

5. Scope of ‘Business Support Service’ has been expanded to cover ‘operational or administrative assistance in any manner’, by amending definition in section 65(104c) of Finance Act, 1994 w.e.f. 1-5-2011.

The Operational or Administrative Assistance provided in any branch of business like finance, human resource, purchase, granting of loan etc would be taxable service under this category.

It has been clarified by department as follows [Refer Annexure B of TRU (II), Ministry of Finance, Department of Revenue DOF No. 334/3/2011-TRU dated 28-2-2011]

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5.2 The words “operational and administrative assistance” have wide connotation and can include certain services already taxed under any other head of more specific description. The correct classification will continue to be governed by Section 65A.

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Motor Vehicle Repair and Related Services

7. The service was earlier termed as ‘Authorised Service Station Service’. Tax on this service was introduced with effect from 16-7-2001. The scope is vastly expanded in Budget 2011 w.e.f. 1-5-2011 to cover services provided by any person (whether authorised or not) and all motor vehicles except those used for goods transport and three-wheeler auto rickshaws.

As per section 65(105)(zo) of Finance Act, 1994 [substituted vide Finance Act, 2011 w.e.f. 1-5-2011], any service provided or to be provided to any person, by any other person, in relation to any service for repair, reconditioning, restoration or decoration or any other similar services, of any motor vehicle other than three wheeler scooter auto-rickshaw and motor vehicle meant for goods carriage, is a taxable service.

It has been clarified by department as follows [Refer Para 1 of Annexure B of TRU (II), Ministry of Finance, Department of Revenue DOF No. 334/3/2011-TRU dated 28-2-2011] – ‘The existing service is being substituted with a new definition to cover – (a) Services provided by any person i.e. whether authorized service station or otherwise (b) All motor vehicles, other than vehicles used for goods transport and three-wheeler auto-rickshaws; and (c) Repair, re-conditioning or restoration - which are already taxable – and services of decoration and any other related services’.

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Clinical Establishment and Health Check up services fully exempted

9. Tax on this service is introduced with effect from 1-7-2010, under the name ‘Health Checkup or Preventive Care’ service. Its scope was expanded in Budget 2011 w.e.f. 1-5-2011 to cover services of clinical establishment and diagnostic services.

Though the service tax was proposed on all services provided by clinical establishments having central air conditioning and also all diagnostic services, the proposed tax was criticized as ‘misery tax’. Hence, complete exemption has been granted to this service vide Notification No. 30/2011-ST dated 25-4-2011.

This exemption will also apply to ‘health checkup or preventive care services’ which were taxable w.e.f. 1-7-2010. These will not be taxable w.e.f. 1-5-2011.

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Service tax when goods are imported by air

11. W.e.f. 1-4-2011, goods transport by air service is classifiable under rule 3(iii) of Import of Service. Hence, it will be ‘import of service’ if service is received in India. However, if goods are imported by air, service tax on transport of goods has been partially exempted w.e.f. 1-4-2011. The exemption is available to the extent of air freight included in assessable value under section 14 of Customs Act [Notification No. 9/2011-ST dated 1-3-2011]

In case of air freight, fright to the extent of 20% of FOB value is includible in assessable value for customs duty. Thus, balance air freight will be subject to service tax. In my view, service tax will be payable even if air freight is paid by foreign exporter.

Till 31-3-2011, service tax on transport of goods by air was covered under rule 3(ii) of Import of Service Rules. Hence, it could come under ‘Import of Service’ only if the service was at least partly performed in India. In case of air transport, really service is complete when goods land in India. Hence, in my view, service tax was not payable upto 31-3-2011 if goods were imported by air.


Input Service - A New Jigsaw Puzzle

Wednesday, May 4th, 2011

This is a post by CMA V.S.Datey. He is the author of books on Indirect Taxation and Corporate Laws.

Input Service - A New Jigsaw Puzzle

1 Cenvat Credit is available on input goods, input services and capital goods. Manufacturer as well as service provider will be eligible to get Cenvat credit of ‘input services’.

Definition of ‘input service’ has been changed w.e.f. 1-4-2011. The new definition is significantly different from the earlier definition of ‘input service’.

Rule 2(l) of Cenvat Credit Rules (as effective from 1-4-2011), defines ‘input service’ as follows –

 “Input service” means any service, -

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

(ii) used by a 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 modernisation, 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, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal;

but excludes services, -

(A) specified in sub-clauses (p), (zn), (zzl), (zzm), (zzq), (zzzh) and (zzzza) of clause (105) of section 65 of the Finance Act (hereinafter referred as specified services), in so far as they are used for- (a) construction of a building or a civil structure or a part thereof; or (b) laying of foundation or making of structures for support of capital goods, except for the provision of one or more of the specified services; or

(B) specified in sub-clauses (d), (o), (zo) and (zzzzj) of clause (105) of section 65 of the Finance Act, in so far as they relate to a motor vehicle except when used for the provision of taxable services for which the credit on motor vehicle is available as capital goods; or

(C) such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee.

1-1 Analysis of the definition

The definition of ‘input service’ is broadly in three parts – First is  main part, second is inclusive part and third part covers exclusions. First part of the definition is restrictive in scope as it covers input services used for providing taxable output service or used by manufacturer, directly or indirectly, in relation to manufacture or clearance of final product upto the place of removal.

Second i.e. inclusive part of the definition expands the scope much beyond the coverage of first part. The third part covers specific exclusions.

1-2 Meaning of ‘includes’

Definitions are ‘inclusive’ or ‘exhaustive’. If the definition uses the word “means” it means that it is restrictive and exhaustive. However, if the word “include/s” is used in definition, it means that the definition is not exhaustive but it is inclusive, i.e. it expands the meaning - Doypack Systems (P.) Ltd. v. UOI (1988) 2 SCR 962 = (1988) 2 SCC 299 = 65 Comp Cas 1 = 36 ELT 201 = AIR 1988 SC 782 * Lucknow Development Authority v. M K Gupta (1994) 1 SCC 243 = 1994 AIR SCW 97 = AIR 1994 SC 787 = 80 Comp Cas 714 (SC) * Feroze N Dotivala v. P M Wadhwani 2002 AIR SCW 4904.

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) * Municipal Corporation v. Indian Oil Corpn - AIR 1991 SC 686 = (1991) Supp 2 SCC 18 * S K Gupta v. K P Jain (1979) 3 SCC 54 * Narmada Bachao Andolan v. UOI AIR 2005 SC 2994 (SC 3 member bench) * CTO v. Rajasthan Taxchem Ltd. (2007) 3 SCC 124 = 5 VST 529 = 209 ELT 165 (SC) * Karnataka Bank Ltd. v. State of AP (2008) 12 VST 459 (SC) *  K N Farms Industries v. State of Bihar AIR 2009 SC 3031.

In Forest Range Officer v. P Mohammed Ali - AIR 1994 SC 120 = 1993 AIR SCW 3754 = 1993 (3) SCC (Supp) 627, it was observed : ‘Includes’ is used as extension. An interpretation clause which extends the meaning of a word does not take away its ordinary meaning. An interpretation clause of inclusive definition is not meant to prevent the word receiving its ordinary, popular and natural sense wherever that would properly be applicable, but to enable the word as used in the Act to be applied to some things to which it would be normally not applicable’ - same view in Black Diamond Beverages v. CTO 1997 AIR SCW 3654 = (1997) 107 STC 219 (SC) = AIR 1997 SC 3550, where it was held that inclusive part of definition cannot prevent the main provision from receiving its natural meaning.

When the word used is ‘includes’, such definition is to be given a wider meaning and not exhaustive or restricted to the items contained in the definition - Krishi Utpadan Mandi Samiti v. Shanker Industries - 1993 AIR SCW 762 = 1993 Supp (3) SCC 361(II) (SC) * Tamil Nadu Kalyana Mandapam Association v. UOI 2004 (167) ELT 3 = 4 STT 308 = 267 ITR 9 = 136 Taxman 596 = 135 STC 480 (SC) * Ponds India v. CTT (2008) 227 ELT 497  = 15 VST 256 (SC).

IDecision in Maruti Suzuki restricting scope of ‘includes’ doubted and issue referred to large bench 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 – in appeal from Maruti Suzuki Ltd. v. CCE (2009) 238 ELT 180 (CESTAT). [This view has been doubted and the matter has been referred to a large bench in Ramala Sahkari Chini Mills v. CCE (2010) 29 STT 464 =  8 taxmann.com 122 = 260 ELT 321 (SC)]

1-3 Meaning of ‘in relation to’

Scope of inclusive part of definition of input service is further widened by use of the term ‘in relation to’.

The expression ‘in relation to’ (so also ‘pertaining to’) is a very broad expression, which pre-supposes another subject matter. These are words of comprehension which might both have a direct significance as well as an indirect significance depending on the context. -. - ‘Relating to’ is equivalent to or synonymous with as to ‘concerning with’ and ‘pertaining to’. The expression ‘pertaining to’ is an expression of expansion and not of contraction - Doypack Systems P Ltd. v. UOI  (1988) 2 SCR 962 = 1988 2 SCC 299 = (1989) 65 Comp Cas 1 = 1988 (36) ELT 201 (SC) = AIR 1988 SC 782 * Tamil Nadu Kalyana Mandapam Association v. UOI 2004 (167) ELT 3 = 4 STT 308 = 267 ITR 9  = 136 Taxman 596 = 135 STC 480 (SC) CCE v. Solaris Chemtech (2007) 7 SCC 347 = 9 STT 412 = 214 ELT 481 (SC).

‘In relation to’ are words of comprehensiveness which might have both a direct significance or indirect significance depending on the context. They are not words of restrictive content. - State Waqf Board v. Abdul Azeer Sahib (1967) 1 MLJ 190 = AIR 1968 Mad 79 * State of Karnataka v. Azad Coach Builders  (2010) 9 SCC 524 = 7 taxmann.com 28 = 4 GST 72 = 36 VST 1 = 262 ELT 32 (SC 5 member bench).

The expression ‘in relation to’ is of widest import. – Thyssen Stahlunion GMBH v. Steel Authority of India 1999 AIR SCW 4016 = AIR 1999 SC 3923 = 1999 (6) SCC 334.

2 Place of removal

The concept of ‘removal’ is borrowed from Central Excise and hence applies only to a manufacturer and not service provider.

CBE&C vide circular No. 137/3/2006-CX.4 dated 2-2-2006 has confirmed that when the words ‘place of removal’ are not defined in Finance Act, definition under Central Excise Act is to be considered. It has been clarified that in case of depot sale, depot is place of removal. Hence, service tax on freight upto depot will be eligible for Cenvat credit whether the duty is payable under section 4 (ad valorem) or section 4A (MRP basis).

The term ‘place of removal’ is not defined in Cenvat Credit Rules, but is defined in section 4(3)(c) of Central Excise Act as follows –

“Place of removal” means—

(i)                 a factory or any other place or premises of production or manufacture of the excisable goods;

(ii)               a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty

(iii)             a depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory

from where such goods are removed.

The words ‘from where such goods are removed’ apply to all the three clauses.

As per section 2(h) of Central Excise Act, ‘sale’ and ‘purchase’ with their grammatical variations and cognate expressions, means any transfer of possession of goods by one person to another in the ordinary course of trade or business for cash or deferred payment or other valuation consideration.

2-1 Place of where ownership gets transferred to buyer is place of removal when there is direct sale from factory

Normally, factory gate is place of removal, except in case of depot sales.

In Escorts JCB Ltd. v. CCE (2003) 1 SCC 281  = 53 RLT 1 = 146 ELT 31 (SC), the contract was for sale ex-factory. Goods were handed over to the carrier/transporter. However, insurance was arranged by assessee, though charged separately. It was contended by department that since insurance is arranged by seller, the property in goods passes to buyer only when goods reach the destination. Hence, buyer’s place will be the ‘place of removal’ and hence insurance and freight will be includible in the price. This view was rejected by SC. It was held that as per section 39 of Sale of Goods Act, delivery of goods to carrier is prima facie delivery of goods to buyer. Ownership in the property may not have relevance in so far as insurance of goods sold during the transit is concerned. It is not necessary that insurance of the goods and ownership of goods must always go together. [Reversing decision of CEGAT in Escorts JCB Ltd. v. CCE 2000(118) ELT 650 = 35 RLT 9 (CEGAT)]

However, if ‘sale’ i.e. takes place when ownership in goods is transferred to buyer at destination, that will be the ‘place of removal’ (except in case of depot sales).

2-2 ‘Place of removal’ if ownership is transferred at destination

In Escorts JCB Ltd. v. CCE 2000(118) ELT 650 = 35 RLT 9 (CEGAT), it was observed, in respect of provisions under old section 4, as follows - ‘Place where excisable goods are sold can be place of removal. A place where goods are sold can be a place where the property in goods sold passes from buyer to seller. If goods are sold only when they reach the destination, that will be the place of removal’. – view confirmed in CCE v. Prabhat Zarda Factory Ltd. 2000(119) ELT 191 = 38 RLT 637 (CEGAT 5 member bench), where it was held that as per definition of ’sale’ u/s 2(h) of CEA, transfer of possession of goods is the essence of sale. [In my opinion, though decision in case of Escorts JCB has been reversed by SC on different ground, the principle discussed above is still valid].

In Ambuja Cements v. UOI (2009) 236 ELT 431 (P&H HC DB), it has been held that if freight charges form part of assessable value, price is FOR destination, if ownership of goods remains with seller till delivery at customer’s doorstep, transit insurance is borne by assessee and property in goods is not transferred till delivery, outward transportation is ‘input service’ and is eligible for Cenvat credit. (thus, the customer’s place will be ‘place of removal’).

2-3 Port is place of removal in case of exports

In case of exports, the place of removal is port where export documents are presented to customs office – Kuntal Granites v. CCE (2007) 215 ELT 515 = 2007 TIOL 930 (CESTAT) – quoted and followed in Rajasthan Spinning & Weaving Mills v. CCE (2007) 8 STR 575 (CESTAT).

Port is the place of removal in exports as property gets transferred to buyer at port – RSWM v. CCE (2008) 223 ELT 481 (CESTAT SMB) * CCE v. Adani Pharmachem (2009) 19 STT 239 = 238 ELT 179 (CESTAT SMB) * Modern Petrofils v. CCE (2010) 253 ELT 609 (CESTAT SMB) * Cauvery Stones v. CCE (2010) 24 STT 400 = 257 ELT 152 (CESTAT SMB).

