Levy of Service Tax on Restaurant Services

Levy of Service Tax on Restaurant services has been one of the most controversial topics in Service Tax.   Time and again the same has been challenged by assesses as being not exigible to Service Tax.  Moreover, even the valuation of restaurant services has also been a matter of dispute between the government and subjects.  In this article we shall discuss the levy and various controversies as arisen in past basis the various court rulings on restaurant services.

Before we examine the current provision, we must examine in brief the constitutional provision and history of levy of Service Tax on restaurant services.  Prior to introduction of Article 366(29A) in the constitution, sale of food in restaurant was not exigible to Service Tax.  The understanding was upheld in the case of State of Himachal Pradesh v. Associated Hotels of India Ltd. [[1972] 29 STC 474] wherein Apex Court has held that the transaction between hotelier and the visitor to the hotel is one essentially of service and the hotelier serves meals in the performance and as part of the amenities incidental to the service and that such supply of meals by the hotel to the residents is not sale of food.  It is pertinent to mention that at that time, no Service Tax was there on restaurant services and thus, dispute was limited to levy of Sales Tax. Accordingly, Article 366(29A) introduced the following provision deeming such supply of food as sale:

“(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.”

The levy of VAT on food and drinks supplied for human consumption in case of hotels / restaurant was brought by introduction of this sub clause.  Thus, while there is an introduction of deeming fiction of levy of Service Tax on supply of food, however, the same can be as a part of service and thus, existence of service in such supply is well accepted by the Article.  In East India Hotels Ltd. v UOI [(2001) 121 STC 46 (SC)], it was held that the moment food is supplied to the customer, a sale is effected, and it is not material as to whether whole of the food is consumed by the customer or not.  Thus, this supply contains both elements viz. of sale of goods and provision of services and the two respective statutes have devised Rules to levy tax on their respective share in the activity.

To understand the concept better, we can also refer to the decision of Delhi high Court in the case of The Federation of Hotels Restaurants Association of India And Ors v UOI [2007-TIOL-345-HC-DEL-SWMA], wherein the question examined was whether it was impermissible for the Petitioners to charge their customers/guests any price above the maximum retail price (MRP) mentioned on mineral-water packaged and bottled by third parties.  Hon’ble High Court held that answer in negative and held as under:

“That charging prices for mineral water in excess of MRP printed on the packaging, during the service of customers in hotels and restaurants does not violate any of the provisions of the SWM Act as this does not constitute a sale or transfer of these commodities by the hotelier or Restaurateur to its customers. The customer does not enter a hotel or a restaurant to make a simple purchase of these commodities. It may well be that a client would order nothing beyond a bottle of water or a beverage, but his direct purpose in doing so would clearly travel to enjoying the ambience available therein and incidentally to the ordering of any article for consumption. Can there by any justifiable reason for the Court or Commission to interdict the sale of bottled mineral water other than at a certain price, and ignore the relatively exorbitant charge for a cup of tea or coffee.”

Thus, as on date, both Service Tax and VAT are levied by Centre and states respectively on sale / service of food in restaurants.  Even in case of Bharat Sanchar Nigam Limited vs. Union of India [2006(2)STR161(SC)], Hon’ble Apex Court held that except in cases of works contracts or catering contracts [exact words in article 366(29A) being – ‘service wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as part of the service’], composite transactions cannot be split into contracts of sale and contracts of service.

Restaurant service was first made taxable with effect from May 1, 2011, when the then Hon’ble Finance Minister introduced the new category by explaining its scope vide Circular No. F.No. 334/3/2011-TRU, dated 28-2-2011 (Extracts) as under:

“Restaurants provide a number of services normally in combination with the meal and/or beverage for a consolidated charge. These services relate to the use of restaurant space and furniture, air-conditioning, well-trained waiters, linen, cutlery and crockery, music, live or otherwise, or a dance floor. The customer also has the benefit of personalized service by indicating his preference for certain ingredients e.g. salt, chilies, onion, garlic or oil. The extent and quality of services available in a restaurant is directly reflected in the margin charged over the direct costs. It is thus not uncommon to notice even packaged products being sold at prices far in excess of the MRP.”

Thus, what was being exigible to Service Tax was the service provided in restaurant by way of space, ambience, air conditioning, service etc.  Accordingly, the scope of services was to envisage the services provided in terms of servicing and providing good ambience to customers during their consumption of food and not every provision or supply of food.  The Circular further clarified that the levy was intended to be confined to the value of services contained in the composite contract and shall not cover either the meal portion in the composite contract or mere sale of food by way of pick-up or home delivery, as also goods sold at MRP. Also, it was clarified that the amount paid by the customer ex-gratia e.g. as tip to any member of the staff doesn’t constitute consideration paid to the restaurant and shall remain outside this levy.

Further, an exemption @ 70% of the gross value i.e. the total price charged by the restaurant was given by amending the notification No. 1/2006-S.T., dated 1-3-2006 vide notification No. 34/2011-S.T., dated April 25, 2011. The exemption was available provided no Cenvat credit is availed either of inputs or input services. It was further clarified that the exemption is available on the gross price charged by the restaurant for the taxable service, including any portion shown separately e.g. service charge.

The application of Service Tax on such services continued under the negative list also, and as on date only factory canteen and non air-conditioned restaurants are exempted from levy of Service Tax.  Further, the in place of erstwhile abatement, effective July 1, 2012, vide notification no. 24/2012-ST, Service Tax (Determination of Value) Rules, 2012 were amended and 40% of the billed value, for supply of food or drinks in a restaurant, was provided as value of services there and made liable to service tax.

The levy on restaurant services was challenged by the assessee in Kerala Classified Hotels And Resorts Association & Others Vs UOI & Others [2013 (31) S.T.R. 257 (Ker.)], wherein Hon’ble Court struck the levy of Service Tax on restaurant services is beyond the legislative competence of the Parliament as the sub-clauses are covered by Entry 54 and Entry 62 respectively of List II of the Seventh Schedule.  The Hon’ble Court held that it can be seen from Article 366(29-A)(f) that service is also included in the sale of goods. Accordingly, if the constitution permits sale of goods during service as taxable necessarily Entry 54 has to be read, giving the meaning of sale of goods as stated in the Constitution. The Court thus held that if read in that fashion, necessarily service forms part of sale of goods and State Government alone will have the legislative competence to enact the law imposing a tax on the service element forming part of sale of goods as well, which they have apparently imposed.

However, to the contrary, Bombay High Court upheld the levy in the case of Indian Hotels And Restaurant Association & Others v UOI [2014-TIOL-498-HC-MUM-Service Tax], wherein Hon’ble High Court held as under:

“The fact that the tax on sale of goods involved in the said service can be levied, does not mean that the service tax cannot be levied on the service aspect of catering. With respect, this means that when a restaurant renders to any person a service, the tax on sale of goods involved in the said service can be levied. That does not mean that a service tax cannot be levied on the act of serving food at a restaurant. That is the tax in this case imposed by the Parliament. There could be a sale during the course of rendering of service at a restaurant and therefore, a sales tax could be imposed by the State Legislature. So long as there is no prohibition against imposition of service tax on the services rendered, then it must be held that the Parliament is competent to impose a service tax in question.”

Due reference to the decision of Kerala High Court was made by the Court and it disagreed with the decision of single member judge and upheld the levy relying on the decision of Apex Court in the case of Tamil Nadu Kalyana Mandapam Association v/s Union of India [2004-TIOL-36-SC-Service Tax].  In the said case, hon’ble Apex Court held in Para 45 that the concept of catering admittedly includes the concept of rendering service. The fact that tax on the sale of the goods involved in the said service can be levied does not mean that a service tax cannot be levied on the service aspect of catering.

Further, Hon’ble Uttrakhand High Court in the case of Valley Hotel & Resorts v CCT [2014-TIOL-600-HC-UKHAND-VAT] while has not examined the levy of Service Tax on such services but has examined the extent to which VAT and Service Tax can be levied.  The Court held that VAT cannot be levied on the portion on which Service Tax has been prescribed by competent authority of Service Tax.  Hon’ble Court observed that authority competent to impose service tax has also assumed competence to declare what is service and the State has not challenged the same.  Therefore, it was held that where element of service has been so declared and brought under the Service Tax vide Government of India notification dated 06.06.2012, (i.e. 40% of bill amount to the customers having food or beverage in the restaurant was made liable to service tax) no Value Added Tax can be imposed thereon.

