Critical Aspects in Service Tax

CRITICAL ASPECTS IN SERVICE TAX

–       CA.Pradeep Jain
–       CA Preeti Parihar
–       CA Nishit Shah

POINT OF TAXATION RULES: -

· In the budget of 2011, Point of Taxation rules (POT) have been introduced vide notification no. 18/2011 – S.T. dated 1.3.2011. These rules have become effective as from 1.4.2011. This notification defines the point of taxation for the taxable services. With its implementation, the concept of accrual basis like VAT & Excise has also become applicable in service tax. In other words, now the taxable services are taxed on accrual basis instead of receipt basis. This has been done to align with the proposed Goods and Services Tax.

These rules state that the point of taxation shall be earliest of the following events – raising of invoice, receipt of payment or provision for service. However, in case the rate of service tax changes in-between, the point of taxation shall be determined as shown in following table: -

EVENTS OCCURING BEFORE CHANGE OF RATE		CHANGE IN RATE	EVENTS OCCURING AFTER CHANGE OF RATE			POINT OF TAXATION
Service provided		SERVICE TAX RATE CHANGES	Invoice raised		Payment received	Date of receipt of payment or issuance of invoice whichever is earlier
Service provided	Invoice raised		Payment received within 30 days of invoice			Date of raising invoice
Service provided	Invoice raised		Payment received after 30 days of invoice			Date of payment
Invoice raised			Service provided	Payment received		Date of payment (A supplementary invoice will be issued for recovery of balance service tax.)
Invoice raised	Payment received		Service provided			Date of receipt of payment or issuance of invoice whichever is earlier

· Many doubts were raised regarding practical implementation of POT, since service tax is to be paid when either of these three events occur i.e. invoice is raised or payment is received or service is provided. Raising of invoice or receipt of payment has documentary evidence but provision of service does not have documentary proof. Further, it will be very difficult to tally the same with books of accounts.

· The continuous supply of services as defined in Rule 2, is a service which continues to be provided for a period exceeding 6 months. The proposed rule prescribes that the rate of tax will be the rate applicable on the date the payment becomes due as per the contract. But if there is no specific contract regarding payments and issuance of invoices, how the POT will be determined, it is not clarified. There may also be case, where services even though are not provided or no payment is received, service tax liability will arise.

· Service provider will have to ensure that necessary checks are maintained, since credit of service tax is taken on accrual basis, it has to be ensured that payment of the same has been made within 3 months, otherwise unnecessary interest liability will arise. Although this provision is not required as it has nothing to do with the service tax department whether payment is made or not. When the service tax is paid to them on accrual basis then credit should be allowed. But we, as a CA, from service industry, should welcome this. It might lead to better realization of outstanding amounts.

· There shall also be a case/issue in which the service provider paying service tax on receipt basis will take credit on accrual basis (i.e before payment) and vice – a –versa that credit on bill provided by service provider paying service tax on receipt basis will pay tax only on receipt however if he issues invoice beforehand, recipient will be able to take credit on accrual basis.

· There is no provision either in POT Rules 2011 or CCR’04 whereby if there is bad debt i.e assessee on issue of invoice has duly paid service tax but he has not been able to recover the same from the other party. Whether he can take such credit or will have to claim the refund, it is not specifically provided. However, provision is there in case the services are renegotiated or not provided, the assessee can take excess credit paid if the amount is refunded.

· For companies providing or maintaining AMCs which are usually for period of year or two years, there will be a peculiar situation since in the same, if invoice is issued in the beginning of year, service tax liability will arise, however the payment of the same may be received on quarterly basis and the service is also provided in case a specific situation arises, thus the agreements will have to be drafted carefully in order to avoid early payment of service tax. Construction industry will also fall in the same situation as it is covered under continuous service. The provision given in such cases says that the POT will be the issuance of invoice. However, the invoice is not issued within 14 days of completion of provision of service; the date of such completion shall be the POT. If the contract says that the provision of service is to be determined periodically or on completion of an event, the date of completion of such event will be the provision of service. Thus, where the percent of work completion or time period is determinant factor in the agreement, the service tax liability will arise at this point even though no payment is received. Thus, utmost care is required to be taken while drafting the agreement.

