SERVICE TAX Points for Consideration

1
Service Tax Conference NIRC- ICAI
Saturday, 21st July 2007
Presented By J.K. MITTAL (Advocate) Co-Chairman
(Indirect Taxes) ASSOCHAM LL.B.,F.C.A., F.C.S.
NEW DELHI
2
Service Tax Expansion under exiting taxable
services w.e.f. 1-6-2007

•   
•   Telecommunication service
• Mining service
•   Renting of immovable property service
•   works contract services
•   Development and supply of content service
• Asset management including portfolio
• Management service
•   Design services

3
Renting of immovable property service

• Taxable service means any service provided or to
  be provided, to any person, by any other person
  in relation to renting of immovable property for
  use in the course or furtherance of business or
  commerce. Section 65 (105)(zzzz).
• Explanation 2.For the purposes of this
  sub-clause, an immovable property partly for use
  in the course or furtherance of business or
  commerce and partly for residential or any other
  purposes shall be deemed to be immovable property
  for use in the course or furtherance of business
  or commerce.

4
Renting of immovable property service

• Immovable property Explanation 1
• immovable property does not include-
• (c) land used for educational, sports, circus,
  entertainment and parking purposes and
• (d) building used solely for residential
  purposes and buildings used for the purposes of
  accommodation, including hotels, hostels,
  boarding houses, holiday accommodation, tents,
  camping facilities.
• Why service tax is being charged for Parking at
  airport?

5
Renting of immovable property service

• use in the course of furtherance of business or
  commerce
• Explanation.For the purposes of this clause,
  for use in the course or furtherance of business
  or commerce includes use of immovable property
  as factories, office buildings, warehouses,
  theatres, exhibition halls and multiple-use
  buildings. Section 65(90a).
• Whether Property given for running Govt. offices
  like service tax, income tax offices, railways,
  similarly, post officers etc.?
• Whether Property given for running offices by a
  Govt. company/ Govt. Department doing activities
  in competition with private sector companies like
  BSNL Telephone services, Parsar Bharti etc.?

6
Renting of immovable property service

• renting of immovable property includes
  renting, letting, leasing, licensing or other
  similar arrangements of immovable property for
  use in the course or furtherance of business or
  commerce but does not include
• (i) renting of immovable property by a religious
  body or to a religious body or
• (ii) renting of immovable property to an
  educational body, imparting skill or knowledge or
  lessons on any subject or field, other than a
  commercial training or coaching centre
• When tax is only for rending of property for
  business or commerce then what was the need to
  giving exclusion to giving property to a
  religious body or educational body as these are
  neither business nor commerce?

7
Renting of immovable property service Deduction
for Property Tax paid

• Deduction of property tax paid from value of
  taxable service - Notification No. 24/2007-ST,
  dated 22-05-2007 .
• Self-adjustment of service tax payable on the
  property tax for which deduction not claimed -
  Rule 4C
• Property tax paid for whole property but let
  out portion of it how much amount shall be
  deducted?

8
Renting of immovable property service Whether
exemption available for first 8
lakhs Notification No. 6/2005-S.T., dated
1-3-2005

• hereby exempts taxable services of aggregate
  value not exceeding eight lakh rupees in any
  financial year from the whole of the service tax
  leviable thereon under section 66 of the said
  Finance Act ..
• the aggregate value of taxable services rendered
  by a provider of taxable service from one or more
  premises, does not exceed rupees eight lakh
  rupees in the preceding financial year. .
• "aggregate value not exceeding eight lakh rupees"
  means the sum total of first consecutive payments
  received during a financial year towards the
  gross amount, as prescribed under section 67 of
  the said Finance Act, charged by the service
  provider towards taxable services till the
  aggregate amount of such payments is equal to
  eight lakh rupees .

