Budget Analysis - 2011 Service tax

Highlight of this budget:

A. Service tax will be payable on accrual basis from 1.04.2011. So the moment a service provider will book any invoice in his books the tax will become payable.

B. Service tax is being levied on all services provided by a medium sized hospital (having more than 25 beds) irrespective of whether the patient has insurance or not.

C. Service tax on Hotels have been introduced in a big way:

a. Room rentals above a declared rate of Rs. 1000 will be chargeable to service tax – with an optional abatement of 50%.

b. Services provided by air-conditioned restaurants having a license to serve alcoholic beverages – this service will get optional 70% abatement.

D. Penal provisions are made harsher with introduction of penalties even when tax is being paid under audit.

E. Introduction of prosecution provisions wherein the assessees evading tax payments for more than 6 months may face imprisonment of upto 3 years.

Gist of Amendments in existing law

1. No change in the rate of service tax – it remains at 10.30 %

NEW SERVICES BROUGHT IN THE TAX NET

2. Two new services are being brought under the tax net:

a. RESTAURANTS

Services provided by air-conditioned restaurants having a license to serve alcoholic beverages – this service will get optional 70% abatement.

b. HOTELS

Hotels and guesthouses giving rooms for accommodation for a continuous period less than 3 months – this service brings into the tax net only rooms having a declared (Rack) rate of more than Rs. 1000 (chargeable rate may be less). This service will get an optional 50% abatement.

CHANGE IN SCOPE OF EXISTING SERVICES

3. Scope of certain existing services is being changed and in almost all cases the changes are drastic :

a. Club or association Services

EARLIER:

Services provided by a club or association to ITS MEMBERS were only taxable NOW:

Services provided to NON MEMBERS will also become taxable

b. Authorised service station

EARLIER:

Services provided by AUTHORISED SERVICE STATION were only taxable

NOW

Services provided by ANY PERSON will be taxable so all small mechanics provided services for more than 10 lacs in a year will become taxable.

c. Lawyers

EARLIER:

Services provided by a firm of lawyers to any individual were not taxable. Secondly legal representational services like appearing in court of law for a client were also not taxable

NOW

Services provided by a firm of lawyers to any person shall become taxable and legal representation services provided by any person (including individuals) to any business entity shall also become taxable. Similar change is expected to come for chartered accountants and company secretaries.

Arbitration services are also brought into the tax net but still if the same are provided to individuals the same shall not be taxable.

d. COMMERCIAL TRAINING OR COACHING SERVICE

The memorandum issued along-with the Budget says that

“The definition of commercial or training service is being amended to bring all unrecognised courses within the tax net, irrespective of the fact that such courses are conducted by an institute.”

But the consequent change in the section does not reflect the said change – on the contrary – the amended section says that all courses offered by a coaching centre WITH OR WITHOUT ISSUANCE of certificate will be taxable

This anomaly needs to be looked into an corrected before enactment of the Finance Act.

e. Hospital Services

Major change has been made in this entry

EARLIER:

2 Services provided by a hospital were ONLY taxable:

· Services provided to patients wherein the payment was to be paid by the insurance company

· Services of health check up or preventive care provided to an employee of a company wherein the company paid the charges to the hospital

NOW:

The whole section is changed and the new entry provides that

· ALL services provided by a CENTRALLY AIR-CONDITIONED (wholly or partially) hospital having more than 25 beds for in-patient treatment during any part of the year. (The insurance company is completely brought out from the picture)

· If an independent doctor (not being an employee of the hospital) provides his services using the premises of the said hospital will also now become taxable – so now all visiting doctors of a hospital will be taxable.

· Diagnostic services provided by the said hospital with the aid of a laboratory or other medical equipments.

4. Full exemption is being provided under the works contract service for providing construction or finishing of new residential complex under JNNURM and Rajiv Awaas Yojana and within a port or airport. (Earlier this exemption was provided only under the category of Construction of residential complex and commercial construction service.