· In the POT Rules, the point of taxation is the issuance of invoice in respect of services provided or to be provided. However, if invoice is not issued within 14 days, POT will be the date of completion of provision of such service. For example, a person approaches a professional engineer to get his products tested and certified. The engineer duly gives the certificate on 18.12.2011 but no invoice is still raised. In such case, the POT will be date of giving the certificate, i.e. 18.12.2011.

· Similarly, GTA and import of service, the service tax is to be paid by recipient of service on payment of such service. But if the payment is not made within 6 months then the service tax will fall back to date on which invoice is raised. Hence there will liability of service tax.

DEFINITION OF INPUT & INPUT SERVICES: -

Input Services

· The definition of input service has been narrowed down. The phrase “activities relating to business such as” has been deleted and a specific list of services has been provided on which credit will be available. This has been done to nullify the effect of decision of theCCE, Nagpur v/s Ultra Tech Cement Ltd [2010-TIOL-745-HC-MUM-ST] and Coca Cola India (P) Ltd v/s CCE, Pune-III {[2009] 22 STT 130 (BOM.)}. In these decisions it was held that the definition of input services is very wide and the phrase “such as” gives only an illustrative list of services and many more services can be added to this list. Credit was allowed on services like courier, CHA, cargo handling, air travel agent, rent-a-cab, insurance, right to use tangible asset, insurance relating to motor vehicle, etc on this basis. However, how credit will not be allowed on these services unless these are specifically included therein. Thus, the things which were going settle by these High Court decision are going to unsettle again from this budget. We have to be prepared for next round of litigation.

· Certain services have been specifically excluded from the list of input services. The architectural services, Port Services; Other port services; Airport Services and Commercial or industrial construction service; Construction of complex and execution of works contract services have been excluded when these services are used for constructing a building or civil structure or a part thereof or are used for laying foundation or making structure for support of capital goods. Credit has also been denied on Insurance Services; Rent-a-cab scheme; Authorized service stations and Supply of tangible goodsso far as they relate to a motor vehicle except when used for taxable services wherein the credit on motor vehicle is available as capital goods. Thus, by this amendment government has made it sure that the credit of insurance/repairs and maintenance/ rent of motor vehicle is available only to those service providers whose main asset is motor vehicle.

· The services which are primarily meant for personal use of any employee have been excluded. The services specified to fall under his category are services provided in relation to outdoor catering service, beauty treatment service, health services, cosmetic and plastic surgery service, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession.

The clause (C) excludes services “used primarily for personal use or consumption of any employee” from the scope of input services. The use of the words “primarily” and “personal” are open to interpretation as they have not been defined anywherein the Rules. However an explanation is given in TRU letter dated 28.02.11 and by reading clause (C) and TRU letter position is that,in case services are provided which are “primarily” used for personal consumption/use of employees then the said services and which constitute a part of cost-to-company will not fall under the purview of input services. Such expenditure is borne by the employer-company. However, the opposite of “personal use” is business expenditure. Hence, the input service relating to business is still allowed although the word “relating to business” is deleted from the definition. But it is point of interpretation and litigation will be seen on this point also in future.

· Services used for setting up of a factory or an office relating to the factory or the provider of output services have been excluded from the scope of input services.However controversy still remains that in case in a factory, if a manufacturer undertakes renovation, repair or modernization of a building then the credit is allowed. Further, if an old structure is dismantled and a new structure is constructed on that place, whether it will be considered as setting up of new factory or renovation or modernization of the old factory?

Input

· The expression “used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not” has been deleted. In its place, the words “all goods used in the factory” have been added. This has enlarged as well as narrowed the definition. It has widened the definition in the sense that the anything used in factory will be termed as input. Even Board Circular No. 943/04/2011-CX, dated 29.04.2011 has also said that the credit on stationary as well furniture will be allowed. But in the last part of the definition, it was said that the credit will not be allowed if it is not used in the manufacturing process. It has narrowed the definition as credit was allowed by Apex Court on Explosives used in mines which were used in mines far away from the factory. But it will not be allowed by this new definition.

· Prior to this amendment, the accessories cleared alongwith final products were inputs without any condition. But now, these will be considered as input only if their value is included in the value of final products. Goods given as warranty are also included in the definition and will be considered as input only if their value is included in the value of final products.

