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Analysis of recent decision in Service Tax

Madhukar N Hiregange 
on 28 May 2013

LinkedIn


SERVICE TAX – Analysis of Recent Judgments                                   

The professional who wishes to practice in service tax or take care of service tax in companies would find that a deeper understanding of the judgments give some tips or pointers on the directions as well as scope for further disputing where necessary. At times the head notes read do not indicate the contents. Examining the details of the case may lead to the following conclusions/ benefits:

1. Though the case is of Tribunal the decision is well thought of and can be relied on. Unlikely that it would be overturned at a later point of time. Or it maybe difficult to distinguish.

2.  The case may not be well reasoned and therefore avoiding reliance as in case of that case being reversed, it should not lead to client’s case becoming weak.

3. The arguments put forth by the Department Representative can indicate the thinking of the revenue and you may therefore guard against.

4. The arguments put forth by the appellant may indicate a few angles we have not thought of.

5. The application of principles of one case to another is also common. Analysis of to which extent the case is relevant or is distinguishable can also add to the strength of another case.

6. Reading on updated basis will enhance the quality of the opinion/ advise provided. Need to revisit the old opinion may also be indicated.

7. When there are contrary cases or doubt in liability or credits the same maybe confirmed with the revenue by RPAD.[ not by discussion with officer]

Service tax liability discharged by agent – again taxable in the hands of principle?

Recently there is decision held in the case of Zaheer khan B Khan Vs CST 2013-TIOL-643-CESTAT-MUM wherein the issue has been decided in favour of appellant.

Background and facts:

Zaheer Khan is a well known cricketer. There was a demand service tax on the modeling assuagements for doing advertisement. For the purpose of modeling for advertisements, TV Commercials, footage, press advertisement, etc., he entered into a tripartite agreement, as per the agreement his agent M/s. Percept D Mark (India) Pvt. Ltd., etc., would negotiate with the corporate on behalf of appellant and agents were discharging service tax liability on the whole amount of consideration received after deducting expenses including agents commission and balance was paid to Zaheer Khan.

Issue:

Notice issued to the Zaheer khan for the services rendered by him on the ground that he was the service provider and service tax paid by his agent on the consideration cannot be treated as proper discharge of service tax.

Arguments:

1. Definition under section 65(7) if Finance Act, 1994 assessee means “a person liable to pay service tax and includes his agent”.

2.  As per the tripartite agreement, he has appointed three agencies as agents not only for the purpose of negotiating with the corporate for the services to be undertaken by him but also for the discharge of tax liability. Since the agent has discharged the service tax liability, which amounts to payment of service tax by the appellant, there cannot be any demand on the same transaction again.

3. Appellant also relies on the decision of this Tribunal in the case of Ms. Katrina R.Turcotte Vs. CST, Mumbai reported in 2012-TIOL-1780-CESTAT-MUM wherein this Tribunal held that the service tax liability discharged through the agent is sufficient and service tax demand cannot be made on the principal for the same transaction again and accordingly allowed the appeal. Therefore, he pleads that in the present case also the appeal be allowed.

Decision

1. The assessee includes his agent and therefore, if the tax liability has been discharged by the agent on the service rendered by his principal that is sufficient for discharge of service tax liability by the principal. Therefore, following the decision in the case of Ms. Katrina R Turcotte (supra), Hon’ble CESTAT allowed the appeal in favour of Zaheerkhan.

Cenvat Credit on input services:

Recently there was a decision in case of CCE Vs Cadila Healthcare Ltd., 2013 (30) STR 3 (Guj) by High Court where various elements of input services and definition of input service are discussed and appeal allowed partly in favour of appellant and partly in favour of department. The same is discussed below:

Background:

The respondent-assessee is engaged in the manufacture of medicines classifiable under chapter 30 of CETA, 1985 and availing cenvat credit benefit under the cenvat credit rules, 2004. During audit it was said to have been observed that appellant had availed CENVAT credit in respect of input services, which were not eligible as input services as defined under Rule 2(l) of the Rules. Accordingly adjudication proceedings were taken up and matter went upto Gujarath High Court and decided as discussed below.

Issues Decided by the Hon’ble High Court:

Whether the CESTAT was right in considering the services namely Technical Testing and Analysis Service, Technical Testing and Certification Service, Business Auxiliary Service (Service rendered by the Commission agent), Service rendered by clearing and Forwarding Agent, Courier Service, Commercial and Industrial Construction Service, Maintenance or Repair service, Interior Decorator Service, Management Consultancy Service, availed by the assessee, as eligible services for availing input service credit as defined under Rule 2(l) of the CCR, 2004? And also discussion on Scope of definition in Rule 2(l) should be r/w Rule 6(5) of CCR, 2004 and interpretation of the word ‘such as’

Discussion on each category of service independently:

1. Technical Testing and Analysis services: The assessee is engaged in the manufacture of medicaments. By their very nature, the drugs manufactured by the assessee prior to final production thereof are required to be subjected to technical testing and analysis before entering into commercial production. For such purpose, the products are manufactured in small trial batches and thereafter, sent for testing and analysis purpose. When the goods are removed for testing and analysis, excise duty has been paid thereon. Final production could be manufactured only upon approval of regulatory authority after technical testing and analysis. Therefore tribunal was justified in holding that assessee is entitled to avail Cenvat credit.

