THE CHAMBER OF TAX CONSULTANTS SC...Page 1 of 21 THE CHAMBER OF TAX CONSULTANTS 3, Rewa Chambers, Ground Floor, 31, New Marine Lines, Mumbai - 400 020 Tel.: 2200 1787 / 2209 0423 Fax:

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THE CHAMBER OF TAX CONSULTANTS

3, Rewa Chambers, Ground Floor, 31, New Marine Lines, Mumbai - 400 020 Tel.: 2200 1787 / 2209 0423 Fax: 2200 2455 E-mail: [email protected]

Visit us at: Website: http://www.ctconline.org

INDIRECT TAXES MEETING

RECENT JUDGMENTS UNDER SERVICE TAX CHAIRMAN : ADVOCATE PRASAD PARANJPE GROUP LEADER : CA RAJIV LUTHIA

THURSDAY, THE 22ND AUGUST,2013

APPLICABILITY OF SERVICE TAX ON CARGO SPACE BOOKING

1) GREENWICH MERIDIAN LOGISTICS PVT. LTD. VS COMMISSIONER OF SERVICE TAX (2013) TIOL 1206…..HON’BLE MUMBAI CESTAT

FACTS OF THE CASE:

The appellant (Greenwich) is a freight forwarding agency and registered as a multi modal transport operator.

They book cargo space in shipping lines and thereafter, they provide/allot the space to their customers.

The department was of the view that the activity undertaken by the appellant comes within the category of "Business Auxiliary Services" on the ground that the appellant was promoting the service rendered by the shipping lines.

Service tax was demanded for the period from 2005 to 2011.

ISSUE:

Whether trading in services (sale of space for cargo in vessel) is liable to service tax under BAS?

ARGUMENTS OF THE APPELLANT:

Appellant has booked cargo space from shipping lines by purchasing the space and thereafter they sold this space to their customers.

No service was rendered to shipping lines but it was a transaction of trading in service.

Appellant is registered as multi modal transport operator under Multi Modal Transportation of Goods Act, 1993 thereby they should be treated as “carriers” and amount recovered by them from their client is freight.

Service tax is not applicable on freight under BAS.

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ARGUMENTS OF THE RESPONDENTS:

Appellant is a freight forwarder and booking/selling cargo space to importers/ exporters thereby they are rendering services to shipping lines.

The consideration received by them by way of mark up in price is element of commission/service charges earned out of marketing activity.

They relied upon various decisions including the decision of Hon’ble Madras High Court in the case of Leaap International Pvt. Ltd. Vs CST (2013) TIOL 363

OBSERVATIONS OF THE COURT:

Cargo space is not goods; therefore, booking of cargo space and trading in cargo space cannot be considered as supply/sale of goods and has to be considered as supply of services.

Any activity other than supply of goods amount to supply of service.

HELD

Prima facie the activities of the appellant are liable under BAS and pre deposit is ordered. LEAAP INTERNATIONAL PVT.LTD.

Hon’ble Chennai CESTAT, vide it’s Misc. Order No.403892013 dated 4th February,2013, has directed pre-deposit in the case of “Leaap International Pvt.Ltd.” registered under the categories of CHA, BAS & BSS.

Leaap provided cargo space already booked by them in airlines/ships to their clients for export of goods.

Leaap paid charges for space booking to respective airlines/steamer agent and in turn charged freight to their customers after adding their mark up.

It was argued by Leaap that the difference between selling price & purchase price is nothing but profit or loss, as the case may be, and ocean freight is not a notified service.

HELD

The services of Leaap are prima facie considered as taxable under BAS under the clause “procurement of goods or services which are inputs for the client”.

The extra charges were accordingly made liable to service tax under BAS.

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PRINCIPLES FOR LEVY OF PENALTY

2) COMMISSIONER OF SERVICE TAX VS MOTOR WORLD (2012) TIOL 418….HON’BLE KARNATAKA HC

ISSUE:

Whether the penalty imposable under the Finance Act, 1994 is automatic?

Whether Sections 76 and 78 of the Act are mutually exclusive?

Even if the ingredients stipulated in Sections 76 and 78 of the Act are established, if "reasonable cause" is shown for the failure, whether the authorities have power to impose penalties given the explicit discretion in Section 80 of the Act?

If after holding that all the ingredients under Sections 76 and 78 exist and no reasonable cause is made out by the assessee, whether the imposition of penalty as prescribed under these two provisions is automatic or whether any discretion is left in the authority in the matter of imposing penalty?

If the order passed by the assessing authority is within the four corners of law, in other words within the parameters prescribed under the aforesaid statutory provisions, whether the revisional authority by virtue of the power conferred under Section 84 of the Act, can suo motu revise the order of the assessing authority and enhance the penalty? (In other words what is the scope of revisionary power under Section 84 of the Act?)

Whether the revisional authority has jurisdiction to impose penalty for the first time when it has not been imposed by the adjudicating or assessing authority by invoking Section 80?


Sections 76, 77, 78 and 80 of the Finance Act reads as under:-

"SECTIONS 76. Penalty for failure to collect or pay service tax. Any person liable to pay service tax in accordance with the provisions of section 68 or the rules made thereunder, who fails to pay such tax shall pay in addition to paying such tax, an interest on that tax in accordance with the provisions of section 75, a penalty which shall not be less than one hundred rupees but which may extend to two hundred rupees for every day during which such failure continues, so, however, that the penalty under this clause shall not exceed the amount of service tax that he failed to pay.