· The new definition has inserted a new clause wherein the goods used for generation of electricity or steam for captive consumption has been included in the definition of inputs. Prior to this definition, this issue has been a matter of dispute. The Supreme Court has already settled the same in the favour of assessees in the case of COMMR. OF C. EX., VADODARA Versus GUJARAT STATE FERTILIZERS & CHEM. LTD. [2008 (229) E.L.T. 9 (S.C.)] and COLLECTOR OF CENTRAL EXCISE Versus SOLARIS CHEMTECH LIMITED [2007 (214) E.L.T. 481 (S.C.)]. Thus, this inclusion is merely affirming the decision of hon’ble Supreme Court.

· Certain goods have been excluded from the definition of inputs. These are light diesel oil, high speed diesel oil, motor spirit/petrol, motor vehicles, capital goods, goods used for personal use or consumption of employees. Further, goods used for construction of a building or a civil structure or its part or for laying foundation/structure for support of capital goods will not constitute as inputs. However, when capital goods are used as parts or components in the manufacture of final products, these will be considered as inputs.

· Goods used for laying of foundation or structure for support goods will be considered as inputs only if these are used for providing the taxable services like Port services, Other port services, Airport services, Construction of commercial complex services, Residential complex construction and Works Contract services.

ABATEMENT V/S CENVAT: -

· The credit of input services availed is denied when abatement is claimed by the assessee along with the credit on inputs and capital goods. It is logical to deny credit on inputs and capital goods but the denial of credit on input services creates an anomaly.

· Notification No. 01/2006-ST dated 01.03.2006 grants abatement on a number of specified services like GTA, Mandap Keeper, Rent Cab, commercial and residential construction etc. the percentage of abatement allowed for each specified service. But the benefit of abatement is a conditional one. It is provided that abatement will be available only if the service provider does not avail cenvat credit on inputs, capital goods, input services or benefit of exemption under Notification No. 12/2003-ST.

· The service tax is payable only on the value of services and not on cost of material on which sales tax is payable. But the service provider is not able to bifurcate the same and hence the abatement scheme is introduced. In other words, abatement is given for the value of material included in the total value received by service provider. Earlier, only the credit on inputs was disallowed. But later on the credit on input services and capital goods was also disallowed.

The credit is denied on the ground that the cost of materials or goods supplied or used during the course of providing service should not be levied to service tax as sales tax is already levied on the same. Thus, tax is levied on tax. And an anomaly is created. For eg. There is abatement of 60% available in case of Rent – a – cab service, now suppose a company invites quotation from a rent – a – cab operators to provide services of 20 cars, suppose a big operator having a fleet of 20 cars will give quotation of Say Rs. 10,000 + Service tax per car per month, however a small rent a cab operator owing a fleet of 10 cars will naturally have to outsource 10 cars from outside also, person supplying car to the small operator will charge service tax on the 10 cars, thus the small operator apart from bearing cost of outsourcing, will also have to bear a unnecessary burden of 4.12% of service tax, because he is not able to take credit of the same owing to the abatement. Due to this, it is possible that he may lose the contract. The above illustration can be presented in the following table: -

Particulars	Big rent-a-cab operator	Small rent-a-cab operator
Cost 20 cars per month (10000*20)	200000	-
Cost of first 10 cars (10000*10)	-	100000
Cost of another 10 cars outsourced (outsourcing cost + ST @ 4.12%) [110000 + 4532]	-	114532
Total Cost of 20 cars to rent-a-cab operators	200000	214532
Service tax @ 4.12%	8240	8839
Total quotation given for 20 cars per month	208240	223371

The above table clearly indicates the fact that in case of sub-contract, the value on which service tax is charged (here Rs. 214532/-) by the main contractor includes the amount of service tax (here Rs. 4532/-) in it. Thus, the service tax is charged on the value of service tax. This situation arises where the main contractor is operating under abatement scheme.

· The same situation equally applies to the commercial construction service providers, for eg. a builder will have to sub – contract his service and the service tax charged by sub – contractor will not be available as credit to the builder, consequently leading to increase in cost which will be passed on to final consumer. This industry is suffering the most from this concept due to two reasons. Firstly, the work is normally divided into sub-contractors. The stone work, RCC, wood work, sanitary, pipe fitting, electric, iron work, furniture etc. is being done by separate agencies. Secondly, the amount involved is very big and this double taxation leads to overall increase in the cost of building.

