Archive for the ‘Taxation’ Category

Some Observations on Exposure Draft on Tax Accounting Standards

Monday, October 31st, 2011

 This is a post by CMA Devarajan Swaminathan. He is a practising Cost Accountant based in Thane, Mumbai


Why TAS is needed?

We need to understand a fundamental difference between TAS and IndAS.

The former is for computation of income, the latter is for investor iinformation. The purpose, as is obvious, different.

Further, prior period items and its later adjustements requires, Ind AS to make changes retrospectively, where as such changes would be effective prospectively in case of TAS.

They have done correctly in providing a guidance in the form of TAS on how income should be computed with a very clear caveat that TAS must not be used for Accounting purposes.

So it does make sense to have TAS, just as CBEC has a very limited purpose CAS 4 for calculating cost of goods despatched, exclusively for Central Excise purposes. The only difference is that CAS 4 is issued by ICWAI, TAS’s are issued by CBDT.

I would like to suggest to base the cost principles in Construction Contracts and Government Grants as provided in the Tax Accounting Standards on the Generally Accepted Cost Accounting Principles (GACAP) AND Cost Accounting Standards (CAS) as issued by The Institute of Cost and Works Accountants of India (ICWAI).

Below are some observations in the treatment as provided in TAS and the comparision in its treatment as suggested in the GACAP and CAS.

Government Grants:

GACAP:
Any Subsidy / Grant / Incentive and any such payment received / receivable with respect to the input cost is reduced from cost for ascertainment of the cost of the cost object to which such amount pertains.

TAS:

Where the Government grant relates to a non-depreciable asset or assets of a person requiring fulfillment of certain obligations, the grant shall be recognized as income over the same period over which the cost of meeting such obligations is charged to income.

Construction Contracts:

TAS:

Contract Costs
11. Contract costs shall comprise of :
(a) costs that relate directly to the specific contract;
(b) costs that are attributable to contract activity in general and can be allocated to the contract;
(c) such other costs as are specifically chargeable to the customer under the terms of the contract; and
(d) allocated borrowing costs in accordance with the Tax Accounting Standard on Borrowing Costs.

These costs shall be reduced by any incidental income, not being in the nature of interest, dividends or capital gains, that is not included in contract revenue.

12. Costs that cannot be attributed to any contract activity or cannot be allocated to a contract shall be excluded from the costs of a construction contract.
13. Contract costs include the costs attributable to a contract for the period from the date of securing the contract to the final completion of the contract. Costs that are incurred in securing the contract are also included as part of the contract costs, provided
(a) they can be separately identified; and
(b) it is probable that the contract shall be obtained.

When costs incurred in securing a contract are recognised as an expense in the period in which they are incurred, they are not included in contract costs when the contract is obtained in a subsequent period.

14. Contract costs that relate to future activity on the contract are recognised as an asset. Such costs represent an amount due from the customer and are classified as contract work in progress.

GACAP:
The above contract cost should be based on CAS and GACAP.

According to TAS, Costs that cannot be attributed to any contract activity or cannot be allocated to a contract shall be excluded from the costs of a construction contract, instead the concept in PARA 6 and PARA 8 of GACAP on Application Guidance of Admin O/H may be applied.

PARA 6 of GACAP application guidance on Administration Ovedheads:
The use of the terms “share of administrative overheads relating to production” and “share of administrative overheads relating to selling” in the erstwhile Cost Accounting Record Rules has led to arbitrary practices in some entities to assign all administrative overheads on an arbitrary ratio say 60:40 between production and selling. These terms can only refer to administrative costs of functions attached to production or selling. There will be a residuary head of “Administrative Overheads” which cannot be assigned to production or selling functions representing costs of policy making and strategic management and are to be treated as period costs. Also included in this category are expenses such as Directors sitting fees, audit fees, filing fees and other corporate expenses. Paragraph 6.3 in Cost Accounting Standard 3 on overheads should be interpreted in the light of the above discussions.