9
Renting of immovable property service Doubts and
Questions

• Whether Joint owner shall be taxed separately?
• Whether minor shall be liable to pay service tax?
• Whether minor can get registration even if not
  having PAN or his/ her parent PAN would suffice?
• Whether can get centralize registration for
  having property under different jurisdiction?
• Whether assessee is entitle for CENVAT credit of
  duty/ taxes paid on input, input service or
  capital goods?

10
Finance Ministers Reply to the debate on the
Finance Bill 2007-08 in the Lok Sabha on May 3,
2007

• Renting is also an activity that goes into the
  calculation of GDP. It is a value added service.
  It is liable to service tax. That is the
  universal practice. We have introduced service
  tax only in respect of renting of large
  commercial properties.

11
Renting of immovable property service Goodricke
Group Ltd. and Others v State of West Bengal and
Others reported in (1995) Supp (1) SCC 707

• 20.It is thus clear from the aforesaid decision
  that merely because a tax on land or building is
  imposed with reference to its income or yield it
  does not cease to be a tax on land or building.
  The income or yield of the land/building is taken
  merely as a measure of the tax it does not alter
  the nature or character of the levy. It still
  remains a tax on land or building. There is no
  set pattern of levy of tax on lands and buildings
  - indeed there can be no such standardisation. No
  one can say that a tax under a particular entry
  must be levied only in a particular manner, which
  may have been adopted hitherto.

12
Renting of immovable property service Goodricke
Group Ltd. and Others v State of West Bengal and
Others reported in (1995) Supp (1) SCC 707

• 31.The power of the legislature to make
  law with reference to Entry 49 of List II is
  plenary like any other entry in List II. It is
  open to the legislature to adopt such formula as
  it thinks appropriate for levying the tax and so
  long as the character of the tax remains the one
  contemplated by the entry, it does not matter how
  the tax is calculated, measured or assessed. If a
  tax on the land can be assessed with reference to
  or on the basis of the previous years income, we
  failed to see why it cannot be levied on current
  years income. For example, take the case in
  newly constructed building which is let out soon
  after its completion. Can the rent realized for
  the first year not to be taken as the basis for
  determining the rental value for levying property
  tax for that year? Indeed, that can be and should
  be the only basis....

13
Service involved in the execution of a works
contract

• Taxable service means any service provided or
  to be provided, any person, by any other person
  in relation to the execution of a works contract,
  excluding works contract in respect of roads,
  airports, railways, transport terminals, bridges,
  tunnels and dams.
• Port has also been excluded by exemption vide
  Notification No. 25/2007-ST, 22-5-2007.

14
Service involved in the execution of a works
contract

• Explanation.For the purposes of this
  sub-clause, works contract means a contract
  wherein,
• (i) transfer of property in goods involved in
  the execution of such contract is leviable to tax
  as sale of goods, and
• (ii) such contract is for the purposes of
  carrying out,
• Continue..

15
Service involved in the execution of a works
contract

• erection, commissioning or installation
• construction of a new building primarily for the
  purposes of commerce or industry
• construction of a new residential complex or a
  part thereof
• turnkey projects including engineering,
  procurement and construction or commissioning
  (EPC) projects

16
A works contract

• Ultimately, the terms of a given contract would
  be determinative of the nature of the
  transaction, whether it is a sale or a
  works-contract. Therefore, this question has to
  be ascertained on facts of each case, on proper
  construction of terms and conditions of the
  contract between the parties State of Andhra
  Pradesh v Kone Elevators (India) Ltd. 2005 (181)
  ELT 156 (SC).
• And held that installation of Lift was a contract
  for sale.

17
A works contract

• Hindustan Shipyard Ltd. v State of Andhra
  Pradesh (2000) 119 STC 533
• In this case the Supreme Court has given instance
  which could be sale, contract for labour and
  works contract.