In CCE v. Rolex Rings (2008) 230 ELT 569 (CESTAT SMB), it has been held that in case of exports, port is the ‘place of removal’ as exporter continues to be owner of goods till the same are exported. Hence, CHA and surveyor services which are relating to export business are eligible for Cenvat credit.

2-4 Meaning of ‘Warehouse’

If goods are sold from warehouse, that will be treated as ‘place of removal’ in terms of section 4(3)(c)(ii). In such case, transport, handling and insurance charges upto warehouse incurred by assessee will be includible in the Assessable Value.

The term ‘warehouse’ has restricted meaning. It is confined only those warehouses which are notified under rule 20, where goods can be kept without payment of duty – Roha Dyechem v. CCE 2005 (179) ELT 39 (CESTAT SMB).

3. Services specifically excluded from definition of ‘input service’

Some services have been specifically excluded from definition of ‘input service’. These would not be eligible even if these would be eligible as per inclusive part of the definition of ‘input service’.

3.1 Services specifically excluded under clause (A)

Following services have been specifically excluded from definition of ‘Input Services’, if they are used for construction of a building or a civil structure or a part thereof, or laying of foundation or making of structures for support of capital goods The aforesaid services are termed as ‘specified services’ for purpose of this sub-clause] –

* Architect Services [Section 65(105)(p)]

* Port Services [Section 65(105)(zn)]

* Other Port Services [Section 65(105)(zzl)]

* Airport Services [Section 65(105)(zzm)]

* Commercial or Industrial Construction [Section 65(105)(zzq)]

* Construction of Residential Complex [Section 65(105)(zzzh)]

* Works Contract Service [Section 65(105)(zzzza)]

These ‘specified services’ will be eligible for Cenvat credit only if used for any of these ‘Specified Services’. e.g. Architect Service will be eligible as input service if used for Port Service or Construction Service or Works Contract Service.

Further, these services would not be eligible only if they are used for construction of a building or a civil structure or a part thereof, or laying of foundation or making of structures for support of capital goods. If these are used for other purposes, e.g. finishing services, repair, alteration or restoration, these should be eligible.

Port or airport services provided to aircraft or renting would be eligible.

3.2 Services specifically excluded under clause (B)

Following services are excluded from definition of ‘input service’ only so far as they relate to a motor vehicle –

* General Insurance Services [Section 65(105)(d)]

* Renting of a cab [Section 65(105)(o)]

* Motor vehicle related service (earlier termed as Authorised Service Station service) [Section 65(105)(zo)]

* Supply of tangible goods [Section 65(105)(zzzzj)]

However, these services will be eligible as ‘input services’ if used for provision of taxable services for which Cenvat credit of motor vehicle is available as capital goods.

Thus, specified input services relating to ‘motor vehicle’ are specifically excluded except in cases where motor vehicle is eligible for Cenvat Credit as capital goods (See definition of ‘Capital Goods’ for Cenvat Credit).

Meaning of motor vehicle – The term ‘motor vehicle’ is not defined in Cenvat Credit Rules. As per Central Excise Tariff Act, ‘motor vehicles’ are covered under chapter 87 of Central Excise Tariff.

As per section 65(73) of Finance Act, 1994; ‘motor vehicle’ has same meaning as assigned to it under section 2(28) of Motor Vehicles Act. As per that Act, ‘motor vehicle’ means any mechanically propelled vehicle adapted for use upon roads, whether the power or propulsion is transmitted thereto from internal or internal source and includes a chassis to which a body has not been attached and a trailer; but does not include a vehicle run on fixed rails or a vehicle of special type adapted for use only in a factory or in any other enclosed premises or a vehicle having less than four wheels fitted with engine capacity of not exceeding thirty five cubic centimeters.

Some vehicles (e.g. fork lift truck, excavators) require registration under Motor Vehicles Act, but they fall under chapter 84 of Central Excise Tariff. Goods falling under chapter 84 are eligible for Cenvat credit. Hence, insurance, repair services, renting etc. in respect of such vehicles should be eligible for Cenvat credit.

 

3.3 Services specifically excluded under clause (C)

Certain services like outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession have been specifically excluded.

However, this exclusion is only when such services are used primarily for personal use or consumption of any employee. This exclusion will not apply in other cases. For example, outdoor catering for ‘sales promotion’ would be eligible. Club membership fee of a director (who is not employee) would be eligible. Corporate club membership (without naming any specific employee) should be eligible.

The condition that these services must be used primarily for personal use or consumption of employees is essential. For example, say the company X organises Distributor’s conference in which service of outdoor catering is obtained. In the Distributor’s conference, there will be some employees of M/s X who will also take lunch or dinner along with the distributors. The services are not primarily meant for personal use. The services of outdoor catering are provided as incidental to Distributor’s conference. Therefore, the credit of service tax paid on such outdoor catering would be available as credit to M/s X.

4. What is wasteful expenditure as per the revised definition of input service

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As per the revised definition of input service, following is the wasteful expenditure and do not deserve any Cenvat credit, as per department’s view.

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* Factory and office building (We are a free society. Indians do every conceivable thing in open. Hence, department is of vies that production or provision of service or administration should be done in open)

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* Motor vehicle is a luxury even if used to transport employees or for business purposes [Sales and purchase people can either go by bus or by air since air travel can be allowable input service]

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* All employee benefits line transport, canteen facility, health care, insurance, welfare expenditure is a pure waste [Company should employ only casual labour at minimum wages with no benefits].

5. Eligibility of various services as input services

Based on aforesaid discussions, following is summary of various input services eligible and not eligible. Of course, litigation is inevitable in many cases.

 

 

 

Service

Comment about eligibility

Accounting Expenses

Eligible as specifically included in definition

Advertisement (may be for recruitment, tenders, sales promotion, legal notices etc. as no restriction)

Eligible as specifically included in definition

Air travel of employees

Eligible if in relation to manufacture or provision of taxable goods/services, modernization or repairs of factory or office, storage, quality control, recruitment, accounts, audit, sales promotion, procurement of inputs, legal services, financing, computer networking

Airport Service

Not eligible if used for construction of a building or a civil structure or a part thereof, or laying of foundation or making of structures for support of capital goods. If the service is used for other purposes, e.g. for aircrafts, provided to importer/exporter or to CHA, it would be eligible.

The service is also eligible in case of construction or works contract services or port or airport services.

Architect Services

Not eligible if used for construction of a building or a civil structure or a part thereof, or laying of foundation or making of structures for support of capital goods. If the service is used for other purposes, e.g. finishing services, repair, alteration or restoration, these should be eligible.

The service is also eligible in case of construction or works contract services or port or airport services.

Auditing Service

Eligible as specifically included in definition

Authorised Service Station

See under Motor vehicle Related services (as per new definition)

Banking and other financial services

Eligible under ‘Financing’

Beauty Treatment

Specifically excluded – Hence not eligible

Brand Ambassadors

Eligible as relating to ‘sales promotion’

Business exhibition

Eligible as specifically included in definition

Business Support Service

Eligible if in relation to manufacture or provision of taxable goods/services, modernization or repairs of factory or office, storage, quality control, recruitment, accounts, audit, sales promotion, procurement of inputs, legal services, financing, computer networking

Canteen Expenses for employees

Not Eligible as specifically excluded

Clearing & Forwarding Agent

Eligible for inputs and for final products upto place of removal (port is place of removal for export)

Club Membership

Specifically excluded for employee – Hence not eligible [Club membership fee of a director (who is not employee) would be eligible. Similarly, corporate membership of a club (not in name of any particular employee) should be eligible]

Commercial Coaching and training

Eligible as specifically included in definition

Commission Agent

Eligible as relating to ‘sales promotion’ or ‘procurement of inputs’

Computer networking

Eligible as specifically included in definition

Consignment Agent’s expenses

Eligible as consignment agent’s place is ‘place of removal’ when sale is from depot

Construction of a building or a civil structure or a part thereof

Not eligible if used for construction of a building or a civil structure or a part thereof, or laying of foundation or making of structures for support of capital goods. If the service is used for other purposes, e.g. finishing services, repair, alteration or restoration, these should be eligible.

The service is also eligible in case of construction or works contract services or port or airport services.

 

Construction of residential complex

Not eligible if used for construction of a building or a civil structure or a part thereof, or laying of foundation or making of structures for support of capital goods. If the service is used for other purposes, e.g. finishing services, repair, alteration or restoration, these should be eligible.

The service is also eligible in case of construction or works contract services or port or airport services.

Consulting – Engineering, management

Eligible if in relation to manufacture or provision of taxable goods/services, modernization or repairs of factory or office, storage, quality control, recruitment, accounts, audit, sales promotion, procurement of inputs, legal services, financing, computer networking

Courier

Eligible if related to modernization or repairs of factory or office, accounts, financing, procurement of inputs, sales promotion, inward and outward transportation, share registry, recruitment, legal services

Credit rating

Eligible as specifically included in definition

Customs House Agent

Eligible for procurement of inputs and also for exports as port is place of removal for export

Depot expenses

Eligible as depot is ‘place of removal’ when sale is from depot. In other cases, may be eligible as ‘sale promotion’

Erection, commissioning or installation

Eligible since in relation to manufacture or provision of taxable goods/services

Financing (Bank charges, Lease, Hire Purchase)

Eligible as specifically included in definition

Foundation or support of capital goods

Specifically excluded – Hence not eligible except for construction or works contract service

Gardening

Eligible only if done as a statutory requirement (since it can be argued that the service is used in relation to manufacture, as manufacture would be impossible if the statutory requirement is not met) or if in relation to modernization or renovation of factory or office, otherwise not eligible.

General Insurance for machinery, building and transportation of inputs, capital goods and final products upto place of removal (except motor vehicle – see discussions above for meaning of ‘motor vehicle’)

Eligible as in relation to manufacture, provision of taxable services, procurement of inputs, transportation of inputs and final products

General Insurance of motor vehicles

Specifically excluded – Hence not eligible except where motor vehicle is eligible as capital goods – see discussions above for meaning of ‘motor vehicle’

Health Insurance

Insurance of employees not eligible [Insurance of a director (who is not employee) would be eligible]

Hire purchase

Eligible under ‘Financing’

Information Technology Software

Eligible if in relation to manufacture or provision of taxable goods/services, moderniaation or repairs of factory or office, storage, quality control, recruitment, accounts, audit, sales promotion, procurement of inputs, legal services, financing, computer networking

Insurance for machinery, building and transportation of inputs, capital goods and final products upto place of removal (except insurance of motor vehicle)

Eligible as in relation to manufacture, provision of taxable services, procurement of inputs, transportation of inputs and final products.

 

Insurance (Life or Health)

Insurance of employees not eligible [Insurance of a director (who is not employee) would be eligible]

Intellectual Property Service

Eligible if in relation to manufacture or provision of taxable goods/services, quality control, sales promotion, computer networking

Inward transport

Specifically included under ’Inward transportation of inputs or capital goods’

Job work

Eligible if in relation to manufacture or provision of taxable goods/services, modernization or repairs of factory or office, storage, quality control, computer networking

Labour contractor

Eligible if in relation to manufacture or provision of service or modernization or repairs of factory or office, accounts, financing, procurement of inputs, sales promotion, inward and outward transportation, share registry, recruitment, legal services

Leasing

Covered under ‘Financing’. Hence eligible

Legal Consultancy

Specifically included under ‘legal services’

Life Insurance

Insurance of employees not eligible [Insurance of a director (who is not employee) would be eligible]

Maintenance and repairs

Eligible if in relation to manufacture or provision of taxable goods/services, modernization or repairs of factory or office, storage, quality control, except of motor vehicles (see discussions above for meaning of ‘motor vehicle’)

Mandap Keeper

Eligible if in relation to recruitment, accounts, audit, sales promotion, procurement of inputs, legal services, financing, computer networking

Manpower recruitment and supply

Eligible if in relation to manufacture or provision of taxable goods/services, modernization or repairs of factory or office, recruitment, storage, quality control, accounts, sales promotion, financing, computer networking

Market Research

Eligible as specifically included in definition

Mobile phones (even if in name of employees, if endorsed in favour of employer and reimbursed by employer)

Eligible if related to modernization or repairs of factory or office, accounts, financing, procurement of inputs, sales promotion, inward and outward transportation, share registry, recruitment, legal services but not for personal use of employees

Motor Vehicle Related Expenses (earlier termed as authorised station services)

Specifically excluded – Hence not eligible except where motor vehicle is eligible as capital goods (see discussions above for meaning of ‘motor vehicle’)

Outdoor catering

Not eligible when given to employee – should be eligible if used for sales promotion, training, auditing (e.g. giving lunch to auditors), legal services, security or to directors who are not employees

Outward transportation

Outward transportation upto the place of removal is eligible (see meaning of ‘place of removal’ discussed earlier)

Personal Insurance of employees

Not eligible

Port Service

Not eligible if used for construction of a building or a civil structure or a part thereof, or laying of foundation or making of structures for support of capital goods. If the service is used for other purposes, e.g. provided to CHA, ships, importers/exporters, these should be eligible.

The service is also eligible in case of construction or works contract services or port or airport services.

Procurement Expenses

Eligible under ‘Procurement of inputs’

Quality Control

Eligible as specifically included in definition

Realer Estate Agent service

May not be eligible

Recruitment

Eligible as specifically included in definition

Renovation of factory or office building

Renovation of a factory, premises of provider of output service or an office relating to such factory or premises is eligible

Renting of a cab

Specifically excluded – Hence not eligible except where motor vehicle is eligible as capital goods - – see discussions above for meaning of ‘motor vehicle’ (may be eligible if charged by auditor, legal adviser or consulting engineer as part of their services, but they themselves will not be eligible for Cenvat credit on these services)

Renting of immovable property

Eligible if in relation to manufacture or provision of taxable goods/services, modernization or repairs of factory or office, storage, quality control, recruitment, accounts, audit, sales promotion, procurement of inputs, legal services, financing, computer networking

Repairs of factory or office building

Repairs of a factory, premises of provider of output service or an office relating to such factory or premises are eligible

Repairs of motor vehicles

Specifically excluded – Hence not eligible except where motor vehicle is eligible as capital goods – see discussions above for meaning of ‘motor vehicle’

Residential Colony/quarters Expenses

Not eligible except security and legal services

Residential Complex

Specifically excluded – Hence not eligible except for construction or works contract service

Sales Promotion Expenses

Eligible as specifically included in definition

Security at factory, offices, godown, residential colonies

Eligible as specifically included in definition as  ‘Security’ (no restriction where used)

Share registry

Eligible as specifically included in definition

Showroom Expenses

Eligible as ‘sale promotion’

Software

Eligible if in relation to manufacture or provision of taxable goods/services, modernization or repairs of factory or office, storage, quality control, recruitment, accounts, audit, sales promotion, financing, computer networking

Storage of inputs and final products

Eligible as specifically included in definition as ‘Storage upto place of removal’

Supply of tangible goods for use service

Eligible if in relation to manufacture or provision of taxable goods/services, modernization or repairs of factory or office, storage, quality control, recruitment, accounts, audit, sales promotion, procurement of inputs, legal services, financing, computer networking.