PARA 8 of GACAP application guidance on Administration Ovedheads:
The assignment of as much of the administrative overheads as possible based on identified cost drivers is recommended. The balance of administrative overheads can only be assigned to cost centres or objects based on capacity or sales value. It is usual in textile industry to charge corporate office cost to mills based on installed spindle capacity.

For Treatment of Borrowing Costs, GACAP on Interest and Finance Charges may be applied.

Is there a TAS on Borrowing Costs, Para 11 d above??. Here GACAP on Interest and Finance Charges should be used.

Interest and Finance Charges have come to be included in cost of sales though not in cost of production. Such costs are also assigned to products before arriving at margins by product.

PAGE 41 of GACAP.

Should there be a GACAP on Risk Cost also?
Risk is also factored in cost before arriving at Margins. So, in my opinion, there must be a GACAP for risk cost.

ICWAI must come up with a MAG on arriving at Cost of Capital. The earlier this is done, the better.

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.

The Mauritius Advantage—DTC

Monday, July 4th, 2011

 This is a post by Indraneel Sen Gupta. He is a financial, economic writer and research analyst.

The Mauritius Treaty controversy … debated, discussed and beaten to death, but still unresolved after more than a decade.  Though the controversy has meandered through many interesting events, it has been one step back for every step forward.  The Government’s position on this controversy is almost a barometer for the Indian economy.

1990’s …India was taking its first unsteady steps as a liberal capitalist state and keen to encourage foreign investment the Government issued a circular in 1994, stating that gains earned by Mauritian residents from sale of Indian shares would not be taxable in India.  2000 …steadily growing and still in need of foreign investment.

When a zealous Tax Office tried to raise the ‘conduit’ argument to deny the Treaty benefits, the Government in swift and decisive action issued the famous circular 789.  In 2004, SC in the AzadiBachaoAandolan, one hoped, firmly put the issue to bed.  Justice Ruma Pal observed that Treaties at times went beyond just tools for Revenue collection and sought to achieve other objectives such as encouragement of trade and commerce, foreign investment flows etc…

2004 onwards …the Government, probably buoyed by steady growth and a conviction that India was too important for any investor to ignore, changed sides.  The Tax Office in umpteen cases is making attempts to deny the Treaty benefits and litigations are proliferating.

A recent press report suggested that the Tax Office has collected a list of entities that are taking advantage of the Treaty, a list of potential ‘targets’.  The Government is gunning for an amendment in the Treaty citing massive ‘revenue loss’ due to the capital gains shelter.

The proposed GAAR in the Indian Direct Tax Code is the latest variable in a convoluted paradigm and threatens to completely derail the Mauritius band wagon.  GAAR will be invoked to re characterize/annul transactions which lack ‘commercial substance’ with almost unbridled discretion available to the Tax Office.

‘Commercial substance’ is a concept which is ambiguous and has led to a plethora of litigation even in highly developed tax regimes such as Canada and Australia.  One can imagine a tool like this, in the hands of an overtly zealous Tax Office, wont to litigation, which has been striving to scuttle the Treaty, will wreak havoc with investors.

Investors are getting nervous and the Advance Ruling Authority has become a favorite destination. Others are buying insurance against tax risk.  Is this behavior warranted?  India is still a far cry from its potential of being a global leader; we need billions of dollars to fund our infrastructure and social sectors, to fund employment opportunities and to tap the potential of our teeming billions, to trickle down the fruits of capitalism to the rural sector.

At this stage, undermining the importance of a robust investment holding structure is fraught with risk for India.  A 20% (capital gains rate) swing in return economics is a significant play and definitely a key factor in some of the investment decisions in India, at least in the FII and private equity space.  While growth rates in India are zooming, so are valuations (the Indian stock market today trades at 17-18 PE, one of the highest in the world) and hence the capital gains tax shelter provided by Mauritius cannot be undermined.

Investment flows create a big multiplier for the economy and that has to be weighed against any ostensible loss of revenues.  The Government cannot afford to take a myopic view; the numbers speak for themselves …almost 40% of India’s FDI and 50% of FII investment is from Mauritius.  One could argue that none of this will change even if the Treaty went …possibly, but why argue with success, with a winning formula?