18
A works contract

• Sentinel Rolling Shutters and Engineering Company
  Pvt. Ltd. v Commissioner of Sales Tax (1978) 4
  SCC 2609 - whether it was possible to break up
  one contract into two segments one for sale of
  goods and the other for providing services, the
  court observed that in a individual composite
  contract, this is not possible to do so. The
  court accepted the commercial practice in
  spreading the contractual payment over the entire
  period of the execution of the contract and held
  that the progressive release of payment would not
  have any bearing of the nature of the contract.

19
Service involved in the execution of a works
contract

• Levy of service tax on indivisible contract
• Daelim Industrial Co. Limited v Commissioner of
  Central Excise, Vadodara 2003 (155) ELT 457
  (Tribunal-Delhi) 2006 (3) STR 124 (Tri.-Del.),
• Larsen Toubro Ltd v CCE 2004 (174) ELT 322
  2006 (3) STR 223 (Tri.-Del.)
• CCE C, Vadodara v M/s Larsen Toubro Ltd and
  M/s Petrofac International Ltd, 2006 (4) STR 63
  (Tri. - Mumbai) 2006-TIOL-490-CESTAT-MUM .

20
Valuation of services involved in the execution
of works contract (works contract services) Rule
2A

• gross amount charged for the works contract after
  deducting the value of transfer of property in
  goods involved in the said works contract Rule
  2A(1)(i).
• Explanation (b) of said Rule 2A, value of works
  contract service shall include . would not be
  practically feasible to determining the amount
  paid for various services used in the execution
  of a works contract
• There is no option has been given under said Rule
  that one can dis-regard the above mentioned of
  determination of value of works contract
  services.

21
Composition scheme 2 tax

• Works Contract (Composition Scheme for Payment of
  Service Tax) Rules, 2007 -2 of the gross amount
  charged for the works contract .
• The Rule 3(1) of said Rules, start with
  non-obstante clause, which override the
  provisions of Section 67 and the Rule 2A of the
  Service Tax (Determination of Value) Rules, 2006.
  
• Vidya Lachmandas Khanchandani and another AIR
  (2000) SC 2747. In the case of ITW Signode India
  Ltd. v Collector of Central Excise 2003 (158) ELT
  403 (SC)

22
Composition scheme 2 tax

• CENVAT credit of duty paid on inputs shall not
  be available.
• D.O.F. No. 334/1/2007-TRU, dated 28th February
  2007, the Ministry of Finance announced that
  Assessee opting for the composition scheme is
  not entitled to avail CENVAT credit of capital
  goods, inputs and input services required for use
  in the works contract.
• However, while announcing the Scheme,, the credit
  has been denied only in respect of input.

23
Service involved in the execution of a works
contract

• Levy of service tax on works contract
  transactions under separate categories of taxable
  services - Constitutionality validity
• Levy of service tax on services involved in the
  execution of works contract - Constitutionality
  validity

24
works contract recent SC judgment

• The Supreme Court in the case of State of
  Jharkand v Voltas Ltd. 2007-TIOL-86-SC-CT
  (decided on 9th May 2007) held that the State
  legislature under Entry 54 of List II of the
  Seventh Schedule can tax only on the sale or
  purchase of goods. If an item does not come
  within List II or List III of the Seventh
  Schedule to the Constitution, then it can only be
  the Central legislature i.e. the Parliament which
  can levy tax either under List I or under the
  residual provision contained in Article 248
  thereof.

25
Material Used in photography Service

• The Tribunal in the case of Shilpa Color Lab v
  CCE, Calicut 2007 (5) STR 423 (Tri.-Bang.)
  2007-TIOL-340-CESTAT-BANG relying upon the
  Supreme Court decision in the case of Bharat
  Sanchar Nigam Ltd. v UOI 2006 (2) STR 161 (SC)
  held that in the services related to photography,
  if certain goods and materials are consumed, then
  the value of those goods cannot be included in
  the value of service for the levy of service tax.
  In the result, the decision of the Tribunal in
  the Adlabs case is correct and legal

26
Service tax on Commercial/ Residential
Complex-Raheja case

• Mahakaushal Builders Welfare Association v
  Superintendent of Customs Central Excise,
  Jabalpur 2006-TIOL-285-HC-MP-ST - The High Court
  in this case held that impugned circular cannot
  create liability for payment of service tax and
  directed the department to decide the question of
  service tax liability strictly in accordance with
  the provisions contained in the Finance Act, 1994
  (as amended) notwithstanding anything contrary in
  the impugned circular .