Thus, basis the above discussion, it can be said that though the odds are in favour of levy of Service Tax on restaurant service, the non levy of VAT on service portion can bring some relief to the tax payer.  Taxpayer is not frustrated by levy of taxes, but their multiplicity and multiplicity of the authorities having jurisdiction over his business. Thus, a simple regime with both VAT and Service Tax levied in justified and non overlapping manner can  bring end to the controversy of levy of Service Tax / VAT on restaurant services.

 

Clarification on Restaurant Services

In an important clarification vide Circular No. 173/8/2013 – Service Tax dated October 7, 2013, government has clarified the following queries in respect of exemption provided towards restaurant services vide Notification No. 25/2012 –ST.

S.No.QueryClarification as providedMGS comment
1In a complex where air conditioned as well as non-air conditioned restaurants are operational but food is sourced from the common kitchen, will service tax arise in the non-air conditioned restaurant?Services provided in relation to serving of food or beverages by a restaurant, eating joint or mess, having the facility of air conditioning or central air heating in any part of the establishment, at any time during the year (hereinafter referred as ‘specified restaurant’) attracts service tax. In a complex, if there is more than one restaurant, which are clearly demarcated and separately named but food is sourced from a common kitchen, only the service provided in the specified restaurant is liable to service tax and service provided in a non air-conditioned or non centrally air- heated restaurant will not be liable to service tax. In such cases, service provided in the non air-conditioned / non-centrally air-heated restaurant will be treated as exempted service and credit entitlement will be as per the Cenvat Credit Rules.The clarification has been important on two perspective:
a.      It clarifies that kitchen cannot be treated as restaurant. Thus, even if kitchen is same, or food from the kitchen feeding a restaurant is provided for other purpose, the same would not equate to being provided by the restaurant.
b.     It further clarifies that the exemption is available to restaurant and not its source per se.
2In a hotel, if services are provided by a specified restaurant in other areas e.g. swimming pool or an open area attached to the restaurant, will service tax arise?Yes. Services provided by specified restaurant in other areas of the hotel are liable to service tax.The clarification provides that servicing of food in extended portions of restaurant would also be considered at par with servicing inside the restaurant.
3Whether service tax is leviable on goods sold on MRP basis across the counter as part of the Bill/invoice.If goods are sold on MRP basis (fixed under the Legal Metrology Act) they have to be excluded from total amount for the determination of value of service portion.The clarification is in line with excise as preparation of such would amount to manufacture and be exigible to excise . This could be applied to contest no demand on minibar products are they are required to be sold on MRP basis.

However, the much awaited clarification failed to enlighten assessees on the following issues:

  1. Sale of food made by Hotels and Restaurants under Take away / home delivery
  2. Food provided under room service. If not clarified, clarification no.2 can be extended by department for the said purpose to say that provision of food by taxable restaurant in room is also service in restaurant (extended service).  However, alternate argument provides that since there is no ambience or service of waiters and other amenities as is provided in restaurant is not available in room services, the equity lies in treating this as sale of food rather than service.

The issues are highly litigative and respite is required in terms of clarification to avoid unnecessary huge demands later on assessees.

Service tax on Entry to Amusement Parks held Constitutionally Valid – Revisiting Aspect Theory

Hon’ble High Court of Kerala vide WP(C).No.18328 of 2015 (M) in the case of M/S. KANJIRAPPILLY AMUSEMENT PARK AND HOTELS PVT. LTD. V UOI has delivered its judgement on the question as to Whether the removal of “admission and access to entertainment event and amusement facilities”

[sub-clause (j) of Section 66D of the Finance Act, 1994] from the Negative List of “Services” by an Amendment of 2012 and the consequent imposition of service tax on such activity would result in the Union Parliament trenching upon the exclusive field assigned to the State, under Entry 62 List II [any reference to Lists I, II or III is to the Lists under the Seventh Schedule of the Constitution].

It was argued that state has already enacted an act enacted under Entry 62 of List II which deals with “taxes on luxuries, including taxes on entertainments, amusements, betting and gambling” wherein specific entry levies entertainment tax on amusement park. This, being covered exclusively under state list, it cannot be brought under service tax which is levied under list III. It was also argued that , there can be no service element in the amusement enjoyed by the persons who get admitted to the facilities with the sole intention of amusement and entertainment.

On behalf of the government, it was argued that the levy was valid basis aspect theory. In other words, Overlapping regime arising out with distinguished powers cannot make a levy invalid. Even if there is an amount of overlapping when the power is exercised by two legislatures, if the overlapping is in law and is only an incidental trenching upon one, by the other, then it was held to be a valid levy.

It was observed by court that while what can provide entertainment to a person is a subjective concept, but when a facility is created to offer such entertainment, an element of service is introduced. Hon’ble Court departs nature of levy from measure of levy and observed that service tax on admission is only a measure of levy. The real nature of levy is on count of entertainment offered In a facility for a consideration by one person to another. It was further observed that an amusement park, are obliged to pay entertainment tax to the State, whether or not there are entrants to the park. The Union Parliament has provided for a tax on admission to the parks, making it clear that the levy is only when the service is availed of. With these observations, Hon’ble Court has upheld the levy of Service tax on admission and access to entertainment event and amusement facilities.

It is important to note that while upholding the levy, the judgement has relied upon aspect theory and has beautifully carved out the difference between nature of levy and measure of levy. However, it is also to be noted that the judgement views the two levies from two different perspectives – while it observes entertainment tax from the perspective of entertainment being enjoyed by a person, on the other hand, it also finds in existence the services of a man offering such amusement to the other person. While appreciating this argument, one must also understand that this dual aspect is an inherent part of every service. Service is received by a person to fulfil one of his desire and a service is only possible when the provider offers something which fulfils another person’s desire. For eg a student is enlightened On being taught, while a teacher offers services of teaching to a student. One can view this as two aspects or one can also view this as an act and result. Every service provided will surely have a result, or in other words, no result is possible without a service. Only (as court has observed in its judgement) services by mother nature or to oneself are not taxable since they lack consideration as also the other defined person is missing. Else all acts are service. While we can not deny such strong argument in support of multiple levies, however, It feels that It is time that we need to reinvent the wheel of aspect theory as somewhere while understanding the technical arguments, we are visited by the same question time and again – whether while drafting the constitution, our leaders had wanted such dual or even multiple taxation on their subjects. Somewhere, everyone of us might seek as answer as no. Taxation is a matter of gathering funds for running government to meet needs of al of its subjects, but never at the cost of subjects paying such multiple taxes coupled with multiple compliance. The discussion becomes more complicated in a country like ours where one can find variety and disparity. Disparity more in terms of classes. While the idea always remains to tax the upper segment to share resources with masses but somewhere in the present emerging consumption economy, such tax also acts as a infliction on weaker sections when they ever indulge in such consumptions. Also, costlier sources of entertainment also devoid masses from facilities of fun and joy which is in any case required for a healthy society. The depth of discussion forces me to conclude the topic with these final words – it should be requested from governments that multiple levies should be upheld with aspect theory with a small rider that those aspects must lead to fulfilment of multiple purpose, else it is better to have one tax at higher rate rather than two taxes cumulating to a higher rate but dredging India towards a complex tax regime and a nightmare for a taxpayer.

Whether Reimbursement Constitutes Consideration?

Section 67 of Finance Act, 1994 provides that value charged by Service provider for provision of his services shall only be taxable. The relevant proportion fo the Section reads as under:
SECTION

[67. Valuation of taxable services for charging service tax. — (1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference to its value, then such value shall, —

(i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;

Thus, Section 67 envisage only the amount charged by the service provider towards provision of services. Further, in order to determine the value of taxable services, Service Tax (Determination of Value) Rules, 2006 has been prescribed. Rule 5 of Service Tax (Determination of Value) Rules 2006 provides for situations where reimbursable expenditure are to be considered as part of consideration for levy of Service Tax. The relevant extracts of the said Rule are as follows:

RULE 5. Inclusion in or exclusion from value of certain expenditure or costs. — (1) 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.”

