Transcript Recent Issues in Service Tax including

BARODA BRANCH OF WIRC OF ICAI
December 13, 2013
Service as an
Activity
Anirudh Sonpal
‘Service’[65B(44)] means any activity carried out
by a person for another for consideration , and
includes declared services, but does not include:
(a) An activity which constitutes merely:
 A transfer of title in goods or immovable
property, by way of sale, gift or in any other
manner,
 Such transfer, delivery or supply of any
goods which is deemed to be sale within the
meaning of clause(29A) of Article 366 of the
Constitution, or
 A transaction in money or actionable claim
Anirudh Sonpal
Declared Service – Section 66E
(B) 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.
Explanation.- For the purposes of this clause,(I) the expression "competent authority" means the
Government or any authority authorised to issue
completion certificate under any law for the time
being in force and in case of non-requirement of
such certificate from such authority, from any of the
following, namely:Anirudh Sonpal
Declared Service – Section 66E
A. architect registered with the Council of
Architecture
constituted
under
the
Architects Act, 1972; or (20 of 1972.)
B. chartered engineer registered with the
Institution of Engineers (India); or
C. licensed surveyor of the respective local
body of the city or town or village or
development or planning authority;
(II) the expression "construction" includes additions,
alterations, replacements or remodelling of any
existing civil structure;
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Declared Service – Section 66E
(H) service portion in the execution of a
works contract
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Valuation
 Section 67 of the Finance Act,1994
 Service Tax (Determination of
Value) Rules, 2006
 Service Tax Rules,1994
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Value of Taxable Service
Where consideration for service is received
Wholly in money
The gross
amount charged
Charged
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Not wholly/partly in money
Not ascertainable
Such amount in Money
+
a. Gross
b. Where the value cannot
Service
Tax
amount
be determined in
Charged
charged to accordance with (a),
provide
then, equivalent money
similar*
value
of
such
service to
consideration which
any other shall, be at least equal
person
to the cost of provision
of such taxable service
Inclusions and Exclusion from the Value of Taxable
Service Rules 5&6
Reimbursement of expenses will form part
of taxable value
Where any expenditure or costs are
incurred by the service provider in the
course of providing taxable service, all
such expenditure or costs shall be treated
as consideration for the taxable service
provided or to be
provided and shall
be included in the value for the purpose
of charging service tax on the said service.
Anirudh Sonpal
Inclusions and Exclusion from the Value of Taxable
Service Rules 5&6
Will be excluded if costs incurred by service provider as a
Pure Agent – is a person who:
(a)
enters into a contractual agreement with the recipient
of service to act as his pure agent to incur expenditure
or costs in the course of providing taxable service;
(b)
neither intends to hold nor holds any title to the goods
or services so procured or provided as pure agent of the
recipient of service;
(c)
does not use such goods or services so procured; and
(d)
receives only the actual amount incurred to procure
such goods or services.
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Inclusions and Exclusion from the Value of Taxable
Service Rules 5&6
Cost of Pure Agent excluded subject to;
I.
II.
III.
IV.
V.
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the service provider acts as a pure agent of the recipient
of service when he makes payment to third party for
the goods or services procured;
the recipient of service receives and uses the goods or
services so procured by the service provider in his
capacity as pure agent of the recipient of service;
the recipient of service is liable to make payment to the
third party;
the recipient of service authorizes the service provider
to make payment on his behalf;
the recipient of service knows that the goods and
services for which payment has been made by the
service provider shall be provided by the third party;
Inclusions and Exclusion from the Value of Taxable
Service Rules 5&6
VI.
the payment made by the service provider on behalf of
the recipient of service has been separately indicated
in the invoice issued by the service provider to the
recipient of service;
VII. the service provider recovers from the recipient of
service only such amount as has been paid by him to
the third party; and
VIII. the goods or services procured by the service provider
from the third party as a pure agent of the recipient of
service are in addition to the services he provides on
his own account.