5. Rates of Service tax on air travel are being increased as under

Domestic Travel - From flat Rs. 100 to 150

International Travel - From flat Rs. 500 to 750

PENAL PROVISIONS

6. Penal provisions are changed in big way in this budget – following is the gist of them:

a. Section 73 (1A) is deleted wherein benefit of reduced penalty of 25% even in case of fraud, collusion etc shall not be available.

b. Instead a new section 73 (4A) is being introduced wherein it has been provided that if during an audit, verification or investigation by the department it is found that the assessee has short paid any tax than a penalty of 1% per month upto a maximum of 25% shall be levied. If the same is paid than no show cause notice shall be issued. So now penalty will become compulsory the moment an audit party finds any short payment of tax which was not so earlier.

c. Penalty under section 76 for delayed payment of tax has been reduced from Rs. 200 per day or 2% per month to Rs. 100 or to 1% per month – whichever is higher subject to a maximum penalty of 50% of the tax amount. Earlier it was 100%.

d. Maximum penalty for non submission of records etc under section 77 has been increased from Rs. 5000 to 10000.

e. Penalty for late filing of returns has been increased from a maximum of Rs. 2000 to 20000.

f. Power to authorise a Search has now been given to a Joint commissioner (Earlier it was with Commissioner) and power to execute the search has been given to a Superintendent (earlier it was Assistant or deputy commissioner)

g. Certain section of the Central Excise Act which deal with prosecution are now made applicable to Service tax.

h. Section 89 is being introduced to bring prosecution provisions:

i. The prosecution shall apply in the following cases:

· Provision of service without invoice

· Availment and utilisation of credit without receipt of inputs or input services

· Submitting false information

· Non-Payment of collected amount of service tax for a period of more than 6 months

ii. The term of the imprisonment shall be from 6 months to a maximum of 3 years.

iii. The sanction for the prosecution will be granted at the level of chief commissioner

7. The Board has issued 18 notifications to being some more changes which are as under:

a. New Rule 2A has been introduced in Works contract Composition rules whereby Service providers availing the Composition scheme shall now be eligible to take only 40% of the credit of the following 3 input services availed by them:

· Erection commissioning and installation Services

· Commercial Construction Services

· Construction of Residential Complex Services

Please note that this restriction shall apply only if the value of the said input services is inclusive of value of goods.

b. In the earlier budget notification nos. 28/2010, 38/2010 & 42/2010 were issued wherein exemption to Construction of complex & Commercial construction service was given respectively for providing services to JNNURM and Rajiv Awaas Yojana schemes but a similar exemption was not provided to Works contract service. This anomaly has now been corrected by introducing notification no. 6/2011, 10/2011 and 11/2011.

c. Export Rules have been tweaked a bit :

i. Preferential Location services offered by builders has been shifted from customer location based criteria to immovable property criteria

ii. Following services have been shifted from the performance based criteria to location based:

· Credit Rating Agency

· Goods Transport Agency

· Market Research Agency

· Opinion Poll Agency

· Technical Testing and analysis

· Transport of Goods by air

· Transport of Goods in containers by railways

iii. Following Services have been shifted from Location based criteria to performance based:

· Rail Travel Agent

· Health/Hospital Services

d. Import Rules have also been amended. Amendments similar to the ones made in Export rules are made in import rules.

e. Interest on delayed payment which was 13% p.a. earlier has now been increased to 18% p.a. w.e.f. 1.04.2011.

f. New Notification no. 17/2011 is introduced which supersedes the earlier notification no. 9/2009 which deals with SEZ refunds. It simplifies the refund rules and procedures related to SEZ’s.

g. Point of Taxation Rules has been introduced whereby specific rules as to when a particular transaction would become taxable have been prescribed (at the time of invoicing or at the time of receipt of payment). A detailed note on the same is under process and will be mailed very soon.

CHANGES IN CENVAT CREDIT RULES

8. CENVAT credit rules have been amended in a big way and following changes are made to it:

a. Definition of Capital goods has been amended. Now credit of capital goods used outside the factory of the manufacturer for generation of electricity for captive use within the factory will be available.

b. Major change has been brought about in the definition of exempted services. Effect of 2 changes made in the definition are as under:

· Services on which a service provider has claimed abatement will now be considered as exempted services

· Value of trading in goods shall now be treated as exempted services.

c. Definition of Inputs (goods) has been changed and now credit of goods used for construction of building or a civil structure or laying of foundation will not be available except if the goods are used for providing following services:

· Port Services

· Airport Services

· Commercial Construction Services

· Residential Construction Services

· Works Contract Services

d. Definition of Input Services has been amended and following changes are incorporated:

· Credit for setting up of an office, factory or premises of service provider shall not be available

· The words “activities relating to business” have now been deleted from the definition so now credit of ALL services procured for doing the activity of business will not be available on A-la-carte basis.