2.  Commission paid to the foreign agents: It was contended that service tax paid on commission paid to commission agents for sale of final products is available as credit according to the inclusive part of the definition of input service, which includes services in relation to sales promotion.

Meaning of commission agent as stated in BAS: Commission Agent means any person who acts on behalf of another person and causes sale or purchase of goods, or provision or receipt of services, for a consideration, and includes any person who, while acting on behalf of another person.

· deals with goods or services or documents of title to such goods or services; or

· collects payment of sale price of such goods or services; or

· guarantees for collection or payment for such goods; or

· undertakes any activities relating to such sale or purchase of such goods or services;

Sales Promotion: sales promotion has been defined as a group of activities that are intended to improve sales, sometimes including advertising, organizing competitions, providing free gifts and samples. These promotions may form part of a wider sales campaign. Sales promotion has also been defined as stimulation of sales achieved through contests, demonstrations, discounts, exhibitions or tradeshows, games, giveaways, point-of-sale displays and merchandising, special offers, and similar activities.

In the case of Commissioner of Income-tax vs. Mohd. Ishaque Gulam, 232 ITR 869, a Division Bench of the Madhya Pradesh High Court drew a distinction between the expenditure made for sales promotion and commission paid to agents. It was held that commission paid to the agents cannot be termed as expenditure on sales promotion.

3. There was no material on record to show that commission agents were involved in the activity of sales promotion which is specifically included in the input service definition and directly concerned with the sales rather than sales promotion and as such the services provided by such commission agent would not fall within the purview of the main or inclusive part of the definition of input service as laid down in Rule 2(l) of the Rules. Further, the service rendered by the commission agents not being analogous to the activities mentioned in the definition, would not fall within the ambit of the expression activities relating to business. Consequently, CENVAT credit would not be admissible in respect of the commission paid to foreign agents.

4. Courier service: the input service definition undergone on amendment from 01.04.2008 and replaced the words from clearance of final products from the place of removal the words clearance of final products up to the place of removal came to be substituted. The present is before the amendment therefore they are eligible to take Cenvat credit on the same.

5. Clearing and Forwarding services: the court observed that clearing and forwarding agent is an agent of the principal. The goods stored by him after clearance from the factory would therefore, be stored on behalf of the principal, and falls within the purview of sub-clause (iii) of clause (c) of Section 4(3) of the Act and as such would be the place of removal. The same also would fall within the ambit of Rule 2(l) of the Rules as it stood prior to its amendment with effect from 1-4-2008, namely clearance of final products from the place of removal. However HC did not accept the view of Tribunal that such services would amount to sales promotion. Because the services rendered by the C & F agents cannot be said to be in the nature of sales promotion. This issue stands answered accordingly, in favour of the assessee and against the revenue.

6. Technical Inspection and Certification services: The technical inspection and certification services have been availed of by the assessee in respect of inspection and checking of instruments which are used for the purpose of measuring size : gauges and vernier calipers, measuring weight : scales, and measuring temperature : temperature indicators, and instruments like thermo hygrometers for measuring humidity and temperature, etc. which are all in the nature of precision instruments which measure various factors with precision. Such instruments are required to measure the required standards, accurate and precise. Therefore assessee is eligible to take Cenvat credit on the same.

7. Interior decorator, Commercial and Industrial Construction services: The inclusive part of the definition of input service specifically includes services used in relation to renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, activities relating to business, such as accounting, computer networking etc. Thus, the services rendered by interior decorator, commercial and industrial construction services would squarely fall within the inclusive definition of input service. Such services would, therefore, fall within the ambit of input service as defined under Rule 2(l) of the Rules.

8.    Repair/maintenance of copier machine, air-conditioner, water cooler, (ii) Management consultancy, (iii) Interior Decorator, (iv) Commercial or Industrial Construction services:   Rule 6(5) specifically provides that credit shall be allowed in respect of the services mentioned therein unless such service is used in the manufacture of exempted goods. The present Cenvat credit does not relate to manufacture of exempted goods therefore it is pertinent to note that above said services availed by the assessee find a specific mention in Rule 6(5) of the Rules in respect of which credit of the whole of service tax paid on taxable service is admissible.

Extract of Rule 6(5) of Cenvat Credit Rules, 2004: Notwithstanding anything contained in sub-rules (1),(2) and (3), credit of the whole of service tax paid on taxable service as specified in sub-clause (g), (p), (q), (r), (v), (w), (za), (zm), (zp), (zy), (zzd), (zzg), (zzh), (zzh), (zzi), (zzk), (zzq) and (zzr) of clause (105) of section 65 of the Finance Act shall be allowed unless such service is used exclusively in or in relation to the manufacture of exempted goods or providing exempted services.