SECTION 77. Penalty for failure to furnish prescribed return. If a person fails to furnish in due time the return which he is required to furnish under section 70 or the rules made thereunder, he shall be liable to a penalty which may extend to an amount not exceeding one thousand rupees.

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SECTION 78. Penalty for suppressing value of taxable service. If the Assistant Commissioner of Central Excise or, as the case may be, Deputy Commissioner of Central Excise in the course of any proceedings under this Chapter is satisfied that any person has, with intent to evade payment of service tax, suppressed or concealed the value of taxable service or has furnished inaccurate value of such taxable service, he may direct that such person shall pay by way of penalty, in addition to service tax and interest, if any, payable by him, a sum which shall not be less than, but which shall not exceed twice, the amount of income tax sought to be evaded by reason of suppression or concealment of the value of taxable service or the furnishing of inaccurate value of such taxable service. SECTION 80. Penalty not to be imposed in certain cases - Notwithstanding anything contained in the provisions of section 76, section 77, section 78 or section 79, no penalty shall be imposable on the assessee for any failure referred to in the said provisions if the assessee proves that there was reasonable cause for the said failure."

Section 80 is emphatic in terms of text that no penalty shall be imposable on the assessee for any failure referred to in Sections 76,77,78 and 79, if the assessee proves that there was a "reasonable cause" for the said failure. Therefore, mere failure to comply with the requirements of the Section does not vest any power in the adjudicating or assessing authority to impose penalty. Once, the failure of the requirements of the said provisions is established, in view of the non-obstante clause in Section 80, the authority has to find out whether there was any "reasonable cause" for the assessee for such failure to comply with the requirement of law. If the assessee makes out a reasonable cause. Section 80 mandates that no penalty shall be imposable on the assessee. Therefore, the sine qua non for the authority to impose penalty is as follows:-

a) existence of ingredients mentioned in Section 76,77 and 78:

b) failure on the part of the assessee to comply with the requirements of the said

provisions:

c) absence of "reasonable cause" for the failure to comply with the requirement of law. HELD

The imposition of penalty under the Act is not automatic. The ingredients mentioned in the Section should exist. In respect of Sections 76, 77 and 78 of the Act, not only the ingredients of those Sections should exist, but also there should be absence of reasonable cause for the said failure.

Sections 76 and 78 are mutually exclusive. If penalty is payable under Section 78, Section 76 is not attracted. Therefore, no penalty can be imposed for the same failure under both the provisions.

Even if the ingredients stipulated in Sections 76 and 78 of the Act are established, if the assessee shows reasonable cause for such failure, then the authority has no power to impose penalty in view of Section 80 of the Act.

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Even after holding that the ingredients stipulated in Sections 76 and 78 exist, and there is no reasonable cause shown for failure to comply with the said provisions, the authority has the discretion regarding the quantity of the penalty to be imposed. However, the penalty to be imposed cannot be less than the minimum, or more than the maximum prescribed under the statute.

The minimum penalty to be imposed is Rs.100/- and not Rs.100/- per day.

If the penalty imposed is not less than the minimum prescribed under law; the revisional authority has no power to enhance the amount of penalty on the ground that it is less.

When the assessing authority, in its discretion has held that no penalty is leviable, by virtue of Section 80 of the Act, the revisional authority cannot invoke its jurisdiction and impose penalty for the first time.

APPLICABILITY OF SERVICE TAX ON CHIT FUND BUSINESS UNDER NEGATIVE LIST REGIME

3) DELHI CHIT FUND ASSOCIATION VS UOI (2013) TIOL 331….HON’BLE DELHI HC (WP NO.4512 OF 2012)

FACTS OF THE CASE:

The petitioner is an association of Chit Fund companies.

Notification No.26/2012-ST dated 20th June,2012 gives abatement to the tune of 70% on the amount charged by the service provider for providing services in relation to chit.

ISSUE:

Whether the provision of service in relation to conducting a chit business is a taxable service tax for the purpose of Section 65B(44)?

ARGUMENTS OF THE PETITIONERS:

There is no question of exemption for part of consideration when service itself is not taxable.

The term “service” as defined in Section 65B(44) specifically excludes mere transaction in money or actionable claim except in case of conversion of FOREX transactions.

The foreman is the one who organizes the chit and conducts auction proceedings for which he charges nominal commission say 5%.

The discount offered by the bidders is distributed amongst all the subscribers.

The chit fund is somewhat like recurring deposit.

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The chit fund is regulated by the Chit Fund Act, 1982 which contains various provisions related to registration, conduct of business, rights/duties of subscribers/ foreman etc.


Educational Guide, in Para 2.8, clarified that consideration/commission received by a chit fund for services of organizing/managing chit fund is not a transaction in money and is chargeable to service tax.


The answer given by the Educational Guide is not correct having regards to proper interpretation of statutory provisions.

Collecting consideration from the members is transaction in money and would not come within the purview of definition of service.

HELD

Service tax is not chargeable on the foreman running the business of chit fund.