· Credit of services falling in the category of Architect, Port, Other port, Airport, Commercial Construction, Residential construction and Works Contract (Specified services) shall not be available if the same are used for construction of building or a civil structure or laying of foundation. If these services are used to provide the same specified services than the service provider can claim the credit thereof.

· Services falling in the category of General Insurance business, Cab operator, Authorised Service Station and supply of tangible goods so far as they relate to motor vehicle except when used by a service provider falling in the category of courier, Cab operator, Cargo handling, Transport of goods by road, outdoor catering and pandal and shamiana keeper.

· Credit of services falling in the category of outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, 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, when such services are used primarily for personal use or consumption of any employee will not be available henceforth.

e. Rule 3 is being amended retrospectively w.e.f. 18.04.2006 to provide that credit of tax paid under section 66A shall be available – A long awaited amendment and thanks to him its RETROSPECTIVE.

f. Rule 4 (7) is being amended to provide for reversal of credit in case any payment made for any input service is received back

g. Rule 6 is amended to :

- Reduce tax payable on exempted services from 6% to 5%

- Provide an option to keep separate accounts for inputs alone and reverse the amount of input service credit as per the allocation formulae in Rule 6 (3A).

- Rule 6 (5) is omitted – so now credit of 16 services which was available without restrictions will not be available.

CONCLUSION AND SUGGESTIONS

In his speech the Finance Minister said and I Quote:

“The strength of a good value-added-tax lies in the free flow of the credit of the tax paid at the previous stage. Due to complexities, there have been many legal disputes on the availability of credit on a number of inputs or input services. These provisions are being rationalized by laying down clear definitions so that the scope of inputs and input services that are eligible and those that are not, is clear. Allocation of CENVAT credit to exempt and taxable goods and services is also being streamlined.”

Above changes may sound as the finance minister says ‘rationalization’ but the truth of the matter is that in the garb of rationalization the minister has changed the definition in such a way that many of the legitimate credits will now be lost and the basic principle of Value added taxes will be destroyed giving rise to many new litigations.

I hope the feedback to the finance minister’s budget proposals is strong enough to make him change his mind especially on 3 counts:

a. To scrap the levy of service tax on hotel industry when it already faces heavy taxes under state laws.

b. To give abatement option to hospitals

c. To change the definition of input and input services so as to enable the manufacturers and service providers avail credit on construction expenses incurred by them. Construction is a major expense for some of the service providers especially hotels and hospitals.

d. Trading cannot by any stretch of imagination be termed as a service leave alone it being exempted. Question may arise that if the finance minister thinks today that trading is an exempted service can he not say tomorrow that it is a taxable service and start taxing it. It is a frivolous move which will create a big anomaly for those service providers who have trading businesses as well.

e. Re-introduce rule 6(5) of the CENVAT credit rules because there are many input services which cannot be bifurcated strictly between taxable and exempted services.

DISCLAIMER The analysis/views in this booklet do not purport to be and should not be treated as legal opinion. Nothing contained herein can substitute appropriate legal opinion in fact specific situations that affect you or your enterprise.

Formulated by:

Nitesh Jain

N.J. Jain & Associates

Fourth Floor, Dev Complex,

CG Road, Ahmedabad

+91 79 40022629

+91 98241 82629

www.niteshjain.co.in

Blog: http://servicetaxnitesh.blogspot.com/

Impact of Certain Amendments in Finance Act, 2010

Introduction

In the recently notified Finance Act all services provided within the airport will w.e.f. 1.07.2010 be classified as ‘Airport Services’ – hence all services including Commercial Construction Services (CCS) and Works Contract Services (WCS) will be now classified as airport services.

In the individual sections of CCS and WCS – providing services to airport is not taxable but due to the amendment all these services will now fall in airport services category and in that section there is no such provision for exemption to these services.

For this notification 42/2010 dated 28.06.2010 was issued which has given an exemption to CCS services but WCS services have not been considered for such an exemption due to which all WCS service providers which were till now exempt will have to now start paying tax – which I deem is not the intention of the Board.

Legislative Background

The Civil Aviation sector and more specifically the Airports in India is one of the areas where the Government of India has made certain special efforts to create a better and robust infrastructure. For this one part was to exempt the airport builders in various sub-sectors like roads, airports from the levy of Service Tax.