9. Repair and maintenance of copier machine, air-conditioner, water cooler, etc: it cannot be gainsaid that such equipment are necessary for factory buildings as well as for activities relating to business. Therefore the same is not eligible services for the purpose of taking CENVAT credit on the service tax paid thereon. The Cenvat credit can be taken only when there is a repair and maintenance of factory building as per the definition of input services

10.  Interpretation of the word ‘such as’: In Royal Hatcheries (P) Ltd. v. State of A.P., 1994 Supp (1) SCC 429, the Supreme Court held that the words such as indicate that what are mentioned thereafter are only illustrative and not exhaustive. Thus, the activities that follow the words such as are illustrative of the activities relating to business which are included in the definition of input service and are not exhaustive. Therefore, activities relating to business could also be other than the activities mentioned in the sub-rule. However, that does not mean that every activity related to the business of the assessee would fall within the inclusive part of the definition. For an activity related to the business, it has to be an activity which is analogous to the activities mentioned after the words such as.

11.  Rule 2(l) should be r/w Rule 6(5) of CCR, 2004: No provision or word in statute is to be read in isolation. To determine legislative intention, statute has to be read as a whole.

Service Tax implication on services in relation to chit:

Delhi Chit Fund Association Vs UOI 2013-TIOL-331-HC-DEL-ST

Before going through the issue and decision given by the Hon’ble High court it is relevant to know how a chit fund works:

The following is a brief account of the operations of a chit fund business –

“Supposing 50 persons come together to organise a chit. Let us further suppose that each of them undertake to contribute Rs. 1,000/-. The total chit amount would be Rs. 50,000/-. Let us further suppose that the fund would operate for a period of 50 months. Thus the member subscribers and the number of months for which the chit would operate would be the same. In this example at the end of each month, an amount of Rs. 50,000/- (Rs. 1,000/- x 50) would be available in the kitty of the chit fund. The said amount would be put to auction and those subscribers who are interested in drawing the money early because of their needs may participate in the auction. The successful bidder who is normally the person who offers the highest discount is given the chit amount. For example if there are three bidders offering to take the chit of Rs. 50,000/- for Rs. 40,000/-, Rs. 37,500/- and Rs. 35,000/- respectively, the chit would be given to that subscriber who is willing to take it for Rs.35,000/- since he has offered a discount of Rs. 15,000/-. This will leave a balance of Rs. 15,000/- in the kitty. The amount of Rs. 15,000/- which represents the discount which the successful bidder has foregone becomes the dividend which is to be distributed to all the subscribers after deducting a fixed amount representing the commission payable to the 'foreman'. A foreman is normally a person who organises the auction and conducts the proceedings. If in the example given above, the commission payable to the foreman is fixed at 5%, then after deducting Rs. 2,500/- (5% of Rs. 50,000/-, the chit amount) the balance of Rs. 12,500/- would be distributed among all the 50 subscribers so that each would get Rs. 250/-. This amount of Rs. 250/- can be set off by the subscribers against the second month's installment of Rs. 1,000/- payable by him and he can give only Rs. 750/-. The auction would be repeated in the subsequent months and the same procedure is followed.

Any subscriber who delays the bidding or does not bid at all stands to gain the maximum discount. The chit is thus somewhat like a recurring deposit with the bank. There is no bar on the foreman of the chit fund also participating as a subscriber.”

Who is a foreman in chit fund?

A foreman is normally a person who organizes the chit fund auction and conducts the proceedings. He is paid a commission for this purpose.

Statutory provisions in relation to chit fund:

As per the definition of Service given in Section 65B(44) of Finance Act, 1994 excludes ‘transactions only in money or actionable claims do not constitute service’. For the said exclusion education guide gives an idea what and all the transaction will be covered under the ‘transactions only in money’.

Point No. 2.8.2 of education guide speaks about chit fund and it specifically clarifies that ‘in business of chit fund certain commission received from members is retained by the promoters as consideration for providing services in relation to the chit fund it is not a transaction only in money. The consideration received for such services is therefore chargeable to service tax.

From the above it is clear that while negative list of services introduced the chit fund business was also under taxable services. Accordingly there was a abatement provided in the notification no. 26/2012 ST dated 20.06.2012 which is give below for reference:

"the taxable service of the description specified in column (2) of the Table below, from so much of the service tax leviable thereon under section 66B of the said Act, as is in excess of the service tax calculated on a value which is equivalent to a percentage specified in the corresponding entry in column (3) of the said Table, of the amount charged by such service provider for providing the said taxable service, unless specified otherwise, subject to the relevant conditions specified in the corresponding entry in column (4) of the said Table, namely: 

Sl. No.

Description of taxable service

Percentage

Conditions

(1)

(2)

(3)

(4)

8

Services provided in relation to chit

70

CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.

According to the abatement notification on foremen commission after taking abatement of 30%, service tax was paid on 70%.

Whereas everyone on the streets is talking about the West Bengal chit-fund Ponzi scheme, the greed which led people to invest their hard earned money for allowing some individuals to lead a lavish life in the lap of luxury and go in for plastic surgery coupled with many wives and fast cars, the suicides by agents and those who lost their money, the political class seems to wave the magic wand to raise a part of the amount ‘lost' by raising taxes on the ubiquitous cigarette stick and exhorting intellectuals to smoke a few more to raise their intellectuality and thus serve a social cause.

In racket of these news, a writ petition filed in the Delhi High Court has come as a happy piece news for all chit-fund operators who were already started paying service tax out of their incomes.

The petition filed by an association of chit fund companies bases in Delhi. The write petition prays that the Notification should be quashed for the simple reason that chit fund business services are not taxable at all in the first place i.e., service definition.

