Service Tax Issues & Recent Jurdiciary Prouncements: By Niranjan Swain Past Chairman EIRC of ICAI & General Manager(Finance) Odisha Power Generation Corporation

Service Tax Issues & Recent Jurdiciary Prouncements:

By

Niranjan Swain

Past Chairman EIRC of ICAI

&

General Manager(Finance)

Odisha Power Generation Corporation Ltd

Love is a feeling , marriage is a contract and relationships are work

- Lori Gordon

Good Legislation is a feeling , business is a contract and all transactions are taxable

- Indian Taxation system

Breaking News --------

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History of Works Contract Tax

46th amendment to the Constitution clause (29A) –1983 - Builders Association of India v. UOI (1989) 73 STC 370 (1989)“tax on sale or purchase of goods” & it includes “a tax on transfer of property (whether as goods or some other form) involved in execution of works contract”.

Sales tax laws amended by the States to include above.

CST Act amended -11th May 2002.

History of Works Contract Tax

Works Contract is a composite contract involved in transfer of property of goods rendering of some services.

State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. AIR 1958 SC 560

works contract was essentially a contract of service and no sales tax could be levied on goods transferred in the course of execution of works contract.

Basis of taxation of Works Contract

Gannon Dunkerely & Co V. State of Rajsthan (1993)66 Taxman 229 / (1993) 88 STC 204 –

WC TAX payable on value of goods transferred. Charges for labour, services, consumables & profit relatable

to services etc. to be deducted. Taxable event is the transfer of property. Tax cannot be levied when goods which are not taxable

under sec-,3,4 & 5 of CST Act. If no details produced by the contractor the legislator can

prescribe scales of permissible deduction. There may be uniform rate for Works Contract & it can be

different from individual rates.

Builders Association of India V. State of Karnataka (1993)88 STC 248

What Prompted Govt. to Levy Tax on WC Services

Delim Industrial co ltd. V. State of Assam(2003)130 STC53(Gau) – WC tax payable only on goods not on design & engineering.

CCE&C v. Larson & Toubro Ltd. 2004 (174) ELT 322 -Tri-Del lump sum works contract cannot be vivisected & part of it can

not be subjected to service tax

Daelim Industrial Co Ltd V. CCE Vadodora,2003(155)ELT457-Tri-Del Turnkey contract can not be vivisected artificially No levy service tax on design,& detailed engineering,

commissioning of plant.

Supreme Court in BSNL‘s case [2006(2) STR 161 (SC)],

a works contract can be segregated into a contract of sale of goods and contract of provision of service.

Applicability of Works Contract Tax

Budget speech of Finance Minister. “State Governments levy a tax on the transfer of property in

goods involved in the execution of a works contract. The value of services in a works contract should attract service tax. Hence, I propose to levy service tax on services involved in the execution of a works contract. However, I also propose an optional composition scheme under which service tax will be levied at only 2 percent of the total value of the works contract”,

ST on Works Contract Services - June 1, 2007 vide Notification No.23/2007-ST/22.05.2007.

Methodology is used to levy service tax on WC

VAT is leviable on transfer of property in goods involved in the execution of works contract [Art.366(29A)(b) of the Constitution of India], and

(ii) Service tax will be leviable on services provided in relation to the execution of works contract.

What is “Works Contract”?

65B(54) "works contract" means 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 purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, improvement, repair, renovation, alteration of any building or structure on land or for carrying out any other similar activity or a part thereof in relation to any building or structure on land;

Prior to the decision in BSNL. v. UOI [2006] 3 STT 245 (SC) and L & T Ltd. v. State of Karnataka [2013] 41 STT 113/38 the law as understood was :

(a) In a divisible contract, the element of sale would be taxed as an ordinary sale of goods, irrespective of the element of service;

(b)if the predominant intention of the parties was to supply goods, the element of service would be ignored and total value tax as sale.

L & T Ltd. v. State of Karnataka [2013] 41 STT 113/38

Four concepts have clearly emerged. They are :

(i)the works contract is an indivisible contract but, by legal fiction, is divided into two parts, one for sale of goods, and the other for supply of labour and services;

(ii)the concept of "dominant nature test" or, for that matter, the "degree of intention test" or "overwhelming component test" for treating a contract as a works contract is not applicable;

L & T Ltd. v. State of Karnataka [2013] 41 STT 113/38

Four concepts have clearly emerged. They are :

(iii)the term "works contract" as used in Clause (29A) of Article 366 of the Constitution takes in its sweep all genre of works contract and is not to be narrowly construed to cover one species of contract to provide for labour and service alone; and

(iv)once the characteristics of works contract are met with in a contract entered into between the parties, any additional obligation incorporated in the contract would not change the nature of the contract. [Para 42]

State of Andhra Pradesh v. Kone Elevators (India) Ltd.

[2005] 3 SCC 389, Entire transaction amounted to a 'sale' and not works

contract and was liable to sales-tax/VAT only. When the States started proceeding with assessment as per

judgment in Kone Elevators (supra) and started reopening concluded assessments based upon said judgment, assessees preferred petition under Article 32 challenging such actions.

Owing to a perceived contradiction between judgments in : (a) Kone Elevators (supra) and (b) State of Rajasthan v. Man Industrial Corpn. Ltd. [1969] 1 SCC 567, State of Rajasthan v. Nenu Ram [1970] 26 STC 288 (SC) and Vanuguard Rolling Shutters Steel Works v. Commissioner of Sales Tax [1977] 2 SCC 250 matter was referred to Constitution Bench of Hon'ble Five judges.

Tax implication on Works Contracts -

Kone Elevators India (P.) Ltd. v. State of Tamil Nadu

[2014] 45 taxmann.com 150 (SC),:

Issue: Whether the manufacture, supply and installation of lifts was in the

nature of a works contract. This question required judicial consideration to determine whether

such a transaction could be taxed by the State as a sale? Justice Dipak Misra & four Others: Contract was a works contract and

not a sale. Justice Ibrahim Kalifulla dissented: Contract was a sale. Judgments revisited the issue of the validity of the dominant nature

test in determining the legal nature of a contract

.Larsen & Toubro Ltd. v. State of Karnataka [2013] 41 STT

113/38 taxmann.com 98 (SC), "predominant intention test" is no longer relevant and, therefore, supply and installation of lift cannot be treated to be a contract for sale.

A lift comprises of components or parts [goods] like lift car, motors, ropes, rails, etc. and each of them has its own identity prior to installation and they are assembled/installed to create the working mechanism called lift. The installation of these components/parts with immense skill is rendition of service, for without installation in the building, there is no lift. Hence, it is a

works contract.

Can Reimbursable Cost is includible Value of Service Naresh Kumar & Co. (P.) Ltd. v. Union of India[2014] 52 taxmann.com 370 (Calcutta)

Valuation of Taxable Services - Inclusion of Reimbursements (Sec-67 of Finance Act 1994 read with Rule 5 of the Service Tax (Determination of Value) Rules, 2006

Fact of Case: Assessee was carrying out work of loading, shifting and

feeding of coal and gypsum by roads and service recipient provided diesel free of cost there for –

Department argued that cost of diesel was includible in value of services in view of rule 5(1)


Relied upon Intercontinental Consultants & Technocrats (P.) Ltd. v. Union of India [2012] 28 taxmann.com (2013) 38 STT 75 (Delhi)

Sec - 66 - levies ST at a particular rate on the value of taxable service. Sec- 67(1)(i)- Value of the taxable service shall be the gross amount

charged by the service provider "for such service". Nothing more and nothing less

Sec-94 – Empower Central Government to make rules for carrying out the provisions of Chapter V of the Finance Act .

Conclusion: Rule 5(1) runs counter and is repugnant to Sections 66 & 67 of the Act

and to that extent it is ultra vires.


Hakam Chand v. Union of India, AIR 1972 SC 2427 (SC)

"The fact that the rules framed under the Act have to be laid before each House of Parliament would not confer validity on a rule if it is made not in conformity with Section 40 of the Act.“

Sec-94(4) does not add any greater force to the Rules than what the ordinarily have as species of subordinate legislation."

Service Tax on Restaurant:

Section 66E (i) specifies as under:- "(i) service portion in an activity wherein goods, being food or

any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity."

Specific exemptionsrestaurants, eating joints or a mess, other than those having

facility of air-conditioning or central air-heating in any part of the establishment;

. Rule 2C of Valuation Rules & Sec -67 of Finance Act

Determination of value of service portion involved in supply of food or any other article of human consumption or any drink in a restaurant or as outdoor catering

40% of value

Invoicing

. Particulars Amount (Rs.)

