Transcript Valuation of Taxable Services and CENVAT Credit

Workshop on Enabling Service Tax Practice
Baroda Branch of WIRC of ICAI
Valuation of Taxable Services
and
CENVAT Credit Rules, 2004
12th December, 2013,
3.00 p.m. to 6.00 p.m.
Dr. Nilesh V. Suchak
M. Com., LL. B., F.C.A., Ph. D.
Ahmedabad
Phone: 079-20193524, 26764811, 26765011
E-mail: [email protected]
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Valuation of taxable services for
charging service tax
Valuation of Taxable Service
 Section 67(1): Value of taxable services shall be:
Gross amount charged by the service provider for
such (taxable) service where provision of service is
for a consideration in money;
ii. Such amount in money as, with the addition of
service tax charged, is equivalent to consideration
where the provision of service is for a consideration
not wholly or partly consisting of money;
iii. The amount as may be determined in prescribed
manner where the provision of service is for a
consideration which is not ascertainable.
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i.
Valuation of taxable services for
charging service tax
Service Tax (Determination of Value) Rules, 2006
 Rule 2A: Determination of value of service portion in the
execution of a works contract.
i. Value of service portion = Gross amount charged for the works
contract – value of property in goods transferred.
ii. Where value has not been determined under clause (i), value of
service portion shall be as under:
A.
B.
C.
For execution of ‘original works’ - 40% of total amount charged for
the works contract
For works contract for maintenance or repair or reconditioning or
restoration or servicing of any goods - 70% of total amount
charged for the works contract
For any other works contract not covered under (A) and (B) above
including maintenance, repair, completion and finishing services
such as glazing, plastering, floor or wall tiling, installation of
electrical fittings of an immovable property - 60% of total amount
charged for the works contract
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Valuation of taxable services for
charging service tax
 What is Works Contract?
 Section 65B(54): “works contract” means a contract wherein
transfer of property in goods involved in the execution of
such contract is leviable to tax as sale of goods and such
contract is for the purpose of carrying out construction,
erection, commissioning, installation, completion, fitting
out, repair, maintenance, renovation, alteration of any
movable or immovable property or for carrying out any
other similar activity or a part thereof in relation to such
property.
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Valuation of taxable services for
charging service tax
 Determination of value of service in relation to money
changing [Rule 2B]
 Determination of value of service portion involved in supply
of food or any other article of human consumption or any
drink in a restaurant or as outdoor catering. [Rule 2C]
 Manner of determination of value. [Rule 3]
 Rejection of value. [Rule 4]
 Inclusion in or exclusion from value of certain expenditure or
costs. [Rule 5]
 Cases in which the commission, costs, etc., will be included
or excluded. [Rule 6]
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Valuation of taxable services for
charging service tax
 Issues
1. Mr. A has determined value of service portion in execution
of a construction works contract by deducting from the
gross amount charged the value of property in goods
transferred in the execution of the said works contract.
Gross amount charged for the works contract is Rs. 100
crore including VAT and service tax. VAT or sales tax is paid
on actual value of property in goods transferred. The
service receiver has supplied a Golden Kalash whose fair
market value is Rs. 500 crores to be incorporate in
construction in the manner desired by service receiver. Will
the fair market value of this Golden Kalash be included in
value of taxable service provided by Mr. A?
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Valuation of taxable services for
charging service tax
 Issues
2. Will free supplies of cement or steel by service receiver for
construction be included in value of taxable service in the
hands of service provider?
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Valuation of taxable services for
charging service tax
 Issues
2A. Bhayana Builders (P) Ltd. v. CST, Delhi [2013 (32) STR 49 (Tri.LB)]- Implicit in this legislative architecture is concept that any
consideration whether monetary or otherwise should have
flown or should flow from service recipient to service provider
and should accrue to benefit of later. “Free supplies”
incorporated into construction (cement or steel for instance),
even on extravagant inference, would not constitute nonmonetary consideration remitted by service recipient to service
provider for providing service, particularly since no part of goods
and materials so supplied accrues to or is retained by service
provider. Value of ‘free supplies’ by construction service
recipient, for incorporation in constructions would neither
constitute non-monetary consideration to service provider nor
form part of gross amount charged for services provided. Hence,
contrary conclusion in Jaihind Project Ltd. [2010 (18) STR 650
(Tri.-Ahmd)] found to be incorrect, proceeding on flawed
interpretation of section 67.
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Valuation of taxable services for
charging service tax
 Issues
3.
Can expenditure/costs, such as travel, hotel stay,
transportation, etc., incurred by consulting engineering
service provider in course of providing taxable service be
treated as consideration for taxable service and included in
value for charging Service Tax?