APPEAL FILING FEES FOR REFUND CLAIMS

4) GLYPH INTERNATIONAL LTD. VS CCE, NOIDA (2013) TIOL 1103…. HON’BLE DELHI

CESTAT (LB) FACTS OF THE CASE:

Appellant filed an appeal before the Hon’ble CESTAT against rejection of refund/ rebate of service tax by CCE (Appeals).

Registry raised the objection for quantum of appeal filing fees in case of these appeals dealing with refund.

There are contrary views taken by different Tribunals about applicability of fees on appeals related to refunds therefore the matter is referred to Larger Bench.

ISSUE:

Whether appeal filing fees is applicable for appeals related to rejection of refunds/ rebates?


Section 86(6) of the Finance Act, 1994 deals with provisions related to appeals to Appellate Tribunal and payment of fees thereon.

Section 86(6) was amended w.e.f. 1st November,2004. Prior to 1st November,2004, the fees was to be charged on an appeal pertaining to refund @Rs.200/-.

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However, w.e.f. 1st November,2004, Section 86(6) clearly speaks of charging of fees only in respect of demand of service tax, interest or levy of penalty.


W.e.f. 1st November,2004, Section 86(6) provided for levy of fees for appeals pertaining only in respect of demand of service tax, interest & penalty.

Section 86(6) neither speaks of refunds/rebates nor there is a residuary clause to cover appeals other than demand of service tax, interest & penalty.

HELD

No filing fees is payable in respect of appeals pertaining to refunds/rebates.

Similar provisions U/s.129A(6) of the Customs Act,1962 and Section 35B(6) of the Central Excise Act, 1944 which are identical providing for no fees in respect of appeal pertaining to refund of duty.

ISSUANCE OF SHOW CAUSE NOTICE

5) CCE & ST LTU, BANGALORE VS. ADECCO FLEXIONE WORKFORCE SOLUTIONS LTD (2011) TIOL 635…HON’BLE KARNATAKA HIGH COURT

FACTS OF THE CASE:

The assessee was providing manpower to various companies. However, there was delay in payment of service tax on account of delay in recoveries from the clients. But the entire service tax was paid along with interest u/s 75 of the Finance Act, 1994 before the show cause notice was served upon them. The impugned SCN proposed to levy penalty u/s 76 of the Act for delay in payment of service tax.

Section 73(3) of the Act, provides that if the payment of service tax along with interest is made by the assessee, and the same is intimated to the authorities, the provisions of Section 73(1) for issuing the SCN should not be invoked.

The assessee preferred an appeal against the order invoking penalty u/s 76. The said penalty was waived by the appellate authority considering the provision of Section 73(3) of the Act.

Aggrieved by the same, the appellants are before the Hon’ble High Court. ISSUE:

Whether penalty proceedings shall be initiated against the assessee, who has paid the amount of service tax along with interest before the SCN was issued?


The delay in payment of service tax was with an intention to evade payment of tax. The assessee received the amount of service tax from the clients but delayed in discharging the

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same to the exchequer in time. Hence, the assessee should be castigated for their wrongdoing by imposing penalties on them even if they have discharged service tax along with interest.


The service tax payment was made before the issuance of show cause notice and the delay in payment was made good by payment of interest to the exchequer. The reason for belated payment of service tax was on account of delay in recovery of dues from the clients because of the economic recession in the industry.

There was never any malafide intention to defraud the revenue or to evade the payment of tax. Hence, their case falls within the provisions of section 73(3) of the Act, by virtue of which penalty u/s 76 should not be imposed on them for delay in payment of service tax.


When the service tax along with interest is discharged entirely by the assessee and the same is intimated to the department, then invoking provisions of Section 73(1) for issue of show cause notice by the department is not tenable in law.

The provisions of Section 73(3) clearly explicit that no notice shall be served u/s 73(1) of the Act, when the payment of service tax is made along with interest. In such scenario, it is unfortunate that department is harassing the assessee and wasting the Courts time due to ignorance of law and indulging in this extravaganza of unnecessarily invoking penalty provisions on the assesses who have paid their tax dues with interest.

The department officers are paid salary to act in accordance with the law and to take action against the defaulters who have not paid service tax inspite of serving notices on them. The department’s attitude of harassing the honest tax payers should be changed and they should be made understand that object of enactment and the express provisions contained in Section 73(3). If the notices are issued contrary to this Section, then the persons to be punished are the one who have issued SCN rather than the one against whom it is issued. (PARA 3)

HELD

The appeal was dismissed and it was ordered to the Commissioner of Large Tax Payer Unit to issue circular to the concerned authorities for not contravening the provisions of sub-section (3) of section 73 of the Act.

APPLICABILITY OF SERVICE TAX ON REIMBURSEMENT OF EXPENSES

6) INTERCONTINENTAL CONSULTANTS & TECHNOCRATS PVT. LTD. VS UOI (2012) TIOL 966….HON’BLE DELHI HC (WP NO.6370/2008)

FACTS OF THE CASE:

Petitioner is a company providing consulting engineering services.

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It specialises in highways, structures, airports, urban and rural infrastructural projects and is engaged in various road projects outside and inside India.

In the course of the carrying on of its business, the petitioner 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.

A demand was raised for including such reimbursable expenses in the gross value for the period from October,2002 to March,2007.