Law relating to chit funds: as discussed in the decision of Delhi Chit Fund Association Vs UOI

The business of chit funds is strictly regulated by the Chit Funds Act, 1982. It contains detailed provisions relating to registration of chits, commencement and conduct of chit business. Rights and duties of foreman, rights and duties of the subscribers, termination of chits, meetings of general body of subscribers, provisions relating to winding up, disputes and arbitration and other miscellaneous provisions. Section 11 recognises that a chit business can be known by several names such as chit, chit fund, chitty, kuri, etc. Dealing with the Chit Funds Act, the Supreme Court in Sriram Chits & Investment (P) Ltd. vs. Union of India : AIR 1993 SC 2063 has laid down the following propositions: -

a) The Act, in pith and substance, deals with special contract and consequently falls within entry 7 of list III of the 7th Schedule to the constitution of India;

b) A chit fund transaction is not a case of borrowing, nor is it a loan transaction. If a subscriber advances any amount, he does so only to one of the members;

c) The funds of the chit fund belong to the entire lot of subscribers;

d) The amounts are in deposit which the stake holder only holds a trust for the benefit of the members of the fund;

e) The foreman acts only as a person to bring together the subscribers and he is subject to certain obligations with a view to protecting the subscribers from any mischief or fraud committed by him by using the position;

f) Commission is payable to the foreman for the service rendered by him as he does not lend money belonging to him.

Arguments – whether chit fund services are taxable:

1. The contention taken on behalf of the petitioner is based on the definition of the word ‘service’ in section 65B(44). The definition excludes an activity which constitutes ‘merely a transaction of money or actionable claim’.

2.  Meaning of Service as per Section 65B(44):

Section 65B(44) "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include—

(a) an activity which constitutes merely,––

(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

(ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of Article 366 of the Constitution; or

(iii) a transaction in money or actionable claim;

(b) a provision of service by an employee to the employer in the course of or in relation to his employment;

(c) fees taken in any Court or tribunal established under any law for the time being in force.

3. A chit business is a transaction in money and it is obvious that a transaction in money by itself cannot be a service in the sense of being an activity carried out by any person for consideration.

4. The activity already excluded by the definition itself, the service rendered in connection with said business is also excluded from the definition. The argument took place refereeing to Explanation 2 to section 65B(44).

5. From the above it is clearly implies that all other services rendered in connection with a transaction in money or actionable claim, including the services rendered by the foreman of a chit business, stand excluded from the definition. It is accordingly submitted that the commission received by the foreman or any other

Observations made by the High Court:

1. Section 65B (44) defines ‘service’ as any activity carried out by a person for another for consideration. This implies that there are four elements therein: the person who provides the service, the person who receives the service, the actual rendering of the service and, lastly, the consideration for the service. Explanation 2 read with exclusionary part of definition is considered.

2.  In a mere transaction in money or actionable claim, no service involved there is just the payment and receipt of money. It lacks our elements of to constitute a service.

3.  The exclusionary part of the definition of the word 'service' however refers to 'an activity which constitutes merely a transaction in money or actionable claim'. Since a mere transaction in money or actionable claim cannot under the common notions of a service be considered as a service by any stretch of imagination, it is necessary to examine what could have been the intention of the legislature in excluding it from the definition.

4. The subscription is tendered in any one of the forms of money as defined in section 65B (33).

5. Section 65B(33) defines money : "money" means legal tender, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveler cheque, money order, postal or electronic remittance or any similar instrument but shall not include any currency that is held for its numismatic value;

6. It would, therefore, be a transaction in money. So considered, the transaction would fall within the exclusionary part of the definition of the word 'service' as being merely a transaction in money.

7. In a chit business, the subscription is tendered in any one of the forms of 'money' as defined in section 65B(33). It would, therefore, be a transaction in money. So considered, the transaction would fall within the exclusionary part of the definition of the word 'service' as being merely a transaction in money.

Decision

The High Court observed that since on an interpretation of the statutory provisions it had come to a conclusion that no service tax is chargeable on the services rendered by the foreman in a business chit fund, it was not necessary for the Court to express any opinion as to the correctness of the views expressed in the Education Guide.

In the result the Writ Petition was allowed and the notification No.26/2012-ST dated 20.06.2012 was quashed to the extent of the entry in serial No.8 thereof.

2. Taxability on free services provided

Service tax applicability on Free phones given to employees – Bharti Airtel – stay matter2013-TIOL-654-CESTAT-DEL CESTAT:

Facts of the Case:

1. Appellant is a service provider of telecom service had provided mobile phone, fixed line and broad band service as well as fixed wireless phone connection free of cost to its employees , to their family members and employees of Bharti Group Companies during the period October 2004 to September 2009 under " Bharti Airtel Limited Employees Phone Policy"

2. The commissioner confirmed service tax on the said activity Rs.118 Crores under section 73 along with interest and penalties.

Observations made by the Tribunal

Factual points:

1. Tribunal observed that there was no dispute that the appellant provided an option to its employees, employees of Bharti Group company as well as selective relatives of such employees who were eligible as described in clause 1 of the policy. Apart from the above referred services gave another option to the employees to avail free calls to the extent of 20% of the amount against fixed line and the rest against mobile. Calls to certain limit were provided free and beyond that was recoverable as per the policy.