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Valuation of taxable services for
charging service tax
 Issues
3A. Intercontinental
Consultants & Technocrats Pvt. Ltd. v. UOI [2013 (29)
S.T.R. 9 (Del.)] – Rule 5(1) purports to tax not what is due from service
provider under charging Section 66 of Finance Act, 1994. It is ultra
vires Section 67, which quantifies the charge of Service Tax, both
before and after its amendment of 1-5-2006. In these Sections phrase
‘for such service’ is important. Such expenditure/costs cannot be
considered as amount charged by Service provider ‘for such service’
provided by him. Power to make rules could not exceed or go beyond
Section which provides for charge or collection of Service Tax. Apart
from being ultra vires, Rule ibid may also result in double taxation, if
expenses like air travel tickets, had already been subjected to Service
Tax. Also, ‘consideration in money’ or ‘gross amount charged’ used in
Section 67 ibid did not have widest sense of including such
expenditure/costs. In their definition in Explanation to the section,
these expenditure/costs have not been included. Even if Rule ibid is
considered to have been made under Section 94 ibid, which provides
for delegated legislation, it could only be for carrying out provisions of
Chapter V of Finance Act, 1994 which provides for the levy,
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quantification and collection of the Service Tax.
Valuation of taxable services for
charging service tax
 Issues
4. Can components of salary, Bonus, uniform
charges etc. payable to security guard/staff and
statutory contributions like PF and ESI be
included in value of taxable service provided by
security agency supplying security personnel?
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Valuation of taxable services for
charging service tax
 Issues
4A. Hon. Delhi High Court has, in Writ Petition (C) No.
6226/2012 in case of Skylark Securities Pvt. Ltd. passed an
interim order on 4th September, 2013, directing the
Department that while adjudicating the matter, service tax
demanded in respect of components of Salary, ESI, PF,
Uniform Charges, Bonus etc. has to be computed separately
but restrained the Department from recovery of said
service tax from the petitioner providing security service.
The High Court has further directed that recovery only can
be made in respect of the Service Tax on service charges
(other than above-components) of supply of security
personnel/manpower supply and other demands shall be
subject to the further order of the High Court.
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Valuation of taxable services for
charging service tax
 Issues
5. Is service tax payable on serving of food and
beverages?
5A. Kerala Classified Hotels and Resorts Association v. UOI
[2013 (31) STR 257 (Ker.)] – When food or alcoholic
beverages were supplied as a part of any service, such
transfer was deemed to be a sale. As deeming provision
permitted State Government to impose tax on such
transfer, there could not be any different component of
service which could be imposed with any service tax in
exercise of residuary power of Central Government under
entry 97 of List I of Constitution of India.
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Any Questions?
Dr. Nilesh V. Suchak
M. Com., LL. B., F.C.A., Ph. D.
Ahmedabad
Phone: 079-20193524, 26764811, 26765011
E-mail: [email protected]
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CENVAT Credit Rules, 2004
 What is CENVAT Credit?
 Why CENVAT Credit?
 When can CENVAT Credit be availed?
 What are the conditions for availment of CENVAT
Credit?
 For what purpose can CENVAT Credit be used?
 What is Exempted Service?
 What is Export of Service? Rule 6A of STR
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CENVAT Credit Rules, 2004
 Capital Goods [Rule 2(a)]
 Input [Rule 2(k)]
 Input Service [Rule 2(l)]
 Output Service [Rule 2(p)]
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CENVAT Credit Rules, 2004
 [Rule 3(1)] CENVAT Credit of about 16 different types of
duties and taxes paid on input service or capital goods or
inputs.
 No CENVAT Credit of additional duty U/s 3(5) of CTA to
provider of output service
 [Rule 3(2)] CENVAT Credit of duty paid on inputs lying in
stock or in process or contained in final products lying in
stock to be allowed on the date when goods manufactured
cease to be exempted goods or when any goods become
excisable.
 [Rule 3(3)] CENVAT Credit of duty paid on inputs lying in
stock on the date on which any service ceases to be exempted
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service shall be allowed.
CENVAT Credit Rules, 2004
 [Rule 3(4)] The CENVAT credit may be utilized for payment
of –
 (a) any duty of excise on any final product; or
 (b) an amount equal to CENVAT credit taken on inputs if such inputs are
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removed as such or after being partially processed; or
(c) an amount equal to the CENVAT credit taken on capital goods if such
capital goods are removed as such; or
(d) an amount under sub-rule (2) of rule 16 of Central Excise Rules, 2002;
or
(e) service tax on any output service :
Provided No CENVAT Credit of additional duty U/s 3(5) of CTA shall not
be utilized for payment of service tax on output service.
Explanation. - CENVAT credit cannot be used for payment of service tax
in respect of services where the person liable to pay tax is the service
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recipient.
CENVAT Credit Rules, 2004
 [Rule 3(5)] The manufacturer of the final products or
provider of output service, as the case may be shall pay an
amount equal to the credit availed on inputs of capital goods
removed as such except for providing output service or for
providing free warranty of final product.