ISSUE:

Whether Rule 5 of the Service Tax (Determination of Value) Rules, 2006 is unconstitutional & ultra vires Section 66 & 67 of the Finance Act ,1994 to the extent it includes the reimbursement of expenses in the value of taxable service for the purpose of charging service tax

ARGUMENTS OF THE PETITIONER:

The charge of service tax is effectuated in Section 66 of the Act. It provides that “there shall be levy of tax (hereinafter referred to as the service tax) @ 12% of the value of taxable services referred to in sub-clauses…………….of Section 65 and collected in such manner as may be prescribed”.

Section 67 prescribes the valuation mechanism for charging service tax.

The Service Tax (Determination of Value) Rules, 2006 was brought into effect from 01.06.2007 (correct date should be 19/04/2006). Rule 5 provided for “inclusion in or exclusion from value of certain expenditure or costs”.

Rule 5(1) of the Rules, in as much as it provides that all expenditure or costs incurred by the service provider in the course of providing the taxable service shall be treated as consideration for the taxable service and shall be included in the value for the purpose of charging service tax goes beyond the mandate of Section 67.


Under Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006, service tax was to be charged on the gross value including reimbursable and out of pocket expenses such as travelling, boarding and lodging, transportation, office rent, office supplies and utilities,

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testing charges, etc. which were “essential expenses for providing the taxable service of consulting engineers”.

Prior to 19.04.2006, under Section 67 of the Finance Act, 1994, the value of taxable services in relation to consulting engineer services provided or to be provided by a consulting engineer to the client shall be the gross amount charged from the client in respect of engineering services.


Section 67 as it stood both before 01.05.2006 (correct date should be 18/04/2006) and after quantifies the charge of service tax provided in Section 66, which is the charging section.

Section 67, both before and after 01.05.2006 (correct date should be 18/04/2006) authorises the determination of the value of the taxable service for the purpose of charging service tax under Section 66 as the gross amount charged by the service provider for such service provided or to be provided by him, in a case where the consideration for the service is money.

The underlined words i.e. “for such service” are important in the setting of Section 66 and 67.

The charge of service tax under Section 66 is on the value of taxable services. The taxable services are listed in Section 65(105). The service provided by the petitioner falls under clause (g).

Section 66 levies service tax at a particular rate on the value of taxable services. Section 67 (1) makes the provisions of the section subject to the provisions of Chapter V, which includes Section 66. This is a clear mandate that the value of taxable services for charging service tax has to be in consonance with Section 66 which levies a tax only on the taxable service and nothing else. There is thus in built mechanism to ensure that only the taxable service shall be evaluated under the provisions of 67. Clause (i) of sub-section (1) of Section 67 provides that the value of the taxable service shall be the gross amount charged by the service provider “for such service”.

Reading Section 66 and Section 67 (1) (i) together and harmoniously, it seems clear to us that 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.

Sub-section (4) of Section 67 which enables the determination of the value of the taxable service “in such manner as may be prescribed” is expressly made subject to the provisions of sub-section (1).

The thread which runs through Sections 66, 67 and Section 94, which empowers the Central Government to make rules for carrying out the provisions of Chapter V of the Act is

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manifest, in the sense that only the service actually provided by the service provider can be valued and assessed to service tax.

Rule 5 (1) of the Rules runs counter and is repugnant to Sections 66 and 67 of the Act and to that extent it is ultra vires. It 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”.

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. It is no answer to say that under sub-section (4) of Section 94 of the Act, every rule framed by the Central Government shall be laid before each House of Parliament and that the House has the power to modify the rule.

It is only the value of such service that is to say, the value of the service rendered by the petitioner to NHAI, which is that of a consulting engineer, that can be brought to charge and nothing more. The quantification of the value of the service can therefore never exceed the gross amount charged by the service provider for the service provided by him.

Even if the rule has been made under Section 94 of the Act which provides for delegated legislation and authorises the Central Government to make rules by notification in the official gazette, such rules can only be made “for carrying out the provisions of this Chapter” i.e. Chapter V of the Act which provides for the levy, quantification and collection of the service tax.

The power to make rules can never exceed or go beyond the section which provides for the charge or collection of the service tax.

HELD

Rule 5 (1) which provides for inclusion of the expenditure or costs incurred by the service provider in the course of providing the taxable service in the value for the purpose of charging service tax is ultra vires Section 66 and 67 and travels much beyond the scope of those sections. To that extent it has to be struck down as bad in law.

The expenditure or costs incurred by the service provider in the course of providing the taxable service can never be considered as the gross amount charged by the service provider “for such service” provided by him.

Apart from travelling beyond the scope and mandate of the Section, the Rule may also result in double taxation. If the expenses on air travel tickets are already subject to service tax and is included in the bill, to charge service tax again on the expense would certainly amount to double taxation.

7) SHRI BHAGAVATHY TRADERS VS CCE, COCHIN (2011) TIOL 1155…. HON’BLE

BANGALORE CESTAT (LB)

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FACTS OF THE CASE:

The appellants are engaged in the business of rendering C&F agency services to several persons including M/s Indian Oil Corporation Ltd.

Appellant were preparing two invoices, one for service charges and another for amounts claimed as reimbursement of expenses incurred towards transportation charges, loading and unloading charges, rent, salary to the staff, electricity, telephone charges, stationery charges, courier charges, etc. & paying service tax only on the service charges.

The lower authorities have included the reimbursement expenses in the value of taxable service and raised the demand of service tax on entire amount.