India’s concerns around round tripping and money laundering are probably more justifiable and need remediation and should be reviewed in any Treaty re-negotiations. Though in this space, Mauritius, has certainly taken many steps over the years.  Mauritius casts onerous requirements on companies for the issue of Tax Residency Certificate, the banking system has strengthened KYC norms, it has made tax laws more robust and onerous and Mauritius was removed from the OECD watch-list of tax havens. It has co-operated with India on sharing information on fund flows in cases of suspected round tripping.

I also want to raise a debate on the notion that there is significant ‘revenue loss’ due to the capital gains shelter under the Mauritius Treaty.  Is a capital gains tax on shares, equitable?  As a tax policy matter, there is at least one school of thought that believes that taxing capital gains on equity tantamounts to double taxation.

The capital gain represents capitalization of future corporate earnings which will anyway be taxed as corporate profits (barring cases of tax holidays, which are anyway proposed to be done away under DTC) in future.  The Kelkar Committee (in 2002) had made a recommendation to do away with such a tax.

In summary, there is merit for the Government to seriously re-look at its strategy around the India Mauritius Treaty.  It has been a key enabler for fund flows in the past and will likely continue as such.  Even if revenue loss is a concern, there are several other adjacencies and ancillary benefits associated with higher investments which probably more than offset any perception of a revenue loss.  The current situation is really undesirable.  The investor today is confused and is running amok to review his options.

The need of the hour is (1) for the Tax Office to respect settled law and the Government’s own famous circular 789 (2) provide clarity on applicability of GAAR (under DTC) in the context of the Treaty, with a clear definition of ‘commercial substance’ in the context of a holding company and possibly only restrict it to cases of round-tripping (3) clarify that existing investments which were evaluated under extant law and hence already baked in the benefits of the Treaty would be grandfathered and not get impacted by GAAR.

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.

Profession Tax - Maharashtra State

Thursday, March 31st, 2011

 This is a post by Ms. Sumati Dinkar Jadhav. She is a CMA Student and Trainee at Devarajan Swaminathan & Co. - Cost Accountants

PROFESSION TAX ACT, 1975 – MAHARASHTRA

This act is also called as The Maharashtra State Tax on Professions, Trade, Callings and Employments Act, 1975.

Profession Tax means the tax on Professions, Trades, Callings and Employments levied under this Act. This act may be called the Maharashtra Tax Laws (Levy & Amendment) ACT, 2010. It extends to the whole of the State of Maharashtra. It shall be deemed to have come force on the 1st day of April, 1975.

Profession Tax is a Tax may be imposed on Professions and Employments even though the employee is already paying an income tax. As per Constitution of India Article 276 the total amount payable in respect of any person to the state or to any one municipality, district board, local board, or other local authority in the state by way of taxes on Professions, Trades, Callings and Employments shall not exceed Rs. 2500 p.a.

It is a tax on Professions, Trades, Callings and Employments for raising the resources needed for implementing the Employment Guarantee Scheme of the Maharashtra State Govt. and to provide for establishment of the Employment Guarantee Fund.

The following is the Procedure for Registration and Enrolment as per the act.

Registration – Section 5 of the Act, 1975 states that -

Every employer not being an officer of govt. liable to pay tax under Sec 4 or 10 A(5) (Special Provisions regarding liability to pay tax in certain cases) shall obtain a certificate of Registration from the prescribed authority in the prescribed manner.

As per Sec 2 employers means the person or the officer who is responsible for paying salary or wages of the employee. It includes the head of the office of any establishment and that of the employer. As per section 2  person means it covers anybody who is engaged actively of otherwise in any profession , trade, callings or employment in the State of Maharashtra. It includes a HUF, Firm, Company, Corporation or other corporate body, any society, club or association. In other words it includes individuals and all types of organizations. It specifically excludes any person who earns wages on a casual basis.

Form I has to be used for applying for Registration then the authority will issue Certificate of Registration in Form IA.

If an employer has more than one place of work then in that case he shall make an application for Registration separately to each authority in respect of his place of work within the jurisdiction of that authority.

A company which employs persons should get certificate of registration. It is liable to pay profession tax as it is engaged in trade and it shall also get certificate of enrolment.