Anirudh Sonpal
Abatement
Anirudh Sonpal
ABATEMENTS
“12.
Construction of a complex, building, civil
structure or a part thereof, intended for a sale to
a buyer, wholly or partly, except where entire
consideration is received after issuance of
completion certificate by the competent
authority,-
(i) CENVAT credit on inputs
used for providing the
taxable service has not
been taken under the
provisions of the CENVAT
Credit Rules,2004;
(a)
for a residential unit satisfying both the 25
following conditions, namely :(ii) The value of land is
included in the amount
charged from the service
receiver.”.
(i)
the carpet area of the unit is less than
2000 square feet; and
(ii)
the amount charged for the unit is less
than rupees one crore;
(b)
for other than the (a) above.
30
Amount charged includes FMV of goods and services supplied by recipient
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ISSUES
▪ NOTIFICATION 12/2003 RESCINDED
▪ Composite Contracts – VAT vs Service Tax
▪ One time Maintenance Charges collected
by Builders
▪ Sale of Developed Plots
▪ Abatement in case of Separate Agreement
for Sale of Land and Construction
Anirudh Sonpal
VALUATION - ISSUES
Free Issue of Materials
2013 (32) S.T.R. 49 (Tri. - LB)
BHAYANA BUILDERS (P) LTD.
Versus
COMMISSIONER OF SERVICE TAX, DELHI
16.
(a)
In conclusion we answer the reference as follows :
The value of goods and materials supplied free of cost by a
service recipient to the provider of the taxable construction
service, being neither monetary or non-monetary
consideration paid by or flowing from the service recipient,
accruing to the benefit of service provider, would be outside
the taxable value or the gross amount charged, within the
meaning of the later expression in Section 67 of the Finance
Act, 1994; and
(b) Value of free supplies by service recipient do not comprise the
gross amount charged under Notification No. 15/2004-S.T.,
including the Explanation thereto as introduced by
Anirudh Sonpal Notification No. 4/2005-S.T.
VALUATION - ISSUES
Free Services
Anirudh Sonpal
2013 (31) S.T.R. 192 (Tri. - Del.)
Member (J) and Manmohan Singh, Member (T)
BHARTI AIRTEL LTD.
Versus
COMMISSIONER OF SERVICE TAX, NEW DELHI
8.6 Bare perusal of respective clauses of telecom policy prima facie throws
light that service recipients of free telecom service provided by appellant were
employees of the appellant, their relatives and Bharti Group companies who
otherwise would have paid Service Tax for the telecom service availed had
there been no exercise of option by them under the Policy of Appellant or
availed such service from other telecom service providers. The value of charges
indicated in the policy was found by the learned Adjudicating Authority as far
below the market charges. The manner of providing free telecom service by
appellant was made apparently shows that perquisite was given to the
employees in the garb of free calls at reduced rate beyond certain call limit
without payment of service tax and the appellant was enriched at the cost of
Revenue. There was no nexus brought out to demonstrate that how the free
calls were used by above persons and for what purpose. The telecom service
provided had value in monetary terms under law being taxable under a taxing
entry under Section 65(105) of the Act. But suppression of such value was
made to serve mutual interest of service provider and service recipient.
2013 (31) S.T.R. 192 (Tri. - Del.)
Member (J) and Manmohan Singh, Member (T)
BHARTI AIRTEL LTD.
Versus
COMMISSIONER OF SERVICE TAX, NEW DELHI
Revenue was thereby prejudiced seriously. Had the service been
proved to be used to provide taxable output service by the appellant
Revenue would not have been prejudiced. But that was not the case of
the appellant. Revenue neutrality was baseless plea. When there was
no consideration disclosed by appellant the rule of valuation
prescribed under Section 67 of the Act was invocable and value was
rightly determined by ld. Adjudicating Authority in Para 38 of his order.