The Tribunal (Referral Bench) noted various contrary decisions, few of which holding that reimbursement should not form part of gross value of service as against a decision in the case of Naresh Kumar & Co. Pvt. Ltd. Vs CST that the reimbursement expenses are to be included in the gross value of taxable services.

Due to these contrary decisions, the matter is referred to Larger Bench.

ISSUE:

Whether reimbursement of expenses is to be included for determining the value of taxable service for the period from April,2003 to March,2006 ?


Section 67 provides that the value of taxable service is defined as "gross amount charged for the services rendered".

Board's Circular No. B 43/1/97 dated 6.6.1997 clarifies that value of Customs House Agent Service and Steamer Agent Service did not include several expenses incurred on account of exporter/importer.

Circular No. F No. 343/5/97 dated 2.7.1997 clarifies that the value of Consulting Engineering Service and Manpower Recruitment Service did not include amount incurred on behalf of the clients and which are reimbursed on actual basis.

Circular No. B 11/1/1998 TRU dated 7.10.1998, issued in the context of value of Market Research Agency Service and Security Agency Services clarifies that expenses incurred on travelling, boarding and lodging which are reimbursed are not to be included in the value of taxable service.

Only with effect from 19.4.2006, the provisions of Section 67 have undergone changes and the concept of "consideration" has been introduced and by virtue of Rule 5 of the Service

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Tax (Determination of Value) Rules, 2006, the consideration is defined to include reimbursement of expenses also.

Appellant relied upon various decisions of Hon’ble Tribunals wherein it is held that reimbursement of expenses do not form part of value of taxable services.


In view of Section 67 of the Finance Act, 1994 during the relevant period, the service tax has

been levied on the gross amount paid by service recipient and that the gross amount will

include all expenses incurred towards provision of service till the same is consumed at the

destination, since the service tax is a destination based consumption tax.

Rule 6 (8) of Service Tax Rules, 1994, as it existed in the relevant time, provided that "the

value of taxable service in relation to service provided by clearing and Forwarding Agent to a

client for rendering services of clearing and forwarding operations in any manner shall be

deemed to be gross amount of remuneration or commission (by whatever name called) paid

to such agent by the client engaging such Agent".


The concept of reimbursement will arise only when the person actually paying was under no obligation to pay the amount and he pays the amount on behalf of the buyer of the goods and recovers the said amount from the buyer of the goods. Similar is the situation in the transaction between a service provider and the service recipient. Only when the service recipient has an obligation legal or contractual to pay certain amount to any third party and the said amount is paid by the service provider on behalf of the service recipient, the question of reimbursing the expenses incurred on behalf of the recipient shall arise.

The various Circulars of the Board relied upon by the learned Advocate for the assessee clearly referred to amounts payable on behalf of the service recipient. For example, the Customs House Agent paying the Customs duty to the Customs Department, paying the charges levied by the Port Trust to the Prot Trust, paying the fee for testing to the Testing Organization are clearly on behalf of the importer/exporter and the same are recoverable by the CHA as reimbursement, that too on actual basis. These Circulars cannot be held to be in support of the claim of the assessee that they can split part of the amount as reimbursable expenses and the rest as towards service charges.

What are costs for input services and inputs used in rendering services cannot be treated as reimbursable costs.

HELD

Reimbursement of expenses is to be included in the value of taxable service to the extent the obligation primarily is on the service provider to incur and pay for the same.

NON/LATE FILING OF NIL RETURNS

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8) SUCHAK MARKETING PVT. LTD. VS CST, KOLKATA (2013) TIOL 963….HON’BLE KOLKATA CESTAT

FACTS OF THE CASE:

Appellant is engaged in providing the taxable services under the category of “construction in respect of commercial or industrial building and civil structure services”.

The appellants had filed six “NIL” returns in ST-3 form for the period from September, 2005 to March, 2008 on 18th November,2008.

Show-cause notice was issued to them proposing penalty under Rule 7C of the Service Tax Rules, 1994 and Section 77 of the Finance Act, 1994.

The adjudicating authority directed the appellants to pay Rs.12,000/- for each ST-3 Return and also imposed penalty of Rs.2,000/- U/s. 77 of the Finance Act, 1994.

Aggrieved by the same, the appellant had filed appeals before the ld. Commissioner (Appeals).

The ld. Commissioner (Appeals) dropped the penalty U/s. 77 of the Finance Act, but confirmed the penalty of Rs.12,000/- against the appellant under Rule 7C of Service Tax Rules,1994.

ISSUE:

Whether late fees is payable for non/late filing of NIL service tax return when no service is rendered by the assessee during relevant period.


Since the Ld. Commissioner (Appeals) has already dropped the penalty under Section 77 of the Finance Act, 1994, there is no reason to waive the late fees directed to be paid under Rule 7C of the Service Tax Rules, 1994.


In view of the Board's Circular No.97/8/07-ST dated 23.08.2007, in the event, no service is rendered by the service provider, there is no requirement to file ST-3 Returns.

As per Rule 7C of the Service Tax Rules, in the event, “NIL” returns are filed, the assessing officer had the discretion to waive the late fees for filing the ST-3 Returns

HELD

In view of proviso to Rule 7C, no late filing fees is payable when the assessee has delayed/not filed any service tax return for a particular period when no service is rendered by the assessee.