However, supply of motor vehicle for use is not eligible – see discussions above for meaning of ‘motor vehicle’.

Telephones and telephones at residence of employees

Eligible if related to modernization or repairs of factory or office, accounts, financing, procurement of inputs, sales promotion, inward and outward transportation, share registry, recruitment, legal services but not for personal use of employees

Training

Eligible as specifically included in definition

Transport charges for transport of employees

Not eligible as specifically excluded

Travel by air, road or water except by motor vehicle

Eligible if in relation to manufacture or provision of taxable goods/services, modernization or repairs of factory or office, storage, quality control, recruitment, accounts, audit, sales promotion, procurement of inputs, legal services, financing, computer networking

Works Contract Service

Not eligible if used for construction of a building or a civil structure or a part thereof, or laying of foundation or making of structures for support of capital goods. If the service is used for other purposes, e.g. finishing services, repair, alteration or restoration, these should be eligible.

The service is also eligible in case of construction or works contract services or port or airport services.

Wealth Tax

Thursday, February 17th, 2011

 This is a post by CMA.V.S.Datey

Wealth tax

1 Introduction

Wealth tax is not a very important or high revenue tax in view of various exemptions. Wealth tax is a socialistic tax. It is not on income but payable only because a person is wealthy.

Wealth tax is payable on net wealth on ‘valuation date’. As per Section 2(q), valuation date is 31st March every year. It is payable by every individual, HUF and company. Tax rate is 1% on amount by which ‘net wealth’ exceeds Rs 30 lakhs from AY 2010-11. (Till 31-3-2009, the limit was Rs 15 lakhs). No surcharge or education cess is payable.

No wealth-tax is chargeable in respect of net wealth of any company registered under section 25 of the Companies Act, 1956; any co-operative society; any social club; any political party; and a Mutual fund specified under section 10(23D) of the Income-tax Act [section 45]

Net wealth = Value of assets [as defined in section 2(ea] plus deemed assets (as defined in section 4) less exempted assets (as defined in section 5), less debt owed [as defined in section 2(m)].

Debt should have been incurred in relation to the assets which are included in net wealth of assessee. Only debt owed on date of valuation is deductible.

In case of residents of India, assets outside India (less corresponding debts) are also liable to wealth tax. In case of non-residents and foreign national, only assets located in India including deemed assets less corresponding debts are liable to wealth tax [section 6].

Net wealth in excess of Rs. 30,00,000 is chargeable to wealth-tax @ 1 per cent (on surcharge and education cess).

Assessment year - Assessment year means a period of 12 months commencing from the first day of April every year falling immediately after the valuation date [Section 2(d)]

All.).

1-1 Assets

Assets are defined in Section 2(ea) as follows.

Guest house, residential house or commercial building  - The following are treated as “assets” - (a) Any building or land appurtenant thereto whether used for commercial or residential purposes or for the purpose of guest house (b) A farm house situated within 25 kilometers from the local limits of any municipality (whether known as a municipality, municipal corporation, or by any other name) or a cantonment board [Section 2(ea)(i)]

A residential house is not asset, if it is meant exclusively for residential purposes  of employee who is in whole-time employment  and the gross annual salary of such employee, officer or director is less than Rs. 5,00,000.

Any house (may be residential house or used for commercial purposes) which forms part of stock-in-trade of the assessee is not treated as “asset”.

Any house which the assessee may occupy for the purposes of any business or profession carried on by him is not treated as “asset”.

A residential property which is let out for a minimum period of 300 days in the previous year is not treated as an “asset”.

Any property in the nature of commercial establishments or complex is not treated as an “asset”.

Motor cars  - Motor car is an “asset”, but not the following - (a) motor cars used by the assessee in the business of running them on hire (b) motor cars treated as stock-in-trade [Section 2(ea)(ii)]. In the case of a leasing company, motor car is an asset.

Jewellery, bullion, utensils of gold, silver, etc. [Section 2(ea)(iii)] - Jewellery, bullion, furniture, utensils and any other article made wholly or partly of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals are treated as “assets” [Section 2(ea)(ii)]

For this purpose, “jewellery” includes ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals,   and also precious or semi-precious stones, whether or not set in any furniture, utensils or other article or worked or sewn into any wearing apparel.

Where any of the above assets (i.e., jewellery, bullion, utensils of gold, etc.) is used by an assessee as stock-in-trade, then such asset is not treated as “assets” under section 2(ea)(iii).

Yachts, boats and aircrafts  - Yachts, boats and aircrafts (other than those used by the assessee for commercial purposes) are treated as “assets” [Section 2(ea)(iv)]

Urban land  - Urban land is an “asset” [Section 2(ea)(v)]

Urban land means land situated in the area which is comprised within the jurisdiction of a municipality and which has a population of not less than 10,000 according to the last preceding census.

Land occupied by any building which has been constructed with the approval of the appropriate authority is not ‘asset’.

Any unused land held by the assessee for industrial purposes for a period of 2 years from the date of its acquisition by him is not an asset. Any land held by the assessee as stock-in-trade for a period of 10 years from the date of its acquisition by him is also not an asset.

Cash in hand  - In case of individual and HUF, cash in hand on the last moment of the valuation date in excess of Rs. 50,000 is an ‘asset’. In case of companies, any amount not recorded in books of account is ‘asset’ [Section 2(ea)(vi)]

1-2 Deemed assets

Often, a person transfers his assets in name of others to reduce his liability of wealth tax. To stop such tax avoidance, provision of ‘deemed asset’ has been made. In computing the net wealth of an assessee, the following assets will be included as deemed assets u/s 4.

Assets transferred by one spouse to another  - The asset is transferred by an individual after March 31, 1956 to his or her spouse, directly or indirectly, without adequate consideration or not in connection with an agreement to live apart will be ‘deemed asset’ [Section 4(1)(a)(i)]

If an asset is transferred by an individual to his/her spouse, under an agreement to live apart, the provisions of section 4(1)(a)(i) are not applicable. The expression “to live apart” is of wider connotation and even the voluntary agreements to live apart will fall within the exceptions of this sub-clause.

Assets held by minor child - In computing the net wealth of an individual, there shall be included the value of assets which on the valuation date are held by a minor child (including step child/adopted child but not being a married daughter) of such individual  [Section 4(1)(a)(ii)]

The net wealth of minor child will be included in the net wealth of that parent whose net wealth [excluding the assets of minor child so includible under section 4(1)] is greater.

Assets transferred to a person or an association of persons  - An asset transferred by an individual after March 31, 1956 to a person or an association of person, directly or indirectly, for the benefit of the transferor, his or her spouse, otherwise than for adequate consideration, is ‘deemed asset’ of transferor [Section 4(1)(a)(iii)]

Assets transferred under revocable transfers  - The asset is transferred by an individual to a person or an association of person after March 31, 1956, under a revocable transfer is ‘deemed asset’ of transferor [Section 4(1)(a)(iv)]

Assets transferred to son’s wife [Section 4(1)(a)(v)] - The asset transferred by an individual after May 31, 1973, to son’s wife, directly or indirectly, without  adequate consideration will be ‘deemed asset’ of transferor [Section 4(1)(a)(iv)]

Assets transferred for the benefit of son’s wife - If the asset is transferred by an individual after May 31, 1973, to a person or an association of the immediate or deferred benefit of son’s wife, whether directly or indirectly, without adequate consideration, it will be treated as ‘deemed asset’ of the transferor [Section 4(1)(a)(vi)].

Interest of partner- Where the assessee (may or may not be an individual) is a partner in a firm or a member of an association of persons, the value of his interest in the assets of the firm or an association shall be included in the net wealth of the partner/member. For this purpose, interest of partner/member in the firm or association of persons should be determined in the manner laid down in Schedule III to the Wealth-tax Act  [Section 4(1)(b)].

Admission of minor to benefits of the partnership firm - If a minor is admitted to the benefits of partnership in a firm, the value of his interest in the firm shall be included in the net wealth of parent of minor in accordance with the provisions of section 4(1)(a)(ii) [see para 546.2]. It will be determined in the manner specified in Schedule III.

Conversion by an individual of his self-acquired property into joint family property - If an individual is a member of a Hindu undivided family and he converts his separate property into property belonging to his Hindu undivided family, or if he transfers his separate property to his Hindu undivided family, directly or indirectly, without adequate consideration, the converted or transferred property shall be deemed to be the property of the individual and the value of such property is includible in his net wealth [Section 4(1A)]

If there was such transfer and if the converted or transferred property becomes the subject-matter of a total or a partial partition among the members of the family, the converted or transferred property or any part thereof, which is received by the spouse of the transferor, is deemed to be the asset of the transferor and is includible in his net wealth.

Gifts by book entries  - Where a gift of money from one person to another is made by means of entries in the books of account maintained by the person making the gift, or by an individual, or a Hindu undivided family, or a firm or an association of persons, or a body of individuals with whom he has business connection, the value of such gift will be included in the net wealth of the person making the gifts, unless he proves to the satisfaction of the Wealth-tax Officer that the money had actually been delivered to the other person at the time the entries were made [Section 4(5A)]

Impartible estate  - For the purpose of the Wealth-tax Act, the holder of an impartible estate shall be deemed to be the owner of all the properties comprised in the estate [Section 4(6)]

Property held by a member of a housing society - Where the assessee is a member of a co-operative housing society and a building or part thereof is allotted or leased to him, the assessee is deemed to be the owner of such building and the value of such building is includible in computing his net wealth. In determining the value of such building, any outstanding instalments, payable by the assessee to the society towards the costs of such house, are deductible as debt owed by the assessee. The above rules are also applicable if the assessee is a member of a company or an association of persons [Section 4(7)]

Property held by a person in part performance of a contract [Section 4(8)] - A person who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882. Similarly, a person can acquire any rights, excluding any rights by way of a lease from month to month or for a period not exceeding one year, in or with respect to any building or part thereof, by virtue of transaction as is referred to in section 269UA(f)  of the Income-tax Act.

In above cases, the assets are taxable in the hands of beneficial owners, in the same manner in which they are taxed under the Income-tax Act :

1-3 Assets which are exempt from tax

The following assets are exempt from wealth-tax, as per section 5.

Property held under a trust  - Any property held by an assessee under a trust or other legal obligation for any public purpose of charitable or religious nature in India is totally exempt from tax. [Section 5(i)].

Business assets held in trust, which are exempt - The following business assets held by as assessee under a trust for any public charitable/religious trust are exempt from tax - (a) where the business is carried on by a trust wholly for public religious purposes and the business consists of printing and publication of books or publication of books or the business is of a kind notified by the Central Government in this behalf in the Official Gazette (b) the business is carried on by an institution wholly for charitable purposes and the work in connection with the business is mainly carried on by the beneficiaries of the institution (c) the business is carried on by an institution, fund or trust specified in sections 10(23B) or 20(23C) of the Income-tax Act.

Any other business assets of a public charitable/religious trust is not exempt.

Coparcenary interest in a Hindu undivided family  - If the assessee is a member of a Hindu undivided family, his interest in the family property is totally exempt from tax [Section 5(ii)].

Residential building of a former ruler  - The value of any one building used for the residence by a former ruler of a princely State is totally exempt from tax [Section 5(iii)]

Former ruler’s jewellery  - Jewellery in possession of a former ruler of a princely State, not being his personal property which has been recognised as a heirloom is totally exempt from tax [Section 5(iv)]

 The jewellery shall be permanently kept in India and shall not be removed outside India except for a purpose and period approved by the Board. Reasonable steps shall be taken for keeping that jewellery substantially in its original shape. Reasonable facilities shall be allowed to any officer of the Government, or authorised by the Board, to examine the jewellery as and when necessary.

Assets belonging to the Indian repatriates  - Assets (as given below) belonging to assessee who is a person of Indian origin or a citizen of India, who was ordinarily residing in a foreign country and who has returned to India with intention to permanently reside in India, is exempt. A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India.

After his return to India, following shall not be chargeable to tax for seven successive assessment years  - (a) moneys brought by him into India (b) value of asset brought by him into India  (c) moneys standing to the credit of such person in a Non-resident (External) Account in any bank in India on the date of his return to India  and (d) value of assets acquired by him out of money referred to in (a) and (c) above within one year prior to the date of his return and at any time thereafter [Section 5(v)]

One house or part of a house  - In the case of an individual or a Hindu undivided family,  a house or a part of house, or a plot of land not exceeding 500 sq. meters in area is exempt. A house is qualified for exemption, regardless of the fact whether the house is self-occupied or let out. In case a house is owned by more than one person, exemption is available to each co-owner of the house [Section 5(vi)]

 2 Valuation of assets

The value of an asset, other than cash, shall be its value as on the valuation date determined in the manner laid down in Schedule III.

Valuation of a building  - Value of any building or land appurtenant thereto, or part thereof, is to be made in accordance with Part B of Schedule III to the Wealth-tax Act

The first step is to find out gross maintainable rent. Gross maintainable rent is (a) annual rent received/receivable by the owner or annual value of the property as assessed by local authority, whichever is higher (if the property is let out) or (b) annual rent assessed by the local authority or if the property is situated outside the jurisdiction of a local authority, the amount which the owner can reasonably be expected to receive as annual rent had such property been let (if the property is not let).

In the following cases “actual rent” shall be increased in the manner specified below : (a) Taxes borne by tenant (b) If property is rented, one-ninth of actual rent will be added, if expenditure on repairs in respect of the property is borne by the tenant  (c) Interest @ 15% on deposit given by tenant or difference (d) Premium received as consideration for leasing of the property or any modification of the terms of the lease will be divided over the number of years of the period of the lease and will be added to ‘actual rent’ (d) If the derives any benefit or perquisite as consideration for leasing of the property or any modification of the terms of the lease), the value of such benefit or perquisite shall be added to actual rent.