Every employer is required to obtain a certificate of Registration within Thirty days of his becoming liable to pay tax.

 

Enrolment – Section 5 of the Act, 1975 states that -

Every person liable to pay tax under this act, other than a person earning salary of wages in respect of the tax is payable by his employer, shall obtain certificate of enrolment from the prescribed authority in the prescribed manner.

If an Indian Citizen is in employment of any diplomatic office, consular office or trade commissioner of any foreign country situated in any part of the state, he shall obtain a certificate of enrolment provided he is liable to pay tax and pay the tax himself. In other words these offices need not get deduct tax from the Salary of their employees and they need not get certificate of registration. In case of foreign citizens employed in these offices are not liable to pay profession tax.

Form II has to be used for applying for certificate of enrolment or revision of certificate of enrolment. The certificate of enrolment will be issued in Form IIA.

If a person, who has to apply for certificate of enrolment, has more than one place of work within State of Maharashtra, he shall make a single application only in respect of all places of work. He has to name one place of work as principal place work and submit the application to the authority in whose jurisdiction the principal place of work is situated.

This certificate shall also serve as a notice of demand for the purpose of section 10 (penalty for nonpayment of tax).

Every person required to obtain a certificate of enrolment shall, in respect of a person referred in subsection 2 or 2A within Thirty days of his becoming liable to pay tax at a rate higher or lower than the one mentioned in his certificate of enrolment apply for certificate of enrolment or a revised certificate of enrolment. The prescribed authority shall after making such inquiry as may be necessary within Thirty days of the receipt of the application , if the application is in order, grant him such certificate.

Amount of Profession Tax:

Amount of Profession tax is to be determined according to New Schedule – I Schedule of Rates of Tax on Professions, Trades, Callings and Employments.

As per section 3 – Levy and charge of Tax:

1.     Subject to the provision of Article 276 of the Constitution of India and of this act, there shall be collected a tax on professions, trades, callings and employments for the benefit of the state.

2.     Every person excluding firms (whether registered under the Indian Partnership Act, 1932 or not) and HUF engaged actively or otherwise in any profession , trade, callings and employments and falling under one or the other of the classes mentioned in the second column of schedule I shall be liable to pay to the State Govt. the tax at the rate mentioned against the class of such persons in the Third column of the said schedule provided that the tax so payable in respect of any one person shall not exceed Two Thousand and Five Hundred Rupees in any year.

 

Provided further that, entry [21] in schedule I shall apply only to such classes of persons as may be specified by the State Govt. by notification in the official Gazette, from time to time.

Entry [21] in schedule I is a residuary entry if a person has to be covered under this entry, the State Govt. by notification in the official Gazette specify the class of person as liable to professional tax and the person should belong to that class of persons.

 

As per Section 8 the payment of Profession Tax is as follows:

 

The tax payable under this Act shall be paid in the prescribed manner. The amount of tax due from enrolled persons for each year as specified in their enrolment certificates shall be paid in accordance with the following table as per section 8 of the Act, 1975.

PAYMENT OF TAX BY THE ENROLMENT CERTIFICATE HOLDER

Particulars

Form

Due Date for Paying Tax

 EC Obtained before 31st May of the year

VIII

Before 30th June of that year.

EC Obtained after 31st May

VIII                   

Within 1 month from the date of obtaining EC

Revised EC

VIII 

Within 1 month from the date of obtaining revision of tax.

Lump Sum Payment for Five years:

If the person holding certificate of enrolment, who is liable to professional tax at rate of Rs. 1700, 2200 or 2500, wants to pay lump sum amount for five years, he can pay it. He can discharge his liability for payment of tax by making payment in advance of a lump sum amount to four times of the tax applicable to him . He has to make payment on or before the 30th June of the year.

If the lump sum payment is not made before 30th June but made before the end of the year, then he is liable to pay an additional amount for the delay at the rate of Rs. 200 per month.