WORKS CONTRACT COMPOSITION SCHEME

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9) VISTAR CONSTRUCTION PVT. LTD. VS UOI (2013) TIOL 73….HON’BLE DELHI HIGH COURT (WP NO.5636/2010)

FACTS OF THE CASE:

Petitioners are rendering services classifiable under the category of “Works Contract Services”

Petitioners are paying service tax under the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007.

The rate of service tax under the said Rules was increased from 2% to 4% w.e.f. 1st March,2008

Petitioners have rendered services prior to 1st March,2008 for which payments are received by them after 1st March,2008.

Show Cause Notice was issued to petitioners demanding service tax @4% on the value of services rendered prior to 1st March,2008 in view of CBEC Instructions F. No.545/6/2007-TRU dated 28th April,2008

ISSUE:

Whether the CBEC Instruction F.No.545/6/2007-TRU dated 28th April,2008 is contrary to law and be declared invalid?

Whether the revision in rate of Service Tax under Works Contract Composition Scheme w.e.f. 1st March,2008 is applicable to services rendered prior to 1st March,2008 for which payments are received after 1st March,2008?


Since the services were rendered prior to 1st March,2008, the applicable rate would be the rate prevailing on the date of rendering services, which, in the instant case is 2%.


By virtue of the impugned instruction dated 28.04.2008, the rate of service tax is to be determined based on the date of receipt of payment and not on the date of rendition of service


On going through the said instruction and particularly para 3 thereof it appears that that the view of the respondents is that service tax becomes chargeable on receipt of payment for the service whether or not the services are performed. This view is clearly wrong.

Hon’ble Supreme Court in the case of Association of Leasing & Financial Service Companies Vs. UOI : 2010 (20) STR 417 (SC) = (2010-TIOL-87-SC-ST-LB) has categorically held as under :

http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=42&filename=legal/sc/2010/2010-TIOL-87-SC-ST-LB.htm

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“Thus, the impugned tax is levied on these services as taxable services. It is not a tax on material or sale. The taxable event is rendition of service.”

Therefore, the taxable event, in so far as service tax is concerned, is the rendition of the service. That being the position, the taxable events in the present writ petition had admittedly occurred prior to 01.03.2008.

At that point of time the rate of service tax applicable in respect of the services in question was 2% and not 4%, which came into effect only on or after 01.03.2008. In both the writ petitions the date of receipt of payments was subsequent to 01.03.2008 but that would not make any difference because it is not receipt of payment which is the taxable event but the rendition of service.

It should also be mentioned that at that point of time neither was Rule 5B of the Service Tax Rules, 1994 in effect nor was Section 67A of the Finance Act, 1994 inasmuch as the latter provision was inserted in 2012 which came in effect from 28.02.2012.

Furthermore, even Rule 4(a)(i) of the Point of Taxation Rules, 2011 was not applicable to the facts of the present case in as much as those rules also came into effect much later in 2011.

HELD

The rate of tax applicable on the date on which the services were rendered would be the one that would be relevant and not the rate of tax on the date on which payments were received.

The instruction dated 28.04.2008 is contrary to the law declared by the Supreme Court and is clearly invalid.

FILING OF DECLARATION FOR EXPORT REBATE

10) WIPRO LTD. VS UOI (2013) TIOL 119….HON’BLE DELHI HIGH COURT FACTS OF THE CASE:

Petitioner was engaged in rendering IT enabled services such as technical support services, back-office services, customer-care services etc. to its various clients all of whom were situated outside India.

The petitioner lodged two claims claiming rebate in respect of service tax paid on input services.

In respect of the services rendered by the appellant between 16.03.2005 and 30.09.2005, the claim for rebate was filed on 15.12.2005 and in respect of the services rendered between 01.10.2005 and 31.12.2005, the claim was filed on 17.03.2006.

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The declaration required to be filed in terms of paragraph 3 of the Notification No.12/2005-ST dated 19th April,2005 was filed by the petitioner only on 05.02.2007

Show Cause Notices were issued to the petitioner proposing to reject the rebate claims on the ground that declaration was not filed “prior to the date of export”.

The rebate claims were rejected by lower authorities and the same were upheld by the Hon’ble CESTAT.

ISSUE:

Whether the filing of the declaration in terms of paragraph 3 of the notification No.12 after the date of the export of the services would amount to non-compliance with the condition disentitling the assessee from the rebate claims?


Given the nature of services rendered by the Petitioner, it is impossible to give the description, value and amount of the input services used in the services that are exported and that in any case, having regard to the object and purpose of the condition which is to prevent misuse of the rebate claim, there cannot be any objection if the relevant details are furnished in the rebate claim which are capable of verification with the help of documentary evidence which would by then be available.


The reasoning adopted by the lower authorities for rejecting rebate claims that this condition of filing declaration is for the purpose of preventing the evasion of duty by misuse of this facility and, therefore, if this condition, though a procedural condition, is violated, the rebate would not be admissible is proper.


Any condition imposed by the notification must be capable of being complied with. If it is impossible of compliance, then there is no purpose behind it.

The nature of the services of the petitioner is such that they are rendered on a continuous basis without any commencement or terminal points; it is a seamless service. It involves attending to cross-border telephone calls relating to a variety of queries from existing or prospective customers in respect of the products or services of multinational corporations.