Thus, every costs incurred by Service provider in the course of providing output service shall be guided by the provisions of Rule 5. However, the only requisite for inclusion in value of taxable service is that such cost should be towards provision of such taxable service as required by Section 67 of Finance Act, 1994. Thus, in case any cost which is not incurred in provision of taxable service but merely paid in order to facilitate the service recipient on any other position, shall not form part of consideration as envisaged in Rule 5 above.

In Rolex Logistics Pvt. Ltd v. CST, Bangalore 2009 -TMI – CESTAT BANGLORE), it was held that reimbursement of expenses are not for services rendered but expenditure incurred on behalf of client by service provider. Gross amount for service rendered means only for services rendered. It also interpreted ‘reimbursement’ as payments made on behalf of service recipient by service provider in the course of rendering services. The gross receipt for the services rendered means only for the services rendered. The value for the purpose of charging service tax as in the gross amount received as consideration for provision of service.

The recent decision of Delhi High Court in the matter of Intercontinental Consultants and Technocrats Pvt. Ltd v UOI & Anr. [ W.P. (C) 6370/2008 ] has clarified the position further as it holds that the expenditure or costs incurred by the service provider in the course of providing the taxable service can never be considered as the gross amount charged by the service provider “for such service” provided by him and accordingly has held Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 as ultraviolet the provisions of Section 66 and 67 of Finance Act, 1994 to the extent it includes reimbursement of expenses in the value of taxable services for the purposes of levy of service tax. In the present matter, the assessee was a consulting engineer and was not charging Service Tax on reimbursements like travel, hotel stay etc. and the appeal was against the demand of Service Tax on such reimbursements.

The decision elaborated on subordination of rules to the statute and that the subordinate legislation cannot override the provisions of the statute. The Honorable Court made an important observation that “The thread which runs through Sections 66, 67 and Section 94, which empowers the Central Government to make rules for carrying out the provisions of Chapter V of the Act is manifest, in the sense that only the service actually provided by the service provider can be valued and assessed to service tax. It purports to tax not what is due from the service provider under the charging Section, but it seeks to extract something more from him by including in the valuation of the taxable service the other expenditure and costs which are incurred by the service provider “in the course of providing taxable service”.

In the case of International Logistics [[2012] 22 301 (New Delhi – CESTAT)] it was held that expenses incurred to provide taxable services shall be part of assessable value if such expenses are inseparable and integrally connected with performance of taxable services.

Further, explanation (1) to rule 5(2) clearly specifies the criteria to decide whether the service provider acts as a pure agent or not in a given situation. In the case of agency function, the agent neither intends to hold nor holds any title to the goods or services and also never uses such goods or services so procured. It is also important to note that the service provider only receives the actual amount incurred to procure such goods or services.

For understanding the nature of allowable reimbursements, reference can be made to the CESTAT decision in the case of Mckinsey & Company Inc. Versus Commissioner Of C. Ex. & Cus., Mumbai [2007-TIOL-583-CESTAT-MUM] wherein it was held as follows.

“OPE means expenses which cannot be budgeted for and have to be incurred on the spot to meet immediate requirement and are therefore contingent in nature. These must be the expenses which are primarily to be incurred by the client and not the service provider. Therefore it has to be first established, that normally the services were required to be provided by the client and were rendered on behalf of the client as per his request and it will be then only that the expenses will be reimbursable. The distinction should be not on the basis of non infrastructure and not establishment services, but with respect to the liability of the client to incur such expenses. For e.g. if the service provider has to visit the project site, then he has to be provided some office place for which necessary furniture, computer, telephone and other facilities have to be given. These can be said to be expenses which are required to be incurred by the client but are incurred by the service provider on behalf of the client who is thereafter reimbursed these expenses and will therefore be eligible for abatement. On the other hand office expenses incurred in running the normal office of service provider cannot be said to be expenses incurred on behalf of the client.”

In case of Lepra Society V CCE [2011 (22) S.T.R. 645 (Tri. – Bang.)], the assessee being a non-governmental organization was engaging services of medical personnel on payment of specified amount. This specified amount is paid by the District TB Control Society. The assessee submitted that that the persons engaged by the appellant are on contractual basis and thus, the assessee was not liable to pay Service tax on the amounts paid to such medical personnel as he was incurring expenditure as a pure agent. The Hon’ble Tribunal stayed the recovery of Service tax from the assessee observing that the provisions of Rule 5(2) of Service Tax (Determination of Value) Rules, 2006 prima facie apply to the assessee’s case.

In the case of Naresh Kumar & Co. Pvt. Ltd. v CCE [2008 (11) S.T.R. 578 (Tri. – Kolkata)], the Honorable Tribunal held that if an expenditure is indispensable in provision of a service, such expenditure should essentially form part of cost of service itself and shall form part of value of taxable service. The detailed observations are as under:

“The Appellant in the course of hearing simply submitted that reimbursement of expenditure, bending and bundling charges and stock verification charges are not relatable to the taxable service for which those receipts shall not be value of taxable service and there shall be no taxation under the provisions of the Act. Except such a bald argument, there was neither any evidence adduced nor the Appellant proved its stand demonstrating before us how all these receipts were not relatable to the service of clearing and forwarding operations provided to TISCO and TRL. Therefore each and every aspect of such claim calls for detailed examination on the basis of evidence. Their nature, live link and nexus to the principal service of clearing and forwarding operations shall be decisive. The learned Adjudicating Authority has merely held that above receipts were in relation to clearing and forwarding operations without bringing out relatability thereof by any cogent reason. In absence of any intimate connection or relation of expenditure to the principal activity of clearing and forwarding operations, those receipts may not assume the character of value of taxable service or contribute to that. If an expenditure is indispensable and inevitably incurred to provide a service, such cost should essentially form part of cost of service itself and shall contribute to value of taxable service. Thus expenditure incurred being incidental or ancillary to perform an act, shall essentially make value addition to the service. Therefore claim of Appellant in respect of above three items need to be remanded for reexamination and finding with reason, granting fair opportunity of hearing to the Appellant. In view of remand, the citations made by the Appellant calls for consideration by the learned Adjudicating Authority.”

In the case of Scott Wilson Kirkpatrick (I) Pvt. Ltd. Versus CCE, Jaipur, [2007-TIOL-269-CESTAT-DEL] held that the reimbursement for office equipment purchased on behalf of contractee was reimbursement and not subjected to Service Tax. As per facts of the case, the equipment and appliances as well as vehicle etc. as purchased by the assessee, and reimbursement claimed from NHAI become the property of NHAI at the completion of the project. It means, NHAI is providing the facilities of the site office, office equipments, telephone, utilities etc. to the consultant, because the consultant is organizing these facilities at the first instance and is paying for them, the same is being claimed as reimbursement from NHAI.

Hon’ble CESTAT in the case of Rolex Logistics Pvt. Ltd. Vs. Commissioner Of Service Tax, Bangalore 2009-TIOL-270-CESTAT-BANG held as follows.

“What is a reimbursement? When a service provider provides service to a service receiver or a client, on behalf of his client he incurs various expenditure and these expenditure are all for different purposes. The Service Tax liability in terms of Section 67 is only on the gross amount received towards the services rendered. If the service provider in the course of rendering service has to make certain payments on behalf of the service receiver, they are known as reimbursements. The reimbursements are actually not towards the service rendered but they are only towards other expenditure incurred on behalf of the client by the service provider. Normally, the service provider incurs these expenditures in the interest of quicker service. Suppose the service provider has to first receive the money and then render the service, it would cause lot of delay.”

Is Rule 5(1) ultravires Section 66 and Section 67?

The matter has been decided in the appeal matter before Hon’ble Delhi High Court in W.P. (C) 6370/2008 of Intercontinental Consultants and Technocrats Pvt. Ltd. Vs. Union of India & ANR (2012-TIOL-966-HC-DEL-ST).

The Petitioner Company was engaged in providing consulting engineer services and receives payments not only for its service but also for reimbursed expenses incurred by it such as air travel, hotel stay, etc. It was paying service tax in respect of its services and not in respect of the expenses incurred by it, which were reimbursed by the clients. Department sought service tax on the expenses reimbursed by invoking the provisions of Rule 5(1) of the Service Tax (Determination of value) Rules 2006 which was challenged by the Company in the Writ Petition.