Net maintainable rent is determined by deducting from the gross maintainable rent  (a) the amount of taxes levied by any local authority in respect of property (deduction is available even if these are to be borne by the tenant) ; and (b) A sum equal to 15% of gross maintainable rent.

The net maintainable rent is finally capitalized to arrive as value of net asset.. This can be done by multiplying the net maintainable rent by 12.5. If the property is constructed on leasehold land, net maintainable rent is to be multiplied by 10 when the unexpired period of lease of such land is 50 years or more and multiplied by 8 where the unexpired period of lease of such land is less than 50 years).

If a property is acquired/constructed after March 31, 1974, then the value of the house property is determined as above. Original cost of construction/acquisition plus cost of improvement of the house property is calculated.  The higher of the above is taken as capitalised value of net maintainable rent. This exception is applicable in respect one house property. The cost of acquisition/construction (plus cost of improvement) does not exceed Rs. 50 lakh, if the house is situated at Bombay, Calcutta, Delhi and Madras (Rs. 25 lakh at any other place).

If unbuilt area of the plot of land on which the property is built exceeds the specified area, premium is to be added to the capitalised value determined above.

Valuation of self-occupied property - If assessee owns a house (or a part of the house), being an independent residential unit and is used by the assessee exclusively for his residential purposes throughout 12 months ending on the valuation date, valuation will be as per provisions of section 7(2).

Assessee can either take value of the house as determined above on the valuation date relevant for the current assessment year or he take value of the house, as determined above, on the first valuation date next following the date on which he became the owner or the valuation relevant for the assessment year 1971-72, whichever is later. The choice is of the assessee.

Where the house has been constructed by the assessee, he shall be deemed to have become the owner thereof on the date on which the construction of such house was completed.

Valuation of assets of business - If the assessee is carrying on a business for which accounts are maintained by him regularly, the net value of the assets of the business as a whole, having regard to the balance sheet of such business on the valuation date, is taken as value of such assets [Part D, Schedule III].

(A) The assets are valued as follows - Depreciable assets - Written down value, plus 20%, Non-depreciable assets (other than stock-in- trade) - Book value, plus 20%, Closing stock - Value adopted for the purpose of income-tax, plus 20%.

(B) Then value of house property, life interest, jewellery and other assets is calculated as per other provisions of Wealth Tax Act.

Higher of A or B is taken as value of assets.

Value of interest in firm or association of persons  - The net wealth of the firm on the valuation date is ascertained.. For determining the net wealth of the firm (or association), no account shall be taken of the exemptions given by section 5. The portion of the net wealth as is equal to the amount of the capital of the firm or association is allocated amongst the partners or the members in the proportion in which capital has been contributed by them.

The residue of the net wealth is allocated amongst the partners or the members in accordance with the agreement of the partnership or association of persons for the distribution of assets in the event of dissolution of the firm or association or in the absence of such agreement, in the proportion in which the partners (or members) are entitled to share profits [Part E, Schedule III]

Value of life interest  - The value of life interest of an assessee shall be determined as per Part F, Schedule III. Average net annual income of the assessee derived from the life interest during 3 years ending on the valuation date is calculated. While computing net annual income, expenses incurred on the collection of such income (maximum of 5% of the average of annual gross income) shall be deducted. This is multiplied as per formula prescribed to arrive at value of asset.

Valuation of jewellery - The value of jewellery shall be estimated to be the price which it would fetch if sold in the open market on the valuation date (i.e., fair market value). Where the value of jewellery does not exceed Rs. 5,00,000, a statement in Form No. O-8A is to be submitted. Where  the  value  of the  jewellery  exceeds Rs.  5,00,000, a report of a registered valuer in Form No. O-8 should be submitted. The report is not binding on assessing officer (Valuation Officer) and he can determine fair market value of jewellery.

The value of jewellery determined by the Valuation Officer for any assessment year shall be taken to be the value of such jewellery for the subsequent four assessment years subject to the prescribed adjustments.

Valuation of any other asset - The value of any asset, other than cash (being an asset which is not covered in above paras) shall be estimated either by the Assessing Officer himself or by the Valuation Officer if reference is made to him under section 16A. In both these cases, the value shall be estimated to be the price which it would fetch if sold in the open market, on the valuation date. If the asset is not saleable in the open market, the value shall be determined in accordance with guidelines or principles specified by the Board from time to time by general or special order.

3 Other issues relating to wealth tax

Charitable or religious trusts - A trust can  forfeit exemption for any of the following reasons - (a) any part of the trust’s property or any income of the trust, including income by way of voluntary contributions, is used for the benefit of the settlor, the trustee, their relatives etc.;  or (b) any part of the income of the trust, created on or after April 1, 1962, including income by way of voluntary contributions, enures directly or indirectly, for the benefit of any of the persons referred to in section 13(3) of the Income-tax Act ;  or (c) any funds of the trust are invested or deposited or any shares in a company are held by the trust in contravention of the investment pattern for trust funds laid down in section 11(5) of the Income-tax Act.

In such case, tax shall be leviable upon and recoverable from the trustee or manager in respect of the property held by him under trust at the rate of tax applicable to a resident in India.

These provisions are not applicable in the case of a scientific research association [Section 10(21) of the Income-tax Act] and in the case of any institution, fund or trust referred to in section 10(22), (22A), (22B) or (23C) of the Income-tax Act in specified situations [Section 21A]

Association of persons where shares of members are indeterminate/unknown - If assets chargeable to wealth-tax are held by an association of persons and the individual shares of the members in the income or assets of the association are indeterminate or unknown, wealth-tax is levied to the same extent as it would be leviable upon and recoverable from an individual who is citizen of India and resident in India [Section 21AA] 

3-1 Return of wealth and assessment

Every person is required to file with the Wealth-tax Officer a return of net wealth in Form BA, if his net wealth or net wealth of any other person in respect of which he is assessable under the Act on the valuation date is of such an amount as to render him liable to wealth-tax. Return can be filed on or before the “due date” specified under section 139 of the Income-tax Act.

Return in response to a notice - In the case of any person who, in the opinion of Wealth-tax Officer, is assessable to tax, the Wealth-tax Officer may, before the end of the relevant assessment year, issue a notice requiring him to furnish, within 30 days from the date of service of such notice, a return of net wealth in the prescribed form.

Assessment - The assessee is required to pay the tax before filing of the return and such return is to be accompanied by the proof of such payment. Provisions of regular assessment, as applicable under Income Tax, will apply to wealth tax also.

Interest or penalty and prosecution - Interest @ 1% per month is payable for failure to pay wealth tax on due date. Penalty and prosecution provisions also apply.

 

Mr. A has the following assets on 31-3-2008:

Asset

Market

value on

31-3-2008

Rs. lakhs

Loan

outstanding

On 31-3-2008

Rs. Lakhs

(loans taken

acquire

the asset)

Security

Given for

Taking the

Loan

Gold and silver

80

6

Shares

Shares

10

3

House B

Residential House A

50

4

Gold

Residential House B

42

38

Personal

Commercial House C(used for

Carrying on own business)

95

5

Personal

Boat

8

12

Gold

Motor cars

11

1

Silver

Bank deposit

1

1

——

Residential House D(let out throughout

The financial year 2007-08)

55

40

House D

Commercial complex (having 20 offices)

190

100

Commercial

Complex

A also took a bank loan of Rs. 75,000 against the security of his car for his friend’s marriage. Out of the Rs. 12 lakh loan taken by him for purchasing the boat, he utilized Rs. 1 Lakh for his foreign visit. Compute the net wealth for assessment year 2008-09

 

Answer

 

Assets

(Rs. Lakh)

Debts owed

Rs. Lakhs

 

Gold and silver

80

6

Shares- not  an “asset” within the meaning  of section 2(ea)

—-

—-

Residential House A[exempt under Section 5(vi)]

—-

Residential House B

42

38

Commercial House C(used for Carrying on own business-Therefore it is not  an “asset” within the meaning  of section 2(ea))

—-

—-

Boat

8

11

Motor cars

11

1

Bank deposit[not an asset within the meaning  of section 2(ea)]

—-

Residential House D(let out throughout the financial year 2005-06) –Residential house not an “asset” if let out for 300 days or more in the previous year.

—-

Commercial complex (having 20 offices) not  an “asset” within the meaning  of section 2(ea)

—-

—-

Total

141

56

 

Net wealth = Rs 141 lakhs minus Rs 56 Lakhs = Rs. 85 lakhs

Mr. A owns a commercial house property which is situated at Pune. The difference between unbuilt area and specified area is 22% of the aggregate area. The property was acquired on 31-5-1988 for Rs. 12,50,000. The property is built on freehold land. How will the property be valued for wealth-tax purposes?

As the difference between unbuilt area and specified area exceeds 20% of the aggregate area, value shall be estimated by the Assessing Officer himself or by the Valuation Officer under section 16A if the reference is made to him under section 16A. In either case, the value shall be estimated to be the price which it would fetch if sold in the open market, on the valuation date. If the property is not saleable in the open market, valuation shall be as per CBDT’s guidelines specified from time to time.

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 taxmann.com 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 taxmann.com 20 = 2010-TIOL-745 (Bom HC DB) [contrary view has been held in CCE v. Manikgarh Cement (2010) 7 taxmann.com 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 taxmann.com 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 taxmann.com 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.

ACES - Salient Features

Sunday, December 5th, 2010

 This is a post by CMA.V.S.Datey.Besides being a Cost Accountant, CMA.Datey is also a B.’Tech (Hons) and FCS. CMA.Datey is a renowned author of books on Corporate Laws and Indirect Taxation.

Electronic filing of applications and returns in excise and service tax

 

1.1 Background

CBE&C has undertaken an ambitious project of automation in excise and service tax administration. ‘Automation of Central Excise and Service Tax’ (ACES) has been introduced in all 104 Commissionerates of excise and service tax.

The details given below are based on ‘FAQs’ issued by the department, as available on AECS website.

One major initiative is that e-filing of returns and e-payment of taxes has been made mandatory w.e.f. 1-4-2010 in case of assessees who had paid service tax or excise duty of rupees ten lakh or more in the preceding financial year (either in cash or by utilising Cenvat credit or both).

What is ACES - ACES stands for Automation of Central Excise and Service Tax. It is a centralized, web based software application which automates various processes of Central Excise and Service Tax for assessees and department, and gives complete end to end solution. Any assessee can register with Department using ACES application, can file tax return, claims & intimations, track its status and get online messages.

Name and URL of the ACES homepage - ACES website, known as ACES Homepage, is hosted at http://www.aces.gov.in. You can access the website directly or through http://www.cbec.gov.in or CBEC website at http://www.icegate.gov.in.

Login and user ID – The Help topic is open to all. Access to excise and service tax applications require user name and password.

Parts of ACES - ACES application has two parts, one is for Central Excise and other for Service Tax. Assessee has to register separately to use each of them.

Central Excise processes covered in ACES - In ACES, the various processes of Central Excise automated are – Registration, Returns, Refunds & Rebate, Claims & Intimations, Provisional Assessments, Exports, Dispute Resolution and Audit.

Service Tax processes covered in ACES - In ACES, the various processes of Service Tax automated are – Registration, Returns, Refunds, ST3A, Dispute Resolution and Audit.

1.1-1 Salient features of ACES homepage

ACES homepage is an interface for users/assessees to access the Central Excise and Service Tax applications. The website also enables users to make online payment through e-Payment option, download the Returns offline utilities through Download option. The website also keeps track on latest updates of the ACES application and gives links to various other sites under CBEC.

1.1-2 Learning about ACES

 FAQ on website are quite good. A power point presentation (ppt) is available on ACES website which gives salient features of ACES.

LMS - Learning Management Software abbreviated as LMS is self learning software developed in flash. The software demonstrates to use various functionalities across ACES application. The software is accessible through ‘Help section’ of ACES homepage. You need to have flash player installed at your computer along with speakers before using the same.

ACES Service Desk - Toll Free Number – 1800 425 4251, is available from 9.00 AM to 7.00 PM on working days.

Complaint can also be e-mailed to aces.servicedesk@icegate.gov.in. A ticket is opened and closed only when the issue is resolved. Acknowledgement of the complaint lodged sent to the Email ID of the assessee. Resolution of problems will be communicated.

1.1-3 Uses of ACES

Any person who wishes to transact any business with Central Excise or Service Tax Department can use ACES. He need not be registered under excise or service tax.

ACES can be used for following –

-         Online registration and amendment of registration details

-         Electronic filing of documents such as Returns, Claims, Intimations and permissions

-         Online tracking of the status of applications, claims and permissions

-         Online facility to view documents like Registration Certificate, Returns, Show Cause Notice, Order-In-Original etc.

 PAN number is not mandatory for registration - A user not having PAN number can register with ACES application. PAN number is required if assessee wants to file a refund claim.

 1.2 Basics of ACES

Links mentioned on the login page - There are following links appearing on the login page:

-         Click here to Register with ACES - To register yourself with ACES application, if you are a new user, this link be used

-         -Forgot your password - To retrieve your password in case you forget it
- Know your location - To know your Commissionerate, Division and Range, with their exact addresses, based on name of the State

Know your location based on locality - To know your Commissionerate, Division and Range, with their exact addresses, based on Pin Code (practically, you will have to ask make enquiry with department.

1.2-1 Registration on ACES

You have to register on ACES with user name and password. Registration is free. (This registration is different from registration under central excise or service tax). No registration is required to access help menu.

 Separate user ID and email ID for Central Excise and Service Tax applications - You have to maintain user ID and password for Central Excise and Service Tax application separately, but same email ID can be used for both the applications.

Assessees who are already registered with department - Assessees already registered with the Department do not have to register with ACES again. Their existing data in SACER/SAPS will be migrated to ACES. System will automatically send a TPIN (Temporary Personal Identification Number) mail with password to their e-mail ID existing in SACER/SAPS database. The assessee has to choose the user name on first Login.

The existing statutory registration number (assessee code) will remain the same. Assessee is required to only click at ‘Register with ACES’ which will enable him to be recognized by ACES as a user.

 If assessee has not received the email, he should contact jurisdictional Range Officer or AC/DC with details of a valid email ID for getting a fresh TPIN number.

 Registration of new user - You need to click on “Click here to Register with ACES” link on the login page and submit the form “Registration with ACES”.

You have to select a user name and furnishing credentials like e-mail id, Unit Name, Designation and Phone Number. System checks for availability of the chosen User ID. The system will then generate a password and send it by e-mail, which can be used for logging into the system (This is not a statutory registration required under Central Excise or Service Tax Laws, but registration only with the ACES application).