· For the providers of works contract scheme, an optional composition scheme has been provided. The works contract service provider opting for composition scheme has to pay an amount of 4% in lieu of service tax instead of paying the service tax at the normal rate of 10.3%. The logic behind such concessional rate is same i.e. material is used in providing service on which no service tax is payable but sales tax is payable. The condition imposed for availing the benefit under composition scheme is that cenvat credit on inputs will not be available. Thus, the credit of capital goods as well as input services has been allowed.

· To avoid the anomaly existing, the solution will be to remove the condition denying cenvat credit on input services. It is not proposed that denial of credit on inputs and capital goods should also be lifted. But as anomaly is present only in the case of input services, the cenvat credit of service tax paid on the input services alone should be allowed to the output service provider availing benefit of abatement under Notification No. 01/2006-ST.

TRADING AS AN EXEMPTED SERVICE: -

· The definition of exempted services shall include taxable services which are partially exempted with the condition that no credit of input and input service shall be availed. Moreover it has been clarified that exempted service will include trading service. But trading activity involves payment of sales tax and it cannot termed as service at all. It will lead to litigation once again. We hope that such sort of litigation will be settled as soon as GST comes.

· The implication of the same is that, since now trading is an exempted service, the reversal, in case cenvat credit is used for providing both taxable and exempted services, than reversal of 5% of the value of exempted services shall have to be done.

· Moreover as per explanation given in Rule – 6(3) and (3A) of CCR’04, value shall be the difference between the sale price and purchase price of goods traded or 10% of the cost of goods sold, whichever is higher.

· This issue also arose before the Ahmedabad Tribunal in the case of Orion Appliances Limited Vs. CCE, Ahmedabad [2010(019) STR 0205(Trib. Ahm)] wherein it was held that trading activity is not at all a service. Thus department may also ask for reversal, prior to the amendment also, on the basis of above decision. Even the board has clarified on the same lines.

· However, there are few pending issues which may create controversy – that whether as such removal will also be considered as trading activity? If there are goods other than input which are traded whether duty shall have to reversed on that also, because cenvat credit on same goods will have not been taken. This is due to the fact that there are always common input services for the same. Nobody can maintain the separate record for telephone service i.e. which telephone call is for taxable service and which is exempted service.

· This has already created havoc in the minds of manufacturers. Department is taking paras on the same. In one case, the total credit available is Rs. 50,000/- but the reversal being asked is Rs. 3,00,000/-. The party has pleaded to reverse the proportionate credit available in Rule 6(3A) but they say that it is not available now as the option is not filed. Secondly, he has offered to reverse the complete input service but the department does not agree with the same by alleging that once the credit is taken provisions of rule 6 gets attracted. When the option of proportionate reversal is not available, paying the 5% of the value of exempted goods is the only option available to them. Thus, it is also very critical issue.

RENTING OF IMMOVABLE PROPERTY SERVICE:-

· Renting of Immovable property has been the issue of litigation from the date it was introduced, many high courts have upheld imposition of service tax on renting of immovable property, recently Delhi high court also in its larger bench decision in case of Home Solutions Retail India ltd. (2011-TIOL-610-HC-DEL-ST-LB) has upheld the levy and supreme court has also directed in case of Retailers Association (2011-TIOL-104-SC-ST) to pay half of the tax by March 2012 and to give surety for the rest and in case of Home Solutions has granted stay up to period 30.09.2011 and there is no stay liability with effect from 01.10.2011. Thus as on date Service tax on renting of immovable property service is inevitable. However, appeal has been filed in Supreme Court for the same but it is unlikely that Apex court will reverse the judgment. Here is the brief of the one of the most litigated issue in India.

· Service tax on renting of Immovable property was introduced with effect from 01.06.2007, the levy of service tax was extended to include any service provided or to be provided to any person, by any person, in relation to renting of immovable property for use in the course of furtherance of business of commerce’.

· Decision of Delhi High court in case of Home Solutions Retail India ltd. (2009-TIOL-196-HC-DEL-ST) came. In this case, the petitioners had mainly challenged the validity and vires of this service on ground that what is sought to be taxed by the ‘Renting of Immovable Property Service’ is not ‘renting of immovable property’ per se but ‘services in relation to renting of immovable property’.

The Court had held that Renting of immovable property by itself cannot be regarded as a service in the context of the definition. If there is some other service, such as air conditioning service provided along with the renting of immovable property, then it would fall within the concerned taxable service.

· The above decision was challenged in Apex Court but the stay was not granted to the department. But the CBEC issued letter to field formation to take step to safeguard revenue. It said that the Delhi High Court decision is not applicable to other assessees. The matter went again to High Court and it was held that the CBEC should withdraw the instructions otherwise the Court will take action in this matter. The attorney on the behalf gave the affidavit that the CBEC will withdraw the instructions.

· But before withdrawing the instructions as well as to overcome the Delhi High Court decision in the First Home Solutions case, the Budget 2010 brought amendment in the service tax category of ‘Renting of Immovable Property’ whereby ‘Renting’ activity itself was regarded as taxable service. The amendment was made with retrospective effect from 1 June 2007.

· Post the aforesaid amendment, various writ petitions were filed by various assesses and trade associations at different jurisdictional High Courts challenging the amended taxing entry, its constitutional validity and retrospective amendment. Consequent to such writ petitions, various High Courts have pronounced judgment from time to time on the applicability of service tax on ‘Renting of Immovable Property’ all in the favour of revenue summarized as follows -

o M/s Shubh Timb Steels Ltd V UOI (2010-TIOL-765-HC-P&H-ST)

o Retailers Association of India and another Multiplex Association of India V UOI and ORS (2011-TIOL-523-HC-MUM-ST )

o Cinemax India Ltd v UOI (SCA/ 8032/ 2010)

o Decision of Delhi High court – LB in Home Solutions case (Second Home Solutions case)as described above in the favour of revenue.

· The above litigation was mainly driven by the retail lobby in India and their plight is also understandable since they were not able to get the CENVAT of the service tax paid by them as they were not manufacturing any excisable goods or nor else providing any output service. Moreover since the retailers were tenants (service recipient) and not the service providers, the landlords will have to pay hefty interest and penalty for no fault of theirs. Department is happy since it has successfully challenged the levy and is ready to collect service tax. However, the final verdict of the Supreme court in the above case will surely clear all the air but right now, service tax on renting of immovable property is to be paid.

STATE LEVY V/S CENTRAL LEVY: -

· From 01.05.2011, two new services namely Restaurant service (sec 65(105) (zzzzv) and hotel, inn, guest house, club or campsite (sec 65(105)(zzzzw) were introduced. However the same has created much debate, because Centre is trying to levy service tax on products which are being essentially being governed by VAT law and on which State has right to levy the tax.

· Central government is seeking to levy service tax on, what are essentially, sale of meals/beverages etc. and on the charges of the movable assets like Furniture, linen, cutlery, crockery etc. These activities are clearly considered as “sale” within the meaning of VAT Law and are accordingly subjected to levy of VAT.

· In the case of one our client, for services provided they are charging VAT and Service tax simultaneously in order to avoid any litigation, however same is leading to assessee paying tax twice on the same transaction. Though abatement is provided, the fact remains that 100% of the most of the items sold by a restaurant are subjected to levy of VAT and the levy of service tax would result in a double levy.

· Also, service tax is proposed to be levy on hotel, inn, guest house, club or campsite where the stay is for a continuous period of less than 3 months. Room rentals are charged to luxury tax. The levy of service tax on room rentals is resulting in a double taxation.

· Thus, it is clear that centre is approaching to the things on which VAT is also charged. In works contract, the composite rates are there. But in the instant cases, VAT is levied at full rate on sale of food and beverages in hotel. Also, luxury tax is also levied on full value of room rent. Now, the service tax is also being imposed. It is clearly double taxation. The solution lies in GST. It seems that the Government is thinking that everyone should himself demand that GST should be introduced. But it is pending due to conflict between the state and centre and not due to opposition of trading community.

REFUND OF UNUTILIZED SERVICE TAX CREDIT UNDER RULE 5 OF CENVAT CREDIT RULES, 2004: -

· Refund of unutilized input service tax credit used in exported goods is being granted to the assessee vide Notification no. 05/2006 – C.E. dtd 14.03.2006 read with Rule 5 of Cenvat credit rules, 2004. It is one issue in which litigation has been created unnecessarily by department, by rejecting refund claim to the assessee for various bizarre reasons.

· The main difficulty faced was the determination of the input services eligible for refund under notification no. 5/2006. In order to sort out this problem, recently, CBEC has issued draft circular dated 28.10.2011, issued on 31.10.2011 indicating a list of input services that are eligible for refund subject to the fulfillment of conditions as indicated therein. However, the basic conditions have been kept intact that the service should be an input service under rule 2(l) of the Cenvat Credit Rules, 2004 and it should not have been used exclusively for the domestic purpose. Now, controversies are bound to create also since the refund circular mentions only 68 service as eligible and it also states that the list is exhaustive and not illustrative.

· One major drawback of this circular is that many of the services specified therein do not fall in the definition of the input services as amended by the recent budget. It is reiterated here that by this budget, the scope of input services have been restricted to the services specified in rule 2(l) of the Cenvat Credit Rules, 2004. This definition specifically excludes certain services which have been included in this circular. Further, many of the services specified in this circular are not specifically mentioned in the definition of input services. This will lead to litigation as assessee will demand refund on all the 68 services but department will deny many of the services as these are not mentioned in the definition of input services.

· Also, the circular specifies that services which are usually of personal nature such as Photography, Event management, Convention, Mandap keeper etc. will not be allowed. And the service of Rail travel agent, Hotel, Telecommunication service will be allowed only if it is utilized for business purpose. The same is also bound to create controversy since department will obviously deny refund of the same saying that same was not used for business and assessee will try to prove that it was used for business only.

· Draft circular also state that for services such as packaging, promotion or marketing or brand services, steamer’s agent, storage and warehouse refund will be allowed and no condition is attached on the same. But once again, it is should be seen with the definition of input services as given in rule 2(l) of the Cenvat credit Rules, 2004. In the nutshell, if the definition of input services is to be taken as the base, it would render a major part of this circular as redundant.

WORKS CONTRACT SERVICE: -

· Initially service tax was levied on the works contracts w.e.f. 1^st June, 2007. The service tax was to be paid at the rate specified in section 66 of the Finance Act, 1994 or the assessees could opt for Composition scheme of works contract where the service tax was payable @ 2% (excluding education cess and secondary and higher education cess) on the composite value of works contract. Under composition scheme, credit on inputs was not allowed, but credit of input services and capital goods was available. Since the composition scheme under works contract was too attractive with a nominal rate of 2% alongwith benefit of Cenvat Credit on input services and capital goods, most of the reality sector wished to shift over to works contract. But, subsequently this rate was enhanced to 4% vide notification no. 7/2008 dated 1^st March, 2008. Till this date, normal service tax rate was 12%, so reality sector was finding it better than alternative services like Commercial construction or installation commissioning services. But now the service tax has been lowered to 10%, but the rate in works contract is still at 4%. So, at the reduced rate of 10% alongwith the abatement facility, the alternative services have become cheaper. But now no option is left with the assessees who have already opted for composition scheme.

· Where an assessee wants to opt for the composition scheme, he has to file an option before doing so as per composition scheme rules. When this scheme was introduced, litigation started for ongoing contracts. Assessees said ongoing contracts can be shifted to composition scheme of works contract and the option could be exercised at the time of shifting. But hon’ble Andhra Pradesh High Court in the case of M/s Nagarjuna Construction Company Limited vs. Government of India [2010-TIOL-403-HC-AP-ST] held that the Benefit of composition scheme is not available prior to 01.06.2007 to a service provider who has already paid service tax prior to 01.06.2007 under some other head like erection-commissioning or commercial construction. But where no service tax is paid under any other head, the option was still available. This decision was based upon circular no. 98/1/2008 as issued by the Board which was further affirmed in Circular no. 128/10/2010-ST dated 24.8.2010.

· There are cases where the contractee supplies some material free of cost to be used in execution of works contract. At the time of enactment of works contract, there was no provision whether the cost of free supply is to be included or not. However, subsequently the composition scheme was amended vide Notification No. 23/2009-S.T.,dated 7.7.2009 and now the material supplied free by the contractee is required to be added in the gross value of contract.

· Recently, Board has issued Circular No. 147/16/2011 ST dated 21.10.2011 whereby exemption has been granted to the sub-contractors providing Works Contract Services to the main contractor rendering Works Contract Service. The condition attached to it is that the main contractor should be executing infrastructure projects involving construction of roads, airports, railways, transport terminals, bridges, tunnels, dams etc. are specifically excluded from the definition of taxable works contract service. Prior to this, Circular No. 138/07/2011 – ST dated 06.05.2011 had clarified that while the main contractor providing works contract services in respect of such infrastructure projects is exempt from service tax, the services provided by its subcontractors would be distinctly classifiable under the respective sub-clauses of section 65(105) of the Finance Act, as per their description and taxed accordingly. But now, CBEC vide circular dated 21.10.2011 has clarified that where the services provided by the sub-contractors to the main contractor are independently classifiable under WCS, they too will get the benefit of exemption if they are in relation to the infrastructure projects mentioned above.

REFUND OF SERVICE TAX TO EXPORTERS UNDER NOTIFICATION NO. 17/2009-ST DATED 7.7.2009: -

· For allowing refund of service tax paid on services availed during the course of export, Notification no. 17/2009-ST dated 7.7.2009 has been issued. This notification is a simplified form of the earlier Notification no. 41/2007-ST dated 6-10-2007 and it is issued to reduce the complexities involved in claiming the service tax refund claim under the old notification. The terms and conditions have been reduced by the government by issuing this notification so that more and more exporters are benefitted by this notification. However, the rigidity adopted by the concerned departmental officers in interpreting the provisions of this new notification has resulted into lowering down the amount of service tax refund claim, which was not the intention of the government.

· Under the old notification no. 41/2007, where the terms and conditions for allowing the service tax refund were more complicated, even there also, refund claim was allowed on a no. of services including the Transportation of goods by rail and road, CHA, Technical Testing and analysis, fumigation services, etc. The services specified in the old notification no. 41/2007 and the new notification no. 17/2009 are the same with some addition in the new notification. But the conditions attached in the new notification are much simpler than as contained in the old notification. Inspite of this fact, the exporters are being loaded with the show cause notices for denying the refund claim. Even the services like CHA, GTA, etc. where a no. of refund claims have been sanctioned under old notification are not allowed under new notification. Even the refund on THC charges which are specifically added in the list of services is also being denied for one reason or another.

· The exporters are producing the original documents to the divisional office, they are giving declaration on each and every invoice to the effect that the said service is being availed in course of export of their final product. They are producing certificate from Chartered Accountant in the cases it is required. They are pursuing their service providers to rectify the invoices so as to bring them at par with the provisions of the rule 4A of the Service Tax Rules, 1994. But, the refund claims are still denied.

· There is a condition in the notification no. 17/2009-ST dated 7.7.2009 that refund is not allowed if the claim is below Rs. 500/-. The divisional office is interpreting this limit as a limit per invoice. Whereas, this limit should be per refund claim application; if not so, it should be per shipping bill. Treating this limit as per invoice/service is not justified. This query has also been answered in the service tax review dated 15.7.2010. But rejection is still continued.

· The notification no. 17/2009 allows the refund on fumigation of export container. But the refund claim is being denied on the grounds that the fumigation of export cargo does not satisfy the statutory definition of cleaning activity under Finance Act, 1994. Thus, it is alleged that the service provider has wrongly charged the service tax whereas it is not leviable. But here the fact is that the service provider has charged the service tax and deposited to the government exchequer and the incidence has been born by the exporter. Government intends to grant refund of service tax so born by the exporter. This is the prime reason of issuing this notification and language of notification clearly says that “Specialised cleaning services namely disinfecting, exterminating, sterilising or fumigating of containers used for export of said goods provided to an exporter will be exempted. So, it is not proper to deny the same as the service provider has charged the service tax on the fumigation of the export containers and it is borne by the exporter.

· Regarding the insurance services, two conditions are prescribed – the insurer’s premium document should be specifically related to export goods and it should be in the name of exporter. The documents are always in the name of exporter. However, the first condition that it should be specifically related to the export goods is not satisfied. The problem here is that one insurance policy is taken for all types of dispatches and the same is renewed at the time of expiry. As and when the goods are dispatched, the proportionate amount is debited in the policy. On the other hand, premium is due on monthly basis. In a particular month there are no. of exports. As such, it is not possible to correlate the insurance premium with the ARE 1. However, it is general practice all over India and if this condition is so rigidly adopted, not a single exporter will be benefitted.

· In the services like technical testing and analysis and inspection and certification agency, it is also required to furnish copy of written agreement. However, this is not possible as there is normally a verbal agreement between buyer and seller. Moreover, in certain cases it is desirable also as unless and until the goods are as per specifications of the buyer, they won’t be accepted by them. Also, the notification No. 32/2008-ST, dated 18.11.2008 has been issued which states that the where the testing is statutorily required, written agreement is not required to be submitted. However, in most of the cases, even if the buyer has specifically asked, the written agreement is not available. However, without completing these formalities, it is not possible to export the goods due to fear of rejection by buyer. As such, the denial of refund claim on the grounds that written agreement is not furnished is simply vague.

· The service tax on courier agency is the most common service availed by all the exporters. Perhaps this must be the aim of including it in the list of specified services. But the intention of the govt. does not seems to be fulfilled as a list of formalities are attached thereto. Refund of service tax on courier services is allowed only if the courier receipt contains the details like IEC code of exporter, export invoice no., nature of courier, destination of courier, name and address of recipient of courier and the exporter produces evidence to link the use of courier service to export goods. However, courier agencies normally issue a receipt which merely contains the general details like name and address of the sender and receiver, value of service and details of service tax. Normally, these agencies do not bother to write any other details inspite of being specifically asked. As such, these conditions are beyond the control of the exporter and department emphasize deny the refund claim by alleging that the details in the receipt are not complete.

· As regards the services of the Custom House Agent and Clearing and forwarding agent’s services, it is also prescribed that their invoice should contain the details like no. & date of invoice and shipping bill, description of export goods, etc. However, the bill raised by CHA or Clearing and forwarding agent is normally a simple bill containing the basic details like name and address of exporter, value of services and service tax payable. No other details are normally there and as such it is not possible for the exporter to fulfill the conditions of the notification in respect of these services.

· The most critical issue in filing of the refund claim is that it requires the submission of a number of documents like ARE 1, shipping bills, bill of lading and invoices of the service providers. In this regard, it is to be noted here that the copies of ARE 1, shipping bills and bill of ladings are already with the department as these are already filed alongwith the Proof of Export. As such, it is not feasible to demand the same documents once again as it will only increase the bulkiness of the claim. However, some alternate arrangements can be made like submission of copy of proof of export instead of demanding these documents once again. This will not only reduce the papers but will also facilitate the quick disposal of the refund claims as the shipping bills, B/Ls and ARE 1s are already been analyzed in the Proof of Exports.

OTHER ISSUES

· Service tax in normal cases can be paid by utilizing balance in CENVAT A/c; however in certain exception it has to be paid only through CASH otherwise it may lead to unnecessary interest and penalty. The two main services in which service tax has to be paid through cash are GTA and Import of services. Though issue has been settled now for GTA and service tax has to be paid only through cash only. This has been done by amendment in definition of output service with effect from 1.4.2008. However for the period between 18.4.2006 to 31.32008, still litigation is going on.

· Further, no amendment is being made in respect of import of services. As such, the assessee is pleading that the service tax in this respect can be paid from credit while department is demanding in cash. Though, decision in case of CST, Bangalore v/s M/s Arvind Fashions ltd. (2011-TIOL-748-HC-KAR-ST) High court has taken favour of assessees, but still the department is not ready to accept this decision and controversy still continues.

· The other issue which has been issue of litigation is the credit of service tax freight paid on outward GTA. Prior to 01.04.2008 in the decision of Commissioner Vs. ABB Ltd. & Others – (2011-TIOL-395-HC-KAR-ST) outward freight was allowed without fulfilling any condition. However with effect from 01.04.2008 as per Boards Circular no.97/8/2007 and decision of Ambuja Cement Ltd. V. Union of India & Ors [2009 (236) ELT 0431 (P&H)].Credit will be allowed only on fulfillment of following conditions -

¨ The sale takes place at the buyer’s door or the property in the goods remains with the seller till the goods reaches buyer in an acceptable condition;

¨ The risk of damage to goods during the transit is borne by the seller/manufacturer; and

¨ The freight charges are integral part of the price of the goods.

Thus, credit of service tax paid on outward freight will be allowed undoubtedly if the above conditions are fulfilled.

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Critical Aspects in Service Tax

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