2. With regard to black berry services, the same was provided at rate prescribed. Call facility at free of cost, beyond certain limits, the excess calls if proved to be work related, remission was permissible. Different category of employees the limit was prescribed at different slabs.

Revenue points - arguments

3.  Under the above said policy the value of charges was at a reduced rate than the market rate and unaccounted.

4. It was also indicated that the employees were receiving consideration indirectly as perquisite which was part of their remuneration package and was incentive other than cash at the cost of Revenue and such benefit was provided evading service tax.

5. The telecom service provided had value in monetary terms under law being taxable under a taxing entry under section 65(105) of the Act.

6. There was no nexus that the service provided under the policy is with regard to providing taxable output service. The same is not proved by the appellant.

7. Revenue contention is that the same has to be disclosed in the accounts at market value.

8. Appellant pleaded that the revenue did not calculated the liability according to books of accounts. But the same is not calculated by the appellant also. Revenue took a contention that the calculated figures might have furnished during adjudication time the same was done.

9. Revenue had worked out the liability and prima facie, it appeared that taxable service provided was determinable and has escaped the levy of service tax. According to Rule of Valuation prescribed under section 67 of the Act, the economic activity carried out by appellant had economic value.

10. The appellant appears to have been immensely benefited by reduction of monetary package of remuneration to its eligible, employees, their relatives and employees of Bharti Group of companies. Such undisclosed benefit of appellant was at the cost of Revenue. The appellant failed in the course of hearing to satisfy that value of service were disclosed perquisite to its employees in its account and disclosed to Income tax Authority.

11. All the aforesaid aspects, prima facie, prove that substance of the policy gives rise to the demand as has been rightly adjudicated.

Decision

12. In the course of hearing, the appellant reiterated as that was submitted before learned Adjudicating Authority that it has calculated its liability of service tax to the tune of Rs. 21 crores but the Adjudicating Authority by his speaking order in Para 40(x) brought out that service tax demand shall be Rs.118,70,19,472/- followed by consequence of penalty and interest stated at the very outset.

13. Keeping in view that Revenue was deprived of realising its legitimate dues and the questionable modus operandi followed by the appellant as well as irreparable injury caused to Revenue, as an interim measure the appellant is directed to deposit Rs.80.00 (eighty) crores only within a period of four weeks and make compliance on 23.5.2013.

Impact:

Free services provided or at concessional rate compared to market value, appellant or service provider requires to pay service tax on the value charged to the customer or market value. What about amounts payable by employees to company for services provided as part of perks?

Decision on Construction Services:

Concept of Service under negative list based taxation

1. Narne Construction P. Ltd. Vs  UOI 2013 (29) S.T.R. 3 (S.C.)

Facts:

a. The company was engaged in the promotion of ventures for development of lands into house-sites and invited the intending purchasers through paper publication and brochures to join as members. The intending purchasers responded and joined as members on payment of fees. The sale and allotment of plots were subject to terms and conditions.

b. The sale is not open to any general buyer but restricted only to the persons who have joined as members on payment of the stipulated fee. The members should abide by the terms and conditions set out by the seller. The sale is not on "as it is where it is" basis.

c. The terms and conditions stipulated for sale of only developed plots and the registration of the plots would be made after the sanction of lay out by the concerned authorities. The sale price was not for the virgin land but included the development of sites and provision of infrastructure.

d. The company had undertaken the obligations to develop the plots and obtain permissions/approvals of the lay outs. The plots were developed by spending huge amounts and subsequent to the amounts paid by the purchasers the plots were developed.

e. It is therefore, manifest that the transaction between the parties is not a sale simplicitor but coupled with obligations for development and provision of infrastructure. Inevitably, there is an element of service in the discharge of the said obligations."

Issue:

Whether the company was, in the facts and circumstances of the case, offering any "service" to the purchasers within the meaning of the Consumer Protection Act, 1986 so as to make it amenable to the jurisdiction of the fora established under the said Act.

Observations of Supreme Court on service concept

While examining the true purport of the word "service" appearing in the legislation[Consumer Protection Act, 1986] observed: "It is in three parts. The main part is followed by inclusive clause and ends by exclusionary clause. The main clause itself is very wide. It applies to any service made available to potential users. The words 'any' and 'potential' are significant. Both are of wide amplitude. The word 'any' dictionarily means 'one or some or all'. In Black's Law Dictionary it is explained thus, "word 'any' has a diversity of meaning and may be employed to indicate 'all' or 'every' as well as 'some' or 'one' and its meaning in a given statute depends upon the context and the subject-matter of the statute".

The use of the word 'any' in the context it has been used in Clause (o) indicates that it has been used in wider sense extending from one to all. The other word 'potential' is again very wide. In Oxford Dictionary it is defined as 'capable of coming into being, possibility'. In Black's Law Dictionary it is defined as "existing in possibility but not in act. Naturally and probably expected to come into existence at some future time, though not now existing; for example, the future product of grain or trees already planted, or the successive future installments or payments on a contract or engagement already made."

In other words service which is not only extended to actual users but those who are capable of using it are covered in the definition. The clause is thus very wide and extends to any or all actual or potential users.

