RECENT AMENDMENTS IN SERVICE TAX

A: CENVAT ELIGIBILITY OF WORKS CONTRACT SERVICE:

 Recently CESTAT of Mumbai in the case of Red Hat India (P.) Ltd. v. Principal Commissioner of Service Tax, Pune (2016) 70 taxmann.com 132 has held that Works Contract Services used for maintenance of office equipment and building is not excluded from definition of input service and hence, same is eligible for input service credit.

In the given case assessee availed credit of ‘works contract services’ used for maintenance of photocopier, computer and building premises of assessee. The Department rejected the refund of works contract service only on the ground that the said services is excluded from the definition of the input service under Rule 2(l) of Cenvat Credit Rules, 2004.

Sub-clause (A) of Rule 2(l) reads as follows:

(A) service portion in the execution of a works contract and construction services including service listed under clause (b) of section 66E of the Finance Act (hereinafter referred as specified services) in so far as they are used for—

• construction or execution of works contract of a building or a civil structure or a part thereof or
• laying of foundation or making of structures for support of capital goods,

except for the provision of one or more of the specified services; or

As per given provisions it can be seen that works contract Services are excluded only when it is used for construction service, whereas in given case it is for maintenance of various equipment and building and not for construction. Therefore it does not fall under the exclusion category in definition of input service and hence, works contract service is input service.

B :INTEREST SHOULD BE COMPUTED IN ACCORDANCE WITH INTEREST RATE IN FORCE DURING THE PERIOD OF DELAY:

In recent past, interest rates under Section 75 have undergone various changes. However there always arises ambiguity in respect of interest rate to be used while discharging Service tax liability. Recently, Hon’ble CESTAT of Chennai in the matter of Jeevan Diesels & Electricals Ltd. v. Commissioner of Central Excise, Pondichery (2016) 68 taxmann.com 325 (Chennai-CESTAT),held that applicable rate of interest for belated payments is the rate of interest in force during the period of delay.

In the aforesaid case, department had found the liability short paid for the month January 2011. While computing the demand, Department had computed the interest liability at the rate of 13 percent upto 31.3.2011 and thereafter at the rate of 18 percent upto date of payment as rate of interest got enhanced from 13 percent to 18 percent from 1-4-2011. However, appellant had pleaded that since the liability pertained to January 2011 so rate applicable at that time i.e. 13 percent should be applied.

Giving the decision in the favour of the revenue, Honorable CESTAT-Chennai held that adjudicating authority has rightly computed the interest liability in accordance with the interest rate prevalent during the period of delay.

C: “NO SERVICE TAX ON SERVICES BY BUILDERS- AS NO MACHINERY PROVISION IN THE FINANCE ACT 1994 TO SEGREGATE THE VALUE OF LAND”:

Prior to Finance Act 2010, there was a confusion regarding the taxability of the services provided by builders/developers to prospective buyers. The issue was almost settled with the coming into force of the circular no. 96/7/2007, dated 23/8/2007 wherein CBEC clarified that builders/developers who construct buildings/civil structures for themselves (for their own use, renting it out or for selling it subsequently) are not taxable service providers

Finance Act, 2010 inserted an explanation to bring the concept of deemed service under the purview of service tax. In addition, Finance Act, 2010 has introduced new service to tax PLC and other charges charged from prospective buyers.

Post the introduction of Negative List, “construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion-certificate by the competent authority”, is introduced as Declared service.

Recently, on 3rd June, 2016 W.P.(C) NOS. 2235 & 2971 OF 2011 was decided by The Hon’ble Delhi High Court in the case of Suresh Kumar Bansal v. Union of India (2016) 70 taxmann.com 55 (Delhi), wherein it was held that no service tax under section 66 read with Section 65(105)(zzzh) of the Act (Construction of Complex Services) and Explanation to section 65(105)(zzzh) could be charged in respect of composite contracts. Further, the impugned explanation to the extent that it seeks to include composite contracts for purchase of units in a complex within the scope of taxable service is set aside.

In the said case, assessee purchased flat in a residential complex for charges inclusive of value of land. Assessee challenged levy of service tax on ground that composite contract (inclusive of value of land) cannot be charged to service tax in absence of any machinery provision for determination of value of service portion. Further, it was contended that preferential location charges do not amount to service and cannot be charged to service tax.