Appellant is unable to avail benefit of the citation made for the reasons
of no nexus with output service established by appellant.
Anirudh Sonpal
2013 (31) S.T.R. 192 (Tri. - Del.)
Member (J) and Manmohan Singh, Member (T)
BHARTI AIRTEL LTD.
Versus
COMMISSIONER OF SERVICE TAX, NEW DELHI
8.7 Further reading of the policy throws light that the employees
were encouraged to avail telecom service provided by the appellant
granting an option to avail so at a lesser tariff rate, instead of switching
over to avail such service provided by other telecom service providers.
Varied choice and options granted by Appellant, prima facie,
demonstrate that the value of calls provided to employees and
relatives were less than the market value and unaccounted. Such
service provided was at the cost of Revenue. Had the call charges
been valued and as per market value and disclosed in the accounts,
Revenue would not have been affected. But that was not done by the
appellant.
Anirudh Sonpal
VALUATION - ISSUES
Reimbursement of Expenses
2013 (29) S.T.R. 9 (Del.)
INTERCONTINENTAL CONSULTANTS & TECHNOCRATS PVT. LTD.
Versus
UNION OF INDIA
Service Tax (Determination of Value) Rules, 2006 - Rule 5(1) Expenditure/costs, such as travel, hotel stay, transportation, etc.,
incurred by service provider in course of providing taxable service Stipulation that it has to be treated as consideration for taxable
service and included in value for charging Service Tax - HELD : It
purports to tax not what is due from service provider under charging
Section 66 of Finance Act, 1994 - It is ultra vires Section 67 ibid,
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
Anirudh Sonpal
2013 (29) S.T.R. 9 (Del.)
INTERCONTINENTAL CONSULTANTS & TECHNOCRATS PVT. LTD.
Versus
UNION OF INDIA
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,
quantification and collection of the Service Tax - It was no
answer to say that under Section 94(4) ibid, every rule framed
by Central Government had to be laid before each House of
Parliament, which have power to modify them.
Anirudh Sonpal
2013 (29) S.T.R. 9 (Del.)
INTERCONTINENTAL CONSULTANTS & TECHNOCRATS PVT. LTD.
Versus
UNION OF INDIA
Valuation (Service Tax) - Scope of - Section 67(1) of
Finance Act, 1994 is subject to provisions of Chapter V,
which includes Section 66 ibid - This means value of
taxable services has to be in consonance with Section 66
ibid which levies tax only on taxable service and nothing
else - It is inbuilt mechanism to ensure that only taxable
service shall be evaluated under Section 67 ibid,
whereunder value of taxable service is gross amount
charged by service provider ‘for such service’ Harmonious reading of Sections 66 and 67(1)(i) ibid
indicates that valuation of taxable service is only a
consideration paid as quid pro quo for service can be
brought to charge. [para 18]
Anirudh Sonpal
2013 (29) S.T.R. 9 (Del.)
INTERCONTINENTAL CONSULTANTS & TECHNOCRATS PVT. LTD.
Versus
UNION OF INDIA
Valuation (Service Tax) - Consulting engineer Expenditure/costs such as air travel, hotel stay, etc.,
incurred for service - They are not includible gross taxable
value of service - Only value of service rendered as
consulting engineer could be brought to charge - Sections
65(31), 66 and 67(1)(i) of Finance Act, 1994. [para 10]
Anirudh Sonpal
Works Contract
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
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Valuation of Service portion in execution of Works
Contract – Rule 2A
Anirudh Sonpal
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
Valuation of Service portion in execution of Works
Contract – Rule 2A
Works Contract Composition Scheme rescinded
Two Options – Valuation Rules

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OPTION (1)
Value of service portion in the execution of a works
contract shall be equivalent to gross amount charged
for works contract less value of transfer of property
in goods involved in execution of said works contract
and VAT/Sales Tax.
In case VAT or Sales Tax is paid on actual value of
transfer of property in goods involved in execution
of works contract, then such value adopted
for
payment of VAT to be taken as value of transfer of
property for determining the value of works contract
service as referred above.
Valuation of Service portion in execution of Works
Contract – Rule 2A
 Value of works contract service shall include (i)
labour charges for execution of the works;
(ii)
amount paid to a sub-contractor for labour
and services;
(iii)
charges for planning,
architect’s fees;
(iv)
charges for obtaining on hire or otherwise,
machinery and tools used for the execution
of the works contract;
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designing
and
Valuation of Service portion in execution of Works
Contract – Rule 2A
 Value of works contract service shall include (v)
cost of consumables such as water,
electricity, fuel used in the execution of the
works contract;
(vi)
cost of establishment of the contractor
relatable to supply of labour and services;
(vii)
other similar expenses relatable to supply of
labour and services; and
(viii) profit earned by the service provider
relatable to supply of labour and services
Anirudh Sonpal
Valuation of Service portion in execution of Works
Contract – Rule 2A
OPTION (2)
If the value of service portion in the execution of a work
contract has not been determined as above, then the
person liable to pay service tax shall determine the
service tax payable as under:
Works Contract
Service tax payable on
Execution of original works
40% of the total amount charged for the
works contract
Maintenance or repair or reconditioning or 70% of the total amount charged for the
restoration or servicing of any goods
works contract
Works contract, not covered above, including 60% of the total amount charged for the
maintenance,
repair,
completion
and works contract
finishing services such as glazing, plastering,
floor
and
wall
tiling,
installation
of
electrical fittings of an immovable property
Valuation of Service portion in execution of Works
Contract – Rule 2A
“original works” means
I. all new constructions;
II.
all types of additions and alterations to
abandoned or damaged structures on
land that are required to make them
workable;
III. erection, commissioning or installation
of plant, machinery or equipment
Anirudh Sonpal
Valuation of Service portion in execution of Works
Contract – Rule 2A
“total amount” means the sum total of the gross amount
charged for the works contract and the fair market value of
all goods and services supplied in or in relation to the
execution of the works contract, whether or not supplied
under the same contract or any other contract, after
deductingI. the amount charged for such goods or services, if any;
and
II. the value added tax or sales tax, if any, levied thereon:
 CENVAT credit of duties or cess paid on any inputs shall
not be taken, which are used in or in relation to the said
works contract.
Anirudh Sonpal
Valuation of Service portion in execution of Works
Contract – Rule 2A
Sr. No.
Particulars
Amount in Rs.
1
Gross amount received for Works Contract excl taxes
1,00,00,000
2
Fair market value of goods supplied by the service
25,00,000
provider excluding taxes
3
Amount charged by service provider for 2
4
Total amount charged (1+2-3)
5
Value of service portion (40% of 4 in case of original
15,00,000
1,10,00,000
44,00,000
works)
As seen in the above example, the service provider has to discharge service tax
liability on fair market value for the works contract.
What is Fair Market Value? - Generally Accepted Accounting Principles
Is there a standard/guidance by ICAI on determining Fair Market Value?
Anirudh Sonpal
Point of Taxation
 Earlier of :
 Invoice – 30 Days
 Advance Received
 Continuous Supply :
 Continuously Provided – more than 3 months
with periodically payment
 Notified – Telecommunication and Works
Contracts
 POT – Completion of an event that requires
payment
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Reverse Charge
Mechanism
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Reverse Charge Mechanism
 Section 68(2) of the Finance Act,1994 & Rule
2(1)(d) of the Service Tax Rules,1994
 Applicability will depend on:
 Nature and description of Service
 Status of Service Provider
 Status of Service Recipient
Partial Reverse Charge – discharge of liability by
both - Provider and Receiver- due precautions to
be exercised by Receiver?
Anirudh Sonpal
REVERSE CHARGE
S.No.
9
Description of a service
Service portion in execution of works contract non-corporate entity to corporate business
entity
(In works contract services, where both service
provider and service recipient is the persons
liable to pay tax, the service recipient has the
option of choosing the valuation method as per
choice, independent of valuation method
adopted by the provider of service)
“Business Entity” means any person ordinarily
carrying out any activity relating to industry,
commerce or any other business or profession;
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% of service tax
% of service tax
payable by the
payable by the
provider
receiver
50%
50%
Reverse Charge Mechanism – Some Issues
 Where Service provider is not liable to Service tax,
whether Service receiver is liable to discharge the
tax obligation? If yes, whether full tax or part of
tax is to be paid by him?
 Where one of the parties do not discharge its
obligation, whether full tax can be recovered from
other party?
 Whether service receiver liable even if provider
has charged full tax in invoice and the receiver has
paid the full tax which has been deposited by
provider – Revenue Neutrality?
Anirudh Sonpal
Reverse Charge Mechanism – Some Issues
 Whether Service recipient can choose valuation
method (especially in case of works contract
service) different than that of Service provider?
 Whether Service provider (discharging partial
liability) entitled to claim cenvat credit?
 Whether Service recipient can discharge Service
tax liability under Reverse charge mechanism
from accumulated Cenvat balance?
Anirudh Sonpal
Reverse Charge Mechanism – Some Issues
 Whether Service provider and Service recipient
have to discharge their respective service tax
liability on the same point of time?
 Reverse Charge when Construction Abatement
claimed
 Whether Service recipient can avail threshold
exemption in respect of services on which tax to
be paid under Reverse Charge mechanism?
 Whether Service recipient (who is not liable to
Excise or Service tax) is obliged to:
 Obtain Service tax registration
 File the Service tax returns
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Mega Exemption
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Mega Exemption
12.
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Services provided to the Government, a local authority
or
a
governmental
authority
by
way
of construction, erection, commissioning, installation,
completion, fitting out, repair, maintenance,
renovation, or alteration of (a) a civil structure or any other original works meant
predominantly for use other than for commerce,
industry, or any other business or profession;
(b) a historical monument, archaeological site or
remains of national importance, archaeological
excavation, or antiquity specified under the
Ancient Monuments and Archaeological Sites and
Remains Act, 1958 (24 of 1958);
(c) a structure meant predominantly for use as (i) an
educational, (ii) a clinical, or (iii) an art or cultural
establishment;
Mega Exemption
(d) canal, dam or other irrigation works;
(e) pipeline, conduit or plant for (i) water supply (ii)
water treatment, or (iii) sewerage treatment or
disposal; or
(f) a residential complex predominantly meant for
self-use or the use of their employees or other
persons specified in the Explanation 1 to clause
44 of section 65 B of the said Act;
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Mega Exemption
13.
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Services provided by way of construction, erection,
commissioning, installation, completion, fitting out,
repair, maintenance, renovation, or alteration of,(a) a road, bridge, tunnel, or terminal for road
transportation for use by general public;
(b) a civil structure or any other original works
pertaining to a scheme under Jawaharlal Nehru
National
Urban
Renewal
Mission
or
Rajiv Awaas Yojana;
(c) a building owned by an entity registered under
section 12 AA of the Income tax Act, 1961(43 of
1961) and meant predominantly for religious use
by general public;
(d) a pollution control or effluent treatment plant,
except located as a part of a factory; or
a structure meant for funeral, burial or cremation
of deceased;
Mega Exemption
14.
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Services by way of construction, erection,
commissioning, or installation of original works
pertaining to,(a) an airport, port or railways, including monorail
or metro;
(b)
a single residential unit otherwise than as a
part of a residential complex;
(c)
low- cost houses up to a carpet area of 60
square metres per house in a housing project
approved by competent authority empowered
under the ‘Scheme of Affordable Housing in
Partnership’ framed by the Ministry of
Housing and Urban Poverty Alleviation,
Government of India;
Mega Exemption
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(d)
post- harvest storage infrastructure for
agricultural produce including a cold storages
for such purposes; or
(e)
mechanised food grain handling system,
machinery or equipment for units processing
agricultural produce as food stuff excluding
alcoholic beverages;
Mega Exemption
25.
Services provided to Government, a local authority
or a governmental authority by way of –
(a) carrying out any activity in relation to any
function ordinarily entrusted to a municipality
in relation to water supply, public health,
sanitation
conservancy,
solid
waste
management or slum improvement and
upgradation; or
(b) repair or maintenance of a vessel;
29(h) Sub-contractor providing services by way of works
contract to another contractor providing works
contract services which are exempt;
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Mega Exemption
“governmental authority’’ means a board, or an authority
or any other body established with 90% or more
participation by way of equity or control by Government
and set up by an Act of the Parliament or a State
Legislature to carry out any function entrusted to a
municipality under article 243W of the Constitution;
“residential complex” means any complex comprising of a
building or buildings, having more than one single
residential unit;
“single residential unit” means a
self-contained
residential unit which is designed for use, wholly or
principally, for residential purposes for one family;
Anirudh Sonpal
Definition
Anirudh Sonpal
Local authority” means • A Panchayat as referred to in clause (d) of article 243 of
the Constitution
• A Municipality as referred to in clause (e) of article
243P of the Constitution
• A Municipal Committee and a District Board, legally
entitled to, or entrusted by the Government with, the
control or management of a municipal or local fund
• A Cantonment Board as defined in section 3 of the
Cantonments Act, 2006
• A regional council or a district council constituted
under the Sixth Schedule to the Constitution
• A development board constituted under article 371 of
the Constitution, or
• A regional council constituted under article 371A of the
Constitution.
ISSUES
 Service Tax on Sub-Contractors
 Whether option available for Valuation other
than provided in Valuation Rules
 Exemption to Services for Infrastructure Projects
– in relation to water supply
 Valuation below Cost – Fiat India Pvt. Ltd. – SC
Valuation (Central Excise) - Selling goods below cost - Loss
making price in wholesale trade - For penetration of market
and competing with other manufacturers of similar goods Not based on manufacturing cost and profit - Spread over
five years - HELD : It was extra commercial consideration in
fixing of price, and artificially depressed it - Full commercial
cost of manufacturing and selling was not reflected in it - It
was not ‘normal price
Anirudh Sonpal
Cenvat Credit - Input Service
“Input Service” means any service, I. used by a provider of output service for providing
an output service; or
II. used by a manufacturer, whether directly or
indirectly, in or in relation to the manufacture of
final products and clearance of final products
upto the place of removal,
and includes services used in relation to
modernisation, renovation or repairs of a factory,
premises of provider of output service or an office
relating to such factory or premises, advertisement
or sales promotion, market research, storage upto the
place of removal, procurement of inputs,
Anirudh Sonpal
Cenvat Credit - Input Service
accounting, auditing, financing, recruitment and
quality control, coaching and training, computer
networking, credit rating, share registry, security,
business
exhibition,
legal
services,
inward
transportation of inputs or capital goods and outward
transportation upto the place of removal;
but excludes services,Service portion in the execution of a works contract
and construction service including service listed under
clause (b) of Section 66E of the Finance Act
(hereinafter referred as specified service) in so far as
they are used for Anirudh Sonpal
Cenvat Credit - Input Service
(a) construction or execution of work contract of a
building or a civil structure or a part thereof; or
(b) laying of foundation or making of structures for
support of capital goods,
except for the provision of one or more of the
specified services;
Anirudh Sonpal
Service Tax Return
Issues wrt disclosure:
1. Reverse Charge
2. Gross Amount
3. Rate – Abatement
Anirudh Sonpal
PRESENTED BY : CA ANIRUDH SONPAL