Hon’ble High Court rules in favour of assessee holding Rule 5(1) as ultravires holding that rules can never exceed or go beyond the section which provides for the charge or collection of the service tax. The Court held that the charge of service tax under section 66 (now 66B) is on the value of taxable services. It is only the value of such service are rendered by the assessee, which can be brought to charge and nothing more. The quantification of the value of the service can therefore never exceed the gross amount charged by the service provider for the service provided by him. The expenditure or costs incurred by the service provider in the course of providing the taxable service can never be considered as the gross amount charged by the service provider “for such service” provided by him. Thus, the Court has made clear that any value which does not form part of gross value towards taxable services cannot be brought to tax under Finance Act, 1994.

Cross Border Transaction and Service Tax

Service Tax is a value added consumption tax which means that every service shall attract Service Tax each time service is supplied or imported along the commercial chain to its final consumption in India. The destination principle means that Service Tax shall be levied in the country in which services are finally consumed.  Thus, when such services are provided in India and received by a person in India, there is no iota of doubt on taxation of such services.  Such provision can be called as a pure domestic transaction of provision of services.  However, when we speak of “cross-border,” or “multijurisdictional” or “international” transactions, we are referring to transaction which has its source of provision in one country and its consumption in another country.  There can be more complex situations involving more than 2 countries. While issues  from Service Tax perspective in a domestic transaction primarily revolves around provision of services and its classification, issues involved in a cross-border transaction are more considering the complexities inherent in such transaction such as determination of country of consumption, exchange fluctuations, double taxation, etc. to name a few.  The present paper tries to discuss certain important aspects and its taxability in present era of negative list in Indian Service Tax regime.

Concept of Service Tax on Export

The law of no tax on exports, is common for all statues, however, what differs is the manner in which one determines how does such activity or transfer of goods or services qualify as export.  It is a trite law that service tax is a destination based consumption tax as held by the Hon’ble Supreme Court in All India Federation of Tax Practitioners v. Union of India

[2007] 10 STT 166. It was clarified that it is levied on commercial activities and it is not a charge on the business but on the consumer. The understanding has been affirmed in the case of Association of Leasing & Financial Service Companies v. Union of India [2010] 29 STT 316 (SC) as well. The position has always been upheld in Service Tax regime.  Board also issued a clarification vide Circular No. 56/05/2003-ST dated 25-4-2003, where it was clarified that the Service Tax is destination-based consumption tax and it is not applicable on export of services. Determination of export in case of services has always been a contagious issue as unlike goods where crossing of customs barrier can be determined, in case of services, being intangible, such determination becomes tough to prove.  In this respects courts have many a times resorted to the law of equivalence between goods and services [Please refer Association of Leasing & Financial Service Companies v. Union of India [2010] 29 STT 316 (SC), Godfrey Phillips India Ltd. v. State of U.P. (2005 (2) SCC 515, Moti Laminates Pvt. Ltd. v. Collector of Central Excise, Ahmedabad – 1995 (76) E.L.T . 241 (S.C.)].  However, applicability of such theory of equivalence in determination of export of services was restricted in the case of Paul Merchants v CCE, Chandigar [[2013] 30 taxmann.com 23 (New Delhi – CESTAT)],wherein Hon’ble Third member observed as follows:

“In my view, the above criteria as to what constitutes the export of goods, or import of goods which is for the purpose of the Customs Act, 1962, where the objective, besides the collection of duties on import of goods into India and export of goods from India, is also regulation of the movement of the goods across the border, cannot be applied for determining what constitutes the export of service, as unlike the movement of the goods across the international border, whether on sale basis or otherwise, where the event of export or import of goods can be easily detected, determining whether a service provided by a person in India is export or a service provided by a person abroad is service import into India, is a much complex question as, as mentioned above the services are intangible and can be provided by various modes and for this purpose one uniform criteria for all the services cannot be adopted.”

Exemption mechanism to Service Tax on exports has been prescribed since FY 1999 by tax authorities.  Earlier, the only condition for considering export of services was to receive the payment for the service in convertible foreign exchange.  However, with more and more services joining the taxable status, such mechanism became unfeasible and impractical as with increasing participation of India in global service industry, companies could avail such exemption by simply routing payment from company outside India.  Thus, the first formal step towards providing proper manner of determination of export of services was made through Export of Services Rules, 2005.  However, such Export Rules remained an unsolved mystery for a long time. There had been three categories of services.  One determines export in case of services related to immovable properties when such property was located outside India, the other category covered certain services which when performed wholly or partly outside India were considered as export.  The last and the most controversial one was services linked to recipient outside India.  Such category contained multiple conditions which were amended from time to time. Firstly, it contained the condition of services being ‘delivered outside India’ which cause lot of interpretation issues since services are intangible.  Then such phrase was replaced by ‘is provided from India’, which was a case in most scenario and was simpler to interpret.  However, the expression ‘used outside India’ continued to create problems for the assesses as authorities took a view that such services could only be used outside India when used exclusively in business outside India.  The department also issued Circular No. 111/05/2009-ST dated 24-02-2009 which provided the following clarification:

“In terms of rule 3(2)(a) of the Export of Services Rules 2005, a taxable service shall be treated as export of service if ‘such service is provided from India and used outside India’ Instances have come to notice that certain activities, illustrations of which are given below, are denied the benefit of export of services and the refund of service tax under rule 5 of the Cenvat Credit Rules, 2004 [notification No. 5/2006-CE (NT) dated 14.03.2006] on the ground that these activities do not satisfy the condition ‘used outside India’,-

(i)   Call centres engaged by foreign companies who attend to calls from customers or prospective customers from all around the world including from India;
(ii)   Medical transcription where the case history of a patient as dictated by the doctor abroad is typed out in India and forwarded back to him ;

*** not relevant***

 

  1. It is an accepted legal principle that the law has to be read harmoniously so as to avoid contradictions within a legislation . Keeping this principle in view, the meaning of the term ‘used outside India’ has to be understood in the context of the characteristics of a particular category of service as mentioned in sub-rule (1) of rule 3. For example, under Architect service (a Category I service [Rule 3(1)(i)]), even if an Indian architect prepares a design sitting in India for a property located in U.K. and hands it over to the owner of such property having his business and residence in India, it would have to be presumed that service has been used outside India. Similarly, if an Indian event manager (a Category II service [Rule 3(1)(ii)]) arranges a seminar for an Indian company in U.K. the service has to be treated to have been used outside India because the place of performance is U.K. even though the benefit of such a seminar may flow back to the employees serving the company in India. For the services that fall under Category III [Rule 3(1)(iii)], the relevant factor is the location of the service receiver and not the place of performance. In this context, the phrase ‘used outside India’ is to be interpreted to mean that the benefit of the service should accrue outside India. Thus, for Category III services [Rule 3(1)(iii)], it is possible that export of service may take place even when all the relevant activities take place in India so long as the benefits of these services accrue outside India. In all the illustrations mentioned in the opening paragraph, what is accruing outside India is the benefit in terms of promotion of business of a foreign company. Similar would be the treatment for other Category III [Rule 3(1)(iii)] services as well.

 

Thus, the above clarification tries to put things in right perspective by clarifying that export happens when the benefit of such services arise outside India. The beneficiary or recipient of services is a person who is obliged to make payment for the services provided. In this regard, reliance is placed on Tribunal’s judgment in case of Sumangalam Suiting (P) Ltd. v. CCE [2010] 29 STT 290 (New Delhi – CESTAT).  Similar decision has been held by majority in the case of Paul Merchants v CCE, Chandigar [[2013] 30 taxmann.com 23 (New Delhi – CESTAT)].  The Judgement of Paul Merchants is effective in understanding the concept of recipient of services and is very much relevant in present era post enactment of Place of Provision of Services Rules, 2012.