The Finance Act, 1994 has 2 sections which cover the whole gamut of construction activity which are:

A. Commercial or Industrial Construction Service [Section 65 (105) (zzq) read with section 65 (25b)] which is reproduced as under:

Section 65 (105) (zzq)

Taxable service means any service provided or to be provided —

(zzq) to any person, by any other person, in relation to commercial or industrial construction service;

Section 65 (25b)

(25b) “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;]

B. Works Contract Service – Section 65 (105) (zzzza)

Taxable service means any service provided or to be provided —

(zzzza) to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.

Explanation.—For the purposes of this sub-clause, “works contract” means a contract wherein,—

(i) transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and

(ii) such contract is for the purposes of carrying out,—

(a) erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluids, heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators; or

(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or

(c) construction of a new residential complex or a part thereof; or

(d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or

(e) turnkey projects including engineering, procurement and construction or commissioning (EPC) projects;

As can be seen the infrastructure sector is broadly out of the ambit of the definition of these two levies including the airports.

In case of Ports the Board had issued a blanket exemption notification no. 25/2007 dated 22.05.2007 which came into effect on 1.06.2007. This notification exempted CCS as well as WCS services provided to ports and other ports.

So it can be concluded that till 30.06.2010 all CCS or WCS services provided to or within the airport or port or other ports was not taxable under the service tax law.

Amendment made:

Finance Act, 2010 was amended and one such amendment relates to Airport and port services – the relevant text of the amendment is as under:

Old Section:

65 (82)

“port service” means any service rendered by a port or other port or any person authorised by such port or other port, in any manner, in relation to a vessel or goods;

65 (105) (zzl)

to any person, by other port or any person authorised by that port in relation to port services, in any manner;

65 (105) (zzm)

to any person, by airports authority or any person authorised by it, in an airport or a civil enclave;

After amendment w.e.f. 1.07.2010

65 (82)

“port service” means any service rendered within a port or other port, in any manner;’;

65 (105) (zzl)

“(zzl) to any person, by any other person, in relation to port services in other port, in any manner:

Provided that the provisions of section 65A shall not apply to any service when the

same is rendered wholly within other port;’’;

65 (105) (zzm)

(zzm) to any person, by airports authority or by any other person, in any airport or a civil enclave:

Provided that the provisions of section 65A shall not apply to any service when the

same is rendered wholly within the airport or civil enclave;”;

Above amendment was brought about in the recent budget 2010. These amendments were meant to minimise the classification issues that were arising because the old sections were general in nature. In other words all services provided by persons who were authorised by port or airport were termed as ‘Port Services’ or ‘Airport Services’. So if a Warehousing service provider who was authorised to provide warehousing inside the port was falling under both ‘Storage & warehousing services’ as well as Port services.

These amendments are two fold:

a. All persons providing services within the port or airport services to any other person shall now become taxable.

b. All these persons shall now be classified under ‘Port Services’ or ‘Airport Services’.

In the logical corollary of the above interpretation all persons who were providing CCS or WCS services to the airports or ports shall now loose their core classification and fall into either of the 2 categories as enumerated above and consequently also loose the exemption of non taxability of providing services to airports and ports which was available to them hitherto.

To correct this anomaly the government issued notification no. 38/2010 and 42/2010 dated 28.06.2010 which provide exemption to CCS services provided within the port or airport respectively.

The point of representation lies herein.

The exemption which was previously available to both CCS as well as WCS is now only extended to CCS providers and WCS providers are w.e.f. 1.07.2010 made taxable if they provide services to these 2 categories of customers.

This cannot be the intention of the legislature or for that matter of the Board.

All people who follow the Service Tax law will understand the anomaly and its impact if not corrected on time.

Comments are invited.......