The legislative intention is thus clear to protect a consumer against services rendered even by statutory bodies. The test, therefore, is not if a person against whom complaint is made is a statutory body but whether the nature of the duty and function performed by it is service or even facility." (emphasis supplied)

Whether housing construction and building activities carried on by a private or statutory body tantamounts to service?

Construction of a house or flat is for the benefit of person for whom it is constructed. He may do it himself or hire services of a builder or contractor. The latter being for consideration is service as defined in the Act.

Similarly when a statutory authority develops land or allots a site or constructs a house for the benefit of common man it is as much service as by a builder or contractor. The one is contractual service and other statutory service. If the service is defective or it is not what was represented then it would be unfair trade practice as defined in the Act. Any defect in construction activity would be denial of comfort and service to a consumer. When possession of property is not delivered within stipulated period the delay so caused is denial of service.

Such disputes or claims are not in respect of Immovable property as argued but deficiency in rendering of service of particular standard, quality or grade.

When the contractor or builder undertakes to erect a house or flat then it is inherent in it that he shall perform his obligation as agreed to. A flat with a leaking roof, or cracking wall or substandard floor is denial of service. Similarly when a statutory authority undertakes to develop land and frame housing scheme, it, while performing statutory duty renders service to the society in general and individual in particular." (emphasis supplied)

Held by the Supreme Court that-

This Court held that when a person applies for allotment of building site or for a flat constructed by development authority and enters into an agreement with the developer or a contractor, the nature of the transaction is covered by the expression "service" of any description.

This kind of transaction involved much more than a simple transfer of a piece of immovable property. It was not a case of mere sale of property with all advantages and/or disadvantages on “as is where is” basis and it is service within the meaning of section 2(1)( c ) of Consumer Protection Act, 1986 and any deficiency/defect therein was amenable to jurisdiction of forum established there under.

It is a case where a clear cut assurance was made to the purchasers as to the nature and the extent of development that would be carried out by the company as a part of the package under which sale of fully developed plots with assured facilities was to be made in favour of the purchasers for valuable consideration. To the extent the transfer of the site with developments in the manner and to the extent indicated earlier was a part of the transaction, the company had indeed undertaken to provide a service.

Implications of this decision under Service Tax Law-

This decision could be of assistance in interpreting the expression ‘activity involving merely transfer of title in immoveable property’, which is excluded from the definition of service in section 65B(44) of Act, under the negative list based taxation, as extracted below-

Section 65B(44) "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include—

(a) an activity which constitutes merely,––

(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

(ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of Article 366 of the Constitution; or

(iii) a transaction in money or actionable claim;

(b) a provision of service by an employee to the employer in the course of or in relation to his employment;

(c) fees taken in any Court or tribunal established under any law for the time being in force.

Since in the instant case, the activity has involved more than a transfer of title, it was held to be a service.

Valuation & Reimbursement of Expenses

2. Recently, there has been an important judgment of Delhi High Court in the case of Intercontinental Consultants And Technocrats Pvt Ltd vs. UOI & Anr [2012-TIOL-966- HC-Del-ST] changing the position of law pertaining to valuation covering reimbursements. Considering the change in the position of law, we would discuss the essence of the decision, its impact on valuation of taxable services for the period prior to and after the introduction of negative list based taxation.

Background

In Intercontinental Consultants And Technocrats Pvt Ltd, was providing consulting engineering services. In the course of the carrying on of its business, they rendered consultancy services in respect of highway projects to the National Highway Authority of India (NHAI). The petitioner receives payments not only for its service but is also reimbursed expenses incurred by it such as air travel, hotel stay, etc. It was paying service tax in respect of amounts received by it for services rendered to its clients. It was not paying any service tax in respect of the expenses incurred by it, which was reimbursed by the clients.

Department had issued show cause notices demanding service tax on the said reimbursed expenses on the ground that those are essential expenses for providing the taxable services of consulting engineers.

Issue:

The said company had filed writ petition before the High Court of Delhi with following two prayers along with quashing of show cause notice:

a. Quashing Rule 5 of the Service Tax (Determination of Value) Rules, 2006 to the extent it includes the reimbursement of expenses in the value of taxable service for the purpose of charging service tax in entirety.

b. Declaring the said rule to be unconstitutional and ultra vires Section 66 and 67 of Finance Act, 1994.

After examining the legal position, H’ble High Court of Delhi allowed the writ holding that:

a. In the valuation of the taxable service, nothing more and nothing less than the consideration paid as quid pro quo for the service can be brought to charge.

b. Rule 5 purports to tax not what is due from the service provider under the charging Section, but it seeks to extract something more from him by including in the valuation of the taxable service the other expenditure and costs which are incurred by the service provider “in the course of providing taxable service”.

c. What is brought to charge under the relevant Sections is only the consideration for the taxable service. By including the expenditure and costs, Rule 5(1) goes far beyond the charging provisions and cannot be upheld.

In this backdrop we discuss what would be the impact prior to and after introduction of negative list based taxation.

Implications of this decision prior to 01.07.2012 i.e. before introduction of negative list based taxation:

Since April 2006 till now, more than five and half years, most of the service providers did not wanted to challenge the provisions and decided to include reimbursements also in the taxable value and were charging service tax. However in certain cases where they had not charged service tax on such reimbursements and either found and notices were issued or no notices were issued would have now little sense of relief with this decision as it would give relief for them from any demands already raised or would have raised.