1.2-2 User-ID and password

User-name (User ID) once selected cannot be changed, but password can be changed. You can change your password anytime using Change Password feature within ACES application. On first Login, user will be compelled to change the password and choose a new password, a hint question and answer.

User name cannot be changed but password can be changed anytime.

 User-name or password should be kept secret - Sharing user-name or password is not a good practice as it is confidential data. It is strongly advised not to share your User ID or password to others for security issues. In case of sharing these credentials, the assessee will be the whole sole responsible and liable if any thing goes wrong.

Mails and alerts from ACES - Before filing a registration form all communications will be sent to the email ID mentioned during the registration with ACES. Later communications will be sent to the Email ID mentioned in the statutory form (A1/A2/A3/ST1).

 More than one e-mail IDs - While filling the A1, A2 or A3 registration form you can mention the emails at pages 1 and 3 but email will be sent only on the email ID mentioned at page 1.

 Change e-mail ID for correspondence - You can change your email ID by amending your registration or you can approach your Range Officer to get your email ID changed.

 1.2-3 TPIN

For the existing assessees, whose data is migrated from SACER/SAPS into ACES, the system generates a TPIN (Temporary Personal Identification Number) and password for initial access to the application. The format of TPIN is t+‘9 digit number’ (e.g. t012345678). A message with details for accessing ACES is sent to the email ID available in assessee’s registration details. The message contains a hyperlink to User Name selection screen in ACES, and password for the assessee.

When the assessee accesses ACES application for the first time through the hyperlink, TPIN is auto populated and assessee has to enter the new User Name that would be used for accessing ACES, password as provided in the mail, new password and details of security question. The system authenticates the user based on the password entered and checks for availability of desired User Name.

Once the User Name and password are assigned successfully, the TPIN is deactivated, and all subsequent logins are possible using the selected credentials.

1.2-4 Error messages and blocking of access

If user has entered incorrect user name or password 5 consecutive times, respective user account gets blocked by the system. In such situation, contact your respective Range Officer to get your account unblocked and have respective password regenerated, if required.

 The error message “The login Information is wrong. Please try again. Your password will be blocked after 5 attempts” appears when user is not entering his/her user-name or password correctly or has forgotten the correct credentials. In such cases it is suggested that the user should contact his/her Range Officer to have the password regenerated. Upon regeneration user will receive an auto-email with correct credentials. Alternatively, user can use “Forgot Your Password” feature on the login page to retrieve his/her password.

Error message “You are not a valid migrated user”. appears when your assessee registration details are not properly migrated into ACES from the existing database. You should approach the Range Officer on this or log a complaint with Service Desk.

 If error message “Content Management Server is down” appears, you should try after some time and log a complaint with Service Desk.

 If error message “Your registration is either rejected or surrendered” appears, it is possible that your registration has been either rejected or your surrender request has been approved by the department. You may contact your Range Officer for further enquiry.

Session closes if not used for 30 minutes - Current session time out is 30 minutes. If system is idle for 30 minutes and there is no transactions between the pages, you will have to login again into ACES.

1.2-5 Error messages due to settings in browser

 Paper size nut supported - If the message “Paper size specified by you is not supported by your printer“ appears when you try to take a print, check configuration of browser. If you are using Mozilla FireFox then this problem may be due to an error in the configuration of Mozilla FireFox. Sometimes the default paper size is set to A4 instead of letter. The possible solution may be as follows –

-         Enter about:config in the address bar of FireFox.

-         Next in the filter bar type print.printer_PostScript. This filters out all but the entries that start with this string.

-         Find the entry print.printer_PostScript/default.print_paper_height, double click it and change the value to 279.40.

-         Next find print.printer_PostScript/default.print_paper_name, and change this entry to ‘Letter’.

-         Finally find print.printer_PostScript/default.print_paper_width and change it to read 215.90.- Close FireFox and re-open.

 Unable to submit return – Some times, you are unable to file return, as when you click on Submit button, no action seems to be taken place, and error is shown on page. This is an internet browser settings specific issue, where some features of browser which are necessary for application are not enabled. Follow the following steps and try to submit the form again:-

-         Open an Internet Explorer window and ‘Goto Tools’ - Internet Options.

-         Click on the Security Tab. Change the Security level by moving the slider to Medium-High setting > Click Ok tab

-         Open a new browser window and again try to upload the file.

 1.2-6 Help of service desk

In case of any difficulty in accessing or using the ACES application, Assessees can seek help of the ACES Service Desk. You can contact ACES Service Desk by sending email to Service Desk or calling up national toll-free number given in ACES homepage at Help Section.

 1.2-7 Minimum systems requirement to use ACES application

The minimum systems requirement to use ACES application is following:-

-         Processor:- Intel Pentium III or higher

-         RAM:- 256 MB or higher

-         HDD:- 80GB or more

-         Web Browser:- Internet Explorer (I.E.) 6.0 or above, Netscape 6.2 or above

-         MS Excel 2003 or above

-         Sound card with speakers for LMS (required only if you want to learn using LMS)

 No digital signature - At present facility of digital signature has been disabled.

 1.3 Registration of new assessee

 ACES system has a two step process for New Registrations -

  1. First step is user registers with the ACES software online after selecting applicable Central Excise Portal or Service Tax Portal from the website www.aces.gov.in to become an ACES user (as explained above)
  2. Second step is the user fills up appropriate registration form and becomes an assessee.

Registration with ACES application and registration with Central Excise or Service Tax department are different - To transact business online under ACES, all users have to first register with ACES. This registration is not a statutory registration as envisaged in Central Excise or Service Tax Act but only a registration with the system. To register with the Central Excise or Service Tax department, assessee is required to submit statutory registration form such as A1, A2, A3, ST1 etc. online, to become assessee.

1.3-1 Selection of appropriate form for registration as assessee

Once you successfully login into the ACES application by using user ID and password, the homepage displays the different statutory forms i.e. A1, A2, A3, Declaration and Non Assessee or ST1 for Service Tax in tabular format mentioned with their category. You can choose as per the category your business falls under.

 In the login screen, select REG -> A1/A2/A3 or ST1 or Declarant select (form) and start filling the form with the details.

 No offline form for registration - There is no offline tool available currently for registration, through which registration can be filled and uploaded directly to the database. Form for registration has to be filled online only.

1.3-2 Departmental officer can file Registration forms on behalf of assessee

The range Superintendent can file a Registration on behalf of user if user desires so. The Superintendent has rights of filing the A1/A2/A3 or ST1 and ‘Non Assessee’ forms. If user is not able to file the registration through the ‘Assessee interface’, then user can contact the range officer for filing the registration on behalf of user.

1.3-3 Details required for filling registration application

Some of the details you should have are

-         • PAN

-         • Details of authorised signatories and all partners/directors/trustees etc.

-         • Details of Bank account numbers

-          Details of registration numbers under Companies Act, Sales Tax Act, IEC code etc.

-         • Details of goods /raw materials used.

 Mandatory fields in the forms - Only those fields marked with asterisk (“*”) in ACES application are mandatory fields and the same are to be filled before proceeding further.

 Registration without PAN - Though ACES has a PAN based registration process, if an assessee does not have PAN, he can still register with a Temporary Registration Number.

 Selection of Commissionerate/Division and Range in respective dropdown menu - Once you identify the Commissionerate name and select it, you can select the Division/Range from the list of Divisions/ranges which is fetched by the system when the page gets refreshed.

 1.3-4 Selection of the category of Taxable Service

To select the services for which you want to register, in ST1 form, click on the Search button with the magnifying glass. A list of services will be displayed in which the checkboxes on the left of the required services can be ticked to select them.

 Add/delete Services - In case where the activities undertaken by the user falls under different categories, he can select all the relevant services from the search list and add it to the relevant column. After adding, if he wants to delete any services selected, he can delete selecting its check box and then pressing Delete button.

 Next and save buttons - If there are more than one page in the form say A1 Form, then “Next” button is used to navigate to next page. In case of single page Form, Save button allows user to go to confirmation page.

 1.3-5 Modifying the page of the form before submission

You can make changes in the previous pages. In case of multi page forms, you can navigate through “Previous” button and can make changes. You can also click on “Modify“ button on the confirmation page, which will take you to the first page of the form to modify the contents.

 Difference between ‘SAVE’ and ‘SUBMIT’ buttons - Clicking on the “Save” button makes the system display the confirmation screen where user can verify the details already entered by him in all previous pages before submission and change if required. Clicking on the “Submit” button user’s request gets submitted for further processing and takes the user to acknowledgement page.

 No provision to save the Registration details while filing the A1/A2/A3 or Declarant forms - The Registration details cannot be expressly saved midway/partially by the user while filing. However, the details of data already entered in the various screens of the form will be made available for further correction to the user (provided he has not pressed the ‘CANCEL’ button) if there is a sudden disconnection midway. After submission of the form online, the user can see/take a printout of the submitted application. No corrections are possible after submission.

 1.3-6 Enclosures to be furnished along with the registration form

There is no need to furnish any enclosures while filing the registration form online. However, in the case of Service Tax certain documents as mentioned in the system generated acknowledgement are required to be submitted within the stipulated time with the Superintendent.

1.3-7 Acknowledgement for registration

After successful submission of the form, an acknowledgement appears which confirms the submission. A unique number appears on this page which is the Registration Number and can be noted for future references.

1.3-8 Coding of registration number

 Registration number is of 15 digits.

In ACES, the registration structure will be as follows – First 10 digits – PAN, 11-12 digit - EM/ED/SD, 13-15 digit - Alpha-Numeric.

Earlier (existing) registration numbering is as follows - First 10 digits – PAN, 11th and 12th digits - ‘XM’ for Manufacturers, ‘XD’ for dealers (Central Excise) and ‘ST’ for service tax. Last three digits are serial numbers (in case of multi-unit registrations).

1.3-9 Processing of Registration Form in the department

After the successful submission of the form on ACES, the application Form goes to AC/DC (having the range of assessee in his jurisdiction) in case of Central Excise and to Superintendent (Range) in the case of Service Tax for Generation of Registration Certificate (RC).

 There is no need to submit hard copy of application form in case you have been able to successfully submit the registration form online in the case of Central Excise. In the case of Service Tax, supporting documents may have to be submitted as indicated in the acknowledgement.

No need to send form again if you have indicated wrong jurisdiction of office – If by mistake, you have selected wrong jurisdictions in the form, there is no need to file A1 form again. (In fact, you are not allowed to file again by the system.). There is a provision in ACES where Assistant Commissioner (AC) or Deputy Commissioner (DC) will re-assign your application to correct jurisdiction. You can contact the jurisdictional officer if required.

Physical verification for excise registration but not in case of service tax - After generation of Registration Certificate, the application is sent to the jurisdictional Range Officer(Superintendent) for physical verification of the premises in the case of Central Excise . The Range Officer will choose a date for the verification and the same will be intimated through email to the assessee. On completion of the verification, a report will be filed by the Range officer in the system which will then be approved by the AC/DC.

In the case of Service Tax, post verification is not mandatory and Registration Certificate will be generated after document verification.

Registration Certificate in ACES - The jurisdictional Deputy Commissioner/Assistant Commissioner generates the Registration Certificate after viewing the particulars in the application. The registration certificate will be duly signed and sent to the assessee in the mode as selected in the application. After ‘Post Verification’ is completed, the Registration Certificate can be viewed under the REG menu by the assessee.

Intimation of registration - An intimation of issuing of Registration Certificate will be sent through e-mail and the same can then be viewed under REG menu.

 Time limit to get the registration Certificate - After Submission of Registration Form, Departmental Officer will issue the Registration Certificate in a couple of working days, if otherwise found complete.

Whom to contact if the registration certificate is not received/issued - You should contact your Jurisdictional Range Officer in the case of Service Tax and the Jurisdictional Assistant/Deputy Commissioner in case of Central Excise, if you have not received Registration Certificate.

 Viewing of registration certificate - Once Registration application has been filed, the Registration is approved by the AC and Registration certificate is issued. You will get the intimation of issue of Registration Certificate through e-mail.

You can view Registration Certificate on ‘View RC’ link. In case of excise, the Registration certificate can be viewed only after approval of Physical Verification report.

It is necessary to follow up with department for getting registration? - There is no action attached to the Declarant form, if users who have filed a Declarant form do not receive RC. The process for ‘Declarant Assessees’ gets completed once the form is submitted

[These are the exact words as given in FAQ issued by department. In fact, as per law, if no communication is received within seven days, the registration is deemed to have been granted].

 1.3-10 Temporary registration when no PAN

 System issues a temporary Registration Number to the assessee if he/she does not furnish PAN number while filing. The temporary Registration does not have any impact on working of the assessee in the system and assessee having temporary Registration works normally. To get a permanent PAN based number, the assessee can file an amendment in Registration mentioning the new PAN number obtained from the Income Tax department. The amendment will again follow the same approval cycle as that of fresh registration.

1.3-11 Amending the Registration details

Existing assessees can amend the details whenever required by filling in the details in the application again. New assessees can also amend the registration details after approval of Physical Verification report by the AC/DC. In certain cases (like change in constitution of business), the details changed may warrant a fresh physical verification or the issue of a new Registration Certificate.

1.3-12 Surrendering the Registration

You can submit online request for surrendering your Registration Certificate in ACES though: REG-> Surrender RC (In case of CE) and REG->Surrender (In case of ST). Once the surrender request is submitted by the assessee, approval process passes through the Superintendent and then AC/DC.

How to know if surrender request is accepted - You should receive an auto generated mail from the system once your surrender request is approved and accepted.

 No access ACES once you have surrendered Registration - You will not be able to login to the ACES application once Registration has been surrendered.

 1.3-13 Registration as non-assessee

 A non-assessee can fill registration form himself or a designated Range Officer can generate ‘Non-Assessee Code’ . There is no approval required in this process, hence no certificate will be issued by the Department. Once form is submitted, a Non-Assessee code is generated by the system. This code can be used to transact with the department and for making payment through the bank.

1.4 e-filing of returns

 Registration is one time affair but assessee has to file return periodically. E-filing of return is mandatory w.e.f. 1-4-2010 in case of assessees whose payment of service tax or excise duty (either in cash or through Cenvat credit) was more than Rs 10 lakhs in previous year.