27
Service Tax Expansion under exiting taxable
services w.e.f. 1-6-2007

• Scope of ten existing taxable services
• Expended or clarified, some of them are
• Renting of motor vehicles
• marriage functions
• Cash management services
• business consultants service
• computer hardware engineering consultancy
• goods includes computer software
• Advertisement space in commercial publication

28
CIRCULAR NO 93/04/2007-ST , Dated May 10, 2007

• Review of Circulars/ clarifications/ instructions
  issued on matters relating to service tax law and
  procedures.
• 48 circulars/ clarifications/ instructions stand
  withdrawn with immediate effect.

29
Draft Comprehensive Circulars Issued on 19th June
2007

• Procedural Issues.
• Technical Issue.
• After Public Comments, pending finalization.
• Withdraw all previous circulars, clarifications,
  letters etc. issued in respect of service tax
  except instructions issued at the time of Budget
  or enactment of Finance Bill.

30
Draft Comprehensive Circulars Issued on 19th June
2007

• Total 28 issues
• Total 16 taxable services
• Some issues/ clarifications are concerned to
  trade/ industry
• Express Cargo, Hotel Rooms for social functions,
  merger/acquisitions, goods sold/ consumed, postal
  services.

31
Effective date of Notification Finance Act,
2007 - 1 Additional Cess

• Union of India Vs. Ganesh Das Bhojraj - 2000
  (116) ELT 431(SC) the date on which the
  Notification is dated.
• CCE Vs. New Tobacco Co. - 1998 (74) ECR 478(sc)
  and that of Garware Nylons Ltd. Vs. CC CE, Pune
  - 1998 (27) RLT 6(SC) the Notification will come
  into force only when it is made known to the
  public.

32
Fee for filing late Return

• Section 70(1) is amended for empowering
  Government to prescribed the fee to be payable
  for late filing of return but not more than Rs.
  2000/- .
• Rule 7C has been introduced w.e.f. 12-5-2007
  for prescribing late fee which based on delay in
  filing return, upto 15 days Rs. 500/- then next
  15days Rs. 1000/- thereafter Rs. 100 per day but
  not exceeding Rs. 2000/-

33
Exemption from levy of Service Tax on
international in-bound roamer for the period
1-7-1994 to 14-1-2007

• the Central government has directed that the
  service tax payable on roaming services provided
  by a telegraph authority to an international
  in-bound roaming subscriber, which was not being
  levied in accordance with the prevailing
  practice, shall not be required to be paid in
  respect of such roaming service provided during
  the period 1-7-1994 to 14-1-2007 Notification No.
  36/2007-S.T., dated 15-6-2007

34
Whether a service provider exempted under
Notification No.6/2005-ST dated 01.03.2005 can
get deregistration?

• Yes, Issue resolved vide Board instruction
  through F.No. 137/58/2007-CX.4, dated 29.03.2007
• The Board has directed to the Directorate of
  Publicity and Public Relation to carry out
  publicity campaign, to advise exempted service
  providers to come forward to get themselves
  deregistered.

35
Whether a person exemption under Notification
No.6/2005-ST dated 01.03.2005 is required to file
service tax return?

• No, Issue resolved vide Board instruction
  through F.No. 137/58/2007-CX.4, dated 29.03.2007
• The Board has clarified that a person who is not
  liable to pay service because of exemption are
  also not required to file service tax return. The
  Board has further clarified that any show cause
  notice issued for non-filing of return whose
  annual turnover is far below the exempted limit
  may be disposed of accordingly .

36
Thank you..