Until the law laid down by this decision holds the field, those cases would get relief. Even if the said position is changed either by retrospective amendment or overruled by Hon’ble supreme court by taking any other view also, the service providers can claim the limitation aspect and also seek waiver of penalties as the matter pertains to interpretation and different view existed.

By virtue of this decision after quashing Rule 5(1) it would be important for service provider to identify what is reimbursement and what is not. Merely calling it as reimbursement in the bills would not make it reimbursements. It should be clear from the terms of agreement/service order/work order etc., that there was an obligation upon the service receiver to incur such expenditure and instead if the service provider incurs such expenditure, the same would be reimbursed by the service receiver to service provider. Further reimbursement means it should be at actual and supported by sufficient documentary evidence.

On the other hand in view of the paper writer, if it is merely said that the price would be determined by cost incurred plus certain percentage of such cost, it cannot be considered as reimbursement.

Therefore it would be responsibility of the service providers to have sufficient documentary support to prove whether exclusions made claiming it to be reimbursements are in fact reimbursements and not separation or segregation of consideration as reimbursements.

Implications of this decision after 01.07.2012 i.e. before introduction of negative list based taxation:

There was paradigm shift in the methodology of taxation under service tax, from positive list based taxation to taxing of any activity defined to be service unless it is covered under negative list.

Though there was change in the manner of determining the levy, there was no change in the valuation provisions, which remained essentially same. Therefore in the normal course, the proposition as explained above would have to continue even after the 1st of July 2012.

However in view of paper writer, there are certain aspects, which would come into play. Earlier the taxation was based on positive list based taxation, i.e. if the activity undertaken falls under defined specific type of services, it would have been taxed. Otherwise, it would not have been taxed. But now any activity undertaken if it is not covered under the negative list would become taxable.

Now the question arises, whether the activity of incurring such expenditure on behalf of the service receiver can also be considered as service and if so, whether it would become part of the main service as it would be considered as bundled services?

In the opinion of paper writer the answer may be ‘YES’. However again the consideration for such additional activity is said to be already included in the amount being charged for the main services and the expenditure incurred by the service provider on behalf of service receiver cannot be considered as consideration for the activity of incurring such expenditure. When it is reimbursement, it means that the payment is made on behalf of the service providers and not as service charges.

To conclude in view of the paper writer, even under the new law, the re-imbursements would not form part of taxable value and should not be included in the taxable value until this position of law holds good, subject to the fact that there is proper documentary evidence to support the fact that the amounts incurred are reimbursement of expenses.

Point of Taxation:

3. There is an recent decision of Hon’ble Delhi High Court in Delhi Chartered Accountants Society(Regd) vs UOI and Ors(2013-TIOL-81-HC-Del-ST).

Delhi Chartered Accountants Society(Regd) vs UOI and Ors(2013-TIOL-81-HC-Del-ST)

Facts:

The petitioner is an association of chartered accountants. Services rendered by chartered accountants are taxable services under erstwhile section 65(105)(s) of the Finance Act, 1994. As you know that the rate of service tax was enhanced from 10% to 12% wef 1.4.2012. As per Rule 79c) of Point of Taxation Rules in case of 8 specified services [one of which was chartered accountants service] provided by the individuals or proprietary firms or partnership firms, point of taxation shall be the date on which payment received or made as case maybe.

Further Rule 7© of POT Rules amended vide notification no.4/2012-ST dated 17.3.2012 effective from 1.4.2012 under new Rule 7 of POT rule, whereby the point of taxation is date of receipt of payment only for the service tax payable under reverse charge, i.e. under Section 68(2) of Finance Act, 1994.

Further date of receipt of payment for 8 specified services by the individuals or proprietary firms or partnership firms been extended to all service providers, by inserting a proviso to section 6(1) of Service Tax Rules, 1994 vide notification no.3/2012-ST w.e.f 1.4.2012 as under:

“Provided also that in case of individuals and partnership firms whose aggregate value of taxable services provided from one or more premises is fifty lakh rupees or less in the previous financial year, the service provider shall have the option to pay tax on taxable services provided or agreed to be provided by him up to a total of rupees fifty lakhs in the current financial year, by the dates specified in this sub-rule with respect to the month or quarter, as the case may be, in which payment is received”.

Issue:

In this backdrop service tax authorities rely on two circulars issued by TRU Circular no.154 dated 28.3.2012 and 158 dated 8.5.2012 which says in case of 8 specified services provided by individuals or proprietary firms or partnership firms and in case of services wherein tax is required to be paid on reverse charge by service receiver, if payment is received or made as case maybe on or after 1st April, 2012, the rate of service tax applicable will be 12% and not 10%.

What is rate of service tax for the services provided by the Chartered Accountants prior to 1.4.2012 and the invoice also issued prior to 1.4.2012 but payment received after 1.4.2012.

Decision:

It was held that where services of chartered accountants were actually rendered before 1.4.2012 and the invoices also issued before that date, but the payment was received after that date, the rate of service tax would be 10% and not 12%.