Food and beverages ……….. 1,000.00 Service Charges @ 10% ……….. 100.00 Total Amount ………………… 1,100.00 VAT @ 13.5% on the total amount (1100 X 13.5%) - the VAT rate may vary from State-to-State …………..

148.50

Service Tax @ 4.94% on the total amount (1100 X 4.94%)…

54.34

Total Amount Charged from customer on bill ………….

1,302.84

Legal Position

Kerala Classified Hotels & Resorts Association v. Union of India

[2013] 35 taxmann.com 568 (Keral) Levy of service tax is Unconstitutional

Indian Hotels & Restaurant Association v. Union of India

[2014] 44 taxmann.com 455(Bom) Upheld the constitutional validity of levy of service tax. As per the Court, if a tax on sale of goods involved in a service could

be levied, it would not mean that the service tax could not be levied on the service element involved in such sale.

Legal Position

Indian Coffee Workers Cooperative Society Ltd. v. CCE&ST

[2014] 44 taxmann.com 474 (Allahabad). Charge of Service tax was not on the sale of goods but on a taxable

service provided. Unlike a tax which was imposed on the sale of goods, the charge of

Service tax was on the provision of a taxable service provided by the assessee.

No clarity on applicability of Service tax for a takeaway facility.

Sale of food items are made across the counter and customer becomes owner of food-stuff upon handling over by the seller, the transaction would amount to sale of goods but there would be no or insignificant amount of service involved in such a transaction.

Conversely, where food is served in a restaurant to a

visitor, transaction would qualify as a service.

Taxability of Supply of Stent and Valve for heart Surgery

International Hospital Private Ltd V. State of U.P. (2014) 48 Taxmann.com / 47 GST 335 Use of stent or valve during performance of heart

procedure on inplant at hospital is not a case of sale- not liable for VAT

Exempted from Service Tax Sl. 2 OF Notification 25/2012 dated.20.06.2012

Sanjos Parish Hospital v. CTO (2012) 55 VST 208 (Ker HC) If the contract is only for supply – Tax would be

attracted

Can Gross Value of Service includes – Free Supply of Materials

G.D.Builders vs. Uoi[2013]40 taxmann.com 415(Delhi)Bhayana Builders (P.)Ltd. v. CST [2013] 38 taxmann.com

221(New Delhi-CESTAT)(LB)

Value of Free of Cost Supplies provided by recipient not includible in value of services. is neither monetary nor non-monetary consideration paid

by or flowing from service recipient, accruing to benefit of service provider.

It is outside ‘gross amount charged’, as used in section 67 of Finance Act, 1994 and not includible in taxable value of services as such.

Validity of Service Tax Audit: Rule 5A(2)

Section 72 A- Special Audit: introduced with effect from 28th May 2012

Rule 5A(2) of the Service Tax Rules 1994:Every Assessee, shall on demand make available for scrutiny to the officers empowered under Rule 5A(1) or Audit Party

deputed by the Commissioner or the Controller and Auditor General of India or A Cost Accountant OR Chartered Accountant nominated u/s

72A of Finance Act, 1994. Records as mentioned in sub rule 5 (2) Cost Audit Report if any Income tax audit report u/s 44AB of income tax act


Travelite (India) vs. UOI [2014] 48 taxmann.com 227 /46 GST 708(Delhi)

FACTS letter from Department seeking records for scrutiny by audit

party. Assessee challenged said letter and also challenged Rule

5A(2) as well as Instruction issued there under as invalid on ground that –

There is no substantive power under Act to call for records and

Audit is provided only by section 72A and there is no scope for general audit.



Only type of audit contemplated is special audit under Section 72A –

Assessee cannot be subjected to general Service Tax audit’ under Rule 5A(2)-Rule 5A (2) is invalid



HELD Section 72A envisages an audit of an assessee’s records only

in special circumstances, Only type of audit within contemplation of statute is that

stipulated for in Section 72A, i.e. a special audit; Parliament did not intend to provide for a general audit that “ every assessee” may be subjected to , “on demand”.

Thus, any attempt to include provision for such a general audit through back-door, such as through Rule 5A(2) is valid.

Contrary View:

A.C.L. Education Centre (P.)Ltd. vs. UOI [2014] 42 taxmann.com 344 (Allahabad), as corrected vide [2014] 35 STR J 217 (Allahabad)

Rule 5A (2) mandating supply of records / reports to authorized officer is valid

HELD Rule 5A (2) is not ultra vires, as the same is in consonance to

Section 72A of the Finance Act, 1994 and the same was enacted by the competent authority.