The services rendered by the petitioner in its call centre or BPO centre are considered exported, as the services are rendered to persons outside the country. Thus every phone call is an export of taxable service.

In a call centre where there are hundreds of employees attending to calls from abroad at any given point of time, it is next to impossible to anticipate the date of export and with precision demarcate the point of time prior to the export and also determine the point of time when the export may be said to have been completed. What can be the determining

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factor? Is each call to be considered as an independent export of taxable services? Is the total number of calls attended to on any particular day to be considered as the export of taxable services? Or is the petitioner to reckon the calls on a monthly basis? It needs also to be remembered that there is no way of anticipating any call or the number of calls the call centre would be required to attend on a single day, so that the petitioner can comply with the requirement of filing a declaration “prior” to the date of export of taxable service. The very bedrock of the business is the attending of calls and given that they are received on a continuous basis, we find it difficult to conceive of any possibility as to how the petitioner could not only determine the date of export but also anticipate the call so that the declaration could be filed “prior” to the date of export.

In addition to this practically impossible situation, the petitioner is also required by the procedure laid out in paragraph 3 of the notification to describe, value and specify the amount of service tax and cess payable on input services actually required to be used in providing taxable service to be exported. With the possible exception of the description, we are unable to appreciate how the service-exporter will be in a position to value and specify the amount of service tax/ cess payable on the input services actually required to be used in providing the exported service. An estimate is ruled out by the use of the word “actually required”; and unless what was actually required is known, it is impossible to value and specify the amount of service tax or cess payable on the input services. That will be known only when the bill or invoice for the input-services is received by the petitioner. The bill or invoice is received after the calls are attended to. Thus, it seems to us that in the very nature of things, and considering the peculiar features of the petitioner's business, it is difficult to comply with the requirement “prior” to the date of the export.

HELD

In the facts and circumstances of the case, rebate claims allowed since the petitioner could not have complied with the requirement prior to the date of the export of the IT-enabled services.

However, the Hon’ble HC declined to answer the broader question whether the requirement of paragraph 3 of the Notification No.12 /2005-ST dated 19.04.2005 is merely procedural and hence directory or is substantive and hence mandatory.

APPLICABILITY OF SERVICE TAX ON HOTELS & RESTAURANTS

11) KERALA CLASSIFIED HOTELS AND RESORTS ASSOCIATION & OTHERS VS UOI & OTHERS (2013) TIOL 533…HON’BLE KERALA HIGH COURT

FACTS OF THE CASE:

Through Finance Act, 2011, following two new services were brought to tax net namely “Restaurants Services” and “Short term Accommodation in Hotels/Inn/Guest Houses/Campsites for a continuous period of less than 3 months” (Section 65(105)(zzzzv))” & (Section 65(105)(zzzzw))” w.e.f. 1st May,2011.

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The relevant definition of the taxable services reads as under: (zzzzv) : services provided or to be provided to any person, by a restaurant, by whatever name called, having the facility of air-conditioning in any part of the establishment, at any time during the financial year, which has licence to serve alcoholic beverages, in relation to serving of food or beverage, including alcoholic beverages or both, in its premises; (zzzzw) : Services provided or to be provided to any person, by a hotel, inn, guest house, club or camp-site, by whatever name called, for providing of accommodation for a continuous period of less than three months;"

A writ was filed by Kerala Classifieds Hotels and Resorts Association & Others in Hon’ble Kerala High Court challenging constitutional validity of the above stated provisions.

ISSUE:

Whether service tax levied on the activity of serving of food and beverage including alcoholic beverages is constitutionally valid levy under Entry 97 of Union List?

Whether service tax can be levied on the short term accommodation in hotels, inn, guest house, etc is constitutionally valid levy under Entry 97 of Union List?


The levy of service tax on services relating to serving of food and beverages, including alcoholic beverages is beyond the legislative competence of Parliament since the subject matter squarely falls within the legislative power of the States under Entry 54 of List II of the Seventh Schedule to the Constitution.

Similarly, the levy of tax on accommodation in hotels, inn , guest house, etc is subject matter of the State Legislation under Entry 62 of List II of the Seventh Schedule to the Constitution and hence it beyond legislative competence of the Parliament to impose service tax on the said activity.

The origin of Service Tax was introduced by the Parliament by exercising power under the residuary entry 97 of List I. Even though Entry 92C was brought under List I of the Seventh Schedule to enable “Levy of Taxes on Services”, the same was never notified by the Government. Hence, when the State already has power to levy tax on the above said activities under the respective entries of List II, then by invoking the residuary power under entry 97, the Union or the Parliament is enforcing tax on sale of goods which is absolutely within the exclusive competence of the State Legislature.

The definition incorporated in the Article 366(29-A) of the Constitution, provides an inclusive meaning to “tax on sale and purchase of goods” wherein in sub-clause (f) it has been clearly stated that the supply, whether it is by way of or as a part of any service of goods either being food or any other article for human consumption or any drink either intoxicating or not intoxicating, such supply shall deemed to be sale of goods. Hence, the intention of the

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legislation is to tax the service part included in the sale of goods by creating a deeming fiction under the said clause of Article 366. The service portion included in such activities necessarily form part of the sale of goods, on which the State alone has an exclusive power to enact the law imposing tax on such transactions.


