Rent -a -Cab is Input Service

Whether Rent-a-cab service used for bringing employees to work in the factory for manufacture goods is eligible Input Service for the purpose of Cenvat Credit.


The answer is yes.
While referring the meaning of Input Service assigned to rule 2(l) of the Cenvat Credit Rules, 2004, honorable tribunal has held that:
"From the above definition, it is very clear that the input services besides being used in or in relation to the manufacture of final products and clearances of final products from the place of removal includes a plethora of other services such as service used in relation to setting up, modernization, renovation or repairs of factory, premises of provider of input service or an office relating to such factory or premises, advertisement or sales, activities of business, accounting, auditing, financing, recruitment, quality control, training and coaching etc. and therefore its scope is much larger than being used directly or indirectly in relation to manufacture. The decision cited by Revenue are therefore not relevant as those decisions have not considered the inclusive part of input service as defined under rule 2(l) of Cenvat Credit Rules and these decisions have only considered the term in or in relation to the manufacture. Since Rent-a-Cab service is used for bringing employees to work in the factory for manufacture of goods it has to be considered as being used indirectly in relation to the manufacture or as part of business activity for promoting the business as any facility given to the employees will result in greater efficiency and promotion of business."

Refund of Service Tax paid in excess wrongly

Service Tax paid in excess wrongly - Can department refuse to refund the same?
Where it is found that that service tax has been paid in excess wrongly - department should refund the same on making an application for refund the same.
In the instant case, CESTAT has refused to allow the claim of refund on the ground that
"…..that since the assessee had not challenged the assessment order, the claim of refund cannot be entertained, so as to indirectly challenge the assessment order, without filing statutory appeal, against the assessment order. It was also found, that in the case in hand, the order is appelable and no appeal having been filed, the claim of refund has no merit, and the appeal was dismissed."
In this matter, Honorable High Court of Rajasthan held that:"At the outset, it may be observed, that under the scheme of things, starting from Section 73 onwards it is clear, that the assessee himself is to deposit service tax in form ST-3, there is no provision for assessment. Passing of assessment order is contemplated only in cases where the notice is issued under Section 73, and it is found, that service tax is not levied or paid, or has been short levied or short paid etc. In that view of the matter, the very basis/reasonings given by the learned Tribunal, simply have no legs to stand. Admittedly, the appeal under Section 85 lies against a specific order of the concerned authority in Form ST-4, which requires to disclose, designation and address of the officer passing the decision or order appealed against, and the date of decision or order, so also the date of communication of the decision or order appealed against to the appellant. Admittedly, when no order capable of being appealed against, had ever been passed, it cannot be said that the assessee could file appeal against the assessment order, and not having so filed appeal he cannot lay the claim of refund. Thus, the order of the Tribunal cannot sustain."

Solve issues on taxability of AEs

Solve issues on taxability of AEs
Vivek Mishra UNDERthe service tax law, the liability to pay service tax arises on collection of service charges. Therefore, accrual of income or recording of book entries were not relevant for service tax purposes. However, through the amendments introduced by the Finance Act, 2008, it has been provided that for transactions between associated enterprises (AEs), the liability to pay service tax will arise on accrual or collection basis, whichever is earlier. This amendment is apparently an anti-avoidance measure. It seeks to cover transactions between AEs wherein service tax has not been paid on the ground of non-receipt of payment even though the transaction has been recognised as revenue/expenditure in the statement of profit and loss account. The concept of AE has been borrowed from the transfer pricing provisions under the Income Tax Act. These provisions broadly provide that two entities would qualify as AEs if one entity is managed or controlled by the other or if the two entities are under common control or management. Further, the amendments to the service tax rules provide that in case of transactions between AEs, payment received for the taxable service would include any amount debited or credited to any account in the books of account of a person liable to pay service tax. This would have a significant impact on the cash flow of the AE providing the taxable services. Take this example. Company X and company Y are AEs. X provides taxable services to Y in June 2008 worth Rs 1 million and passes an entry debiting Y for this amount on July 1 2008. The amount is received by X on November 1 2008. Prior to this amendment, X would have been liable to pay tax on this amount by 5 December 2008. However, as a result of the amendment, X is liable to pay service tax on Rs 1 million by 5 August 2008, the due date for payment of service tax for July 2008. Further, this would set back the cash flow of X as it would need to deposit service tax on Rs 1 million without having collected such amount from Y. The amendment has ostensibly been introduced as an anti-avoidance measure. However, the amendment has created certain ambiguities in the operation of service tax provisions which should be clarified at the earliest to avoid unnecessary litigation. Some of these ambiguities are discussed below. 1. One of the conditions to qualify as export of services under the Export of Service Rules, 2005 is that payment for the service should have been received in convertible foreign currency. Now, in case of export of services between AE, the liability to pay service tax has been shifted from collections to accrual basis. At the time of such accrual, the service may not qualify as export as the payment for the service has not been received. Thus, the issue that arises is whether on such accrual the Indian entity would be required to pay service tax and subsequently on receipt of payment initiate refund proceeding to recover output service tax paid or whether such accrual would be treated as a receipt of convertible foreign currency for the purpose of export rules. 2. With regard to accrual entries made in relation to AE, would the Indian entity be required to pay service tax on the opening balance in the account of the AE as on 10 May 2008 or does this amendment apply only to accrual entries made post 10 May 2008. As per the Cenvat Credit Rules, 2004 credit of service tax paid on input services is available only if the value of input service and service tax has been paid. Given that in case of import of taxable service from an AE, service tax is payable on an accrual basis, an issue that arises is whether the Indian enterprise would be permitted to avail credit of service tax paid on such input service imported though the payment for the value of input service has not been made. Provisions permitting a service provider to adjust excess service tax deposited, where the service charges and service tax thereon is refunded to the service recipient, will not be applicable since there will be no refund of these amounts in case the tax is paid on accrual basis. So, the introduction of the deeming fiction in relation to AE has resulted in various anomalies which should be clarified at the earliest to avoid unnecessary litigation.

Job Working Activity

Service Tax on Job Working Activity
November 27, 2008

For the purpose of "Business Auxiliary Service" the definition of section 65(19)(v) of Finance Act, 1994 (Service Tax) provides that an activity of "production or processing of goods for, or on behalf of, the client" is a taxable activity. However an activity which is amounting to manufacture within the meaning of section 2(f) of Central Excise Act, 1944 is excluded from the scope of service tax under "Business Auxiliary Service"
There is a wide confusion over applicability and taxability of job working activity because, there is wide gap in different interpretation of provisions of the provisions of service tax relating to Job working activity under Business Auxiliary Service.
It happens in generally that a principle who buys excise duty paid material (goods) and send the same to job worker for further processing. Many times the activity undertaken by the job worker is not amounting to manufacture.
In the present case the job worker was engaged in the following FBE Coating activities:
The process of FBE coating undertaken by the appellant is as under:
(a) Duty paid bars received from the customers, are cleaned in Short Blasting Machine using steel shot of abrasives.
(b) Bars are heated to around 220 to 240 C in induction heater.
(c) Epoxy powder is sprayed over the heated bars by Electrostatic Spray guns housed inside the Coating Booth.
(d) Epoxy powder on contact with hot bars melts and fuses with the shot blasted heated bar surface making a strong corrosion protection bond with bars.
(e) Bars are then cooled in a free flowing water quench tunnel.
(f) Thereafter Coated Bars are inspected to check quality of Coating and then dispatched back to the respective customers.
The FBE coated bars are returned to their customers and used in civil construction job like construction of dams, bridges, canals, channels, pipelines etc. The said coating is essentially carried out on the bars for the purpose of protecting them from corrosion.
After hearing the arguments and analyzing the provisions in details with reference to amendments made in the provisions with effect from June 2005, honorable CESTAT held that:
"…..In the present case, the appellant is a company having expertise in the FBE coating and are professional in the fields. Their services are being used by the main contractors in furtherance of providing their service to the State Road Development Corporation Ltd. As such, the said main contractors instead of themselves doing the job of epoxy coating are getting the same done from the appellants by utilizing their services.
….Having discussed the various issues in the preceding paragraphs, we hold that the appellants are liable to pay service tax in respect of the activity undertaken by them during the relevant period."
However, having the facts of the case, CESTAT gave the following reliefs to the appellant:
1 Benefit of Cenvat credit as per Cenvat Credit Rules, 2004 allowed on inputs and input services.
2 Penalty is waived by invoking the provisions of section 80

exports and imports of services

Similarity of treatment in exports and imports of services

key issue in regard to taxation of cross border transactions of services is to ensure that the provisions of indirect tax law across countries are aligned so that there is just the one tax on a particular cross border transaction and, therefore, there is no possibility of either double taxation or double non-taxation.
There are two ways to analyse the situation. The first is to compare whether the provisions of specific countries relating to exportation of services therefrom and their consequent zero rating are matched by corresponding provisions on importation of services and their taxability in the importing countries. The other way to do this is to see whether within one country, the provisions relating to exports and imports of services are broadly similar in nature, in order to conclude that the two are in tandem and hence mutually compatible. It will be interesting to see whether this is indeed the case in India.
The service tax provisions were amended for the first time in 2005 in order to incorporate a taxation code in relation to exports of services, vide the Exports of Services Rules 2005 (Export Rules). While there were erstwhile provisions that did address the issue of zero rating of services prior to these rules, it was only with the introduction of these rules that comprehensive provisions were introduced to precisely determine the exportation of services.
A similar situation has obtained regarding importation of services as well. There has been a great deal of controversy as to the effective date from which importation of services were sought to be taxed. However, here again, it was only with the introduction of the Taxation of Services (Provided from outside India and Received in India) Rules 2006 (Import Rules) that the provisions were codified and formalized. The question that is addressed in this article is whether the Export and Import Rules are mirror images of each other, as they ideally should be.
The Export rules categorise the several taxable services into three different categories. The first category covers 13 services, all of which are related to immovable property. The Export Rules hold that if the immovable property in relation to which such services are provided is situated outside India, such services would be treated as exports simply on that ground.
The second category covers a set of 53 services which are performance based and the Export Rules hold that these services will be treated as exports if they are performed outside India. They also hold that such services will be treated as exports even if partly performed outside India.
The third category is the most important one and extends to all taxable services other than those referred to above. The Export Rules state that such services will be treated as exports if they relate to business or commerce and are provided to a recipient located outside India. The Rules also provide that if the recipient has a commercial establishment or an office in India, the services will be treated as exports only if the order for provision of services is issued by an establishment or office located outside India. Thus, the third category extends the benefit of zero rating to services, based on the condition that the recipient of the services should be located outside the country.
Apart from the above categorisation of services, the Export Rules also incorporate two important additional requirements as well. These are that the services should be provided from India and should be used outside India and that the payment for such services should be received by the service provider in convertible foreign exchange. These two conditions are applicable to all three categories of services. As is well known by now, the particular condition of provision of services from India and its use outside India, even though more liberally worded than was the case earlier, continues to bedevil the service exporters and the taxing authorities alike.
If one were to analyse the Import Rules in alike fashion, it can be seen that a similar set of three categories of services has been incorporated thereunder, with similar underlying conditions. Thus, the set of 13 services in relation to immovable property for the first category and the Import Rules provide that if the immovable property were to be situated in India, the reverse charge mechanism of payment of tax by the importer on such services would apply. Similarly, the second category covers the set of 53 services and the Import Rules hold that if these are performed either wholly or partly in India, the tax consequences would apply.
Finally, the third category of services in the Import Rules is also a mirror image of the third category of services as contained in the Export Rules and the Import Rules similarly hold that if the recipient of such services was located in India and the services were in relation to business or commerce, the service tax on imports would accordingly apply.
As can thus be seen, the aforesaid categorisation of services is identically done in both the Export and Import Rules. To that extent, the two Rules are indeed mirror images. However, if one were to analyse the key common condition in the Export Rules i.e. the provision of services from India and their use outside India, it can be seen that no corresponding provision exists in the Import Rules. Indeed, the significant divergence between the two Rules is the absence of the common condition, referred to above, in the Import Rules.
However, even if one were to analyse the third category of services under the Import Rules, they provide that such services will be treated as imports into India if they are received by a recipient located in India.
Thus, apart from the fact that there is no equivalence of the expression ‘provided from India and used outside India’, as occurring in Export Rules, in the Import Rules, in that there is no expression such as ‘provided from outside India and used in India’, the particular expression incorporated in the third category thereof i.e. services should be received by a recipient located in India, is itself the subject of differing judicial interpretation.
As a result of these materially differently worded provisions, as contained in the Export and Import Rules, it is the position today that notwithstanding that the categorisation of services as contained in these two Rules are identical, the two Rules are not mirror images in terms of their real effect and it is therefore a reality today that the tax consequences in terms of zero rating of exports and a reverse charge payment of tax on imports do not correspond with each other. This situation needs to be addressed through legislative changes in order to avoid unintended tax consequences.

service tax cases

Service Tax - COMMISSIONER OF CENTRAL EXCISE, MUMBAI-V Versus GTC INDUSTRIES LTD. = 2008

Date of Decision: September 25, 2008 - CESTAT MUMBAIWhether the services provided by the outdoor caterers in the canteen of the manufacturer is input service, in respect of which credit can be taken by the manufacturer – Whether the cost of food is borne by the worker or by the factory, the same will form part of expenditure incurred by the manufacturer and will have a bearing on the cost of production - hence, employment of outdoor caterer has to be considered as an input service relating to the business and Cenvat credit is admissible
Service Tax - TOYOTA KIRLOSKAR MOTOR P. LTD. Versus C.C.E. (L.T.U.), BANGALORE = 2008

Date of Decision: August 5, 2008 - CESTAT BANGLORESocial functions to entertain the employees for Rajyostava Function and inauguration of police station cannot be brought within the ambit of activities relating to business – hence expenses for holding Kannada Rajyostava function and for inaugural function of Kengeri Police Station cannot be considered as input service – credit not admissible – bona fide belief of appellant of admissibility of credit on input services – no allegation of willful suppression in SCN – demand is time barred
Service Tax - MORINDA CO-OPERATIVE SUGAR MILLS LTD. Versus COMMR. OF C. EX., LUDHIANA = 2008

Date of Decision: September 5, 2008 - CESTAT NEW DELHIAppellants are manufacturers of sugar; as required by the Government, during the relevant period, they maintained a specified buffer stock out of free sale sugar to be disposed of subsequently based on specific instructions - prima-facie view is that in the given facts and circumstances of the case the appellants are not rendering the service of storage and warehouse – demand under the category of storage and warehouse service is not justified – stay granted
Service Tax - COMMISSIONER OF CENTRAL EXCISE Versus EXCEL CROP CARE LTD. = 2008

Date of Decision: July 29, 2008 - HIGH COURT GUJARAT Input credit on mobile services - On a plain reading of Rule 2(l)(i), it is apparent that the mobile service provider, who is liable to pay service tax, and recovers the same by adding such service tax in his bill, is the person providing taxable service and is rendering ‘output service’ so as to constitute ‘input service’ in hands of respondent assessee – credit not deniable on ground that phones were not installed in the factory premises – no question of law arise – revenue’s appeal dismissed
Service Tax - ANAND ASSOCIATES Versus CST, AHMEDABAD = 2008

Date of Decision: August 26, 2008 - CESTAT AHMEDABADServices of Mandap Keeper - that the definition of “Mandap Keeper” includes providing of services to client in respect of open plot allowed to be used for social function and the same does not include commission received from decorators by providing them the client for the purpose of decoration. Such commission has to be excluded while calculating the service tax – matter is remanded to original adjudicating authority for re-quantification of the duty & penalty
Service Tax - CCE. RAJKOT Versus RAJHANS METALS P. LTD. = 2008

Date of Decision: August 13, 2008 - CESTAT AHMEDABADWhether the respondents are eligible for cenvat credit of service tax paid on GTA services availed for the purpose of transportation of the finished goods from the factory to the consignment agent’s premises - Circular No.137/3/2006-CX.4 dt. 2/2/2006 - In view of the fact that consignment agent premises is also defined as a place of removal and the property in the goods never passes to a consignment agent, respondents are eligible for the cenvat credit.

BENEFIT OF COMPOSITION SCHEME

WHETHER THE BENEFIT OF COMPOSITION SCHEME UNDER WORKS CONTRACT SERVICE IS AVAILABLE FOR ONGOING WORKS CONTRACT?

Works Contract (Composition Scheme for Payment of Service Tax) Rules was made by the Government made effect from 01.06.2007. The term 'Works Contract Service' has the meaning as defined under Sec. 65(105)(zzzza) of Finance Act, 1994. According to Sec.65(105)(zzzza) the taxable service means any services provided to be provided to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams. The explanation to above section defines 'works contract' as a contract wherein-
Transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods; and
· Such contract is for the purposes of carrying out-
· Erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluids, heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators; or
· Construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or
· Construction of a new residential complex or part thereof; or
· Completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to the previous two points; or
· Turnkey projects including engineering, procurement and construction or commissioning (EPC) projects.
The person liable to pay service tax in relation to works contract service shall have the option to discharge his service tax liability on the works contract service provided or to be provided, instead of paying an amount equivalent to four per cent of the gross amount charged on the works contract.
The gross amount charged for the works contract shall not include value added tax or sales tax as the case may be, paid on transfer of property in goods involved in the execution of the said works contract.
The provider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004.
The provider of taxable service who opts to pay service tax under these rules shall exercise such option in respect of a works contract prior to payment of service tax in respect of the said works contract and the option so exercised shall be applicable for the entire works contract and shall not be withdrawn until the completion of the said works contract.
The case law 'In Re. M.B. Chitale Constructions' 2008 (11) STR 583 (Commr. Appeals) gives the answer for the question arised in the topic. The appellant with the intention to avail the benefit under Composition Scheme for payment of service tax approached the Central Excise Authorities and gave option of composition scheme under the new head of taxable service i.e., works contract service and accordingly requested for issuing fresh/amended registration certificate. They further informed that they were issuing running bills and service tax was charged accordingly but they will take the benefit of composition scheme for the remaining part of the works contract. The Deputy Commissioner in response to the letter of the appellant informed that they could not to pay service tax at 2% in respect of ongoing contracts due to the reasons spelt out in Rule 3 of the Rules as under:
Option should be given in respect of works contract prior to payment of service tax;
· The option exercised shall be applicable for the entire work contract.
The appellants against the order of Deputy Commissioner, in this appeal made the following contentions:
That in the absence of any expression 'ongoing works contract' in the statutory provisions, notification or clarificatory circular of the Board, the Deputy Commissioner has no authority to give such a decision;
· That the option under Rule 3(3) of Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007, is open and hence available to any service provider including the appellant on the part of works contract which is yet to be provided or completed and he can pay service tax @ 2% in respect of the part of the works contract to be executed after 1.6.2007.
· That running bills are obviously made only part of the contract is completed in a progressive manner and when such running bills is made and when service tax is paid on such portion, then the next portion is totally a new job for further progress of the entire works contract;
· That portion of the contract already executed before 01.06.2007 rightly attracted service tax under the then appropriate category.
The Commissioner (Appeals) held that in the instant case the appellant who is holder of service tax registration under 'commercial and industrial construction services', had already started paying service tax under the provisions of Notification No.1/2006 read with Section 66. Besides the same Rules speaks that the option has to be exercised for the entire works contract. In the instant case the appellant himself has accepted that they have provided some services and paying service tax on the running bills. Therefore, a part of service has already been completed and service tax has been paid under Sec. 66. Therefore, the appellant cannot exercise option under Rule 3(1) of the Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007.
The Commissioner further held that composite scheme itself means that various elements which are taken together will complete a works contract. In other words, the works contract is a contract for the sale of goods as well as the provision of work or services, but is indivisible in nature, meaning that the value cannot be easily broken into these constituent elements. In the instant case the appellant has already provided some services and paid service tax. As such the services for which the appellant wants to exercise option under works contract may not constitute a composite contract. Besides in the composite contract the works contractor is required to pay service tax on the entire value of the contract without making a split of the value of the goods and material supplied and the value of the services provided. But in the present case a part of the services have already been completed and therefore the remaining part of the service for which the appellant wants to exercise option under works contract services may not be considered as a composite works contact.
In view of the above, the Commissioner held that the appellant is not eligible to exercise option under Rule 3(1).

DOCUMENTS IN SERVICE TAX

IMPORTANT DOCUMENTS IN SERVICE TAX

Let us discus few important documents which assessees are expected to maintain under service tax provisions.
Following are the important documents required to be maintained by service tax assessees —
Invoice
Time period for raising an Invoice
Rule 4A of Service Tax Rules states that every person providing taxable service, not later than fourteen days from the date of completion of such taxable service, or receipt of any payment towards the value of such taxable service whichever is earlier, shall issue an invoice, a bill or as the case may be, a challan signed by such person or a person authorised by him in respect of such taxable service provided or to be provided and such invoice, bill or as the case may be, challan shall be serially numbered.
Contents of an Invoice
Rule 4A states that the invoice shall contain the following particulars —
(i) the name, address and the registration number of such person;
(ii) the name and address of the person receiving taxable service;
(iii) description, classification and value of taxable service provided or to be provided; and
(iv) the service tax payable thereon.
For Banking Companies
In the case of a banking company or a financial institution including a NBFC or any other body corporate, or commercial concern, providing service to a customer, in relation to banking and other financial services, an invoice, a bill or as the case may be, challan shall include any document by whatever name called, whether or not serially numbered and whether or not containing address of the person receiving taxable service but containing other information in such documents as required under this law.
Goods Transport Agency
In the case of provider of taxable service is a Goods Transport Agency, providing service to a customer, in relation to transport of goods by road in a goods carriage, an invoice, a bill or as the case may be, a challan shall include any document by whatever name called, which shall contain the details of the consignment note, number and date, gross weight of the consignment and also contain other information as required under this law.
Continuous Services
Where any payment towards the value of taxable service is not received, and such taxable service is provided continuously, for successive periods of time and the value of such taxable service is determined or payable periodically, an invoice, a bill or as the case may be, a challan shall be issued by a person providing such taxable service, not later than fourteen days, from the last day of the said period.
Input Service Distributor
Every input service distributor distributing credit of taxable services, shall in respect of credit distributed, issue an invoice, a bill, as the case may be, a challan signed by such person or a person authorised by him, for each of the recipient of the credit distributed, and such invoice, bill or as the case may be, challan shall be serially numbered and shall contain the following namely —
(i) the name, address and registration number of the person providing input services, and the serial number and date of invoice, bill or as the case may be
(ii) the name and address of the said input service distributor
(iii) the name and address of the recipient of the credit distributed
(iv) the amount of the credit distributed
In case the input service distributor is an office of a banking company, or a financial institution including a NBFC or any other body corporate or commercial concern, providing service to a customer, in relation to banking and other financial services an invoice, a bill or as the case may be, challan shall include any document whatever name called whether or not serially numbered, but containing other information in such document as required under this law.
Consignment Note
Rule 4B of Service Tax Rules state that any Goods Transport Agency which provides service in relation to transport of goods by road in a goods carriage shall issue a consignment note to the customer. Where any taxable service in relation to transport of goods by road in a goods carriage is wholly exempted, the Goods Transport Agency shall not be required to issue the consignment note.
Consignment note means a document issued by Goods Transport Agency, against the receipt of goods for the purpose of transport of goods by road in a goods carriage which is serially numbered and contains the name of the consignor and consignee, registration number of the goods carriage in which the goods are transported, details of the goods transported, details of the place of origin and destination, person liable for paying service tax, whether consignor, consignee or the Goods Transport Agency.
TR-6 Challan
Rule 6(2) of Service Tax Rules states that the assessee shall deposit service tax in Form TR-6 or in any other manner prescribed by CBEC. TR-6 Challan has since been replaced by GAR 7 challan which is now mandatory for use for electronic payments.
Returns
Rule 7 of Service Tax Rules states that every assessee shall submit a half yearly return in Form ST-3 or ST-3A, as the case may be, in triplicate along with a copy of the Form TR-6 for the months covered in the half yearly return.
Registration
Rule 4 of Service Tax Rules states that every person liable for paying the service tax shall make an application in Form ST-1 for registration within a period of 30 days and the Registration certificate will be in Form ST-2.
Form of Appeal
An appeal to Commissioner of Appeals shall be in Form ST-4 and to the Appellate Tribunal in Form ST-5 in quadruplicate, and shall be accompanied by a copy of the order appealed against.
Cenvat Documents
An assessee desirous of taking Cenvat credit, is permitted to use the following documents —
(a) Invoice of input service provider issued on or after 10.9.2004;
(b) Invoice of input service distributor;
(c) Invoice of Manufacturer/Importer or his agent;
(d) A challan evidencing payment of service tax by the person liable to pay service tax.
Records
Freedom has been given to the assessees to maintain their own set of records but such record should, however show the required particulars for taxation purposes.

Club liable to pay service tax ?

WHETHER MEMBERS CLUB PROVIDING FACILITES TO ITS MEMBERS IS LIABLE TO PAY SERVICE TAX?

The Commissioner of Service Tax, New Delhi filed an appeal against the order of Commissioner (Appeals) setting aside the demand of service tax from Delhi Gymkhana Club Limited for the use of the club by its members as Mandap Keeper, after following the decisions of Hon'ble High Court, Kolkatta: (2008) 40 TAXCOM (Del) 636)

Saturday Club Ltd., V. Asst. Commissioner, Service Tax Cell, Calcutta 2005 -TMI - 206 - HIGH COURT CALCUTTA;
Dalhousie Institute V. Asst. Commissioner, Service Tax Cell, Calcutta 2005 -TMI - 204 - HIGH COURT CALCUTTA
The contention of the Revenue is that the respondent is a company limited by guarantee and registered under the Companies Act, 1956 and accordingly is a separate person altogether in the eye of the law. The members of the club when using the facility of the club are acting as clients of the club.

The tribunal considered the arguments and analyzed the case laws which were relied by the respondents.

In 'Saturday Club Ltd., V. Asst. Commissioner of Service Tax Cell, Calcutta (Supra) the applicant filed a writ petition before Calcutta High Court praying inter alia declaration that the petitioner club is not a mandap keeper with in the meaning of Chapter V of the Finance Act, 1994 and is not liable to pay service tax. It was contended by the applicant that:

The petitioner club is members' club but not a proprietary club;

· It is not supposed to pay service tax for using the space as mandap keeper as per requirement of the members;

· The question of giving service tax for using the club premises as mandap cannot be held to be a service or different from its usual services to the members so that service tax can be imposed.

The Calcutta High Court analyzed various judgments relied on by the applicant. In 'Harbour Division - II, Madras V. Young Men's Indian Association, Madras and others' the Supreme Court held that if a members' club even though a distinct legal entity acts as only agent for its members in the matter of supply of various preparations and articles to them no sale would be involved as the element of transfer would be completely absent. Members are joint owners of the properties. Proprietary clubs stand on a different footing. The members are not owners of or interested in the property of the club. To show the difference of characteristics between the 'members' club' and 'proprietary club' the court held that where every member is a shareholder and every shareholder is a member, then the same would be called as 'members' club'. In the members' club what is essential that the holding of the property by the agent or trustee must be holding for and on behalf of and not a holding antagonistic to the members of the club. If a club even though a distinct legal entity, is only acting as an agent for its members in the matter of supply of various preparations to them no sale would be involved as the element of transfer would be completely absent.

In 'Commissioner of Income Tax V. Darjeeling Club Ltd., 1985 (153) ITR 676 a Division Bench of Calcutta High Court held that there is a long line of decisions in which it has been held that supplies made by a club to its members or the facilities afforded by a club to its members for a price will not amount business activity of the club, even though there may be surplus of revenue over expenditure and the surplus could not be taxed as a business profit of the sales were confined to the members of the club only.

In this case the revenue contended that providing 'mandap' by a 'club' as a mandap keeper cannot be the usual course of business activities under the objects of the Memorandum of Association of the club. The club authorities are using the space as against the consideration and thereby making profit out of it which cannot be called as usual privilege to the members.

The Court held that it is true to say that there is a clear distinction between the 'member's club' and 'proprietary club'. No argument has put forward by the Department to indicate that the club is a proprietary club. Therefore if the club space is allowed to be occupied by any member or his family members or by his guest for a function by constructing a 'mandap' the club cannot be called as 'mandap keeper' because the club is allowing his own member to do so who is, by virtue of his position, principal of the club. If any outside agency is called upon to do the needful it may raise a bill along with the service tax upon the club and the club as an agent of its members, is supposed to pay the same. There should be principally existence of two sides/entities for having transaction as against consideration. In a members' club there is no question of two sides. 'Members' and 'club' both are same entity. One may be called as principal when the other may be called as agent, therefore, such transactions in between themselves cannot be recorded as service. The Court, therefore, did not find it precedent to say that members' club is liable to pay service tax in allowing its members to use its space as 'mandap'.

In 'Dalhousie Institute V. Asst. Commissioner, Service Tax cell, Calcutta (Supra) the Court observed that all the members of the club jointly own all the immoveable properties as per the definition of the term 'mandap'. The members of the club are allowed exclusively to participate in the services rendered by the club and the club fund, no third party is allowed to participate in the same. Service tax is recoverable from such 'mandap keeper' who is having different and separate legal and physical entity and, let out mandap with commercial and trading object. Hence the members have formed the club to serve themselves mutually and for this purpose the members are paying for such uses and any amount of receipt and expenditure of the club is enjoyed and/or participated and/or incurred by the members alone, not by third party. In this case the facility of the use of the premises to the members by its club cannot be termed to be letting out nor can the members of the club using the facility of any portion of the premises for any functions be termed to be a client.

The Delhi tribunal in the case after considering the findings of the Calcutta High Court, upheld the order of Commissioner (Appeals).

Recent Service Tax Cases

Service Tax - Nithyananda Electronics Versus Commissioner Of Central Excise Mangalore = 2008

Date of Decision: February 4, 2008 - CESTAT, BANGALORECommissioner (Appeals) rejected the refund claim & confirmed Order-in-Original on ground that the assessee is carrying on the business of marketing & distribution on behalf of M/s. Zee Turner in terms of their Distribution Agreement - appellants not produced OIO as well as the Agreement with M/s. Zee Turner even after giving sufficient opportunities – hence appeal cannot be heard - appeal is rejected granting liberty to the appellants to seek restoration after producing the same
Service Tax - TNS INDIA PVT. LTD. Versus COMMISSIONER OF CENTRAL EXCISE BANGALORE = 2008

Date of Decision: February 4, 2008 - CESTAT, BANGALOREViolation of Principles of Natural Justice – remand order of commissioner is under challenge - terms of reference for remand is beyond the terms of the Show Cause Notice - aspect pertaining to limitation is also not considered - citations relied upon by appelalnts have not been examined – Commissioner (Appeals) shall deal with all the grounds raised by the appellants - appeal is allowed by way of remand to the Commissioner (Appeals) for fresh hearing
Service Tax - Wiptech Peripherals Pvt. Ltd. Versus CCE Rajkot = 2008

Date of Decision: June 27, 2008 - CESTAT AHMEDABADInput credit of service tax denied on the ground that the service tax paid on cell-phone, land-line, courier service cannot be held to be input service for the output service “maintenance & repairs” – held that service tax paid on cell phones or land-lines used in connection with output services is available as credit - some of the cell phones in the name of individuals were not established that they were used in relation to the output services – matter remanded to verify above aspect
Service Tax - Sundaram Brake Linings Ltd. Versus CCE Chennai = 2008

Date of Decision: February 6, 2008 - CESTAT CHENNAIWhether service tax is leviable in the category of “Consulting Engineer’s Service” on the technical know-how fee paid by the appellants to their foreign collaborators for the period 28.2.99 to 31.3.03 - issue is no longer res integra as it stands settled in favour of the assessee by a line of decisions of this Tribunal - Following the consistent view taken by this Tribunal, I set aside the impugned order, wherein tax was demanded in respect of transfer of technical know-how for above period
Service Tax - M/s Industrial Security Agency Versus CCE, Allahabad = 2008

Date of Decision: May 12, 2008 - CESTAT NEW DELHI“Security Agency” service - failure to pay the tax - Commissioner (Appeals) upheld penalty u/s 77 but imposed penalty u/s 76 & 78 by modifying the OIO - appellant was under bonafide belief that it was liable to pay Service Tax only on receipt of the amount from the recipient – impugned order of commissioner (A) is modified further – held that penalty of Rs.1 lac u/s 76 and Rs.1,000 u/s 77 are justified – but penalty u/s 78 is not justified - appeal stands allowed partly
Service Tax - M/s Kurele Industries Versus CCE, Kanpur = 2008

Date of Decision: May 27, 2008 - CESTAT, NEW DELHIDemand - Clearing and Forwarding Agent - During the pendency of the matter before the Commissioner (Appeals), CCE revised Adjudication order & enhanced penalty - Commissioner (Appeals) held that the Appellants are “Commission Agent” not “C/F Agent”, so demand is not sustainable - order of the Commissioner (Appeals) was not challenged by the Revenue before the Appellate Authority - As the demand is not sustainable, enhancement of penalty by the Revision order is also not maintainable
Service Tax - CCE, Allahabad Versus M/s New Govindgarh Steel = 2008

Date of Decision: May 27, 2008 - CESTAT NEW DELHITransportation of goods by road - delay in payment of tax – non-submission of return within the stipulated period - out of penalty imposed u/s 76 & 77, commissioner set aside penalty u/s 77 - Revenue submits that waiver of penalty under Section 77 of the Act is ultra wires – commissioner has dropped penalty u/s 77 only after considering the facts and circumstances of the case, so contention of revenue is not correct - appeal filed by the Revenue is rejected
Central Excise - STRIDES RESEARCH & SPECIALITY CHEM. LTD. Versus C.C.E., MANGALORE = 2008

Date of Decision: June 14, 2007 - CESTAT, BANGALORECenvat credit - Mere for the reason that dealer mentioned incorrect address of appellant factory in invoice, it can’t be said that appellant availed credit irregularly – moreover, dealer has addressed a letter to appellant-assessee that by mistake he put incorrect address in invoice - there is sufficient record to establish that credit had not been availed irregularly – credit not deniable
====================

RECENT CASES

RECENT SERVICE TAX CASES

Service Tax - S. B. ENTERPRISES Versus COMMR. OF C. EX., COCHIN = 2008 Date of Decision: February 18, 2008 - CESTAT BANGALORE

No evidence to say that the appellant carried out clearing and forwarding activities on behalf of the Principal - held that mere procuring or booking orders for the Principal by an agent on a payment of commission basis would not amount to providing services as clearing and forwarding agent within the meaning of definition of that expression under Section 65(25)
Service Tax - NATIONAL ENGG. INDUSTRIES LTD. Versus COMMR. OF C. EX., JAIPUR = 2008 Date of Decision: December 13, 2007 - CESTAT, NEW DELHI

Tax wrongly paid on the commission got from foreign Co. through Indian railways under Business Auxiliary service - Rule 3 of Export of Services Rule, exempts export of service - contract reveals that the appellant would be paid USD equipment to non-convertible Indian Rupee at the Rate of Exchange prevailing on the date of supply order - equivalent amount of foreign exchange payable to the appellant was not released to the Indian Railways, so appellant complied with Rule 3(1)(b) -refund allowed

Service Tax - COMMR. OF C. EX., LUDHIANA Versus CITY CABLE = 2008 Date of Decision: April 7, 2008 - CESTAT, NEW DELHI

Application by revenue seeking grant of stay of order of Commissioner (A) setting aside the penalties - Commissioner observed that entire tax with interest was deposited before SCN so penalty is not justified - stay of the Commissioner order would enable Dept. to realise dues, which would not be proper without adjudication on merit by the Tribunal - At this stage, we are not inclined to go into the question of propriety of the imposition of penalty, so application is rejected
Service Tax - NCR CORPORATION INDIA PVT. LTD. Versus CST, BANGALORE = 2008 Date of Decision: May 16, 2008 - CESTAT BANGALORE

Appellants supplied Automatic Teller Machines (ATMs) for the period from July 2003 to March 2005 – Revenue contended that appellants rendered the cash replenishment services & caretaker services for the above period and these would fall under Business Auxiliary Service - automatic teller machine services came under the Tax net only w.e.f. 1.5.2006 and also the cash replenishment has also been included in the said services - hence tax cannot be levied for the period prior to that date
Service Tax - RAJINDER KUMAR Versus COMMR. OF C. EX., CHANDIGARH = 2008 Date of Decision: April 17, 2008 - CESTAT, NEW DELHI

Demand is confirmed on the ground that the applicants were providing business auxiliary service to the petroleum company - Contention of the applicants is that establishment expenses are being reimbursed to them by the company, and therefore, that portion cannot be added for charging service tax on the business auxiliary service - applicants are directed to deposit Rs. 35,000/-each in addition to the amount already deposited by the applicants – stay partly granted
Service Tax - COMMISSIONER OF C. EX., JAIPUR-I Versus TARGET INSTITUTION OF COMPETITION = 2008 Date of Decision: February 25, 2008 - CESTAT, NEW DELHI

Assessee obtained the registration on 27-7-04 and did not pay the tax but they recorded the fees in their records - no material for suppression of facts with intent to evade payment of tax so penalty u/s 78 is not justified - new levy on coaching centre and there was a dispute regarding availability of the exemption benefit and the respondent paid the tax before issue of SCN so imposition of penalty u/s 76 is excessive, so it is reduced
Service Tax - COMMISSIONER OF C. EX., LUDHIANA Versus BHANDARI HOSIERY EXPORTS LTD. = 2008 Date of Decision: February 19, 2008 - CESTAT, NEW DELHI

Import of services – assessee, service recipient - demand for the period from 9.2.2004 to February, 2006 prior to introduction of Section 66A - provisions of Section 66A of the Finance Act introduced w.e.f. 18.4.06, provides that the recipient of taxable service (provided by a person who is residing outside India) is liable to service tax - In the present case as the period of demand is prior to the introduction of Section 66A, Therefore, demand is not sustainable and, hence, set aside

ST ON CONSTRUCTION

SERVICE TAX ON CONSTRUCTION OF RESIDENTIAL COMPLEX

Gauhati High Court has held in Magus Construction v. Union of India that when a person is engaged in construction of residential complex for sale to various persons, it does not amount to service and the transaction is not taxable under service tax laws. When the construction company doing construction activity on its own self, and selling the complex to various buyers, it does not fall under the ambit of service tax. Until the time sale deed is executed, the construction company remains the owner and it cannot be said that the construction company is doing construction activity on behalf of any person. Mere agreement to sale at some future date does not transfer the ownership.
The court further held that service is an intangible commodity in the form of human effort and to have service there must be service provider rendering services to some other person, who shall be the recipient of service.
The court further held that departmental circulars are not binding on the courts.
The judgment is a landmark judgment and will be applicable in a variety of other situations, where service tax is demanded by the department without establishing as to who is a service provider and who is a service recipient.

IMPORTANT SERVICE TAX CASES

SERVICE TAX CASE LAWS
SOURABH SONI
SECRETARY
JAB WE MET CA

Service Tax - 2008 - - HIGH COURT OF GAUHATI -

Applicability of Service Tax on the business of development and sale of immovable properties, i.e., real estates - whether the appellant has been working, as a "service provider", for those persons with whom the petitioner-company enters into agreements and constructs flats for the purpose of sale to those with whom such agreements are entered into - HC held that department is binding by the circular issued by board. HC further held that, the activity in question is not subject to service tax.
Service Tax - 2008 - - HIGH COURT OF ANDHRA PRADESH

Applicability of Service tax on Works Contract - Appellant sought to declare the circular no. 98/1/2008 St dated 4-1-2008 ultra virus the Finance Act, 1994. In the circular it is said that contracts executed prior to 1.6.2006 shall be taxable under the old respective categories. Appellant wants to pay tax on the works contract under the new provision 65(105)(zzzza) - HC has granted interim relief to the petitioner to pay service tax under new category subject to further orders.
Service Tax - 2008 - CESTAT, Delhi

Applicability of Service Tax on services provided by private companies relating to generation, supply, distribution etc. on behalf of state power board (state governments, i.e. Madhya Pradesh Electricity Board) to the consumers - Demand was raised to the tune of Rs. 67,28,53,038/-. CESTAT has found that prima fascia the service is taxable under the category of "Business Support Service" and ordered to deposit Rs. 5 crore and stay granted for the balance demand from pre-deposit

WHAT IS SERVICE ?

TAX ON SERVICES BUT WHAT IS SERVICE ?

Service tax has been levied on services i.e., taxable services as per section 65(105) of the Finance Act, 1994 but the term 'service' has not been defined in Act/Rules or by way of any explanation. What constitutes taxable service is very often a subject matter of dispute. Its literal meaning is an act of helpful activity, rendering of assistance or help. Service is a transformation of the user or user's goods, as a result of the voluntary intervention by the producer of services. It is generally an intangible commodity in the forms of external efforts and excludes sale of goods or property or commodities. It pre-supposes existence of a service provider. For service tax purposes, if there is no taxable service, there is no tax.
What is Service ?
Service has been defined differently under various laws and dictionaries. Under Income Tax Act, 1961, service means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial nature such as accounting, banking, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging.
Service means service of any description which is made available to potential users and includes the provisions of facilities in connection with banking financing, insurance, chit fund, real estate, transport, processing, supply of electrical or other energy, board or lodging or both, entertainment, amusement or the conveying of news or other information but does not include the rendering of any service free of charge or under a contract of personal service.
Explanation.— For the removal of doubts, it is hereby declared that any dealings in real estate shall be included and shall be deemed always to have been included within the definition of 'service'. [Monopolies and Restrictive Trade Practices Act].
Service means service of any description which is made available to potential users and includes the provisions of facilities in connection with banking, financing, insurance transport processing, supply of electrical or other energy, board or lodging or both, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service. [Consumer Protection Act, 1986].
Service means service of any description which is made available to potential users and includes the provisions of facilities in connection with banking financing, insurance, medical assistance, legal assistance, chit fund, real estate, transport, processing, supply of electrical or other energy, boarding or lodging or both, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service fee of charge or under a contract of personal service. [Foreign Exchange Management Act, 1999].
Service means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial matters such as banking, communication, education, financing, insurance, chit funds, real estate, transport, storage, material treatment, processing, supply of electrical or other energy, boarding, lodging, entertainment, amusement, construction, repair, conveying of news or information and advertising. [Trademarks Act, 1999 and Competition Act, 2002].
Service means something provided, usually for a fee, that may not be classed as manufacturing or production in any form (such as legal advice, brokerage, agency services and financial advice). [International Accounting; Business; Insurance].
Thus, literally, service can be said to have the following salient features—
— Act of helpful activity
— Act of doing something useful
— Rendering of assistance/help
— Anything which does not involve supply or transfer of goods is service
— Transformation of user/user goods as a result of voluntary intervention of service provider
— Intangible commodity in form of human effort
— Excludes sale of goods/commodities/property
— Existence of service provider
However, following judgements may create controversy between sale of goods and services -
• Sale of sim card and activation of mobile service is a taxable service [Escotel Mobile Communications Ltd. v. Union of India 2005 -TMI - 185 - HIGH COURT OF KERALA]
• Sale of sim cards by a company engaged in providing cellular telephone services to its subscribers fall within the taxable services [Aircell Digilink India Ltd. v. CCE Jaipur 2005 -TMI - 161 - CESTAT, NEW DELHI; Bharti Cellular Ltd. v. CCE Delhi 2005 -TMI - 197 - CESTAT (NEW DELHI)]
• Provision of telephone connection constitutes a sale, as it involves the transfer of right to use goods attracting sales tax, notwithstanding the fact that service is subject to service tax. [State of Uttar Pradesh & Others v. Union of India & Others 2005 -TMI - 143 - SUPREME COURT]
• Transfer of intellectual property, say software, though a medium which is bought and sold as goods (like in case of floppies, discs, CD Rom, punch cards, magnetic tape etc.) would constitute sale purchase of goods and not that of IPR. In one of the cases of sales tax in Tata Consultancy Services v. State of Andhra Pradesh (2008 -TMI - 4143 - Supreme Court) , Supreme Court has held that software may be intellectual property but as the property contained in a medium is bought and sold, it is an article of value and as such, software can be described as goods subject to sales tax.
Supreme Court observed in TCS case (supra) to distinguish between goods and services as under—
"The music is produced by the artistry of musicians and in it is not a good, but when transferred to a laser-readable disc, it becomes a readily merchantable commodity. Similarly, when a professor delivers a lecture, it is not a good, but when transcribed as a book, it becomes a good".
What constitute 'goods' and is sold by the service provider can not be subjected to service tax which is also evidenced by Notification No. 12/2003-ST dated 20.6.2003 whereby cost of goods or material sold by the service provider to the receiver of services during the course of provision of taxable services is exempt from levy of service tax. Certain abatements also justify this logic.
Anything which is not a good will be called a service. To be a service, some action or rendition of service on the part of service provider is also necessary.
In Imagic Creative Pvt. Ltd. v. Commissioner of Commercial Taxes (2008 -TMI - 2576 - Supreme Court of India), it has been held that payment of service tax and VAT are mutually exclusive. In a composite contracts, both sales and service component can be present.


About the Author: -
Dr. Sanjiv Agarwal

Article Section

List article


TAX ON SERVICES BUT WHAT IS SERVICE ?

Service tax has been levied on services i.e., taxable services as per section 65(105) of the Finance Act, 1994 but the term 'service' has not been defined in Act/Rules or by way of any explanation. What constitutes taxable service is very often a subject matter of dispute. Its literal meaning is an act of helpful activity, rendering of assistance or help. Service is a transformation of the user or user's goods, as a result of the voluntary intervention by the producer of services. It is generally an intangible commodity in the forms of external efforts and excludes sale of goods or property or commodities. It pre-supposes existence of a service provider. For service tax purposes, if there is no taxable service, there is no tax.
What is Service
Service has been defined differently under various laws and dictionaries. Under Income Tax Act, 1961, service means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial nature such as accounting, banking, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging.
Service means service of any description which is made available to potential users and includes the provisions of facilities in connection with banking financing, insurance, chit fund, real estate, transport, processing, supply of electrical or other energy, board or lodging or both, entertainment, amusement or the conveying of news or other information but does not include the rendering of any service free of charge or under a contract of personal service.
Explanation.— For the removal of doubts, it is hereby declared that any dealings in real estate shall be included and shall be deemed always to have been included within the definition of 'service'. [Monopolies and Restrictive Trade Practices Act].
Service means service of any description which is made available to potential users and includes the provisions of facilities in connection with banking, financing, insurance transport processing, supply of electrical or other energy, board or lodging or both, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service. [Consumer Protection Act, 1986].
Service means service of any description which is made available to potential users and includes the provisions of facilities in connection with banking financing, insurance, medical assistance, legal assistance, chit fund, real estate, transport, processing, supply of electrical or other energy, boarding or lodging or both, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service fee of charge or under a contract of personal service. [Foreign Exchange Management Act, 1999].
Service means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial matters such as banking, communication, education, financing, insurance, chit funds, real estate, transport, storage, material treatment, processing, supply of electrical or other energy, boarding, lodging, entertainment, amusement, construction, repair, conveying of news or information and advertising. [Trademarks Act, 1999 and Competition Act, 2002].
Service means something provided, usually for a fee, that may not be classed as manufacturing or production in any form (such as legal advice, brokerage, agency services and financial advice). [International Accounting; Business; Insurance].
Thus, literally, service can be said to have the following salient features—
— Act of helpful activity
— Act of doing something useful
— Rendering of assistance/help
— Anything which does not involve supply or transfer of goods is service
— Transformation of user/user goods as a result of voluntary intervention of service provider
— Intangible commodity in form of human effort
— Excludes sale of goods/commodities/property
— Existence of service provider
However, following judgements may create controversy between sale of goods and services -
• Sale of sim card and activation of mobile service is a taxable service [Escotel Mobile Communications Ltd. v. Union of India 2005 -TMI - 185 - HIGH COURT OF KERALA]
• Sale of sim cards by a company engaged in providing cellular telephone services to its subscribers fall within the taxable services [Aircell Digilink India Ltd. v. CCE Jaipur 2005 -TMI - 161 - CESTAT, NEW DELHI; Bharti Cellular Ltd. v. CCE Delhi 2005 -TMI - 197 - CESTAT (NEW DELHI)]
• Provision of telephone connection constitutes a sale, as it involves the transfer of right to use goods attracting sales tax, notwithstanding the fact that service is subject to service tax. [State of Uttar Pradesh & Others v. Union of India & Others 2005 -TMI - 143 - SUPREME COURT]
• Transfer of intellectual property, say software, though a medium which is bought and sold as goods (like in case of floppies, discs, CD Rom, punch cards, magnetic tape etc.) would constitute sale purchase of goods and not that of IPR. In one of the cases of sales tax in Tata Consultancy Services v. State of Andhra Pradesh (2008 -TMI - 4143 - Supreme Court) , Supreme Court has held that software may be intellectual property but as the property contained in a medium is bought and sold, it is an article of value and as such, software can be described as goods subject to sales tax.
Supreme Court observed in TCS case (supra) to distinguish between goods and services as under—
"The music is produced by the artistry of musicians and in it is not a good, but when transferred to a laser-readable disc, it becomes a readily merchantable commodity. Similarly, when a professor delivers a lecture, it is not a good, but when transcribed as a book, it becomes a good".
What constitute 'goods' and is sold by the service provider can not be subjected to service tax which is also evidenced by Notification No. 12/2003-ST dated 20.6.2003 whereby cost of goods or material sold by the service provider to the receiver of services during the course of provision of taxable services is exempt from levy of service tax. Certain abatements also justify this logic.
Anything which is not a good will be called a service. To be a service, some action or rendition of service on the part of service provider is also necessary.
In Imagic Creative Pvt. Ltd. v. Commissioner of Commercial Taxes (2008 -TMI - 2576 - Supreme Court of India), it has been held that payment of service tax and VAT are mutually exclusive. In a composite contracts, both sales and service component can be present.


About the Author: -
Dr. Sanjiv Agarwal
asandco@gmail.com
FCA, FCS, ACIS(UK)

No service- no service tax

No service- no service tax is a general rule- it should be applied to prepayment charges and other non service charges levied by banks.
Charges in lieu of interest should also not be taxed.
Banking and financial services:
The bank levy several type of charges to customers when there is in fact any service is not rendered. Such charges are in fact in nature of damages or penalty for customers failure in performing his duties fully or partly. For example charges may be levied for:
Minimum commitment charges for not utilizing borrowing facilities charges.
Cheque returning charges.
Delayed payment-- this is in nature of interest so it will be exempt as per valuation Rules.
Loan prepayment charges- this is not for any service rendered by the money lender, rather it is in nature of damages.
Balance transfer charges:
In relation to credit cards most of card issuers provide facility of balance transfer(BT) and levies some charges (1.5 -2.5%) for 90 days. No interest is charged for this period. The fact is that a money is lent as a loan named BT facility. Instead of charging interest, the bank charges BT processing charges, this is nothing but interest. Therefore, such charges should not be burdened with service tax. This is also clear when we consider other schemes of BT in which card issuer/ bank charge interest fro the period of using of BT, and any processing charges are not charged or nominal charges are levied. Therefore suppose in case of a BT of Rs.50000/- if 2% BT processing fees that is Rs.1000 is charged, it is wrong to say that BT processing charges is not interest. Because under other scheme the card issuer/ bank may not charge BT processing fees but interest for a minimum period or for actual period as per terms and conditions.
Therefore, when a charge is levied, which is in lieu of interest, service tax should not be levied.
Loan processing charges- this is levied as a percentage of loan. Therefore, charges can be considered as service charge to some extent and the rest can be considered as a part of interest on loan. For example suppose a loan of Rs.ten lakh is processed and a processing charges of say minimum or 1% of loan amount that is Rs.Ten thousand are collected. In another loan of Rs. One crore processing charges are levied @ 0.50% amounting to Rs.50,000. In this case it cannot be said that the entire amount is for services in relation to processing of loan document. Charges for such services can be say Rs.10,000/- as minimum and Rs.5000 for extra efforts. Thus charges for service is Rs.15,000 and balance Rs. 35000 is in fact not for any service but it is a collection because the bank is in a position to collect extra sum and it can be considered as a part of miscellaneous charges in nature of interest.
Pre payment charges TRU directs to charge service tax:
There is no service rendered by bank when a borrower prepay loan. Therefore pre-closure charges received by the banks / financial institution on pre-payment/ for closure of loan should not be taxable. Prepayment charges are in fact in nature of damages for the loss of interest suffered by the money lender for the period of early payment. However, as discussed later on, TRU says otherwise in its circular of 11.06.08.
Service tax is a tax on value of service:
It is needless to mention that service tax is leviable only when a person renders a service and other person receive service. Thus rendering and receiving of service for a consideration is a precondition for levy of service tax. Besides this precondition, other conditions relating to nature of service, service receiver and service provider, relationship between two parties and nature of consideration are also important. All conditions laid down in relevant provisions must be satisfied to make a service charge taxable. As per the Finance Act 1994 vide section 65 (105) taxable services are defined as follows;
"taxable service" means any 1[service provided or to be provided], -
Xxxx
Thus, the precondition for levy of service tax is that there must be a service provide or to be provided by one person to another person.
Pre closure charges of loan are not for any service:
While granting a loan the bank lent money and in consideration of use of money charge interest. Thus, the function is of a money lender and reward is in nature of interest. In fact 'interest' cannot be called a consideration for service or service charge or fees. It is not necessary to go into this controversy because as per present Rules interest on loan is excluded from taxable service.
In case of a pre-closure of a loan, the borrower payback loan before its scheduled re-payment dates. To keep a check on pre-closures of loan banks charge certain percentage (present range is 3-6%) of principal amount which is repaid earlier than schedules repayment date, as pre-payment charge. For example, suppose a loan of Rs. ten lakh was granted for a period of five years. The borrowers have repaid EMI's for 30 month and now want to prepay entire amount which would otherwise be repayable in 30 months in 30 EMI. Suppose, the principal portion outstanding after payment of 30 EMI's is Rs.640000/-.
If the borrower prepay this amount, the bank will loose further interest earnings. Again it may take some time to redeploy Rs.6,40,000/- in fresh loan. If rate of interest has fallen, then the bank will be able to redeploy this money at lower rate. Suppose bank can charges prepayment charge @ 3% that is Rs.19200/-. However, the borrower insists to reduce it and bank agrees to Rs.15,000/-. This sum of Rs.15,000/- is nothing but a charge in nature of interest for the non-utilization of credit facility granted by way of loan, it is also in nature of damages for early termination of contract for loan by the borrower. Thus it is clear that the banks do not render any service when a borrower prepay loan.
Reasons for pre-payment:
Generally pre-payments takes place when:
a. market rate of interest falls.
b. The borrower receives extra fund inflow and he is unable to earn interest or other return or reward on surplus money which are better than the interest payable on loan.
Consequences of pre-payment of loan:
The money lender find that a profitable loan deployed has been repaid causing shrinkage in loan portfolio. The money lender may not be able to utilize fund flown by prepayment, immediately, by granting fresh loan and therefore, for some time the funds may remain idle. The new loan to be granted may be at lower rate of interest, if there is fall in interest rates. Funds may remain idle for some time or may earn lower returns by way of temporary investments in commercial paper, inter bank loan or by way of keeping funds with RBI or in government securities etc.
Therefore, on a prepayment the money lender- bank suffers loss due to idleness of funds or lower earnings for some time.
In pre-payment by borrower there is no service by money lender:
When a borrower prepays a loan, the banker or moneylender does not render any service to the borrower. The borrower approaches the banker and offer to prepay the loan, the banker charges prepayment charges as per agreement or as per negotiation, and receives prepayment of loan. Therefore, there is no service rendered by banker/ money lender. When a charge is not for a service, the charge cannot be subject to service tax.
Pre-payment charge is in nature of damages or compensation:
As discussed earlier, prepayment charges is in nature of damages or compensation for loss or likely loss which the bank or money lender may suffer. This is on account of loss of interest which the bank or money lender may suffer during intervening period of repayment and redeployment of funds. Therefore, prepayment charges is in nature of damages and not a charge for service. In any case as prepayment charge is in nature of damages for loss of interest on loan, it will assume character of interest on loan as it is for nonavailment of loan for the full period of loan and is for early termination of contract of loan by the borrower.
View taken in Circular:
Department has issued show cause notices and demanded tax therefore Banks and financial institutions are facing uncertainty on issue about Service Tax on pre-payment charges collected on pre-payment of loans from borrowers. Though matters are pending before adjudicating authorities and appellate authorities. The departmental circular has been issued as clarification holding the view that such charges received by the banks / financial institutions can not be treated as interest on loan and therefore, liable to service tax. The circular dated 11.06.08 vide file no. F No 345/6/2008-TRU issued by Tax Research unit reads as follows ( high lights provided):
Subject: Service Tax on pre-closure under banking and other financial Services - regarding Commissioner (Service Tax), Chennai has brought to the notice of the Board that divergent practices are being followed in respect of levy of service tax on services provided by banks and other financial institutions on the amount collected as pre-closure / fore-closure charges in relation to lending.
2. Services provided by a banking company or a financial institution or any other body corporate or any commercial concern in relation to banking or other financial services is leviable to service tax under Section 65(105)(zm) of Finance Act, 1994. 'Banking and other financial services' defined under Section 65(12) include lending. Any amount collected by the service provider on account of lending is either interest or service charges. Pre-closure / fore-closure charges are not charges collected for delayed payment. These charges not being 'interest' are to be appropriately treated as consideration for the services provided and accordingly leviable to service tax under Section 65(105)(zm).
3. Field formation may be advised to take appropriate action. This is issued with the approval of Member (Budget).
Unmesh Wagh, Under Secretary (TRU)
Analysis:
It appears that the view taken is that if there is any charge levied by bank etc. in respect of loan or credit facility, it is charge for a service which is taxable unless it is interest on loan. This appears from the highlighted sentences in the circular given above.
Whether the charge is for any service or not has not been considered, rather merely because there is a levy of a charge, a service has been presumed in Circular of TRU. Merely because a service provider has levied a charge, it cannot be said that it is for a taxable service rendered.
In case of prepayment of loan, the service provider (money lender) does not render any service.
The view taken by revenue is therefore not at all in accordance with the concept of levy of tax on value of a service rendered as envisaged in the charging and other provisions.
Secondly the purpose of prepayment charge has not been considered. As discussed earlier, prepayment charge is nothing but a damage or compensation for earlier than scheduled repayment time. For the period subsequent to the prepayment date the borrower would have paid interest, if prepayment was not made. Again new borrower, to whom funds may be lent, will start payment of interest after some time, and therefore prepayment charge is nothing but a compensation of loss of interest caused due to early repayment of loan.
As discussed earlier, large scale prepayments take place only when interest rates have fallen. In case of firming up of rate of interest, pre-payment are rare. Therefore, in case of prepayment, there is generally also loss of interest to the money lender due to lower rates of interest at which he can deploy funds.
In view of these commercial aspects and business realities it can be said that clause for prepayment charge is inserted in agreements due to contingencies of borrower returning money before scheduled repayment, fall in rate of interest and period required for redeployment of funds etc. Therefore, pre-payment charges is nothing but in nature of damages for loss of interest, and therefore it is not in nature of charges for any service.
In any case prepayment charges is in nature of charge for underutilization of loan and therefore it will partake character of interest on loan, and therefore it is not to be included in the taxable value of service as per relevant Rule which reads as follows:
Definition of interest: There appears no definition of 'loan' and 'interest' in the law relating to service tax. We find meaning or definition of 'interest' in the income-tax Act, 1961 in section 2 (28A) which reads as follows:
Definitions.
2. In this Act, unless the context otherwise requires,—
[ (28A) "interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised ;]
As per section 2 of the Interest Act the meaning is as follows:
(7) "interest" means interest on loans and advances made in India and includes—
(a) commitment charges on unutilised portion of any credit sanctioned for being availed of in India; and
(b) discount on promissory notes and bills of exchange drawn or made in India, but does not include—
(i) interest referred to in sub-section (1B) of section 42 of the Reserve Bank of India Act, 1934 (2 of 1934);
(ii) discount on treasury bills;]
Some relevant definitions from Britannica ready referencer:
Loan:
1 a : money lent at interest b : something lent usu. for the borrower's temporary use 2 a : the grant of temporary use
hire purchase: purchase on the installment plan.
Interest
a charge for borrowed money generally a percentage of the amount borrowed
b : the profit in goods or money that is made on invested capital
c:an excess above what is due or expected
Analysis:
On perusal of the above definitions we find that 'interest', has been defined in a wider manner and it specifically includes items like any charge for relevant obligation, charge for unutilized facility, commitment charge on unutilized portion of any credit etc. The prepayment charge, as discussed is nothing but a charge for non-utilization of loan facility for entire period or entire amount. Pre-payment charge is also levied as a percentage of principal outstanding, which is prepaid. Therefore, such charges are in nature of 'interest' as defined in the two fiscal enactments, as well as general meaning in dictionaries.
Service Tax (Determination of Value) Rules, 2006
We also find that as per Rule 6 of the above Rules the interest on any loan is to be excluded from the value of taxable service. The relevant portion of the Rule is reproduced below:
6. Cases in which the commission, costs, etc., will be included or excluded.- (1) Subject to the provisions of section 67, the value of the taxable services shall include‚-
XXXXXXX - there is no specific clause to include prepayment charges.
(2) Subject to the provisions contained in sub-rule (1), the value of any taxable service, as the case may be, does not include-
XXXXX
(iv) interest on loans."
*****
In these rules there is no definition of interest, therefore we have to adopt a wider meaning to include any payment in nature of and in lieu of interest also.
Keeping in view the above discussion it appears that the circular issued is not correct for the following reasons:
(a) prepayment charges is not for any service rendered,
(b) prepayment charge is nothing but damages for early termination of contract by the borrower and
(c) in any case the prepayment charges are also 'interest' or in nature of interest and in any case they partake character of interest receivable from borrowers.
Therefore, the circular appears to be incorrect.

About the Author: -
Uma Kothari

Applicability of Service Tax

Applicability of Service Tax on photography Service - Whether cost of goods / material used is deductible from the value.?

There is very long history to determine the real nature of photography service. Photography service is neither sale nor works contract as held by the honorable Supreme Court in its earlier judgments.
Now, the issues are arising in Service Tax and different Courts / Tribunal has taken different stands in different situations.
A brief reference of these cases with departmental clarifications is as follows:

Clarification / Letter No. F.No.B.11/1/2001-TRU, Dated 9th July, 2001
In this letter, department clarified that,
The value of taxable service is the gross amount charged from the customer for the service rendered. However, the cost of unexposed photography films sold to the customer is excluded. The service provider claiming benefit of the cost of film should be advised to show them clearly on the invoices along with description and particulars of the film. Otherwise, the claim will not be considered as admissible. No other cost (such as photographic paper, chemicals, etc.) is excluded from the taxable value.

Decision of Apex Court in the matter of C K Jidhees versus Union of India reported in 2006 Supreme Court
In this case, Apex Court held that cost of material used in providing photograph service is not deductible.

Clarification / Letter M.F. (D.R.) Letter F. No. 233/2/2003-CX. 4, dated 3-3 -2006
On the issue of deduction of cost of goods / material from the value of photography service in view of notification no. 12/2003, board clarified that,
The matter has been examined by the Board. The intention of the Notification No. 12/2003-S.T., dated 20-6-2003 is to provide exemption only to the value of goods and material sold subject to documentary evidence of such sale being available. Therefore, in case, the goods are consumed during the provision of service and are not available for sale, the provision of the said notification would not be applicable. Therefore, in supercession of clarification to contrary, it is clarified that goods consumed during the provision of service, that are not available for sale, by the service provider would not be entitled to benefit under Notification No. 12/2003-S.T., dated 20-6-2003.

Tribunal decision dated 6-6-2006 in the matter of LAXMI COLOR (P) LTD. versus COMMISSIONER OF CENTRAL EXCISE, JAIPUR-II reported in 2006 CESTAT, NEW DELHI
CESTAT held that there is no element of sale of goods in photography service. In this case, CESTAT has following the judgment of Apex Court in the matter of C. K. Jedees (Supra)

Tribunal decision dated 30-10-2006 in the matter of SHILPA COLOR LAB Versus COMMISSIONER OF C. EX., CALICUT reported in 2007 CESTAT,BANGALORE
In this case, CESTAT overruled the circular dated 3-3-2006 (supra) and judgment of Apex Court in the matter of C. K. Jedees (Supra). But, it has followed the judgment of Larger Bench of honorable Supreme Court in the matter of Bharat Sanchar Nigam Ltd. and Anr. v. UOI & Others - reported in 2006 . Accordingly, tribunal has allowed the deduction of value of goods / material used for providing photography service.
While delivering the judgment, CESTAT discussed and relied upon certain other decisions of honorable Supreme Court.

Tribunal decision dated 17-9-2007 in the matter of COMMISSIONER OF C. EX., MYSORE Versus EXPRESS COLOR LAB. Reported in 2008 CESTAT, BANGALORE
In this case, CESTAT followed the decision of Shilpa Color Lab (Supra) and allowed the deduction of value of goods / material sold while providing the photograph services.

High Court of Rajasthan delivered its order dated 20-7-2007 in the matter of WESTERN RAJASTHAN COLOUR LAB ASSOCIATION Versus UNION OF INDIA reported in 2008 HIGH COURT RAJASTHAN
In this matter, honorable HC followed the decision of honorable Supreme Court in the matter of C. K. Jedees (Supra) and denied the deduction of value of goods / material from the gross value.

Tribunal decision dated 28-11-2008 in the matter of JYOTI ART STUDIO Versus COMMISSIONER OF CENTRAL EXCISE, HYDERABAD reported in 2008 CESTAT, BANGALORE
In this matter, CESTAT allowed the deduction of value of goods / material from the gross value.
Moreover, CESTAT held that, deduction is available even if the details of inputs used need not be mentioned in the invoices/bills issued by them, as there is no specific clause in the Notification no. 12/2003.

Tribunal decision dated 13-8-2007 in the matter of SHRI ROOPCHHAYA COLOUR STUDIO Versus COMMR. OF C. EX., HYDERABAD reported in 2008
In this decision also, tribunal has allowed the deduction of value of goods / material from the gross value.