Assessees registered with ACES application and with department (Central Excise/Service Tax) can access the online facility to file returns that match their profile (ER-1 / ER-2/ ER-3 / ER-4 / ER-5 / ER-6 / Dealer return or ST-3) and submit the same to the system.

Filing of return online or offline - You can file your returns online after logging into ACES using your user-ID and password. You can also prepare your return off-line using Excel Downloadable Utility and then upload the XML file so generated.

1.4-1 e-filing the return on-line

After logging into the ACES system, click on the “RET” module displayed in the menu item at home page. Select “File return” option. Sub-menu for different types of returns namely, “ER-1”, “ER-2”, “ER-3”, “ER-4”, “ER-5”, “ER-6”,“Dealer return” or “ST-3” will be displayed. Select the required option. Navigation path is – Login as Assessee –> RET –> File Returns –> ER-1 or Login as Assessee –> RET –> Fill ST-3 –> .

After filling all the details, in the last page click on “SAVE” button. A “confirmation view” screen will display the return in its entirety. Verify for the correctness of details entered. Once it is confirmed that the entered details are in order, click on “SUBMIT” button.

If any modification is required, click on “MODIFY” button. The first entry screen will be displayed. Modification can be carried out in all fields. If it is desired that the details are to be entered afresh click on “CANCEL” button.

Saving return half-way in case of disruption - In case of Central Excise Returns (ER-1), the return will get partially saved in case of disconnection (there is no explicit save button for partial save). The return partially saved can be retrieved and completed using “Complete return” available in “RET” menu.

In case of ST-3, there is a provision to save the return explicitly (before submission). The returns can be completed partially/fully using ”Amend return” option in “RET” menu.

1.4-2 Navigating between fields/pages on the screen

Navigation would be as follows:

(i) Moving across fields: After entry in the desired field, tab key can be used. On pressing tab, you will be taken to next field of the section for data entry.

(ii) Moving across pages: After you have filled the data in a page, you can move to the next page by clicking “Next” button. On clicking this button, the system will validate all the entries on the page and lead you to the next sheet (if the data is filled properly on the page or when you want to proceed despite warnings in case of minor errors). Similarly, “Previous” button can be used for moving to a previous page for the purpose of view or correction.

1.4-3 Filling the data in e-return

Note the following –

a)      All the fields marked with asterisk (*) are mandatory and the same are to be filled before proceeding further.

b)      Wherever required, data must be in correct format. For example (i) Challan Number to be a 20 digit number consisting of following - 7 digit BSR code, 8 digit date of tender in the format “ddmmyyyy” and 5 digit challan no. For example, “12345670112200812345” (ii) Wherever columns are available for providing Quantity, decimals upto two places only are allowed.(iii) Columns where amount is to be provided, only whole number is allowed.

1.4-4 Add or Delete Rows in various screens

The procedure is as follows:

(i)                  Adding new rows - Sections such as “Details of the manufacture, clearance and duty payable” allow you to enter multiple rows of data in a tabular form. You can click on “Add” button to add more rows. To add more than one row, you must have filled data in the mandatory fields of the previous row.

(ii)                Delete rows - Rows that have been added in the section, can be removed by checking the “select” box(es) and clicking “Delete”. All rows cannot be deleted since at least a minimum of one row of details should be present.

1.4-5 Check box for “NIL Return”

When an assessee does not have any stock of excisable finished goods, any PLA/CENVAT credit balance, when during a month, there is no manufacture and clearance of any excisable goods etc. i.e. when there is nothing to declare to the department for the month, this can be used. Once the “NIL” return check box is checked, after providing the year and month of the return, the system will take you to the last screen of the return to fill in the details like place etc. and submit the return with the self assessment memorandum.

1.4-6 Entering challan details in case of opening balance

 If the assessee is paying through Account Current he has to enter the Challan No., Date and BSR Code which are mandatory fields. If the assessee has an opening balance in that case he will have to mention the previous Challan details.

 Entering multiple Challans in ER-1/ ER-3 - Multiple Challans can be entered in the last section (Challan Details) of ER-1/ ER-3.

1.4-7 Error messages while filing return online

Error messages are categorized into two categories: Show stopper and Warning.

(i) Show stoppers: These are major errors and you cannot proceed without correcting them e.g. Mandatory field such as month of the return is left blank or when CETSH entered is wrong.

(ii) Warnings : These are minor errors. If you are sure that the entered data is correct, you can proceed with these errors. For example, calculated duty payable not matching with the duty payable as mentioned in the return.

Comments in red at the top of the confirmation page for the return - The comments in red at the top of the confirmation page shows the errors found in the Return. These issues can be corrected by assessee by modifying the return details before submission. 

What if assessee is not able to correct the issues as highlighted in red in the last page of the return - If you do not correct the issues marked in red, then these returns with errors like “Challan Number mentioned does not exist in the database” or “Provisional Assessment Order No. is not valid” etc. are marked for Review & Correction process. Such returns (ER-1, ER-2 and ER-3 only) are marked to Range Superintendent, who will review the return and correct the errors found in the return after due consultation with you (assessee).

1.4-8 Dealer cannot submit revised return

If the dealer has already submitted the return for the mentioned month and year, he will not be able to submit the return again for the same month and year.

1.4-9 Checking of filed return

 In ACES you can view and verify the return submitted by you using RET–> List Original Return (in case of Central Excise) and RET–> View ST-3 (in case of Service Tax).

 1.4-10 Amending ER-5 return

You can amend your ER-5 return through RET –> Amend Returns –> ER5. You can amend ER-5 return multiple times latest by 30th November of current financial year for which ER-5 return was filed.

1.4-11 Amending saved ST-3 Return before submission

You can access saved ST-3 Return for amendment by clicking on Amend ST-3 option of ‘Fill ST-3’ submenu under RET menu. Once ST-3 Return is submitted in ACES, the return cannot be amended.

 1.4-12 Submitting revised return under service tax

 You can revise your ST-3 return once within 90 days after filing the original return, by clicking on ‘Revise ST-3’ option of ‘Fill ST-3’ submenu under RET menu.

 1.4-13 Acknowledgement of return filed

On the successful submission of a return, an acknowledgement with a number in the format “registration number_Type of return_Month and Year of the return” will be shown. For example, for the ER-1 return filed for the month of December, 2009 by an assessee having registration no. AAABC7865HXM001, the number “AAABC7865HXM001_ER1_122009” is generated as acknowledgement. This number becomes a reference number (Source Document number) for subsequent correspondences with the department in respect of the return.

1.4-14 Issue relating to standard unit of quantity

So far, the response to e-filing of return was lukewarm and hence there are few reports from actual users. One major difficulty reported relates to ‘standard unit of quantity’ as given in Central Excise Tariff.

Third column of tariff is ‘Unit’ which is unit of measure. The unit of measure is indicated by abbreviations. Some abbreviations are as follows – cc – Cubic Centimetre, cm – Centimeter(s), g - gram(s), g/cm3 – Gram per cubic centimeter, l – litre, m – metre, mt – Metric Tonne, t – Tonne, Tu – Thousand in number, u – Number, Vol. – Volume, W- Watt.

In many cases, these standard units are not used by trade. In some cases, these are impractical e.g. lubricating oil in Kgs not liters, Adhesive tape and plastic articles in Kgs not Nos. Even furniture and toys are to be indicated in Kgs and not Numbers.

It is reported that the e-return is accepted only if these standard units are used. This will create problems in cases where unit as used by the assessee in records and business is different from the unit as per Tariff.

It seems assessee will have to convert his stock and production figures to standard units by using some ad hoc formula, after informing department.

1.5 Filing return offline

In addition to filing returns online (as discussed above), there is facility to prepare return offline, check it and then submit the return. Assessee can file his returns online by filling up the web-form or by using downloadable utility available in ACES website. Downloadable utility is an offline utility which can be downloaded, filled off-line and submitted on-line. The generated XML file should be uploaded into ACES.

Download utility every time - It is advisable that you download the latest version of utility from the ACES website before filling the same.

1.5-1 Pre-requisites for filling data in this utility

Following are prerequisites for filing data in offline utility:

  1. The version of Microsoft Excel in your system should be Microsoft Office Excel 2003 and above.
  2. Make sure that you have downloaded the latest Excel Utility from ACES website / application to your local system.
  3. Please enable the Macros (if disabled) as per the following instructions: - On the Tools menu, point to Macro, and then click Security. - Click on either Medium or High to select the ‘Security Level’ - On the Trusted Publishers tab, select the Trust all installed add-ins and templates check box.
  4. Make sure that your System Date is correct.

 1.5-2 Overview of offline utility for ER-1.

ER-1 is monthly return for production and removal of goods and other relevant particulars including CENVAT credit. The downloadable excel utility can be used for creating the XML file for e-filing of your return. This Utility is an Excel Workbook that consists of five worksheets and is dynamic.

E-filing consist of two sub processes - (i) Generating xml file of the ER-1 Return and (ii) uploading of generated XML file to ACES application.

1.5-3 Structure of the Excel workbook in the offline utility for ER-1

Filling of ER-1 consists of following five worksheets initially: “Return”, “Paid”, “CENVAT”, “Other - Payments” and “Challan”. The name of each sheet is displayed in the tab at the bottom of the worksheet.

(i) The sheets for entering duty payable data are added dynamically by the excel utility depending on the number of clearances entered. The sheets are named as “Payable (1)” , “Payable (2)” etc. The Utility will add new sheets for Payable dynamically when you enter data for production and clearance on sheet “Return”.

(ii) The sheet for entering data for duty head wise breakup of arrears are also added dynamically e.g. “ARREAR (1)”, “ARREAR (2)” etc.

1.5-4 Steps for filing Return through offline utility

The steps are as follows:

  1. Fill up the Return data - Navigate to each field of every section in the sheet to provide applicable data in correct format. (Formats will get reflected while filling data.)
  2. Validating Sheets - Click on the ”Validate this sheet” button to ensure that the sheet has been properly filled and also data has been furnished in proper format. If there are some errors on the sheet, the Utility will prompt you about the same. In such cases, the offline utility will not allow you to proceed further until you rectify the errors.
  3. Generate XML- There is “Validate Return and Submit” button on last sheet “Challan” for validating all the entries in your return. If you click on this button, Utility will validate all the sheets one by one and also perform inter-sheet validations. After validation, an XML will be generated. In case there is some error identified on some sheet, the utility will prompt you about the same and lead you to the respective sheet(s).
  4. Both files are saved in the same folder of your system where E-filing Utility is placed/ saved (while downloading the e-filing utility).
  5. Upload XML file to ACES application - For uploading the XML generated by the E-filing Utility, login to ACES application and access menu option to upload generated XML file of Return. On ‘Upload’ screen provide the required information and browse to select the relevant XML file and submit the form.

1.5-5 Filing NIL return in offline utility

There is an Option for NIL Return in the first sheet. In case you are filing a NIL Return then change this option to “Yes”. On selection Yes, utility will ask you to freeze the option and then delete all the sheets that are not applicable.

1.5-6 Offline utility for an LTU assessee

There is an Option for LTU in the first sheet. If you are filing return as LTU (Large Tax Paying Unit) then change/ check/ tick the “Yes” option.

1.5-7 Filling up ER-1 return using offline utility

You can fill up your ER-1 return in the following manner:

Using for present or past months - You can use ER-1 Excel Utility for filing the return of Present or Past months.

Fill mandatory fields - All the Fields marked with asterisk (*) are mandatory. You have to provide data for these fields. If mandatory field is left empty, then Utility will not allow you to proceed further for generating XML.

No data in grey cell - You are not allowed to enter data in the Grey Cells.

Use correct form of data - Data provided must be in correct format, otherwise Utility will not allow you to proceed further for generating XML.

10 digit alphanumeric premise code - Please ensure that you enter 10 characters premises code. System does not allow less than or more than 10 characters code. This code can be alphanumeric (all numeric, all alphabetic or alphanumeric). The structure of 10 characters premises code is [Location Code of 6 characters + 4 alphanumeric characters]. User can check the premises code through RET—> Fill ST-3 –> Fill (Check premises code here).

Moving through the cells - After you have reached the desired cell, you can click on the tab keyboard button. On clicking tab, utility will take you to the next cell of the section for data entry.

Moving through the sheet - After you have filled the data in a sheet you can move to the next sheet by clicking the “Next” button. On clicking this button utility will validate all the entries on the sheet and lead you to the next sheet if the data is filled properly on the sheet. In case there is some error in your sheet, the utility will prompt you the error messages and will not allow to proceed till these errors are corrected.

Adding new rows - (i) Sections such as DETAILS OF THE MANUFACTURE, CLEARANCE AND DUTY PAYABLE allow you to enter as much data in a tabular form. You can Click on “Add Row” to add more rows (ii) To add more than one row you must fill data in the mandatory fields of the previous row (iii) If you have added a new row then Utility will add new “Payable” sheet for filling the details of duty payable.

Delete Last row - Rows that has been added in section ‘DETAILS OF RECEIPT AND CONSUMPTION OF PRINCIPAL INPUTS’ can be removed by clicking the button “Delete Last Row”. If you have deleted a row then respective ‘Payable’ sheet will also get deleted. For example, if you have deleted second row then Payable (2) sheet will also be deleted. - Note - While filling tabular data, you must fill the mandatory fields in the added rows also, otherwise Utility will not allow you to proceed further for generating XML.

Filling data for “Return” sheet: - (i) Return Period: Enter the month and Year for which you are filing the return (ii) Registration details: Enter registration number and name and ensure that it is correct.

Details of manufacture and clearance and duty payable - (i) Provide the details like CETSH, Unit of quantity etc. (ii) Please select the value for field CETSH No. from the dropdown very carefully. As you select the CETSH in the first row, the Utility will ask you to freeze the option and add new sheet for filling details of “Duty Payable”. The option once frozen cannot be changed (iii) There is provision for adding new row in clearance details. For adding new row fill all the details in previous row and click on Add Row button. The utility will add new ‘Payable’ sheet for every CETSH entered on Return sheet.

Filling data for “Payable” sheet - Enter the details of duty payable like Duty Head, Notification Details, Rate of duty, Duty payable and Provisional Assessment Number (if any).

Filling data for “Paid” sheet - (i) ‘CLEARANCE DETAILS OF INTER UNIT TRANSFER UNDER SUBRULE(1) OF RULE 12BB and RECEIPT DETAILS OF INTERMEDIATE GOODS RECEIVED FROM OTHER PREMISES UNDER SUBRULE(1) OF RULE 12BB’: These details are applicable for LTU users only (ii) DETAILS OF DUTY PAID ON EXCISABLE GOODS: Enter the details of duty paid on excisable goods. Note that only those duty heads allowed here which are declared in Payable sheets (iii) ABSTRACT OF ACCOUNT-CURRENT (CASH PAYMENT)- All the fields are self-explanatory. Provide the details of cash payment made during the month.

Filling data on “CENVAT” sheet - All the fields are self-explanatory. This is the sheet to enter the details of CENVAT credit taken and utilized during the month of filing the return.

 “Other-Payments” Sheet - If some other payments were made during the month then provide the details on this sheet . The payment type may be “ARREARS”, “INTEREST” and “MISCELLANEOUS”. Please select the value for field ‘Payment’ in section ‘ARREAR’ very carefully. As you select the option, the Utility will ask you to freeze the option and add new sheet for filling duty head wise breakup of Arrears. The option once frozen cannot be changed. If there is no payment made then you can leave this sheet blank and proceed to the next sheet.

“ARREAR” sheets - This sheet is added by the utility if Arrear payments details are filled on the sheet “Other-Payment”. Please provide the duty head wise breakup of payments made for arrears. There is provision for adding new row in Duty head wise breakup. For adding new row fill all the details in previous row and click on Add Row button.

“Challan” sheet - (i) You can enter the details of challan, Invoice numbers, transfer challan details (if any), date and place. There is column for entering Remarks also which is optional. (ii) After filling all the sheets, click on the button “Validate Return & Submit” to generate XML of your Return.

1.5-8 Generating XML file after filling the sheets in the offline utility

Once all relevant fields of the sheet have been filled up, clicking on “Validate Return and Submit” button will again validate all the sheets and XML will be generated if data is found OK.

After generating the XML, the Utility will prompt you the name and location of the files saved The name of the XML file that has been generated by the system will be the Registration Number_Date_StampTime.xml e.g. AAABC7865HXM001_131200834021PM.xml or AAGPI2894EXD001_24-Jun-0910603PM.xml

1.5-9 Uploading the offline return

You can browse and upload offline return (XML file) by logging into ACES with your user-ID and password and navigating in the ACES website in the following manner - RET–> eFiling for Returns –>Upload File (In case of ER-1/ER-2/ER-3 return) or RET–> eFiling–>Upload File (In case of ST-3)

 1.5-10 Status of returns

Status of returns implies the status of offline returns uploaded into the system. Status of returns submitted through offline utility can be either Uploaded or Filed or Rejected. You can view the status of your return submitted using offline utility through: RET–> eFiling for Returns–> View Status (In case of CE) or RET–> eFiling –> View Status (In case of ST)

 Returns submitted through offline utility can have following status:

- Uploaded: Denotes that return is uploaded and under processing by the system. You should view again after some time.

- Filed: Denotes that uploaded return is accepted by the system.

- Rejected: Denotes that the return could not be processed due to errors and is rejected and the assessee return is not filed with the department in this case.

The result of the acceptance or otherwise of the return filed off line will be known within one business day at present.

1.5-11 Rejection of offline return

Returns would not be accepted due to some technical errors validated by the system. For example, such errors may be wrong mention of premise code, mismatch of registration numbers, mismatch of period of return filed etc.

Errors due to which return is rejected are displayed when you click on hyperlink on rejected return. Please also look into the error the systems shows for the rejection of the return and correct the error. If required, returns can be corrected and then new XML file generated and uploaded again.

1.5-12 Error – ‘Corruption of XML file’

While uploading the XML file in ACES, following error may appear - “File corrupt. Regenerate and upload the file again”. This error appears only when user has tampered XML file generated by the utility.

Ensure that you upload the original XML file generated by the utility without tampering/opening for modification.

1.5-13 Error if you use Excess version earlier than 2003 

If you use MS Office Excel earlier than 2003, while clicking on “Validate & Submit” button on worksheet on eFiling Dealer Return, the error will be ‘Compile error in hidden module: Module 5′. System will not generate the XML to be uploaded.

This error will not occur if the user is using Microsoft Office Excel 2003 version or above.

1.6 On-line Duty Payment

Online payment of excise duty and service tax is mandatory w.e.f. 1-4-2010, if the tax/duty paid in previous year (by cash or through Cenvat credit) was more than Rs 10 lakhs.

You can pay your duty through e-payment option on ACES homepage provided you have net-banking account with any of the banks listed in the ACES website. The listed banks will be displayed in a separate page once you click on e-payment option in ACES homepage. By clicking “Please click here” hyperlink in this page you will be taken to e-payment gateway through which you can make e-payment.

The e-Payment link on ACES website only redirects the users to NSDL website to make e-payments and is only a facility provided for the ease of the assessee. In case any issues with the NSDL website, you have to contact the respective helpdesk mentioned in the concerned NSDL website.

1.7 Other facilities on ACES

Following other facilities are supposed to be available on ACES. We have to see whether and how these function.

Claims, Intimations, permissions – (a) Permission for multiple invoices, intimation usage, cancellation & authorized issuer of invoices (b) Application for Remission of Duty (c) Application for permission to pay duty and remove final products from job workers premises (d) Application for availing the benefit of SSI exemption (e) Application for Transfer of CENVAT Credit (f) Application for Permission to remove semi-finished goods for certain purposes (g) Record Maintenance (h) Account of Removal (i) Application of Procurement of Excisable Goods at Concessional Rate of Duty (j) Intimation for monthly return for removal of Goods at Concessional rate of duty (k) Intimation regarding receipt of imported goods at Concessional rate of duty (l) Application for permission to remove excisable goods for carrying out tests.

Provisional Assessment – (a) Facility to file Provisional Assessment requests online by assesses (b) Order for provisional assessment issued online by department (c) Facility to file Provisional Assessment extension requests online by Assesses (d) Provisional Assessment finalization order issued online (e) Details of B 1 bond captured into ACES.

Dispute Resolution – (a) Online issue of Show Cause Notice (SCN) by Department (b) Facilitates assessee to file reply online (c) Intimation for date of Personal Hearing is sent online (d) Online issue of Order in Originals and Commissioner Appeal Orders by Department (e) Facility to assessee to file appeal online with Commissioner Appeals.

Refunds – (a) Facility for assessee to file refund claims online (b) Online issue of notices by Department (c) Online reply to notices by Assesses (d) Passing of Refund Orders online by Department (e) Filing appeals online with Commissioner (Appeals) if assessee is aggrieved.

Exports – (a) Online filing of documents for various categories of exporters like merchant exporter, manufacturer exporter, EOU and Export warehouse (b) Bond details captured online and Debit and credit entries of Bond automated (c) Online filing of AREI, ARE2, Nepal invoice, CT1, CT2, CT3, Procurement Certificate etc. (d) End to End Export cycle - From procurement to warehousing-export is covered (e) Interface with ICES –Customs for receiving proof of exports online.

Changes in Service Tax in June 2010

Thursday, August 26th, 2010

This is a guest post by CMA.V.S.Datey. CMA.Datey BTech(Hons.), FCS, FICWA, is author of books on Corporate Laws and Indirect Taxation published by Taxmann India. You may visit his website at http://dateyvs.com/index.htm


 

Budget 2010 provisions relating to service tax made effective on 1-7-2010

Finance Act, 2010 was passed on 8-5-2010 itself. As per past experience, it was expected that the provisions of service tax would be made effective from 1st June. However, after a long wait, all the provisions relating to service tax contained in Finance Act, 2010 have been made finally made effective from 1-7-2010.

1.1 No service tax on advance received prior to 1-7-2010 in respect of new services and services as per amended definition, if service provided after 1-7-2010

About 8 services have been made taxable w.e.f. 1-7-2010. In addition, scope of certain services like construction service, air transport service, port and airport service etc. have been expanded. In respect of the new services and also in respect of services 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 [Notification No. 36/2010-ST dated 28-6-2010].

This is a transitory provision. This provision applies only in respect of services covered under amended definition and not to those services which were already covered under earlier definition.

1.2 New services effective from 1-7-2010 ands their accounting codes

The new services effective from 1-7-2010 and their codes are given below. If any advance payment was received prior to 1-7-2010 for service to be provided after 1-7-2010 , service tax will not be payable [Notification No. 36/2010-ST dated 28-6-2010].

 

Copyright of cinematographic film and sound recording [Section 65(105)(zzzzt)]

Accounting Code - Service Tax : 00440613. Payment of interest, penalty, etc. : 004406014.

Electricity exchange [Section 65(105)(zzzzs)]

Accounting Code - Service Tax : 00440610. Payment of interest, penalty, etc. : 004406011.

Granting right or Permitting commercial use of an event [Section 65(105)(zzzzr)]

Accounting Code - Service Tax : 00440607. Payment of interest, penalty, etc. : 00440608.

Health check-up or preventive care services [Section 65(105)(zzzzo)]

Accounting Code - Service Tax : 00440598. Payment of interest, penalty, etc. : 00440599.

Medical records storing, keeping or maintaining service [Section 65(105)(zzzzp)]

Accounting Code - Service Tax : 00440601. Payment of interest, penalty, etc. : 00440602.

Preferential location or development in residential complex [Section 65(105)(zzzzu)]

Accounting Code - Service Tax : 00440616. Payment of interest, penalty, etc. : 004406017.

Promotion, marketing organising games of chance service [Section 65(105)(zzzzn)] 

Accounting Code - Service Tax : 00440595. Payment of interest, penalty, etc. : 00440596.

Promotion or marketing of brand [Section 65(105)(zzzzq)]

Accounting Code - Service Tax : 00440604. Payment of interest, penalty, etc. : 00440605.

 

 

1.3 Eligibility of Dumpers or tippers as capital goods

Dumpers or tippers falling under chapter 87 are eligible as capital goods for Cenvat credit to providers of service of Site formation and clearance, excavation and earthmoving and demolition [section 65(105)(zzza)] and Mining of mineral, oil or gas services [section 65(105)(zzzy)], if these are registered in name of service provider and are used for providing taxable service (amendment w.e.f. 22-6-2010). Other service providers and manufacturers are not eligible.

1.4 Clean Energy Cess

A Clean Energy Cess has been imposed w.e.f. 1-7-2010, vide Finance Act, 2010, on gross quantity of raw coal, lignite and peat raised and despatched from a coal mine in India. This cess would be levied and collected as a duty of excise from coal mines. This cess would apply to imported coal as CVD. Tariff rate is Rs 100 but effective rate of duty is Rs 50 per ton. Education cess and SAHE cess is not payable on this cess. Any Cenvat credit cannot be utilised for paying this cess – Notification Nos 1 to 5 (Clean Energy Cess) dated 22-6-2010 and MF(DR) circular No. 354/72/2010-TRU dated 24-6-2010.

2. Expansion in scope of construction service to cover all services before obtaining completion certificate

In the Finance Act, 2010, an explanation has been added w.e.f. 1-7-2010 to 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 purpose of levy of service tax.

The explanation added is not a valuation provision.

Note that similar explanation has not been added to definition of works contract service.

Meaning of ‘authority competent to issue 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 as follows –

For the purposes of sub-clauses (zzq) and (zzzh) of clause (105) of section 65 of the Finance Act, the expression ‘authority competent’ includes, besides any Government authority,—

    (i)   architect registered with the Council of Architecture constituted under the Architects Act, 1972 (20 of 1972); or

   (ii)   chartered engineer registered with the Institution of Engineers (India); or

  (iii)   licensed surveyor of the respective local body of the city or town or village or development or planning authority;

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 authorities. I am not aware where an Architect or a Chartered Engineer or Licensed valuer is authorised by law to issue a completion certificate as precondition of occupation. Hence, it is not clear where this order will be applicable.

This amendment does not apply to works contract service - The explanation added to sections 65(105)(zzq) and 65(105)(zzzh) w.e.f. 1-7-2010 are in respect of construction service. There is no parallel amendment in definition of works contract service under section 65(105)(zzzza). Hence, legally, the amended definition will not apply to works contract service (However, if you fight and win, the victory may be short lived as there will be retrospective amendment in next budget).

2.1 Effect of the amendment  to definition of construction service

The effect of the amendment made w.e.f. 1-7-2010 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 competent authority (like Municipal Corporation, Municipality or other competent authority) 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 only 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 (Now the delay will be more and ‘cost’ of obtaining the certificate will rise further).

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 this case, the builder will not be liable only if entire transaction (including receipt of money) takes place after obtaining ‘completion certificate’ from municipal or other competent authority.

2.2 Valuation for service tax on construction 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 calculate value of service 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 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.

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’.

Service tax on value of services instead of paying on 33%/25% of gross value - Payment of service tax on basis of 25%/33% of gross amount is optional to assessee. Thus, service provider can give break up of material cost and service charges. In such case, he will be liable to pay service tax only on the charges relating to ‘gross value of service’, plus profit attributable to that activity at full rate i.e. without abatement.

This is possible under rule 3(b) of Service Tax Valuation Rules.

In that case, the service provider can avail Cenvat credit of his input service tax and capital goods.

2.3 No service tax on advance received prior to 1-7-2010 in respect of services as per amended definition, if service provided after 1-7-2010

The definition of construction service has been amended w.e.f. 1-7-2010 as explained . 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 [Notification No. 36/2010-ST dated 28-6-2010]. This provision applies only in respect of services covered under amended definition and not to those services which were already covered under earlier definition.

3. Exemptions

The major exemptions are summarised below.

 

 

No. 25/2010-ST dated 22-6-2010

Full Exemption to transit passengers and employees of aircraft operators from service tax on air transport of passengers

No. 26/2010-ST dated 22-6-2010

Service on air transport of passengers is Rs 100 in case of domestic travel and Rs 500 in case of international journey in economy class if Cenvat credit not availed

No. 27/2010-ST dated 22-6-2010

Exemption to air transport of passenger service to remote parts of India in north-east

No. 28/2010-ST dated 22-6-2010

Construction of complex service provided to Jawarharlal Nehru National Urban Renewal Mission and Rajiv Awaas Yojana

No. 30/2010-ST dated 22-6-2010

Exemption to sponsorship service in respect of specified tournaments or championships

No. 31/2010-ST dated 22-6-2010

Exemption to specified services provided within port or airport

No. 32/2010-ST dated 22-6-2010

Exemption to services provided for distribution of electricity

No. 36/2010-ST dated 28-6-2010

Exemption to service tax on advance received prior to 1-7-2010 in respect of new services and extension of existing services, even if the service is provided after 1-7-2010 (transitory relief)

No. 41/2010-ST dated 28-6-2010

Exemption to specified services provided wholly within port, other port or airport

 

 

3.1 Air transport of passengers for domestic or international journey [Section 65(105)(zzzo)]

No service tax on advance received prior to 1-7-2010 in respect of services as per amended definition, if service provided after 1-7-2010 – The definition of air transport of passenger service has been amended w.e.f. 1-7-2010. 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 [Notification No. 36/2010-ST dated 28-6-2010]. This provision applies only in respect of services covered under amended definition and not to those services which were already covered under earlier definition.