The levy of service tax on the service provided by restaurants and hotels is brought in terms of Article 246 of the Constitution read with entry 97 of List I. The clause (1) of Article 246 of the Constitution grants power to the Parliament to make laws with respect to any of the matters enumerated in List I in the seventh schedule( i.e. Union List). The Parliament has not trespassed its power under the Statute to levy tax on the services provided by the restaurants and hotels. The tax is not imposed on the serving of the food or the alcoholic beverages, but its on the services provided to a person by restaurants and hotels. Hence, the contention for the lack of legislative power cannot be sustained.

The reliance was placed on the Hon’ble Supreme Court judgment in M.P. Vs. Rakesh Kohli (2012) 6 SCC 312, wherein the SC lead down the parameters to be considered while dealing with the constitutional validity of a statute. The principles emerging from the said decision are (i) there is always presumption in favour of constitutionality of a law made by Parliament or a State Legislature,(ii) no enactment can be struck down by just saying that it is arbitrary or unreasonable or irrational but some constitutional infirmity has to be found,(iii) the court is not concerned with the wisdom or unwisdom, the justice or injustice of the law as Parliament and State Legislatures are supposed to be alive to the needs of the people whom they represent and they are the best judge of the community by whose suffrage they come into existence,(iv) hardship is not relevant in pronouncing on the constitutional validity of a fiscal statute or economic law, and (v) in the field of taxation, the legislature enjoys greater latitude for classification.” Similar views were expressed by in case of various assessee by the Hon’ble Supreme Court.


When the validity of a law which imposes tax is called into question, it is necessary for the Court to find out whether the impugned legislation has trenched upon the legislative powers of the State Government, keeping in mind the limitations as held in the judicial decisions held by the Supreme Court while considering the constitutional validity of levy of tax. The judgments cited and relied upon by either side have to be referred before proceeding to consider the validity of the levy of service tax.

This distinction was elaborated upon by holding that the Article 366 (29-A) was brought to effect in the 46th Amendment of the Constitution only with an intention to expand the tax base thereby bringing the concept of “deemed sale” to levy tax on the transactions as specified in sub-clauses (a) to (f) of the said Article. This principle was followed by the Supreme Court in the Assn. of Leasing and Financial Service Companies V. UOI (2011) 2 SCC 352. (PARA 19)

In T.N. Kalyana Mandapam Assn Vs.UOI (2004) 5 SCC 632, the Hon’ble Supreme Court held that in regards to Article 366 (29-A) (f), it is the State only which has been permitted to

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impose tax on the supply of food and drink by whatever mode it may be made and supply of services is not included within the definition of sale and purchase of goods. The operative words of the said sub-clause of the article creates a deeming fiction for it to be considered as sale of goods. However, since the question before the Hon’ble SC in this case was in relation to the services of mandap-keepers, the same is not much relevant for the deciding the question before this court. (PARA 18)

The incidence to levy tax in the said article 366 (29-A)(f) is on the supply of any goods by way or as a part of any service. The said transaction is considered to be a deemed sale and permits the State Government to levy tax on such supply or transfer, though the transfer in such transactions is during the course of service. The Parliament cannot exercise the residuary power under Entry 97 to levy service tax on the same by conferring it to be a different component of “service”.

By giving effect to Article 366 (29-A) in the 46th amendment of the Constitution, the constitution has permitted to tax sale of goods during service. Accordingly, the entry 54 of List II has to be read giving the meaning of sale of goods as stated in the constitution. It confirms that service forms part of the sale of goods and it is the power of State Government to impose tax on such transactions, which has been enacted by the State Government. The Supreme Court in the case of K. Damodarasamy Naidu & Bros. Vs. State of T.N. (2000) 1 SCC 521 had observed that when the tax is on the supply of food and drink, it is of no relevance that the such supply is by way of service or as a part of a service. The transaction cannot be split up into two components, even though the supply of food in the restaurant is part of the service that they render. (PARA 20)

The second question before this court is in relation to the imposition of service tax on accommodation in hotels, inn, guest house, club, etc., which is charged by the State as a Luxury under the Kerala Tax Luxury Act in pursuance of Entry 62 of List II of the Seventh Schedule of the Constitution. The meaning of the term luxuries as observed in Godfrey Philips India Ltd Vs. State of U.P. (2005) 2 SCC 515 is held to be an activity of enjoyment or indulgence which is costly or which is generally recognized as being beyond the necessary requirements of an average member of the society. In our view, considering the fact that the State Legislation has exercised its power to impose tax on the luxuries under Entry 62 of State List, then the imposition of service tax on the same transaction by conferring it as services provided by the hotels and such other establishments is beyond the power of the Parliament in the Constitution. (PARA 21)

HELD

The services as defined in sub-clauses (zzzzv) and (zzzzw) of Section 65(105) of the Finance Act, 1994 coming into effect from 1st May,2011 are beyond the legislative competence of the Parliament, as the same are the State subject in view of Entry 54 & 62 of the State List respectively.

The payments of service tax being made under the said sub-clauses, are entitled for refund of the same.

Documents

THE CHAMBER OF TAX CONSULTANTS SC...Page 1 of 21 THE CHAMBER OF TAX CONSULTANTS 3, Rewa Chambers, Ground Floor, 31, New Marine Lines, Mumbai - 400 020 Tel.: 2200 1787 / 2209 0423 Fax: