New Circular for CHA 119/13/2009

New twist in the tale – now the board is issuing circular having retrospective effect – isn’t it ironical – neways its none of my concern – the twist is that now the circular has prescribed 7 conditions and if they are fulfilled – reimbursable expenses collected by CHA’s will not be taxable.

On going thru them it seems that the purpose of issuing the circular (which is to reduce litigation) will not get solved because of one condition alone (coloured in blue). All CHA (atleast those whom I know) have a markup on actual expenses incurred by them.

So in a nutshell nothing much will change for want of “actual basis” condition. And as said above this circular is applicable from 19.04.2006 – can somebody tell me how can circulars be retrospective – does the act provide for it.


CIRCULAR NO 119/13/2009-ST, Dated : December 21, 2009
Subject : Service tax valuation issues pertaining to Customs House Agents Service-reg.

Customs House Agent’s (CHA) Services are taxable since 15th June 1997. As per the definition (section 65 (105) (h) of the Finance Act, 1994) the ‘taxable service’ means any service provided or to be provided to any person, by a custom house agent in relation to the entry or departure of conveyance or the import or the export of goods and the term ‘service provider’ shall be construed accordingly. Further, as per definition appearing under section 65(35) of the aforesaid Act, a ‘custom house agent’ means a person licensed, temporarily or otherwise, under the regulations made under sub-section (2) of section 146 of the Customs Act, 1962. The Custom House Agents Licensing Regulations, 2004, made under the said section, prescribe the procedure for grant of license by the customs department. They (regulation no. 13) also place obligations on such license holders during their interface with customs department pertaining to customs formalities for conveyance or imported or export goods. In sum, the above provisions read in harmony, show that the activities of a CHA i.e. pertaining to customs formalities in relation to the entry or departure of conveyance or the import or the export of goods, is subjected to service tax under CHA services.

02. While the principal job of a CHA is to get the import or export consignments cleared through customs, they, being the ‘persons on the spot’, also at times arrange services for packing, unpacking, loading, unloading, bringing or removing the goods to or from the customs area, vessels or aircrafts for their customers (i.e. importers or exporters). These services are provided by different agencies such as Port Trust, Steamer Agents, Cargo Handlers, Warehouse-keepers, Packers, Goods Transport Agents. Normally the CHAs initially pay the service charges to these agencies and later recover these charges from the customer along with their own charges CHAs. Similar arrangement can occur for payment of statutory levies like Custom Duties, Port charges, Cesses etc. leviable on the said goods.

03. Issue was raised at the initial stage itself as to whether the charges, which are said to be paid by the CHAs and later recovered from the customers (i.e. reimbursable charges) should be added to the value for charging service tax from CHAs. Through the circular F.No.B-43/1/97-TRU, dated 06.06.1997 the Board had clarified that the service tax would be charged on the ‘service charges only’ and statutory levy and other reimbursable charges would not be included in the taxable value. It was also provided that in case there are lump sum payments towards the reimbursable as well as service charges, service tax would be charged on 15% of the gross value only.

04. In 2006 (w.e.f. 19.04.2006) the Service Tax (Determination of Value) Rules were prescribed. Consequently all previous circulars relating to valuation were withdrawn. The said rules brought in the concept of ‘pure agent’ and provided that expenditure or costs incurred by the service provider as pure agent alone will be eligible for exclusion from taxable value.

05. It is reported that disputes have arisen on the issue of inclusion of such reimbursable charges, which are currently pending at various stages of dispute settlement mechanism. Certain field formations have also issued communications, directing that charges on certain activities incurred by CHAs are not covered under exclusions available to ‘pure agent’. It is also reported that divergent practices as regards the records & documentations, are being followed by the CHAs in relation to the charges for receiving services from other service providers as well as to their billings to their customers. This has added to the conflict and litigation.

06. With a view to resolve the disputes and to bring it clarity, the issue has been examined. The divergent practices followed at different places and lack of consistency in the manner of maintaining records and issuance of documents by the CHAs, make it impossible to lay down any specific guidelines or issue any specific directions. In the circumstances, it is clarified that essentially, the exclusion should be allowed to such charges from the taxable value of CHA services, where all the following conditions are satisfied,-
a) The activity/service for which a charge is made, should be in addition to provision of CHA service (as mentioned in paragraph 1);
b) There should be arrangement between the customer & the CHA which authorizes or allows the CHA to (i) arrange for such activities/ services for the customer; and (ii) make payments to other service providers on his behalf;
c) The CHA does not use the activities /services for his own benefit or for the benefit of his other customers;
d) The CHA recovers the reimbursements on ‘actual’ basis i.e. without any mark-up or margin. In case of CHA includes any mark-up or profit margin on any service, then the entire charge (and not the mark-up alone) for that particular activity/ service shall be included in the taxable value;
e) CHA should provide evidence to prove nexus between the other (than CHA) services provided and the reimbursable amounts. It is not necessary such evidence should bear the name or address of the customer. Any other evidence like BE No./Container No./ BL No./ packing lists is acceptable for the establishment of such nexus. Similar would be the case for statutory levies, charges by carriers and custodians, insurance agencies and the like;
f) Each charge for separate activities/services is to be covered either by a separate invoice or by a separate entry in a common invoice (showing the charges against each entry separately) issued by the CHA to his customer. In the latter case, if certain entries do not satisfy the conditions mentioned herein, the charges against those entries alone should be added back to the taxable value;
g) Any other miscellaneous or out of pocket expenses charged by the CHA would be includable in the taxable value for the purposes of charging tax on CHA services.

07. The conditions mentioned at paragraph (06) would be applicable for services provided with effect from 19th April 2006, i.e. after the introduction of the valuation rules. For the prior period, the taxable value should be determined in accordance with the prevailing instructions issued Board as referred to foregoing paragraph 03 of this circular. Any communication issued by any of the subordinate offices which are contrary to the conditions referred to in paragraph

06 of this circular, or as the case may be, the prevailing Boards circulars stands superceded to the extent of the contradiction.

08. The pending disputes may be settled in terms of this circular.

09. Hindi version follows.
F.No.332/36/2008-TRU

Taxation of Reparing of Roads - a new twist in the tale

This ongoing saga of taxation on repairs and maintenance of roads has now taken a new twist – which in my understanding is regressive and should be abhorred. The issue which is and was crystal clear – in other words the Act clearly says that repairs of roads and other specified infrastructural facilities is not taxable at all still the government went ahead and made the same taxable by issuing an illegal circular(no. 110/2009 dt. 23.02.2009). Now the government has tried to back track and has issued an exemption notification (no. 24/2009 dt. 27.07.2009).

It is an accepted legal maxim that – what is not taxable by the Act cannot be taxed by a circular – so I guess this notification creates a farcical situation whereby it says something whereas it means something else. Let me explain.

1. It says that repairing of roads service will not be taxable w.e.f. 27.07.2009 – which if accepted would mean that the same activity was taxable from 16.06.2005 to 26.07.2009 – this in itself is ridiculous.
2. Secondly this notification exempts only roads from the purview – what about Dams, Transport terminals airports etc.

Hence in my view this notification is also as was the earlier circular void ab initio and will be struck down by tribunals in the foreseeable future for reasons discussed above.

Nitesh Jain
www.niteshjain.co.in
Email - nitesh@niteshjain.co.in

Implication of High Court Order on Renting of Immovable Property Services !!!

Introduction:
Service Tax as everyone knows is by far the most evolving taxation law in India today. This evolution sometimes is good as changes required by trade can be included at the right stages without creating much problem for the end user. But an unnecessary by - product of this evolution process is that it gives a lot of chance to the judiciary to interpret the law in terms that the executive may not have imagined.
One such instance of this constant evolution has arisen due to the order of the Honourable Delhi High Court in case of Home Solution Retail India Ltd. vs. Union of India [2009] 20 STT 129 (DELHI) dated 18.04.2009 wherein Justice Shri Baddar Durrez Ahmed has passed an order thereby nullifying the whole tariff entry of section 65 (105) (zzzz) and 65 (90a) of the Finance Act, 1994 as far as Renting of Immovable Property Services are concerned.
This article makes a humble attempt to de-mystify the above order and explain its practical and legal aspect for the members at large.

Legislative Background:
Finance Act, 2007 introduced a new tariff head wide section 65 (105) (zzzz) which was given assent by the President on 1.06.2007. This section introduced a new service category popularly known as the Renting of Immovable Property Services.
This section authorised levy of service tax on Services in relation to Renting of Immovable Property for use in the course of furtherance of business or commerce.
Consequently notification no. 24/2007 dated 22.05.2007 was issued saying that,
In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994) (hereinafter referred to as the Finance Act), the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable service of renting of immovable property, referred to in sub-clause (zzzz) of clause (105) of section 65 of the Finance Act, from so much of the service tax leviable thereon as is in excess of the service tax calculated on a value which is equivalent to the gross amount charged for renting of such immovable property less taxes on such property, namely property tax levied and collected by local bodies
There was a vast difference between the language of section 65 (105) (zzzz) where services in relation to renting were made taxable whereas in this notification the service OF renting were perceived to be made taxable. This issue of difference in language was also raised in the appeal filed by Home Solutions in the Delhi High Court.
Many sections were hit hard by this new tax and they protested by filing Special Civil Applications in various High Courts around India saying that the section itself was un-constitutional and therefore needs to be quashed as void-ab-initio. Many High Courts responded by giving interim stay orders restraining the Service Tax authorities from collecting service tax from the appellants. Gujarat High Court has also given stay orders in the following cases:
Iskrupa Mall Management Company Pvt. Ltd. Vs Union of India - SCA No. 5269 of 2008
where the honourable court has said;
“Notice as to interim relief returnable on 22nd April 2008. Notice to the learned Attorney General returnable on the same day, viz. 22nd April 2008. Till the returnable date, the respondents shall not make any coercive recovery of the Service Tax in respect of the amount of licence fees for the use of the immovable property in question”
Same interim relief is also granted by the Gujarat High Court in case of
1. Fun Multiplex Pvt. Ltd. vs Union of India - SCA No. 9935 of 2008
2. Saffron Traders vs Union of India - SCA No. 8176 to 8179 of 2008

Certain other High Courts like the Bombay High Court, Andhra-Pradesh High Court and Madras High Courts to my knowledge have also given interim reliefs to the petitioners.

Legal Importance of Delhi High Court Order:
I believe that most of the above cases if not all are pending with the Apex court and it has not passed any order till now on the impugned subject.
Meanwhile the on 18.04.2009 the Honourable Delhi Court has now passed a Final order on the issue in the case of Home Solution Retail India Ltd. v. Union of India [2009] 20 STT 129 (DELHI).
The petitioner had challenged the levy of service tax on renting services on 2 counts:
1. The section authorised taxing ONLY services IN RELATION TO renting of immovable properties and not the service of renting itself.
Alternate Plea
2. The levy was unconstitutional and hence void-ab-initio
The High Court has discussed the issue at length and come to a conclusion that the bare section which goes like this,
65 (105) “(zzzz) 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.
seeks to tax only services which are provided or performed in relation to renting of immovable property like providing air-conditioning or infrastructural support, security etc but the Renting itself would not be a service.
Para 35 and 36 of the Order says as follows,
“35. From this analysis, it is clear that we have to understand as to whether renting of immovable property for use in the course or furtherance of business or commerce by itself is a service. There is no dispute that any service connected with the renting of such immovable property would fall within the ambit of section 65(105)(zzzz) and would be exigible to service tax. The question is whether renting of such immovable property by itself constitutes a service and, thereby, a taxable service. We have already seen that service tax is a value added tax. It is a tax on the value addition provided by some service provider. Insofar as renting of immovable property for use in the course or furtherance of business or commerce is concerned, we are unable to discern any value addition. Consequently, the renting of immovable property for use in the course or furtherance of business of commerce by itself does not entail any value addition and, therefore, cannot be regarded as a service. Of course, if there is some other service, such as air conditioning service provided alongwith the renting of immovable property, then it would fall within section 65(105)(zzzz).
36. In view of the foregoing discussion, we hold that section 65(105)(zzzz) does not in terms entail that the renting out of immovable property for use in the course or furtherance of business of commerce would by itself constitute a taxable service and be exigible to service tax under the said Act. The obvious consequence of this finding is that the interpretation placed by the impugned notification and circular on the said provision is not correct. Consequently, the same are ultra vires the said Act and to the extent that they authorize the levy of service tax on renting of immovable property per se, they are set aside.”
On the alternate plea the Honourable court has said,
“37. Before parting with this batch of cases, we would like to observe that we have not examined the alternative plea taken by the petitioners with regard to the legislative competence of the Parliament in the context of Entry 49 of List II of the Constitution of India. Such an examination has become unnecessary because of the view we have taken on the main plea taken by the petitioners as indicate above.”

Following points come out from the order of the Delhi High court:
a. Renting of immovable property per se is not a taxable service in terms of section 65 (105) (zzzz).
b. Services in relation to renting of immovable property are only taxable.
c. Notification 24/2007 dated 22.05.2007 is null and void.
d. Section 65 (105) (zzzz) is not unconstitutional.

Practical difficulties in implementing the High Court Order:
The Delhi High Court has come out with an order saying that Renting of immovable property is not a taxable service at all, however it would be pertinent to note that the High Court has in-effect rejected the alternate plea of the petitioners that the levy is unconstitutional.
There is a lot of excitement in the minds of the tenants and they are taking decisions solely on the basis of the Delhi High Court whereby they have stopped payment of Service Tax to their respective landlords. The landlords are in a catch 22 situation and are unable to decide which course to take as no one knows what future beholds for them in terms of the Supreme Court Order. Otherwise also the Delhi High Court order raises many practical questions for the landlord:
a. Should the landlord stop paying service tax to the exchequer.
b. Should he stop collecting tax from his tenants
c. If he keeps collecting and paying the tax will he be able to get refund of it if the Apex Court rules in favour of the assesses.
There are no easy answers to the above questions, hence the controversy.
The Central Government has already filed an appeal in the Supreme Court wide Special Leave Petition (Civil) 13850 of 2009. Thus the ball has been set rolling. It may take 2 or 3 years for the Supreme Court to give its final order – until that comes the above questions will keep haunting.
Meanwhile the Government also has chance to amend the sections retrospectively as was done in case of GTA Services. For example, in the case of GTA, the Supreme Court in the case of Laghu Udyog Bharati v. Union of India [2006] 4 STT 322 has held that recovery of service tax from the service recipient is ultra vires of the law. Thereafter, the Central Government brought retrospective amendment to validate the levy and deny refund claim by the Finance Act, 2000 and the Finance Act, 2003. The Finance Minister if provoked will not miss the chance once again. What does this leave the landlord with.

Conclusion:
Following practical solutions can be proposed:
1. Collect the tax from the tenant and pay the same to the exchequer “under protest” with a written undertaking to the tenant that in case the supreme court passes an order in favour of the assessee than the landlord shall apply for refund under section 11B of the Central Excise Act r.w.s. 83 of the Finance Act, 1994 and once the refund is granted the same will be refunded back to the tenant. I propose to pay the tax under protest because refunds of taxes paid under protest do not get time barred. In my view doctrine of unjust enrichment will not apply in this case because the tax is collected expressly under an undertaking to refund the same if refund is granted.
2. Stop collection of tax from tenant and payment thereof to the government and take a written undertaking from the tenant that in case the Supreme court passes an order in favour of the Central Government or if the government changes the law retrospectively the tenant will indemnify the amount of tax as well as interest to the landlord.
The first option will save the interest cost as well as the hassle of collection of taxes later from the tenant which in my view is a bigger problem.
Above solutions if accepted will give rise to newer problems for tenants who are taking credit of the service tax so paid on rent. If the tax itself is indemnified for refund – how can one take credit of the same, and if the tax itself is not paid as per solution 2 than there would be no question of credit. Secondly if the tax becomes payable at a later date – question will again arise as to how to take credit of tax at a future date when the related expense was paid earlier. It would also raise the issue of tenants existence when the final order is passed. In todays fast world tenants keep changing addresses and once the tenant leaves the place – it would be hard to collect tax from him on the basis of the written undertaking alone.
Another solutions that comes to mind is that an Escrow account can be created with an express standing instruction to the bank that unless and until all stake holders say, the money will not be released to any single or multiple entity except to the Central Government. The landlord will amend the lease deed and specify that service tax will henceforth be deposited in this escrow account and the same will not be paid to the Central Government till the Supreme Court order comes or a retrospective amendment is made.
I leave the readers to decide how practical this idea is and whether the same can be implemented successfully.
Nitesh Jain
N.J. Jain & Associates
Chartered Accountants
www.niteshjain.co.in
Email ID - nitesh@niteshjain.co.in

Addendum

The Blog written on the issue of the recently issued circular on the leviability of Service tax on the activity of Repair of Roads. My interpretation was solely based on pure reading of legislation and many questioned the logic of it. Now the logic presented by me in the said article has been validated by order passed by Commissioner Appeals (Vizag).
The Commissioner held,
As seen from the definition the activity covers construction, completion and finishing and repair, alteration, renovation or restoration or similar services and the definition itself specifically excludes such services provided in respect of roads, airports, railways, transport terminal, bridges, tunnels and dams. From the above it is evident that not only construction services but also repair services provided in respect of roads are exempted from tax. Though the same may also fall under management, maintenance or repair service in terms of Section 65(64) of the Finance Act, 1994, in view of specific exclusion of repair services provided in respect of roads under Section 65( 25b ) of the Finance Act, 1994 the same cannot be subjected to any tax. If the intention of the government is to subject the repair services provided to roads to tax, then the definition given under ‘Commercial or Industrial Construction Service' should have been suitably amended by omitting the words “does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.” Reading the definitions of Commercial or Industrial construction service and management, maintenance or repair services together gives a meaning that repair of roads, airports, railways, transport terminals, bridges tunnels and dams are excluded from service tax liability in view of the specific exclusion provided in Section 65( 25b ) of the Finance Act, 1994. It also implies that management or maintenance of all immovable properties including roads, Airports, transport terminals, railways, bridges, tunnels and dams are liable to tax but not repairs in view of specific exclusion provided vide Section 65 ( 25b ) of the Finance Act, 1994.
The order of the Commissioner is sure to be challenged by Revenue, but the commissioner has opened a new avenue of repair and at least for some time Roads ATLEAST in Vizag can be repaired without service tax.

Changing of law through issuance of circulars !!!

Introduction:
Law till today on the subject of repairing and maintenance of roads and other infrastructural facilities was clear in the minds of all stake holders (barring a few Service tax commissionerates)
There was this discussion being held in many corners and some queries on this count were being raised that somehow Maintenance and/or repairing of Roads would be a taxable activity but a conclusive view came across from all those corners that no such taxing is possible because the law itself was clear enough.
This view was based on a sound principle of law which says that if a service activity is specifically excluded from the purview of taxation from one service category cannot be included in some other category unless and until specific inclusion thereof is provided for it in that section.
The Central Board of Excise and Customs (CBEC) – has now come up with a Circular No. 110/2009 dated 23.02.2009 clarifying the doubts in respect of levy of service tax on Repair/ renovation/ widening of roads.
The circular has tried to give extra-judicial meaning to 2 sections involved:
1. Commercial or industrial construction service [section 65(105) (zzq)]
2. Management, maintenance or repair service [section 65(105) (zzg)].

Legislative Background:

I. Commercial or Industrial Construction Service:
As per section 65(25b) of the Finance Act, 1994 (Act),
“Commercial or industrial construction service” means—
(a) construction of a new building or a civil structure or a part thereof; or
(b) construction of pipeline or conduit; or
(c) completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure; or
(d) repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit,
which is—
(i) used, or to be used, primarily for; or
(ii) occupied, or to be occupied, primarily with; or
(iii) engaged, or to be engaged, primarily in,
commerce or industry, or work intended for commerce or industry, but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams;]

As you can see, above defining section clearly spells out that all kinds of repairing, alteration, renovation, restoration or similar services provided in relation to any infrastructural facilities including roads is completely non taxable. Therefore it can be safely said that there was and still exists a specific exclusion from charging of service tax on repairing and related services in respect of roads.

II. Management, Maintenance or Repair Service:
As per section 65 (64) of the Act,
“management, maintenance or repair service means any service provided by—
(i) any person under a contract or an agreement; or
(ii) a manufacturer or any person authorised by him,
in relation to,—
(a) management of properties, whether immovable or not;
(b) maintenance or repair of properties, whether immovable or not; or
(c) maintenance or repair including reconditioning or restoration, or servicing of any goods, excluding a motor vehicle.]
[Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this clause,—
(a) “goods” includes computer software;
(b) “properties” includes information technology software;]

This section puts in place a charge on Management, Maintenance or repair services in relation to all movable and immovable goods and properties. This section was first amended w.e.f. 16.06.2005 to include maintenance services in respect of immovable properties and it was further amended from 1.05.2006 to include repairing services thereon also.

Legal Importance of circular:
It is an accepted rule of law that an Act passed by the Parliament is supreme in authority and its provisions cannot be re-defined by issuance of circulars. Circulars can only by guides of law and law cannot be over-defined by these instruments. Many circulars have been struck down by courts. In case of COMMISSIONER OF SALES TAX vs. INDRA INDUSTRIES (2001) 248 ITR 338 (SC), wherein the apex court has opined that,
“A circular by tax authorities is not binding on the Courts. It is not binding on the assessee.”
Hence circulars at best are instruments in the hands of administrators to clear doubts where they exist but unfortunately these are being used to create doubts where none exist.


Defining the Circular
The circular is issued in response to clarification sought by the Nashik Commissionerate on the issue. The circular has tried to clarify 2 issues –
a. Whether management, maintenance or repairs of roads is taxable under similar service head or not.
b. Segregation of activities in relation to roads into 2 distinct heads as under:

i. Maintenance & repair activities
1. Resurfacing
2. Renovation
3. Strengthening
4. Relaying
5. Filling of potholes

ii. Construction Activities
1. Laying of a new road
2. Widening of narrow road to broader road (such as conversion of a two lane road to a four lane road)
3. Changing road surface (graveled road to metalled road/ metalled road to blacktopped/ blacktopped to concrete etc)
In simple language as per this circular all activities of management, maintenance or repairing in respect of roads will be taxable with retrospective effect atleast from 1.05.2006 if not earlier. It has tried to define what activities are classifiable as Maintenance or Repair services and what can be defined as Construction. As there is no legal standing of the circulars – the impact of it cannot be prospective in nature.
If we believe this circular to be sacrosanct than atleast from 1.05.2006 all jobs of resurfacing, renovation, strengthening, relaying or filling of potholes in respect of roads will become taxable.
This can be stretched to mean that if a road is constructed once – all relaying work done on it for as many years to come – would be a taxable activity given that the quality of surface of the road is not changed from graveled road to metalled road/ metalled road to blacktopped/ blacktopped to concrete etc.

Mistake of omission:
The circular fails to recognize one important sub-clause of section 65 (25b) of the Act.
As explained earlier, this section defines the words – “Commercial or Industrial Construction” – wherein sub-clause (d) of section 65 (25b), clearly includes all kinds of repair, alteration, renovation, restoration or similar services. Thereby meaning that repairs is also a sort of Construction.
The definition further has an the exclusion clause which says that,
“but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams;]”
The words “Such services” – refer to sub-clause 65 (25b) (a) to (d) – which means that all repairing, renovation etc jobs in relation to roads are NOT TAXABLE at all.
Why was this clause not referred before issuance of the impugned circular is a question that only the Board can answer but according to me it is clear that they have not considered this sub-clause and this mistake of omission would give birth to serious litigation issues for the infrastructure sector as a whole.

Conclusion:
As far as repairing jobs of roads etc is concerned there was no iota of doubt in the legislative intent because Infrastructure is the need of the day and upkeep of the infrastructural facilities is a core area in which the government is working hard, but unfortunately this circular is issued to undo all the good intentions of law.
It is not as if the law is silent on the issue, on the contrary the law is crystal clear and specifically excludes all kinds of repair jobs done in respect of all infrastructural facilities like roads, airports, railways, transport terminals, bridges, tunnels and dams as explained above.
This circular must be withdrawn with immediate effect and all efforts must be taken by all stake holders to force the Central Government into withdrawing it. The circular in any case according to me is Void-ab-initio and will not stand the scrutiny of Tribunals and courts in the long run but till that happens it would have done the mischief it is intended to do. The litigation creating potential of this circular is immense and immediate.
This circular would proverbially open a Pandora’s box for the maintenance and repairing of infrastructural facilities sector as a whole, because the logic of this circular if accepted would mean that similar services in relation to infrastructural facilities other that Roads – like Airports, tunnels dams etc will also be taxable and that too retrospectively.
This Circular has all the right ingredients to do all the wrong things.

Nitesh Jain
N.J. Jain & Associates
Chartered Accountants

FEAR - Now i understand what this word means !!!

What do terrorists want - they want to instill fear in the masses - their target audience is not the politician sluts but the ordinary public - and for the first time and after so many tragedies - i have started fearing them. Not because they have the weapons but because we do not have the will to fight those weapons.

We are so 'high on spirit' people that we forget that we need to respond not in the same way but in a decent but powerful way - I AM AFRAID BECAUSE WE DO NOT RESPOND - we only talk of responding - of taking suitable action but the promised action is never taken.

The NSG took a good 10 hours to reach the spot of terror - Why ????? who is answerable - why did the police handling the situation carrying only single shot rifles in hand - why werent they wearing bullet proof jackets. there are many such questions and i know for sure that these f...... su........ politicians will have a unique way of dodging these questions because they DO NOT CARE. I hope they come to realise what fear is - many say this - that had some politicians died in any of the terror attacks or taken hostage - then we would have got some concrete actions. But no one from thier class ever dies in these attacks - they live so that we can die. Back to the NSG - the attacks started at 9.15 pm and the NSG started its action at about 8 next morning - i am told that they were informed at 12.00 in the night to move - they were kept waiting at the airport for 2 to 3 hours for a plane to fly them down - then at the mumbai airport they were kept waiting for another 1 hour because some fool had not called in for a bus for them. If this is the standard of planning in India - God save us.

Next question is that more terror strikes have taken place in Mumbai then anywhere else - then why is the NSG not having a permanent base in mumbai. Will any politician of the highest rank - may be the PM or the Home Minister or defence minister asnwer these questions. I will ask question even in this hour of tragedy because some thing grave has happenned and it is repeating itself time and again and our governers keep filling TV studious creating a farce of discussions.

My suggestions for combating terror because i do not want to stop at taking jibes at the political class but also give some ideas :

1. Have united, robust and sustainable policy to cambat terror
2. Give the ropes of this policy (implementation) to an upright and Young officer having a good head on his shoulder (mind u not a beaurocrat) to run it
3. Give all the resources he wants - make that organisation the single window for combating terror - (if we can have a single window for foreign direct investment then why not one agency to combat terror)
4. Let this organisation have permanent bases in all major cities in India.
5. Give them full political backing and keep them immuned from the communal politics.
6. Have meritocracy as its sole guiding force. There should be no interference in their work.
7. Keep it out from the hands of politician and buearocrat - have an autonomous agency like the Election commission or TRAI to look after its affair - the board should have emminent experts from the relevant fields.
8. The agency should have its own inteligence gathering capabilities - the latest gadgets should be available to them. May be it should have its own fully equipped research and development wing with a 5000 crores budget.
9. They should be backed by a democratic but powerful law against terror.
10. Special fast track terror courts should be run for terror cases alone in all major cities. Judges delaying orders must be punished immidiately. The organisation must be free to take good legal advice from the most emminent lawyers for fighting there side of the case.
11. Once a death sentence is cleared by the Supreme court than the guilty must be hanged immidiately and the political class should not be allowed to play petty politicis over this.
12. The Parliament must announce a zero tolerance policy against terror and no government must be allowed to negotiate with hijackers or such hostage takers even if it means endangering the lives of innocent citizens.
13. They must be allowed to take action which is deemed fit by the agency in foreign land - offcource it may be covert or may be overt. Stop this nonsence that we will not cross the border - this crap will not be taken now.
14. All diplomatic help must be provided to this organisation.
15. They will report directly to either the PM or the Cabinet Committee on Internal Security.
16. This organisation must have Public relations wing which gives credible information to the media.
17. At the time of terror all the agencies of the state must come its wings - in other words they will take orders from one organisation only.
18. Joint mock exercises must be conducted with identical forces of major world powers like USA, UK, France, Israel and others to upgrade the training of our men.
19. Personnel working in this organisation must be given good pay structure with good Insurance policies.
20. The government must announce a consistent and uniform policy for awarding the ex-gratia amounts to the deceased or injured in terror attacks. The system must be responsive enough to complete the process in a month of a tragedy.
21. All major facilities of national importance must be charted out - and detailed plans of action in case of terror attacks must be formulated.

I have many such suggestions and i believe there better equipped people out there who suggest much better plans but the issue is that who will bell the cat.

I hope some one in the corridors of power - in the silence of his bedroom - has a tear in his eye - thinks hard about this menance not with eye on the coming press conference and how he will manipulate the vocabulary so that he come unhurt. A thought which guides him to do something drastic about the decease called terrorist. I hope such doctor comes forward and takes the call of his duty.

No one from my family has even come close to such a tragedy and i hope no ones family ever comes close to such events but just hopes wont do any good - this 'spirit of mumbai' cliche will not help us anymore nor has it helped in the past. So get up guys and do something about this or else just keep watching Television and political debates because thats what we are good at - Mera bharat mahan - 100 me se 80 be.............. -

Nitesh Jain

Chartered Accountant

nitesh@niteshjain.co.in

Rent-a-Cab Scheme Operators’ Service – Taxable or Not?????

Introduction
Service tax on services of providing cabs on rent was first made taxable wide an amendment in the Finance Act, 1997 (taxable w.e.f. – 16.07.1997) wherein the service providers who were license holders under the Rent-a-Cab Scheme, 1989 framed by the Central Government were made taxable – practically not many of these service providers were holding such licenses hence the service did not raise much revenue for the Government. Looking at this the government exempted the whole service from tax w.e.f. 28.02.1999. It remained exempted till 1.04.2004 when it was reintroduced dispensing the requirement of holding a license under the Rent-a-Cab Scheme, 1989 thereby throwing the tax net wide open.
Recent case laws have raised major questions on the applicability of this law to a large section of the service providers. This article deals with this very aspect and tries to find answer to the query of many such service providers. Before going into the merits and demerits of the interpretation of this law, let’s see what is the real modus operandi of the majority of the service providers.

Rent a Cab Business Models
Basically there are three service models which are being followed by the industry at large:
1. Providing cars, maxi-cabs and other small to medium vehicles to the customers on a monthly hiring basis – where the driver & fuel is provided by the service provider if asked for otherwise he charges for the vehicle and rest of the expenses thereon are to be borne by the customer himself.
2. The customer gets the vehicle on per kilometer rate basis – where the driver as well as the fuel is provided by the service provider and customer has to pay for as much as he travels subject some minimum charges.
3. The service provider has his car pools at many places – the customer goes there – chooses a car – pays the refundable deposit as well as the per day or per hour rate for the chosen car and drives the car by himself. In this model the customer himself is responsible for driving the vehicle as well as fuel costs have to borne by him. After his use is over, he parks the car at any company designated parking areas and walks away after getting a refund of the deposit paid earlier.

From the above 3 models the first 2 are prevalent in India whereas the third model is yet to start in a major way.
First model is used by the corporates as well as firms who contract vehicles as per their needs on a monthly rental basis whereas the second model is more prevalent in the tourist industry and for individual customers. Lets examine the existing law covering taxation on this industry

Existing Law
Taxable service in relation to renting of cabs has been defined under section 65 (105) (o) of the Act as follows:
“Taxable service means service provided or to be provided to any person, by a rent-a-cab scheme operator in relation to the renting of a cab;”

Main ingredients that come out from the above section to make a transaction taxable are:
a. The service is provided to any person;
b. The service is provided by a rent-a-cab scheme operator
c. The service is provided in relation to renting of cab

Meaning of the above conditions:
1. The service recipient can be ANY PERSON whatsoever.
2. The service provider has to be a rent a scheme operator and section Section 65 (91) of the Act, defines him as :
“rent-a-cab scheme operator” means any person engaged in the business of renting of cabs;”
Therefore any person who in the normal course does a business of renting of cabs will only be taxable under this section and not everybody who provides vehicles on rent.

3. Third condition says that the service has to be in relation to RENTING of cabs.
This condition is proving to be a major bone of contention for the service tax department whereby the honorable tribunals have interpreted it in way which makes the whole section redundant as far as one chunk of the service providers are concerned.

Fact & Law
As discussed above there are basically 2 models of hiring of small vehicles prevalent in India wherein one is outright renting of cars and the second is piecemeal hiring.
Both the models satisfy the first 2 conditions out of the 3 discussed above. The last condition is where the judiciary has given conflicting views. The definition says that the service must be in relation to RENTING of vehicles.
In the first business model where the vehicle is given on monthly rental basis – it can be said that the car is rented but in the second model where the car is given on kilometer basis the vehicle can at best be termed as hired. Hence the difference is of Renting vs. Hiring.

The American Heritage Dictionary defines these terms as under:
Renting: means payment, usually of an amount fixed by contract, made by a tenant at specific intervals in return for the use of a facility, equipment or service provided by another; to grant temporary occupancy of use of (one’s own property or a service) in return for regular payments.

Hiring: means to grant the services of or temporary use of for a fee.

As can be seen from above definitions that there is a distinct difference between the two words hence the taxability of transaction needs to be understood in the light of these differences.

Similar question was raised in the case of Express Tours & Travels (P.) Ltd. v. CCE, [2005] 1 STT 305 (MUM. - CESTAT) – where the honorable Tribunal opined and I quote,

“I do not see much of a difference in the words Hire and Rent in the context in which they are used. The Rent-a-Cab Scheme would have consistently used the word ‘Rent’, ‘Rental Charges’, etc., instead of ‘hire’, ‘hire charges’ if there is such a big difference between the two expressions. An ‘Yellow & Black’ motor taxi is engaged by a person whereas he hires a tourist taxi much more formally for a longer duration. The Government’s intention is to tax the providers of a service, which involves, hiring/renting of a cab formally for a longer duration.”

It must be said that according to the facts of the case stated above the appellant failed to put across sufficient evidence to prove that it was hiring the vehicles and not renting them hence the tribunal was not in a position to appreciate the difference between the two transactions.
In other cases where enough evidences were put before the honorable Tribunals they gave some contrary views which have confused the issue no bounds.

Judicial views:
One view
1. Shiva Travels v. CCE – Meerut I [2007] 7 STT 75 (NEW DELHI – CESTAT)

The tribunal said that, “if motor cabs are given on rent along with drivers, the nature of service, prima facie, would remain the same as that of rent-a-cab scheme operator."

The Tribunal thus refused to entertain the difference between hiring and renting and considered both the activities as the same which makes all business models taxable under this section. Similar view was taken in the case of Anil Kumar Agnihotri v. Commissioner of Central Excise, Kanpur [2007] 11 STT 59 (NEW DELHI - CESTAT).

The other view

2. Kuldip Singh Gill v. Commissioner of Central Excise [2005] 2 STT 34 (NEW DELHI - CESTAT)
This case has proved to be a landmark where many tribunals have now come across and agreed to the views of the New Delhi CESTAT.

“It is clear from the contract that the Oil Corporation was not renting out any stipulated number of vehicles; but was making payment for operating trips to various places. The vehicle in question continued to be with the operator, including during the time of its operations for IOC. As and when the trips were required to be undertaken, the operator was asked to carry out the same and he was paid per trip depending upon distance, time etc. as per the rate sheet. The important thing to be noticed is that the cabs were not leased out for any interval of time, for use by the Oil Corporation, according to its discretion. That service tax under the heading does not cover all manner of transport or vehicle hire services is clear from the wording of the heading itself. The levy has been defined as “any service provided...... by a rent-a-cab scheme operator in relation to renting of a cab”. In the present case, there was no renting of cabs. Instead, transport service was provided. In view of this, service tax demand on the appellant is not sustainable."

The above view has been followed in the following similar cases

a. Dharmabhakti Travels v. Commissioner of Central Excise, Rajkot [2007] 9 STT 332 (AHD. - CESTAT)
b. R.S. Travels v. Commissioner of Central Excise, Meerut [2008] 15 STT 437 (NEW DELHI - CESTAT)

In this case the tribunal has said that the logic of Express Tours & Travels (P.) Ltd. v. CCE case cannot be accepted in all cases because in that case the appellant had not produced any evidence to suggest that the cars were being actually hired by the customers and not rented.

c. P. Sugumar v. Commissioner of Central Excise, Pondicherry - [2008] 13 STT 72 (CHENNAI - CESTAT) where the tribunal in its order said,

“After going through the records of the case and considering the submissions by both sides, I find that apparently, when the vehicles are not provided to a person on rental basis for any continuous period of time and are only made available for making journeys as and when required, will not come under the ‘rent-a-cab’ scheme. This is also the ratio of the two decisions of the Tribunal cited by the Ld. Consultant. The appellants have made prima facie case against the demand."

Hence the whole premise for taxing of service providers who provide vehicles on kilometer basis and where the driver belongs to them have been declared non taxable by these tribunals across India. This model of business is the most prevalent in India hence these pronouncements would bring a big cheer to these service providers.

Conclusion: The Way forward:

In the Budget 2008 the Finance Minister introduced a new service called the Supply of Tangible Goods whereby he proposed to tax those transaction where rights to use goods were transferred without transferring the effective control and possession. If we again look at the transaction where the vehicle is given to a customer on kilometer basis and assume that the same is not taxable under the Rent-a-Cab services (as the tribunals have suggested) than also from 11.05.2008 the said transaction would become taxable under the new category.

I do accept the principal that what is expressly not taxable under one head cannot purported to be made taxable under other head but the fact remains that if a transaction is being classified as non taxable due to judicial review and on an argument that the earlier section does not in any way cover those kinds of transactions than it would be hard to argue that the principal discussed above has been violated.

Secondly under the Rent-a-Cab scheme service providers enjoy a hefty 60% abatement as per notification no. 1/2006 which would not be available if the same service is made taxable in the new head.

Hence it would be futile for people to now fight for classification from now onwards – but the above service of Supply of Tangible Goods has become taxable only w.e.f. 11.05.2008 hence all service providers who have cases pending at any stage of adjudication can take help of the above cited cases and bring permanent relief for them. The situation will only change if any of the above cases are reversed by a higher court like the High Court or Supreme Court but till then we can take support of the above case laws and find some robust solution to the pending cases.

Nitesh Jain
www.niteshjain.co.in
(Mob.) 9824182629