Thus, the position under the erstwhile Export Rules for determination of Export of services now seems to be settled.  However, Post July 1, 2012, with the advent of negative list regime in India, the Rules have now been replaced with Place of Provision of Services Rules, 2012, (“POPS”) which determines the place of performance of a service.  A service when performed (as determined as per POPS) in taxable territory is taxable under Finance Act, 1994, while if it is performed outside taxable territory, is not taxable.  To qualify as Export of service, non taxable service has to satisfy certain more criterions as provided under Rule 6A of Service Tax Rules, 1994.  We shall discuss certain important situations and their taxability as provided under POPS in the following paragraphs.  While we shall discuss the levy in general circumstances, we shall also discuss certain specific cases.  POPS rules have not been replicated for the sake of brevity.

At the outset, it is important to state that the determination of taxability would be guided by a lot factors and is not a scientific formulae.  Factors like entities who enter into an agreement, performance etc cause difference in the arrangement.  Also, the arrangement context should always override its form and the arrangement should not be one designed to bypass the taxability under the Finance Act, 1994.

 

Provision of Services outside India

Generally Services shall be decided as non taxable when services are performed in non taxable territory.  Such performance is determined to have happed outside India in line with the Rules provided in POPS. The concept is explained by way of the following examples.

Case 1:

Untitled

Indi Co (an Indian Company) provides audit services to MGS International for all its entities across globe including MGS India which is its Indian arm. While services of audit of MGS International clearly appears to be non taxable, the audit of MGS India can be in troubled waters as services appear to be provided and consumed in India.  However, since the person who is beneficiary of services and is obligated to pay for such services (MGS International) is outside India and is consuming the services (Audit report) outside India, the place of performance shall be outside India (Rule 3- location of service recipient).  Such services can never be said to be provided to a resident company as he never wanted such audit services and was not under an obligation to pay for such services.   However, in case a cross charge of audit cost is obtained from Indian entity, such cross charge cannot be said to sharing of costs but is allocation of cost for Indian services and thus, in such case, cross charge would be taxable as services are performed in India (Rule 3 of POPS).  Further, Indian entity would be liable to pay Service Tax under reverse charge being recipient of services from a non resident.

 

Case 2:

Untitled1

Indi Co (an Indian Company) provides Information technology consultancy services to MGS Tech (UK) which is used by MGS Tech for production of goods. Goods produced by MGS Tech are imported by an Indian entity (PAN India).  In this case, services of Indi Co would qualify as non taxable being performed outside taxable territory (Rule 3 – recipient location).  Further, PAN India would be required to discharge customs duty on such import.

 

Joint Ventures

A Joint Venture (JV) (when not incorporated as separate company) requires the parties to contribute their goods and services located in multiple jurisdictions to the functioning of that Joint Venture. Such arrangements usually when undertaken as a single entity (with no separate obligations of JV partners require determination of liability of JV as a whole, and its taxability is distinct from that of its JV partners.  The situation is explained as under:

PAN India (resident) and MGS Tech (non resident) enters into an arrangement with Con Asia to provide EPC services in India.  The scope of their work is collective.  Accordingly, the entire contract is agreed to be performed by their unincorporated JV – Indi JV.  Thus, services provided by Indi JV to Con India would be taxable being services by a resident to another resident (Rule 8 of POPS).  Similarly any charge for services from JV (by whatever name called – profit etc.) would be tested for taxability in India.

Alternatively, if MGS Tech and PAN India enters into an arrangement for performance of a contract where their services are distinct and separable, though under a single arrangement, it can be contested that services of MGS Tech is not taxable.

Employee transfers

There can be multiple arrangements for taking services of expatriates who work in country other than their resident state in multi national companies.  The arrangements vary from direct employment into a foreign company to secondment by home country to other country.  There can also be cost sharing of high end employees by group companies situated across different countries.  From the perspective of Service Tax, each of the above arrangement requires proper examination of facts, agreement and understanding.  While a transfer to a group company in another country would entail no Service Tax implication, a secondment would fall under provision of manpower.  In former case, if the employment contract is transferred to the Indian company by the foreign company in relation to the expat, then such services would be that of employment between Indian company and expat and shall be outside the ambit of Service Tax.  However, if such employment continues to subsist with the foreign company, such provision of expat would qualify as service and would be taxable in India (Rule 3 of POPS).  The same is the case vice- versa.  There can also be making available of man hours of persons situated in India.  Such cases also shall be non-taxable when provided to recipient outside India.

Further, under such scenario, usually the companies forget to add up the portion of salary paid in the home country to the employees and consider only the amounts paid to them in foreign country.  Similarly if company is paying any other costs relating to such provision of manpower, then such costs would add up to increase the liability of the company to whom such employee is seconded. To complicate things further, there can be arrangements having ESOPs from home country which require special attention on a case to case basis.

Business Process Outsourcing

Business Process Outsourcing Industry had been one of key movers of the Indian economy in the last decade.  The possibility of Information technology shrinking the world and creating employment opportunities in respect of work in country in another continent became a reality.  Calls from call centres situated in India handling customer complaints for US and UK brought income to the youth and also, tax worries for big corporate.  The question as to whether such services would qualify as export had always been contended by the tax authorities in Service Tax regime prior to July 1, 2012.   Such BPO services were contested to have been provided in India and thus, benefits of such services being export were denied to the companies.  However, such services were clarified to be export vide Circular No. 111/05/2009-ST dated 24-02-2009 (provided earlier).  The situation remains same in present context post enactment of POPS.  Such services would be export when provided to recipient outside India (Rule 3 of POPS).

 

Relevance of Transfer Pricing Report under Income Tax Act, 1961

There is no transfer pricing rules prescribed under Finance Act, 1994.  The valuation in Finance Act, 1994 is determined in accordance with Service Tax (determination of Value) Rules, 2006 (“Value Rules”).  The Rules provides the manner for determination of value of services in different cases.  However, no specific rule is provided for determination of value in case of associated enterprises (as provided in Excise and Income Tax).  Since Excise valuation shall cover valuation of only goods, the Transfer pricing provisions under Income Tax provides arms length pricing for both goods and services.  Thus, the question arises as to whether transfer pricing report can be relevant in any manner from Service Tax perspective.  The question can be answered in affirmative (not all cases but many).  Rule 4 of the Value Rules provides powers to Central Excise Officer to question the valuation of services (not limited to associated enterprises).  The Rule provides that where the Central Excise Officer is satisfied that the value so determined by the service provider is not in accordance with the provisions of the Act or these rules, he shall issue a notice to such service provider to show cause why the value of such taxable service for the purpose of charging service tax should not be fixed at the amount specified in the notice.  Thus, for determining the arms length prices (specifically incases when there is no recipient other than related parties), derivation of valuation can be based on transfer pricing report.

Conclusion:

The complications in cross border transactions is multifold and it should be the aim of the government to provide clear guidelines on all such possible situations.  The concept of providing clarification in case of cross border transaction is prominent in all developed economies as they understand that such ignorance can cost heavily to their foreign investors.  Indian laws are considered as one of the most complicated ones, and thus, all foreign investors shall always like to factor all tax costs so that they can conceive their profits and break even in a closer to certain manner.

 

Budget 2014 – Service Tax Provision

Clause by Clause analysis of Service Tax provisions in Finance (No.2) Bill, 2014

Budget 2014 seems to be a mix bag for meeting multiple objectives.  The budget aims to serve rectification which cannot be undone, planning for “achhe din” in long term, in short term a budget of introduction of remedial measures by stroke of pen and a budget infusing confidence in government policies by Indian citizens and investors across globe.  To the surprise of all, Finance Minister has brought in changes more than expected.  While everyone thought it to be a status quo kind of budget, the new government has made it clear in its very first budget that every year counts and there shall be no rest till the objective is achieved.  The budget seems to address certain much requisite changes while bringing in stronger provisions to push compliance amongst subjects.  Amongst other taxes, Finance Minister has brought about a number of changes in Service Tax as well.  Changes  range from reduction in exemptions, to curtailment of power of relief by Appellate authorities to plugging of procedural lapses.  Even the Budget Circular to this effect explains the basis of changes as “The main focus in service tax at the present juncture is to widen the tax base and enhance compliance.”  In a simple gist:

  • Advertisement and travel by radio cabs and air-conditioned contract carriages withdrawn got costlier
  • All commission earned from outside India is now taxable
  • Carrying cost of cotton and organic manure reduced
  • Relief to rent a cab operators and tour operators from cascading effect of taxes
  • Scope of exemption to Education related services narrowed to few specified services
  • Recovery from Successor made possible under Service Tax
  • Mandatory stay deposit
  • Penalty relief in case of extended period no longer available to assessee. Thus, penalty seems to have become automatic.

We shall now discuss the important changes as brought in by the Budget in detail.

1. Changes in Negative List:

1.1.Transportation by Radio taxi made taxable
[effective from a date to be notified later after enactment of Finance (No.2) Bill, 2014]:

Service tax is proposed to be levied on services provided by radio taxis or radio cabs, whether or not air-conditioned [section 66D (o)(vi)]. The abatement presently available to rent-a-cab service would also be made available to radio taxi service. A definition of radio taxi is being included in the exemption notification No.25/2012-ST, which reads as follows:

““radio taxi” means a taxi including a radio cab, by whatever name called, which is in two-way radio communication with a central control office and is enabled for tracking using Global Positioning System (GPS) or General Packet Radio Service (GPRS)”

 

1.2. All sale of space except print media made taxable [effective from a date to be notified later after enactment of Finance (No.2) Bill, 2014]:

Service tax leviable currently on sale of space or time for advertisements in broadcast media, namely radio or television [section 66D (g) read with section 66B], is proposed to be extended to cover such sales on other segments like online and mobile advertising. The new levy would further extend to advertisements in internet websites, out-of-home media, on film screen in theatres, bill boards, conveyances, buildings, cell phones, Automated Teller Machines, tickets, commercial publications, aerial advertising, etc. Sale of space for advertisements in print media, however, would continue to be in the negative list and hence remain excluded from service tax. Print media is being defined in service tax law for the purpose.

 

(39a) “print media” means,—

(i) “book” as defined in sub-section (1) of section 1 of the Press and Registration of Books Act, 1867, but does not include business directories, yellow pages and trade catalogues which are primarily meant for commercial purposes;

(ii) “newspaper” as defined in sub-section (1) of section 1 of the Press and Registration of Books Act, 1867;’

Book has been defined in the captioned Act as follows:

“”Book” includes every volume, part of division of a volume, and pamphlet, in any language, and every sheet of music, map, chart of plan separately printed.”

Newspaper has been defined as under:

“newspaper” means any printed periodical work containing public news or comments on public news

 

2. Changes in Exemptions, Abatements and Reverse Charge:

2.1.Changes in Exemptions:

 

2.1.1. Withdrawal of exemption to services by way of technical testing or analysis of newly developed drugs [effective from July 11, 2014]:

 

Exemption to services by way of technical testing or analysis of newly developed drugs, including vaccines and herbal remedies on human participants by a clinical research organization approved to conduct clinical trials by the Drug Controller General of India is being withdrawn.  India being a big market for Human drug testing, such exemption was primarily used by Multinationals for their testing and not primarily for production of drugs for masses and accordingly the said exemption was removed.

2.1.2.Exemption to Auxiliary Education Services deleted [effective from July 11, 2014]:

 

At present, a huge number of services (as per certain experts almost all input services used by educational institutions) as received by educational institution are exempt from Service Tax under the umbrella of “auxiliary educational services”. With prevailing doubts regarding the scope and meaning of “auxiliary educational services”, the entire concept has been delted and instead, exemption to specific services when provided to educational institutions.

Accordingly, the following services received by eligible educational institutions are exempted from service tax:

  • transportation of students, faculty and staff of the eligible educational institution;
  • catering service including any mid-day meals scheme sponsored by the Government;
  • security or cleaning or house-keeping services in such educational institution
  • services relating to admission to such institution or conduct of examination. Further, for the purposes of this exemption, “educational institution” is being defined in the exemption notification 25/2012-ST as institutions providing educational services specified in the negative list.

Further, the exemption to services provided by way of renting of immovable property to educational institutions also has been withdrawn and thus, all Company Trust model providing infrastructure to educational institutions without any indirect tax shall now have a tax cost.

However, to add on the ambiguity, services provided by educational institution to its students, faculty and staff has been added and accordingly, the authorities might contest that for the period prior to July 11, 2014, such services were taxable.  It is requested that government should bring suitable clarification to this effect also.

 

2.1.3.Exemption to accommodation places expanded [effective from July 10, 2014]:

 

In order to address doubts on account of use of the word “commercial” in the entry 18 of the Mega Exemption Notification as to whether dharmashalas, ashram or any such non commercial entity which offer accommodation would be covered therein, government has made the entry generic to all places offering accommodation services. Accordingly, Services by any place of stay be it Hotel, camsite, dharamshala etc, providing services of residential or lodging and having declared tariff of a unit of accommodation below one thousand rupees per day or equivalent shall now be exempted from Service Tax.

 

2.1.4.Exemption in respect of services in relation to municipal corporation [effective from July 11, 2014]:

 

For greater clarity, the exemption in respect of services provided to Government or local authority or governmental authority, has been made more specific. Services by way of water supply, public health, sanitation conservancy, solid waste management or slum improvement and up-gradation will continue to remain exempted but the exemption shall not be available to ancillary services for such functions such as consultancy, designing, etc.

2.1.5.Extension of exemption to life micro-insurance schemes having sum assured upto Rs 50,000 [effective from July 11, 2014]:

 

All life micro-insurance schemes approved by the Insurance Regulatory Development Authority (IRDA), where sum assured does not exceed Fifty Thousand Rupees are being exempted from service tax.

 

2.1.6.Extension of exemption to transportation of organic manure and cotton [effective from July 11, 2014]:

 

Transport of organic manure and cotton, ginned or baled by GTA, rail or vessel has been exempted. Therefore, organic manure will be on par with fertilizer which is already exempted.

2.1.7.        Extension of exemption to activities related to cotton, ginned or baled [effective from July 11, 2014]:

 

Services by way of loading, unloading, packing, storage or warehousing, transport by vessel, rail or road (GTA), of cotton, ginned or baled, is being exempted.  This comes in addition to similar exemption provided to rice by government.  However, service tax for intervening period i.e. from July 1, 2012 till July 10, 2014 shall be demanded by authorities on such services.

2.1.8.Extension of exemption to activities of Common Bio-medical Waste Treatment Facility operators [effective from July 11, 2014]:

 

Services provided by Common Bio-medical Waste Treatment Facility operators by way of treatment, disposal of bio medical waste or processes incidental to such treatment or disposal are being exempted.

 

2.1.9.Exemption in respect of air-conditioned contract carriages withdrawn [effective from July 11, 2014]:

 

Presently service of passenger transportation by a contract carriage (other than radio cabs whether air-conditioned or not) other than for the purposes of tourism, conducted tour, charter or hire, is exempt from service tax.  The scope of exemption is being reduced by withdrawing the exemption in respect of air-conditioned contract carriages. As a result, any service provided for transport of passenger by air-conditioned contract carriage including which are used for point to point travel, will attract service tax. Service tax will be charged at an abated value of 40% of the amount charged from service receiver; therefore, effective tax will be 4.944%. Services by non-air conditioned contract carriages for purposes other than tourism, conducted tour, charter or hire continue to be exempted.

2.1.10.ESIC services for prior period exempted [effective from date of enactment of Finance (No.2) Act, 2014]:

 

This was an amendment to remove the ambiguity whereby in absence of exemption, services of ESIC could have been brought within the scope of service tax.  Service provided by Employees State Insurance Corporation (ESIC) during the period prior to 1.7.2012 is proposed to be exempted from service tax.

2.1.11.    Services received by RBI from outside India for specific forex management exempted [effective from July 11, 2014]:

 

Specialized financial services received by RBI from outside India, in the course of management of foreign exchange reserves, e.g. external asset management, custodial services, securities lending services, are being exempted.  On such services RBI was to discharge Service Tax under reverse charge.

 

2.1.12.Services provided by an Indian tour operator to foreign nationals for foreign tours exempted [effective from July 11, 2014]:

 

Services provided by the Indian tour operators to foreign tourists in relation to tours wholly conducted outside India are being exempted. This exemption is available to Indian tour operators in cases where they organize tours for a foreign tourist wholly outside India, e.g., service provided to a Sri Lankan for a tour conducted in Bhutan. It may be noted that service provided by a tour operator in relation to an inbound or an outbound tours continue to be leviable to service tax.  In brief:

Tour Wholly In India Wholly Outside India Partially in India
Indian Tourist Taxable Taxable Taxable
Foreign Tourist Taxable Non Taxable Taxable

2.2.Changes in Abatements:

2.2.1.Condition of non availment of Cenvat credit not applicable on service recipient in case of GTA [effective from July 11, 2014]:

 

The condition for availing abatement in case of GTA service is being amended with immediate effect to clarify that the condition for non- availment of credit is required to be satisfied by the service providers only. Service recipient will not be required to establish satisfaction of this condition by the service provider. Accordingly, in case of GTA, service recipient can discharge the liability at the abated value of 25%.  This is a welcome clarification to remove all ambiguities in this arena as certain industries discharge huge Service Tax under reverse charge in GTA.  Technically, when service recipient is liable to pay Service Tax, the services of GTA gets outside the purview of output services and thus, no Cenvat Credit could be availed on such services by service provider.  However, the present clarification has fortified the understanding.

2.2.2.Abatement on services of air-conditioned contract carriages [effective from July 11, 2014]:

Service of transportation of passenger by air-conditioned contract carriages is taxable with immediate effect, as stated earlier. Hence, an entry has been inserted at Sl. No. 9A providing that the taxable portion of such service shall be 40% with the condition that CENVAT credit of inputs or capital goods or input services has not been taken.

2.2.3.Abatement on services of radio taxes [effective from enactment of Finance (No.2) Act, 2014]:

 

Service of transportation of passenger by radio taxis is proposed to be made taxable by amending the Finance Act, 1994. Hence, suitable abatement has been provided that the taxable portion of such service shall be 40% with the condition that CENVAT credit of inputs or capital goods or input services has not been taken.

2.2.4.Allowance of Cenvat credit of another rent a cab operator in case of availment of Cenvat Credit by rent a cab operator [effective from October 1, 2014]:

The condition against abatement in case of rent a cab is amended to allow the credit of input service of renting of a motor cab if such services are received from a person engaged in the similar line of business i.e. a sub-contractor providing services of renting of motor cab to the main contractor. Credit shall be available as under:

  • The whole of the CENVAT credit has been allowed with respect to input service of renting of any motor cab, received from a person who is paying service tax on 40% of the value of services.
  • The CENVAT credit eligibility will be restricted to 40% of the credit of the input service of renting of any motor cab if service tax is paid or payable on full value of the services i.e. no abatement is availed. Thus, if the sub contractor is not availing abatement, then credit from his invoice shall be restricted to 40% of such credit as shown on invoice.

It is pertinent to note that no other Credit other than above is allowed against such services and such services shall continue to be considered as exempted services for all purpose of Cenvat credit. Also, such benefit is not available in case of radio taxis, which has been provided abatement by way of a separate entry. This is a welcome step for tour operators and Hospitality industry including Hotels who have faced this problem of dual taxation since long.

2.2.5.Allowance of Cenvat credit of another Tour operator in case of availment of Cenvat Credit by a tour operator [effective from October 1, 2014]:

Tour operator service providers are also being allowed to avail CENVAT credit on the input service of another tour operator, which are used for providing the taxable service. This is being provided to avoid cascading of taxes.

  • Increase in abatement in case of transport of goods by vessel [effective from October 1, 2014]:

Taxable portion in respect of transport of goods by vessel is being reduced from 50% to 40%. Effective service tax will decrease from the present 6.18% to 4.944%, with effect from 1st October, 2014.

2.3.Changes in reverse Charge:

 

2.3.1.Ratio under reverse charge changed for rent a cab [effective from October 1, 2014]:

In renting of motor vehicle, where the service provider does not take abatement the portion of service tax payable by the service provider and service receiver will be modified as 50% each.  Thus, in all cases where there is full Service Tax charged or no Service Tax charged by service provider of rent a cab, recipient shall now discharge 50% of 12.36%.

  • Scope of Reverse charge liability in case of payment to directors expanded [effective from July 11, 2014]:

Earlier only Companies were liable to pay Service tax under reverse charge on payments made to Directors.  Service provided by a Director to a body corporate is being brought under the reverse charge mechanism thereby including body corporates such as the Reserve Bank of India etc.

  • Scope of Reverse charge liability in case of payment to recovery agents [effective from July 11, 2014]:

Service recipient being Banks, Financial Institutions and NBFC shall now be liable to discharge the liability of Services Tax under reverse charge mechanism for services provided by Recovery Agents to them. Recovery agents being individuals and that too in most of the cases had been non compliant and thus, in order to plug such leakage of revenue, whole of the liability has now been shifted to financial institutions.  This would add upto the cost of such institutions as only 50% of such amount is available as Cenvat credit to them.

 

3.Substantial changes in Service Tax provisions:

 

3.1.Service tax to have its own Rate of Exchange [effective from a date to be notified later after enactment of Finance (No.2) Bill, 2014]:

 

Currently, Custom notified rates are used for discharge of liability on import and export transaction under Service Tax.  The Explanation to Section 67A is being amended to enable the Government to prescribe rules for determination of rate of exchange for calculation of taxable value in respect of certain services. Separate set of Rules shall be prescribed once the amended Section is notified.

3.2.Advance Ruling made available to resident Private Limited Companies [effective from July 11, 2014]:

 

The resident private limited company is being included as a class of persons eligible to make an application for Advance Ruling in service tax.

 

3.3.Timebound adjudication of Service Tax notices [effective from enactment of Finance (No.2) Bill, 2014]:

 

Section 73 is being amended to prescribe time limits for completion of adjudication as already exists in Central Excise. This time limit would need to be followed, as far as possible.  Time limit as prescribed is as follows:

In case of notice issued within eighteen months (without extending limitation) Within six months from the date of notice
In case of notice issued evoking the extended period of five years Within one year from the date of notice

However, the section provides the limit with the words – “where it is possible to do so”.  Thus, the option for closing order beyond the prescribed period remains with the assessing officer.

 

3.4.Power to waive penalty under Section 80 restricted [effective from enactment of Finance (No.2) Bill, 2014]:

 

Section 80 is being amended to exclude the power to waive the following penalties:

  • Penalty under Section 77 – providing penalty for contravention of rules and provisions of Act for which no penalty is specified elsewhere
  • Penalty under Section 78A – The only waiver available in Section80 waas that of first proviso to Section 78(1) Provided that where true and complete details of the transactions are available in the specified records,

Thus, the only penalty now availed to be waived under Section 80 is that of Section 76, which is not effective in light of provision of Section 73(3).

 

3.5.Power to search expanded [effective from enactment of Finance (No.2) Bill, 2014]:

 

Powers under Section 82(1) is being expanded, to empower Joint Commissioner or Additional Commissioner or any other officer notified by the Board to authorize any Central Excise Officer to search and seize.

3.6.Recovery from successor incorporated [effective from enactment of Finance (No.2) Bill, 2014]:

 

Section 87 is being amended to incorporate power to recover dues of a predecessor from the assets of a successor purchased from the predecessor as it is presently provided for in section 11 of the Central Excise Act, 1944.  Accordingly, any person acquiring any business must ensure two things – that there are no outstanding Service Tax dues of the business as they cannot be withheld by the transferor and also intimation to such transfer is preintimated to Central Excise officer so as to nullify any unknown Service Tax liabilities.

3.7.Rule making power of government enhanced [effective from enactment of Finance (No.2) Bill, 2014]:

 

Section 94 is being amended to obtain rule making powers (a) to impose upon assessees, inter alia, the duty of furnishing information, keeping records and making returns and specify the manner in which they shall be verified; (b) for withdrawal of facilities or imposition of restrictions (including restrictions on utilization of CENVAT credit) on service provider or exporter, to check evasion of duty or misuse of CENVAT credit; and (c) to issue instructions in supplemental or incidental matters.

 

3.8.Interest provisions made harsh [effective October 1, 2014]:

 

To encourage prompt payment of service tax, it is being proposed to introduce interest rates which would vary on the extent of delay. Simple interest rates per annum payable on delayed payments under section 75, are prescribed as follows:

Sl.No Period of delay Rate of simple interest
(1) (2) (3)
1. Up to six months 18 per cent.
2. More than six months

and up to one year

18 per cent. for the first six months of delay and 24 per cent. for the delay beyond six months.
3. More than one year 18 per cent. for the first six months of delay; 24 per cent. for the period beyond six months up to one year and 30 per cent. for any delay beyond one year.