While quashing the circulars as contrary to provisions, the High Court compared the old and the new Rule 7 of the POT Rules and held that the circulars in question have not taken note of this aspect, and as noted earlier have proceeded on the erroneous assumption that the old Rule 7 of POT Rules continued to govern the case notwithstanding introduction of new rule 7 of POT Rules which does not provide for contingency which has arisen in current case.

Hence the Circulars are quashed as being contrary to Finance Act, 1994 and the POT Rules, which have been notified in exercise of powers conferred upon Central Government under clause(a) and clause(hhh) of Sub-section (2) of section 94 of the Finance Act, 1994 and they are also required to be placed before both Houses of Parliament under Sub-section (4) of Section 94. They thus have the force of law. The circulars have to be in conformity with Act and the Rules and if they are not, they cannot be allowed to govern the controversy.

It is well settled that a circular which is contrary to Act and Rules cannot be enforced. This was also held in CCE, Bolpur vs. Ratan Melting & Wire Industries(2008(13)SCC(1).

Import of services:

4. In recent stay matter in Suntec Business Solutions P Ltd vs. C.C.E., C. & S.T., Thiruvananthapuram-I2012 (25) S.T.R. 159 (Tri. - Bang.), held though activities undertaken by such subsidiaries on behalf of applicant in relation to the agreement entered in between the applicant and customer, no evidence of import of services as services prima facie carried out in foreign countries.

Suntec Business Solutions P Ltd vs. C.C.E., C. & S.T., Thiruvananthapuram-I2012 (25) S.T.R. 159 (Tri. - Bang.)

Facts:

The service tax demand related to activities undertaken by the subsidiaries outside India, and that the said activities have been undertaken in respect of software products developed and sold by the assessee to various customers in foreign countries.

Issue:

The assessee seeking waiver of demand of Service Tax totalling around 14.45 crores, out of which, Rs. 13.4 crores relate to demand under the category of Business Auxiliary Services said to have been received from the Subsidiaries of the assessee who are operating from different countries.

Decision:

The activities undertaken by the Subsidiaries appear to be on behalf of the applicant in relation to the agreement entered into between the applicant and the customers, but, prima facie, these activities have been carried out in the foreign countries. The activities undertaken included fixing mistakes in the software during the implementation and also activities in the nature of improvement based on requests of the customers. The evidences do not, prima facie, show that these activities have been carried out in India and, therefore notwithstanding payment by the applicant to the Subsidiaries abroad, there is no evidence of import of the services.

Sales Tax vs Service Tax:

5. In my view it cannot be disputed that even if sales tax is wrongly remitted and paid that would not absolve them from the responsibility of payment of service tax, if otherwise there is a liability to pay the same.

If the article under reference is not susceptible to tax under the Sales Tax Act, the amount of tax paid by the assessee could be refunded as the case may be or, the assessee has to follow the law as may be applicable. But a position in law, may not be accepted that even if sales tax is wrongly remitted that would absolve the parties from paying the service tax if the same is otherwise found payable and a liability accrues on the assessee.

In the same way, the charges paid by the subscribers for procuring a SIM Card are generally processing charges for activating the cellular phone and consequently the same would necessarily be included in the value of the SIM Card. This was held in Idea Mobile Communication Ltd., wherein the apex Court has taken the view that the SIM card has no intrinsic sale value and is supplied to customers for providing mobile service to the customers; that the sale of SIM card is merely incidental to the service being provided and only facility is identification of the subscribers, their credit and other details, and it would not be assessable to sales tax. In this backdrop we examine a very recent CESTAT decision.

Vodafone Essar Ltd Vs Commissioner of Service Tax, Mumbai 2012-TIOL-647-CESTAT-MUM

Facts:

The assessee is a service provider under the category of telecommunication service and providing mobile phone services. To perform this activity, the assessee provides SIM cards to their customers through their dealers. When the applicant is clearing SIM cards to their dealers, they pay sales tax/VAT and for providing telephone services/mobile services they charge activation charges on which they are paying service tax

Issue:

The Revenue is of the view that SIM card is an instrument which provides services only for activation of mobile phone without which the mobile phone cannot function. Therefore, the sale of SIM card is a part of service.

Decision:

The Bench observed -

"7. After carefully considering the submissions made by both sides, we are of the view that in the case of Idea Mobile Communication Ltd., cited (supra), the Hon'ble apex Court has confirmed the view taken by the Hon'ble Kerala High Court wherein it was held that a transaction of selling of SIM card to the subscriber is also a part of the "service" rendered by the service provider to the subscriber. We also are not convinced with the contention of the Ld. Counsel that the amount paid as sales tax be considered as sufficient compliance of Section 35F of the Central Excise Act, read with Section 83 of the Finance Act. As this Tribunal have no power to adjust such payments as the same is created under the Special Act i.e., Customs Act, Finance Act and Central Excise Act. Therefore, we have no power to adjust the payment of sales tax against service tax. As discussed above, the applicant have failed to make out a case for 100% waiver of pre-deposit.

It was held that in respect of the telecommunication service, the value of SIM card to be included in AV for payment of ST. Tribunal has no power to adjust payment of Sales Tax against Service Tax: CESTAT. Following the decision of Idea Mobile Communication Ltd., (supra), applicant directed to make pre-deposit of balance amount of service tax adjudged within twelve weeks and report compliance.

By: Madhukar N Hiregange

F.C.A


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