In this case any increase or decrease after the person pays the lump sum amounts shall not vary the liability of tax payable by him. In other words, if he has paid the lump sum amounts, then he need not pay anything even if there is increase in the professional tax rate applicable to him. Likewise, he is not entitled to any refund if there is any reduction in the professional tax rate applicable to him.

Returns:

As per Sec 6 –

1)    Every employer registered under this act shall furnish to the prescribed authority (a return in such form, for  such period and by such dates as may be prescribed) showing there in the salaries & wages paid by him and the amount of tax deducted by him in respect thereof. Provided that, the commissioner may , subject to such terms and conditions, if any as may be prescribed , permit any employer to furnish a consolidated return relating to all or any of the places of business of such employer in the state, for such period or periods, to such authority, as may direct.

2)    Every such return shall be accompanied by a treasury challan in proof of payment of full amount of tax due according to the returns and a return without such proof of payment shall not be deemed to have been duly filed.

3)    Where an employer has without reasonable cause failed to file such return within the required time, the prescribed authority may, after giving him an opportunity of being heard, impose upon him a penalty of RS. 300 per return.

Provided that, the commissioner may, subject to such return terms and conditions, as may be prescribed, permit any employer to file separate returns-

 

a)     For all or any of the places of business of the employer, whether or not situated within the jurisdiction of the same registering authority or

b)    For different constituents of his business.

TIME LIMIT FOR FILING RETURN

Sr.No

Tax Liability

Due Date and Content

1.

Less than  Rs.5000

Shall furnish an Annual Return on or before 31st March of the year to which the return relates.

2

Rs. 5000 or more but less Than Rs. 20000

Qtr. Ending

Period in respect Of which salary is paid

Due Date

30th June

March to May

30th June

30th Sept

June to August

3oth September

31st December

Sept to Nov.

31st December

31st March

Dec to Feb

31st March

3

Rs. 20000 or more

Furnish a monthly return on or before the last date of the month to which the return relates. It shall contain the details of salaries paid in respect of the preceding month.

Return in the First Year:

In the first year in which the employer is granted registration certificate, the employer has to file quarterly return. The first return to be furnished by the employer shall be for the period commencing on the day on which he so becomes liable to be registered and ending on the last day of the quarter in which he is granted the certificate of registration.

 

Last Return:

Where the certificate of registration is cancelled, the last return to be submitted shall be for the period commencing on the first day of the year, the quarter, or the month, in which the certificate is cancelled and ending on the day on which the employer has ceased to be an employer.

 

Filing of Separate Returns:

The amendment has made provision for filing separate returns for different places of business. The authority may permit any employer to file separate returns, for all or any of the places of business of the employer, whether or not situated within the jurisdiction of the same registered authority. Likewise he may permit any employer to file separate returns, for different constituents of his business. He may direct that the returns are to be filed authority specified by him and he may allow this subject to such terms & conditions as prescribed.

 

PENALTY:

As per section 5 Registration and Enrolment –

Where an employer or a person liable to registration or enrolment has filed to apply for such certificate within the required time, the prescribed authority may, after giving him a reasonable opportunity of being heard, impose penalty of Rupees Five for each day of delay in case of such employer and Rupees two for each day of delay in case of such person.

Where an employer or a person liable to registration or enrolment has given false information in any application submitted under this section, the prescribed authority may, after giving him a reasonable opportunity of being heard, impose a penalty not exceeding Rs. 1000 by MAH. 20 OF   2002, s. 21 (b) (w.e.f. 1-5-2002)

 

 

Penalty for Nonpayment of Tax Section 10:

If an enrolled person or registered employer fails without reasonable cause, to make payment of any amount of tax within the required time or date as specified in the notice of demand, the prescribed authority may, after giving him a reasonable opportunity of being heard, impose upon him “a penalty not exceeding fifty per cent, of the amount of tax due” by Mah. Tax Laws (Levy & Amendment) Act, 2002 s. 23 (w.e.f. 1-5-2002).

 

Profession Tax for Cost Accountants:

As per the Provisions of this Act every practicing Cost Accountant is liable to register and enroll and shall obtain a certificate of registration and enrolment. He is liable to pay a Profession Tax of Rs. 2500 p.a.

 

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.