 [Rule 3(5A)] If the capital goods, on which CENVAT credit
has been taken, are removed after being used, the
manufacturer or provider of output services shall pay an
amount equal to the CENVAT Credit taken on the said capital
goods reduced by the percentage points calculated by
straight line method as specified for each quarter of a year or
part thereof from the date of taking the CENVAT Credit. If
capital goods removed as waste and scrap, manufacturer shall
pay an amount equal to duty leviable on transaction value.19
CENVAT Credit Rules, 2004
 [Rule 3(5B)] If the value of any input or capital goods before
being put to use is written off fully or partially or where any
provision to write off fully or partially has been made in the
books of account, then the manufacturer or service provider, as
the case may be, shall pay an amount equivalent to the CENVAT
credit taken in respect of the said input or capital goods
 Provided that if the said input or capital goods is subsequently
used in the manufacture of final products or the provision of
output services, the manufacturer or output service provider, as
the case may be, shall be entitled to take the credit of the
amount equivalent to the CENVAT credit paid earlier subject to
the other provisions of these rules.
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CENVAT Credit Rules, 2004
 [Rule 3(6)] The amount paid under sub-rule (5) and sub-rule (5A)
shall be eligible as CENVAT credit as if it was a duty paid by the
person who removed such goods under sub-rule (5) and sub-rule
(5A).
 [Rule 3(7)] CENVAT Credit of Education Cess & Secondary and
Higher Secondary Education Cess can be used only for payment of
Education Cess & Secondary and Higher Secondary Education
Cess on taxable service respectively.
 Explanation.-Where the provisions of any other rule or
notification provide for grant of whole or part exemption on
condition of non-availability of credit of duty paid on any input or
capital goods, or of service tax paid on input service, the
provisions of such other rule or notification shall prevail over the
provisions of these rules.
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CENVAT Credit Rules, 2004
 Conditions for allowing CENVAT Credit – Rule 4
 Refund of CENVAT Credit – Rule 5
 Refund of CENVAT Credit to service providers providing services
taxed on reverse charge basis – Rule 5B
 Obligations of a manufacturer or producer of final products and a
provider of output service – Rule 6
 Manner
of distribution of credit by Input Service
Distributor(ISD) – Rule 7
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CENVAT Credit Rules, 2004
 Distribution of credit on inputs by office or any other
premises of output service provider – Rule 7A
 Storage of input outside the factory of the manufacturer –
Rule 8
 Documents and accounts – Rule 9
 Information relating to principal inputs – Rule 9A
 Transfer of CENVAT credit – Rule 10
 Transfer of CENVAT credit of additional duty leviable under
sub-section (5) of section 3 of the Customs Tariff Act – Rule
10A
 Transitional provision – Rule 11
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CENVAT Credit Rules, 2004
 Special dispensation in respect of inputs manufactured in
factories located in specified areas of North East region,
Kutch district of Gujarat, State of Jammu and Kashmir and
State of Sikkim – Rule 12
 Procedure and facilities for a large taxpayer – Rule 12A
 Power to impose restrictions in certain types of cases – Rule
12AAA
 Power of Central Government to notify goods for deemed
CENVAT Credit – Rule 13
 Recovery of CENVAT Credit wrongly taken or erroneously
refunded – Rule 14
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CENVAT Credit Rules, 2004
 Confiscation and penalty – Rule 15
 General penalty – Rule 15A
 Supplementary provision – Rule 16
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CENVAT Credit in respect of Commission
Is CENVAT Credit allowed in respect of commission paid to agents on sales?
CCE v. Cadila Healthcare Ltd. [2013 (30) S.T.R. 3 (Guj.)] – Nothing on record to
indicate that foreign agents they were actually involved in any sales
promotion activities like advertising, covered in inclusive part of definition
of input service. Agents were directly concerned with sales rather than sales
promotion . Services provided by them was neither Business Auxiliary
Service under Sections 65(19) and 65(105)(zzb) of Finance Act, 1994 nor
were they covered in main or inclusive part of definition of input service in
Rule 2(l) of Cenvat Credit Rules, 2004. It was not used directly or indirectly
in or in relation to manufacture of final products or clearance of final
products from place of removal. It was not analogous to illustrative
activities mentioned in the Rule 2(l) ibid viz., accounting, auditing, etc.,
and therefore, do not fall within ambit of “activities relating to business”. In
that view, it was not eligible for Cenvat credit. Sales promotion targets large
population of consumers. It is intended to improve sales, and includes
activities like advertising, organizing competitions, providing free gifts and
samples, demonstrations, discounts, exhibitions or tradeshows, games,
giveaways, point-of-sale displays, merchandising, and similar activities.
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THANK YOU
Dr. Nilesh V. Suchak
M. Com., LL. B., F.C.A., Ph. D.
N. V. Suchak & Co., Chartered Accountants,
314, Satyam Mall, Opp.: Saman Complex, Near
Vishveshwar Temple, Vastrapur,
Ahmedabad-380015. Gujarat
Phone: 079-20193524, 26764811, 26765011
E-mail: [email protected]
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