Relaxation in preparation of invoiceAs per rule 4A(1), the invoice/challan/Bill should be signed by authorised person of provider of input services, should be serially numbered and should contain following details -

    (1)  Name, address and registration number of person providing taxable service

    (2)  Name and address of person receiving taxable service

    (3)  Description, classification and value of taxable service provided or to be provided and

    (4)  Service tax payable on the taxable service

The service provider shall issue an invoice within 14 days containing aforesaid prescribed details.

This provision is not practicable in case of service of air transport of passengers since usually only e-tickets are issued. Hence, it is provided that an invoice, a bill or as the case may be, challan [as required under rule 4A(1)] shall include ticket in any form by whatever name called and whether or not containing registration number of the service provider, classification of the service received and address of the service receiver but containing other information in such documents as required under rule 4A(1) [Fifth proviso to rule 4A(1) inserted w.e.f. 1-7-2010].

In other words, the document should contain serial number, name and address of service provider (airline), name of person receiving the service (passenger) and service tax payable on taxable service. Other details are not required [There is no relaxation in respect of ‘serial number’. It is not clear how airlines will be able to comply with this requirement].

Partial exemption in respect of all passengers Service on air transport of passengers is as follows – (a) Rs 100 or 10% of gross value of ticket whichever is lower, in case of domestic travel and (b) Rs 500 or 10% of gross value of ticket whichever is lower in case of international journey in economy class. ‘Economy class in an aircraft’ means (i) where there is more than one class of travel, the class attracting the lowest standard fare; or (ii) where there is only one class of travel, that class. The condition is that the aircraft operator (service provider) should not avail any Cenvat credit for payment of this service tax [Notification No. 26/2010-ST dated 22-6-2010].

Full Exemption to transit passengers and employees of aircraft operator – There is full exemption from service tax on air transport of passengers in following cases – (a) transit passengers if the passenger does not pass through immigration and does not leave customs area and continues his journey to a place outside India and (b) Person employed or engaged by aircraft operator in any capacity on board the aircraft [Notification No. 25/2010-ST dated 22-6-2010].

Full exemption to passengers to and from North East – In case of passengers embarking on a journey originating or terminating in an airport located in the State of Arunachal Pradesh or Assam or Manipur or Meghalaya or Mizoram or Nagaland or Sikkim or Tripura or at Baghdogra located in West Bengal, there is full exemption from service tax on air transport of passengers [Notification No. 27/2010-ST dated 22-6-2010].

 

3.2 Cargo handling service [section 65(105)(zr)

Exemption to specified services provided within port, other port and airport - Taxable service provided by a cargo handling agency in port, other port or airport, in relation to, agricultural produce or goods intended to be stored in a cold storage is fully exempt, even if the service is classified as port, other port or airport service w.e.f. 1-7-2010 [Notification No. 41/2010-ST dated 28-6-2010].

3.3 Commercial or industrial construction service [section 65(105)(zzq)]

No service tax on advance received prior to 1-7-2010 in respect of services as per amended definition, if service provided after 1-7-2010 – The definition of commercial or industrial construction service has been amended w.e.f. 1-7-2010. 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 [Notification No. 36/2010-ST dated 28-6-2010]. This is a transitory relief. This provision applies only in respect of services covered under amended definition and not to those services which were already covered under earlier definition.

Abatement for service provided within port, other port and airport – Commercial or industrial construction service provided wholly within port, other port or airport will be classified as port, other port or airport service respectively w.e.f. 1-7-2010. Even then abatement will be available and service tax will be payable on 25%/33%% of the gross amount charged if amount includes value of material, vide Notification No. 1/2006-ST dated 1-3-2006, as amended w.e.f. 1-7-2010 (25% if amount includes value of land and 33% if amount charged does not include value of land). The condition is that no Cenvat credit should be availed and benefit of Notification No. 12/2003-ST should not be claimed.

Exemption to all specified commercial or industrial construction service provided within port or other port? – Services of construction, repair, alteration and renovation of wharves, quays, docks, stages, jetties, piers and railways, falling with section 659105)(zzq)  will be fully exempt from service tax, if provided wholly within the port or other port [Notification No. 38/2010-ST dated 28-6-2010] [This exemption seems to be redundant, since if commercial or industrial construction service is provided wholly within port or other port, the service will be classified as port or other port service and hence cannot fall in clause 65(105)(zzq) at all].

Exemption to all commercial or industrial construction service provided within airport? – Services of commercial or industrial construction, falling with section 659105)(zzq)  will be fully exempt from service tax, if provided wholly within the airport [Notification No. 42/2010-ST dated 28-6-2010] [This exemption seems to be redundant, since if commercial or industrial construction service is provided wholly within airport, the service will be classified as airport service and hence cannot fall in clause 65(105)(zzq) at all].

3.4 Construction of (Residential) Complex [section 65(105)(zzzh)]

No service tax on advance received prior to 1-7-2010 in respect of services as per amended definition, if service provided after 1-7-2010 – The definition of service has been amended w.e.f. 1-7-2010. 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 [Notification No. 36/2010-ST dated 28-6-2010]. This provision applies only in respect of services covered under amended definition and not to those services which were already covered under earlier definition.

Exemption to construction service provided to JNNURM and Rajeev Awass Yojana – Construction of residential complex service provided to Jawaharlal Nehru National Urban Renewal Mission and Rajiv Awaas Yojana is fully exempt from service tax [Notification No. 28/2010-ST dated 22-6-2010].

Abatement for service provided within port, other port and airport – Construction of complex service provided wholly within port, other port or airport will be classified as port, other port or airport service respectively w.e.f. 1-7-2010. Even then, abatement will be available and service tax will be payable on 25%/33%% of the gross amount charged if amount includes value of material, vide Notification No. 1/2006-ST dated 1-3-2006, as amended w.e.f. 1-7-2010 (25% if amount includes value of land and 33% if amount charged does not include value of land). The condition is that no Cenvat credit should be availed and benefit of Notification No. 12/2003-ST should not be claimed.

3.5 Erection, commissioning or installation services [Section 65(105)(zzd)]

Abatement for service provided within port, other port and airport – Erection, commissioning or installation service provided wholly within port, other port or airport will be classified as port, other port or airport service respectively w.e.f. 1-7-2010. Even then abatement will be available and service tax will be payable on 33% of the gross amount charged if amount includes value of material, vide Notification No. 1/2006-ST dated 1-3-2006, as amended w.e.f. 1-7-2010. The condition is that no Cenvat credit should be availed and benefit of Notification No. 12/2003-ST should not be claimed.

3.6 Port, other port  or airport services

Exemption to specified services provided within port/airport  - Following services provided within port or airport are fully exempt from service tax [Notification No. 31/2010-ST dated 22-6-2010].

    (i)   repair of ships or boats or vessels belonging to the Government of India including Navy or Coast Guard or Customs but does not include Government owned Public Sector Undertakings.

   (ii)   repair of ships or boats or vessels where such process of repair amounts to ‘manufacture’ and has the meaning assigned to it in clause (f) of section 2 of the Central Excise Act, 1944.

  (iii)   supply of water.

  (iv)   supply of electricity.

   (v)   treatment of persons by a dispensary, hospital, nursing home or multi-specialty clinic (except cosmetic or plastic surgery service).

  (vi)   services provided by a school or centre to provide formal education other than those services provided by commercial coaching or training centre.

(vii)   services provided by fire service agencies.

                (viii)        pollution control services.

Certain services provided within port, other port and airport are completely exempt - Following services provided within port, other port and airport are fully exempt from service tax, vide Notification No. 41/2010-ST dated 28-6-2010, w.e.f. 1-7-2010  –

(i)   taxable service provided by a cargo handling agency in relation to, agricultural produce or goods intended to be stored in a cold storage.

(ii) taxable service provided by storage or warehouse keeper in relation to storage and warehousing of agricultural produce or any service provided for storage of or any service provided by a cold storage.

(iii) taxable service in relation to transport of export goods in an aircraft by an aircraft operator.

(iv) taxable service of site formation and clearance, excavation and earthmoving and demolition and such other similar activities.

Exemption to all specified commercial or industrial construction service provided within port, other port and airport? – Services of construction, repair, alteration and renovation of wharves, quays, docks, stages, jetties, piers and railways, falling with section 659105)(zzq)  will be fully exempt from service tax, if provided wholly within the port or other port [Notification No. 38/2010-ST dated 28-6-2010] [This exemption seems to be redundant, since if commercial or industrial construction service is provided wholly within other port, the service will be classified as port or other port service and hence cannot fall in clause 65(105)(zzq) at all].

Abatement in respect of services provided within port, other port or airport - Abatement has been provided in respect of following services provided within the port, other port or airport, vide Notification No. 1/2006-ST dated 1-3-2006, as amended w.e.f. 1-7-2010. The abatement is subject to condition that no Cenvat credit should be availed and benefit of Notification No. 12/2003-ST should not be availed. Needless to mention, the abatement scheme is at the option of service provider –

bullet Rent a cab service – Service tax will be payable on 40% of gross amount charged.
bullet Erection, commissioning service –Service  tax will be payable on 33% of gross amount charged.
bullet Commercial or industrial construction service – Tax will be payable on 25% of gross amount charged if the amount includes value of land and on 33% of gross amount if the amount charged does not include value of land.
bullet Construction of (residential) complex service – Tax will be payable on 25% of gross amount charged if the amount includes value of land and on 33% of gross amount if the amount charged does not include value of land.
bullet Transport of goods by rail in container – Tax is payable on 30% of gross amount charged.
bullet Transport of goods by road (GTA) – tax is payable on 25% of amount on GTA (Goods Transport Agency) service (in fact, this item i.e. Sr No. 6 was omitted from Notification No. 1/2006-ST w.e.f. 1-3-2008. Thus, amendment has been made to an item which was omitted long ago.

 

3.7 Rent-a-cab service [Section 65(105)(o)]

Abatement for service provided within port, other port and airport - Rent-a-cab service provided wholly within port, other port or airport will be classified as port, other port or airport service respectively w.e.f. 1-7-2010. Even then abatement will be available and service tax will be payable on 40% of the gross amount charged vide Notification No. 1/2006-ST dated 1-3-2006, as amended w.e.f. 1-7-2010. The condition is that no Cenvat credit should be availed and benefit of Notification No. 12/2003-ST should not be claimed.

3.8 Site formation, clearance, excavation service [section 65(105)(zzza)

Exemption to service provided within port, other port or airport - Taxable service of site formation and clearance, excavation and earthmoving and demolition and such other similar activities provided wholly within port, other port and airport are fully exempt, even if the service is classified as port, other port or airport service w.e.f. 1-7-2010 [Notification No. 41/2010-ST dated 28-6-2010].

 

3.9 Sponsorship Service [section 65(105)(zzzn)]

Exemption to sponsorship of certain tournaments or championships - Sponsorship of following tournaments or championships has been fully exempted from service tax [Notification No. 30/2010-ST dated 22-6-2010].

    (i)   tournaments or championships organized by any of the National Sports Federations or Federations affiliated to such National Sports Federations, where the participating teams or individuals represent any District, State or Zone.

   (ii)   tournaments or championships organized by Association of Indian Universities - Inter-University Sports Board, School Games Federation of India, All India Sports Council for the Deaf, Paralympic Committee of India (for the physically challenged), Special Olympics Bharat (for the mentally challenged).

  (iii)   tournaments or championships organized by the Central Civil Services Cultural and Sports Board.

  (iv)   tournaments or championships organized as part of National Games, by the Indian Olympic Association.

   (v)   tournaments or championships organized under Panchayat Yuva Kreeda Aur Khel Abhiyaan (PYKKA) Scheme.

3.10 Storage and warehousing service [section 65(105)(zza)]

Exemption to service provided within port, other port or airport - Taxable service provided by storage or warehouse keeper, within port, other port or airport, in relation to storage and warehousing of agricultural produce or any service provided for storage of or any service provided by a cold storage is fully exempt, even if the service is classified as port, other port or airport service w.e.f. 1-7-2010 [Notification No. 41/2010-ST dated 28-6-2010]

3.11 Transmission and distribution of electricity

Service of transmission of electricity has been exempted w.e.f. 27-2-2010 – Notification No. 11/2010-ST dated 27-2-2010.

Service of distribution of electricity has been exempted vide Notification No. 32/2010-ST dated 22-6-2010.

3.12 Transport of goods by air service [section 65(105)(zzn)]

Exemption to service of transport of export goods - Taxable service in relation to transport of export goods in an aircraft by an aircraft operator, provided in port, other port or airport is fully exempt from service tax, even if the service is classified as airport service w.e.f. 1-7-2010  [Notification No. 41/2010-ST dated 28-6-2010].

3.13 Transport of goods by rail in container [Section 65(105)(zzzp)]

Service tax on transport of all goods by rail is now expected to be made effective only on 1-1-2011. Till then, existing provision i.e. service tax is payable only in case of rail transport in containers by other than Indian railways will continue.

Abatement for service provided within port, other port and airport – Rail transport in container service provided wholly within port, other port or airport will be classified as port, other port or airport service respectively w.e.f. 1-7-2010. Even then abatement will be available and service tax will be payable on 30% of the gross amount charged vide Notification No. 1/2006-ST dated 1-3-2006, as amended w.e.f. 1-7-2010. The condition is that no Cenvat credit should be availed and benefit of Notification No. 12/2003-ST should not be claimed.

3.14 Transport of goods by road service [Section 65(105)(zzn)

Abatement to GTA service provided within port, other port or airport – Goods Transport Agency (GTA) service provided within port, other port or airport will be classified as port, other port or airport service w.e.f. 1-7-2010. Even then, abatement will be available and tax is payable on 25% of amount [Notification No. 1/2006-ST dated 1-3-2006 as amended w.e.f. 1-7-2010] (In fact, this item i.e. Sr No. 6 was omitted from Notification No. 1/2006-ST w.e.f. 1-3-2008. Thus, amendment has been made to an item which was omitted long ago!).