CA Nitesh Jain

nitesh@niteshjain.co.in

Brief Writeup on changes made in Service Tax Law by Budget 2010

Gist of Amendments in existing Service tax law

1. No change in the rate of service tax – it remains at 10.30 %
2. Service tax on the real estate sector has been introduced in a new avatar whereby from the date to be notified sale of commercial or residential property by the builder or any other person authorised by him shall be taxable if the builder or person authorised by him receives any payment before receipt of construction completion certificate from competent authority. In other words if in cases of sale of real estate (residential or commercial) where any sum of money is received by the builder from the prospective buyer before receiving the construction completion certificate then such entire transactions shall be taxable. If this becomes law the real estate Construction sector is going to witness a big shock. Further details if any are awaited.
3. The ambit of Port Services has been reduced to include only those port services provided within the precincts of the port.
4. Retrospective amendment has been introduced to tax all commercial training or coaching service providers irrespective of their constitution or whether or not they make profit. This amendment is applicable from 1st July 2003. Hence all charitable organizations providing commercial training services shall now become taxable and that too on their entire earning since 1st July, 2003. Moreover definition of vocational training institute has been changed (vide notification no. 3/2010) whereby w.e.f. 27.02.2010 only those institutes which affiliated to the National Council for Vocational Training, offering courses in designated trades as notified under the Apprentices Act, 1961(52 of 1961) shall on be tax free.Prior to this budget sponsorship services were taxed only in the hands of body corporates or firms. Now the ambit of sponsorship services has been extended to include all persons receiving such services.
5. Earlier sponsorship services in relation to sports events were exempt from tax which now would become taxable from the date to be notified.
6. Previously service provided by aircraft operators to passengers flying to international destinations on classes above economy class was taxable. Now the domestic travel as well as international travel services provided by aircraft operators shall be liable to service tax irrespective of the class chosen to travel. Now on Domestic travel will become dearer by 10.3%.
7. An explanation has been added to section 65 (105) (zzzr) (for Auctioneers Service) which declares that “auction by the Government” means the Government property being auctioned by any person acting as auctioneer.
8. Retrospective amendment has been brought in w.e.f 01.06.2007 to negate the fallout of Delhi HC decision in case of Home Solutions. The activity of 'renting itself' becomes taxable service from 01.06.2007. So all hopes of a favourable order from the Supreme Court have been negated with this retrospective amendment.
9. From the date to be notified leasing of vacant land for construction of building or temporary structure at a later stage to be used for furtherance of business or commerce shall also be taxable.
10. Earlier information technology software services were taxable only if the same were provided for use in business or commerce. This major requirement has now been done away with & now these services shall be taxable irrespective of the purpose thereof hence from now on software related services provided for use in Education or religious purposes shall also become taxable.
11. An explanation to section 73 (3) of the finance act has been added so as to declare that if service tax & interest are paid before issuance of SCN then no penalties shall be leviable. Earlier this section provided only that if the tax & interest were paid prior to issuance of SCN then in those cases no SCN shall be issued.
    

New services brought under the tax net:

1. Services provided by Hospitals, nursing homes or multispecialty clinics providing services in the following cases have now been made taxable from the date to be notified:
   a. To an employee of any business entity, in relation to health check-up or preventive care, where the payment for such check-up or preventive care is made by such business entity directly to such hospital, nursing home or multi-specialty clinic; or
   b. To a person covered by health insurance scheme, for any health check-up or treatment, where the payment for such health check-up or treatment is made by the insurance company directly to such hospital, nursing home or multi-specialty clinic;
   Hence treatments provided to any person under the cashless facility offered insurance companies would now become taxable. It would be pertinent to note that if treatments are provided where payments are not made directly to the hospitals shall not be taxable. In other words if the same are reimbursed to the insured it shall not be liable to tax.
2. Services provided to any business entity, by any other person, in relation to storing, keeping or maintaining of medical records of employees of a business entity shall now become taxable;
3. Promotion, marketing or endorsement of brand of goods, services, event, tradename, logo or housemark of a business entity shall now become taxable.
4. Services provided by way of granting the right or by permitting commercial; use or exploitation of any event including an event relating to art, entertainment, business, sports or marriage shall be made taxable from the date to be notified;
5. Services provided by an approved electricity exchange in relation to trading, processing, clearing or settlement of spot contracts, term ahead contracts, seasonal contracts, derivatives or any other electricity related contract shall become taxable;
6. Services provided by way of transferring temporarily; or permitting the use or enjoyment of, any copyright defined in the Copyright Act, 1957, except the rights covered under sub-clause (a) of clause (1) of section 13 of the said Act;” shall now become taxable;

Builders selling residential or real estate properties whereby they charge an extra amount to provide any preferential location or development of such property to any buyer, such extra charge shall now be leviable to service tax.




DISCLAIMER

The analysis/views in this booklet do not purport to be and should not be treated as legal opinion. Nothing contained herein can substitute appropriate legal opinion in fact specific situations that affect you or your enterprise.

Nitesh Jain

Chartered Accountant

http://www.niteshjain.co.in/

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