 

4.Changes in Rules

4.1.Changes in Service Tax Rules

4.1.1.E-payment made mandatory [effective from October 1, 2014]:

 

E-payment of service tax is being made mandatory for all assesses.  Relaxation from e-payment may be allowed by the Deputy Commissioner/Asst. Commissioner on case to case basis.

4.2.Changes in place of provision of Services Rules [effective October 1, 2014]

 

4.2.1.Place of provision in case of repair of goods which are to be reexported rationalised:

Rule in case of goods imported for repaid is amended to prescribe that it would suffice for the purpose of exclusion of repair service from applicability of rule 4(a) that the goods imported for repair are exported after repair without being put to any use other than that which is required for such repair. It has further been clarified that this exclusion does not apply to goods in general and goods be imported specifically for repair.  In case of goods that arrive in the taxable territory in the usual course of business and are subject to repair while such goods remain in the taxable territory, e.g., any repair provided in the taxable territory to containers arriving in India in the course of international trade in goods will be governed by rule 4.

4.2.2.Change of place of provision in case of intermediately of goods:

The definition of intermediary is being amended to include the intermediary of goods in its scope. Accordingly, an intermediary of goods, such as a commission agent or consignment agent shall be covered under rule 9(c) of the Place of Supply of Services Rules and his place of provision shall be the location of service provider.  Accordingly, all commissions for foreign buyers / sellers shall now be taxable in India and vice versa.  Thus, there shall be no longer an export of service by Commission agent.  The amendment is brought in purview as India is a major market for sourcing of goods and to counter the decision in cases like GAP International Sourcing (India) P. Ltd.  v CST [2014-TIOL-465-CESTAT-DEL], wherein it was held that recipient of such services is located outside India.

4.2.3.Change of place of provision in case of shipping industry:

Place of provision of Service consisting of hiring of Vessels (excluding yachts) and Aircraft, irrespective of whether short term or long term, will be covered by the general rule, that is, the place of location of the service receiver. Hiring of yachts would however continue to be covered by rule 9 (d) i.e. location of service provider.

4.3.Changes in place of Point of Taxation Rules [effective October 1, 2014]

 

4.3.1.Change of point of taxation in case of reverse charge mechanism:

The first Proviso to rule 7 of the Point of Taxation Rules is being amended to reduce the time allowed for payment to service provider from six months to three months.  However, as a relief, in case such payment is not made within prescribed time, the liability to pay Service Tax shall arise from the first day that occurs immediately after a period of three months from the date of invoice. Thus, in case of reverse charge, the amended date of liability is as under:

Date of payment Point of taxation
Payment made to vendor within three months from date of invoice Date of Payment
Payment made to vendor after three months from date of invoice First day that occurs immediately after a period of three months from the date of invoice

Suitable provision for invoices issued before October 1, 2014 and whose payment period of six months is pending as on October 1, 2014 is made by way of Rule 10 which provides that if payment is made within six months from the date of invoice, date of payment shall be point of taxation, else Rule 3 shall apply.

4.4.Changes in Determination of Value Rules

4.4.1. Ratio of services in Works contract modified [effective from October 1, 2014]:

In Rule 2A of the Service Tax (Determination of Value) Rules, 2006, category “B” and “C‟ of works contracts are proposed to be merged into one single category, with percentage of service portion as 70%.  Thus, the following two categories of valuation under Option 2 of Rule 2A shall remain in case of works contract:

5.Changes in Cenvat Credit Rules, 2004

5.1.Time restriction on availment of Cenvat credit on missed invoices [effective from September 1, 2014]:

A manufacturer or a service provider shall take credit on inputs and input services within a period of six months from the date of issue of invoice, bill or challan.  Thus, the decisions in case of Central Bank of India [2012-TIOL-1314-CESTAT-MAD] holding that there is no time limit for taking Cenvat Credit shall no longer help assessee in availing long forgotten credit.

 

5.2.Payment as pre-condition for availment of Cenvat Credit removed in case of full reverse charge [effective July 11, 2014]:

In case of service tax paid under full reverse charge, the condition of payment of invoice value to the service provider for availing credit of input services is being withdrawn. However, there is no change in respect of partial reverse charge.

5.3.Cenvat credit to reinstate on reinstatement of output services as Export [effective July 11, 2014]:

Re-credit of CENVAT credit reversed on account of non-receipt of export proceeds within the specified period or extended period, to be allowed, if export proceeds are received within one year from the period so specified or extended period. This can be done on the basis of documents evidencing receipt of export proceeds.

 

5.4.Place of removal defined [effective July 11, 2014]:

 

Place of removal has been defined as under:

 

(qa) “place of removal” means-

  • a factory or any other place or premises of production or manufacture of the excisable goods;
  • a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty;
  • a depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory,

 from where such goods are removed;

 

  

6.Changes in Appellate proceedings – Stay

 

6.1.Time restriction on availment of Cenvat credit on missed invoices:

Section 35F of the Central Excise Act has already been made applicable to Service Tax. This section is being substituted with a new section to prescribe a mandatory fixed pre-deposit of 7.5% of the tax demanded or penalty imposed or both for filing of appeal before the Commissioner (Appeal) or the Tribunal at the first stage, and 10% of the duty demanded or penalty imposed or both for filing second stage appeal before the Tribunal. The amount of pre-deposit payable would be subject to a ceiling of Rs 10 Crore. All pending appeals/stay application would be governed by the statutory provisions prevailing at the time of filing such stay applications/appeals. This new provisions would, mutatis mutandis, apply to Service Tax.  This provision though would reduce the time for deposition of appeals as stay would no longer be a separate hearing, however, there is a cost attached to it which even a genuine tax payer and even in case of financial hardship would have to bear to get justice.

7.Application of more sections of Central Excise on Service Tax

 

Section 83 is being amended to prescribe that the provisions of following sections of the Central Excise Act shall apply, mutatis mutandis, to service tax

 

7.1. Section 5A(2):

This section has been introduce to expand the power of government to bring out a change in understanding by way of explanation in a notification or order at any time within one year of issue of notification or order, for clarifying the scope or applicability thereof and such explanation shall have effect from the date of issue of such notification or order.

7.2. Section 15A:

This new section is being inserted in the Central Excise Act to stipulate that third party sources shall furnish periodic information, as specified, in the manner as may be prescribed.

7.3. Section 15B:

This new section is being inserted in the Central Excise Act to prescribe that failure to provide information under section 15A of the Act would attract penalty as specified.

8. Simplification of SEZ refunds procedure [effective from July 11, 2014]:

  • Time bound issuance of Form A-2 by jurisdictional Deputy Commissioner of Central Excise or Assistant Commissioner of Central Excise has been prescribed. Time provided is 15 days
  • Such authorisation is made valid from the date of its verification and in case of delay in submission of Form A-1, from the date of submission of Form A-1.
  • Form A-1 has been made suitable document for non charge of Service Tax by service providers providing services to eligible SEZ units subject to submission of authorisation in Form A-2 later to such service providers. However, when such authorisation is not made available within a period of three months, the benefit so provided shall stand withdrawn.
  • Determination of service being provided in SEZ is simplified by providing suitable explanation to this effect stating that a service shall be treated as used exclusively for the authorised operations if the service is received by the SEZ Unit or the Developer under an invoice in the name of such Unit or the Developer and the service is used only for furtherance of authorised operations in the SEZ. Thus, the test relating to physical performance of such services as often disputed by department shall stand relaxed.
  • Condition of mentioning Service Tax registration number removed in case of full reverse charge liability

 

Conclusion:

As said, that all big suprises come in small packages, this budget though appeared humble has brought in many changes.  Though directly or indirectly all amendments aim to boost the revenue collection, certain clarificatory ones have also come to the benefit of assessee.  However, with aim to tighten compliance, changes like mandatory stay deposit etc would hinder the path of free justice.  All in all, this budget would help India Inc. to revisit their Service Tax compliances more thoroughly.