In view of the contention of the assesse, the Hon’ble Delhi High Court held that:

• Rule 2A of Valuation Rules, which determines valuation of works contract does not apply when price is inclusive of value of land. Further, Rule 2A of Service Tax (Determination of Value) Rules, 2006 provides for mechanism to ascertain the value of services in a composite works contract involving services and goods, the said Rule does not cater to determination of value of services in case of a composite contract which also involves sale of land. The gross consideration charged by a builder/promoter of a project from a buyer would not only include an element of goods and services but also the value of undivided share of land which would be acquired by the buyer.
• No machinery provision is present so far in the Finance Act 1994, to segregate value of land, and mere abatement or circular not sufficient. Neither the Act nor the Rules framed therein provide for a machinery provision for excluding all components other than service components for ascertaining the measure of service tax.
• The abatement to the extent of 75% by a notification or a circular cannot substitute the lack of statutory machinery provisions to ascertain the value of services involved in a composite contract.
• So far as preferential charges are concerned, the same amounts to service. To review the service tax liability on PLC, the High Court analyzed the newly inserted service i.e. Preferential Location Services Section 65(105)(zzzzu) which speaks about the element of service involved in the preferential location charges levied by a builder. Such charges do not relate solely to the location of land. Thus, preferential location charges are charged by the builder based on the preferences of its customers. They are in one sense a measure of additional value that a customer derives from acquiring a particular unit. Such charges may include prime/preferential location charges for allotting a flat/commercial space according to the choice of the buyer (i.e. Direction- sea facing, park facing, corner flat; Floor- first floor, top floor, Vastu- having the bed room in a particular direction; Number- lucky numbers)
• Since these charges are in the nature of service provided by the builder to the buyer of the property over and above the construction service, any charges claimed for sale of flat or preferential location of flat will be taxable under service tax. Such charges cannot be traced directly to the value of any goods or value of land but are as a result of the development of the complex as a whole and the position of a particular unit in the context of the complex.

D: SERVICE RECIPIENT CAN FILE REFUND CLAIM BEFORE THE CENTRAL EXCISE & SERVICE TAX AUTHORITIES OF HIS TAX JURISDICTION:

Recently in the case of Chambal Fertilizers & Chemicals Ltd. v. Commissioner of Central Excise, Jaipur-I (2016) 69 taxmann.com 328 (New Delhi-CESTAT) held that recipient of the services can file refund application of excess service tax before its jurisdictional statutory authorities.

In the present case, a service recipient was manufacturing exempted products ‘urea’ using raw material ‘natural gas’, which the appellant procures from M/s Reliance Gas Transportation Infrastructure Ltd. Mumbai (RGTIL). Transmission charges for transportation of Natural gas are regulated by PNGRB. During the period April 2009 to May 2010, RGTIL supplied natural gas to the applicant at the rate of 68.56 MMBTU. The natural gas is regulated and the price is determined by the regulatory authority and the charges for the said period were finalized on 9.6.2010 by PNGRB @ 67.64 MMBTU. For adjusting excess amount charged, the supplier M/s RGTIL issued two number of credit notes to the appellant, of Rs 1,19,78,338/- towards the value of service. However, no credit notes were issued representing the excess payment of service tax into the government exchequer. The appellant is the recipient of services and the incidence of service tax has been borne by it, the appellant had filed refund application before the jurisdiction Service Tax Authorities.

The refund application was denied by the authorities below on the ground that the service tax amount has not been paid by the appellant and the same has been paid by the service provider M/s RGTIL, and thus, the refund claim filed by the appellant is not maintainable. The other ground assigned for rejection of the refund application is that the appropriate authority for sanction of the refund amount is the service tax authorities having jurisdiction over the premises of the service provider and not the service receiver. Therefore the refund application has been filed before the wrong authority, the same is not maintainable.

The hon’ble CESTAT held that appellant being a service recipient has borne the burden of service tax thus he is entitled for refund and refund claim filed before its Authorities is maintainable.