New Section 94(2)(k)-From 6th Aug 2014

Empowers Central Govt. to make Rules For proper levy and collection of tax

For imposing of duty – furnishing information and keeping records

on persons liable to pay tax and

For the manner in which such records shall be verified.

Infinity Infotech Parks Ltd. v. UOI [2014] 36 STR 37(cal)

CERA Team of C & AG cannot audit records of ‘Private / Non-

Govt. Companies’ - FACTS Department issued notice alleging evasion by assessee

replying upon audit report of Central Excise Revenue Audit (CERA) team of Comptroller and Auditor General (C & AG)

Assessee challenged that audit itself was illegal and consequent notice was also bad.

Infinity Infotech Parks Ltd. v. UOI [2014] 36 STR 37(cal)

HELD -CERA team of CAG can inspect records – Lying at premises of a – (a) government company or

(b)a company, which received any grant / loan /aid from Government or (c) any Government undertaking, or

There is no provision in any law for audit of a private/public company (other than government company) by CAG or its team.

Hence, audit conducted by CERA team of CAG was invalid. Further, notice issue by Department on basis of said audit and

without containing any specific allegations showing evasion, was also bad in law.

Renting of Immovable Property

Renting for temporary purpose like marriages or other social functions because it includes renting without transfer of possession or control,

Permitting use of property for vending/dispensing machine Allowing erection of tower Renting for entertainment or sports Renting of theatres by owners to film distributor As per definition allowing or permitting usage of immovable

property, without transferring possession of such property, is also renting of immoveable property.

Construction of Complex

Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of certificate of completion by a competent authority.(a) sale of land by the landowner which is not a taxable service; and

(b)construction service provided by the builder / developer. – taxable

Temporary transfer or permitting the use or enjoyment of any intellectual property right

Not defined in the act Intellectual property right includes the following:- • Copyright • Patents Trademarks • Designs • Any other similar right to an intangible property

Development, design, programming, customization, adaptation, up gradation, enhancement, implementation of information technology software

Category of software

Excise Duty Manuf. in India)

Customs Duty

(imports)

Service Tax Vat/CST

Packaged software with MRP

Yes No basic customs duty but CVD and SAD is payable

No Yes

Packaged software where MRP not required

Excise Duty on cost of media

No basic customs duty but CVD and SAD is payable on cost of Media

Service tax on transfer of right to use software

Yes

Tailor made (customized) software

No No Yes Yes

Development, design, programming, customization, adaptation, up gradation, enhancement, implementation of information technology software

Category of software

Excise Duty

(manufacture in India)

Customs Duty

(in case of imports)

Service Tax Vat/CST

Paper license of software and PUK cards

No No Yes Yes

Software downloaded from Indian Supplier

No No Yes-payable by supplier

No

Software downloaded on internet from out of India

No No Yes as import of service

Not Applicable to person Downloading software

Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act

Following activities if carried out by a person for another for consideration would be treated as provision of service.

•Agreeing to the obligation to refrain from an act. •Agreeing to the obligation to tolerate an act or a

situation. •Agreeing to the obligation to do an act.

Agreeing to Tolerate an Act or Situation

Demurrage charges not clearing goods within prescribed period.

Cancellation charges by hotels, airlines, builders, contractors etc.

L D Charges ( late delivery charges) Cheque return charges Penalties, forfeiture of deposit or advance as

penalty Rework charges, deductions on account of

quality issues Non Compete Fees payable for agreeing not to

compete for particular period.

Here is a short story with a beautiful message…

A Little girl and her father were crossing a bridge. The father was kind of scared so he asked his little daughter, “Sweetheart, please hold my hand so that you don’t fall into the river.” The little girl said, “No, Dad. You hold my hand.” “What’s the difference?” Asked the puzzled father. “There’s a big difference,” replied the little girl. “If I hold your hand and something happens to me, chances are that I may let your hand go.

Here is a short story with a beautiful message…

But if you hold my hand, I know for sure that no matter what happens, you will never let my hand go….” In any relationship, the essence

of trust is not in its bind, but in its bond.

So hold the hand of the person who loves you rather than expecting them to hold yours…

This message is too short……but carries a lot of Feelings

Documents

Service Tax Issues & Recent Jurdiciary Prouncements: By Niranjan Swain Past Chairman EIRC of ICAI & General Manager(Finance) Odisha Power Generation Corporation