E: BULK DISCOUNTS GIVEN BY MEDIA OWNERS TO ADVERTISING AGENCIES- NOT LIABLE TO SERVICE TAX

Authority for Advance Rulings (Central Excise, Customs And Service Tax) New Delhi, in the case ofAKQA Media India (P.) Ltd., In re* {(2016) 69 taxmann.com 390 (AAR – New Delhi)} have recently held that to be leviable to service tax, the Activity must be carried out for a consideration. In other words, to be ‘service’, there must be nexus between ‘activity’ and ‘consideration’ and also a contractual relationship.

Since burden of proof is always on the department, and the Department in the present case, could not show what ‘activity’ is undertaken by applicant resulting into Media Owner giving volume discount.

In the said case, Revenue has argued that the applicant provides Declared Service in terms of Section 66 E (e) of the Finance Act, 1944 to Media Owners. Section 66E (e) reads as under;

“66E. The following shall constitute declared services, namely;

(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act.”

It is observed that there is no agreement or contractual obligation between the applicant and the Media Owner to give volume discount to the applicant by the Media Owner. Volume discount is not fixed and is to be given at the discretion of Media Owner. Further, volume discount is gratuitous. Applicant/Advertising Agencies cannot claim it as a matter of right. Therefore, applicant is not providing declared services to the Media Owner.

While deciding the present case, the AAR relied on the case of Grey Worldwide India (P.) Ltd. v. CST (Order No. A/1337-1338/14/CSTB/C-1, dated 30-7-2014), wherein the Tribunal held that media giving certain incentives by way of volume discounts cannot be levied to Service Tax. Relevant portion of the Judgment is reproduced below:

“Thereafter, at the end of the year, depending upon the volume of business given by the advertising agency, the media gives certain incentives by way of volume discounts/rate difference. There is no agreement or understanding or any contract between the advertising agency and the media for promotion of the media’s business activities. There is also no obligation on the part of the media to given these incentives.

These payments are made only as a gratuitous payment for the advertisements placed on the media. There is no contractual obligation between the advertising agency and the media for provision of any services. In the absence of such a contractual obligation, it is difficult to accept the Revenue’s contention that on the incentives received, the appellant is liable to service tax under BAS. This was the view taken by this Tribunal consistently in a series of decisions starting from Euro RSCG Advertising Ltd.”

Considering the above, AAR in the present case ruled that volume discounts from Media Owner shall not be considered to be providing a service, as defined under the Finance Act, 1994, to the Media Owner and shall not be liable to Service Tax.

F: AMENDMENTS VIDE FINANCE ACT, 2016, APPLICABLE WEF 1ST JUNE, 2016

Finance Bill, 2016 which get President’s assent dated 14th May, 2016, has proposed to amend various provisions under the Act. Changes made applicable wef. 1st June, 2016 are listed as follows:-

1. Levy of “Krishi Kalyan Cess”

Krishi Kalyan Cess (KKC) @0.5%, vide introduction of Chapter VI in the Act, would be levied on all taxable services, other than services which are fully exempt from Service Tax or services which are otherwise not liable to Service Tax under section 66B of the Finance Act, 1994.

Service providers would be allowed to avail CENVAT Credit of KKC, however, such CENVAT credit can be utilized only for payment of KKC. Further, CENVAT of other duties/tax cannot be utilized for payment of KKC.

2. Negative List entry that covers “service of transportation of passengers, with or without accompanied belongings, by a stage carriage” would be omitted (section 66D (o)(i))

W.e.f. 01.06.2016 the service of transportation of passengers with or without accompanied belongings by an Air-conditioned stage carrier would become taxable, except in case if such service is provided by non-air conditioned contract carriage, which would continue to remain exempt by way of new entry 23(bb) in Mega Exemption Notification, to be applicable wef 1st June, 2016 too.

3. Negative List that covers services by way of transportation of goods by an aircraft or a vessel from a place outside India up to the customs station of clearance is to be omitted (section 66D (p)(ii))

Services by way of transportation of goods by vessel from a place outside India up to the customs station of clearance would now become taxable, however, aforesaid service by an aircraft will continue to exempt by way of Exemption notification no. 09/2016-ST dated 1st March 2016, wef. 1st June, 2016, vide new entry no. 53 in the exemption notification

We look forward for your valuable comments.

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