bombay chartered accountants’ society · adv. v. raghuraman papers for presentation landmark...

Bombay Chartered Accountants’ Society

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Managing Committee 2013-2014

PresidentNaushad A. Panjwani

Vice PresidentNitin P. Shingala

Hon. Joint SecretariesMukesh G. Trivedi

Raman H. Jokhakar

TreasurerChetan M. Shah

Members

Abhay R. Mehta

Aliasgar Z. Kherodawala

Bharatkumar K. Oza

Deepak R. Shah

Himanshu V. Vasa

Jayesh M. Gandhi

Krishna Kumar Jhunjhunwala

Manish P. Sampat

Nandita P. Parekh

Narayan K. Varma

Narayan R. Pasari

Saurabh P. Shah

Sonalee A. Godbole

Suhas S. Paranjpe

Sunil B. Gabhawalla

Suril V. Shah

Bombay Chartered Accountants’ Society

Indirect Taxes & Allied Laws Committee

ChairmanGovind G. Goyal

Ex-OfficioNaushad A. Panjwani

Nitin P. Shingala

ConvenorsMandar U. TelangSuhas S. Paranjpe

Sunil B. Gabhawalla

MembersA. R. Krishnan

Amar N. Shukla Ashit K. Shah Bakul B. Mody

Bharat M. Shemlani Bhavna G. Doshi

Chandrakant B. Thakar Chirag B. Mehta

Hasmukh H. Kamdar Janak K. Vaghani Jayraj S. Sheth

Kanu S. Chokshi Manish R. Chokshi Naresh K. Sheth Parind A. Mehta

Pranay H. Marfatia Puloma D. Dalal Rajiv J. Luthia

Rajkamal R. Shah Raman H. Jokhakar

Ravi A. Shah Sagar N. Shah

Samir L. Kapadia Sanjay M. Dhariwal

Santosh M. Jain Saurabh P. Shah

Surendra S. Gupta Uday V. Sathaye Udayan Choksi

iii

Message

It gives us great pleasure to place in your hands this booklet of 8th Residential Study Course on Service Tax and VAT.

Service Tax was introduced in India for the first time in the year 1994 based on the recommendation by Chelliah Committee on Tax Reforms. Since then the number of services, assessees and revenue from Service Tax has drawn significant. Service Tax has become an important source of Revenue for the Government. This can be gauged by the fact that the total collection of service tax is now 2nd only to excise duty. Knowledge of this expanding tax is important for us so that we can advice the clients appropriately. Recognising this need, the Indirect Taxes and Allied Laws Committee of Bombay Chartered Accountants’ Society has been periodically holding a Residential Study Course to identify and deems the complexity that has arisen during the year. This year there will be 3 Discussion papers and 2 Presentation papers.

We are thankful to all the Paper Writers for accepting our invitation to share their experience and knowledge and sparing time from their busy schedule to prepare comprehensive papers.

We would also like to acknowledge the efforts put in by convenors and members of the Indirect Taxes and Allied Laws Committee to make this course possible. Last but not the least, we thank all the delegates for joining this course to make it a grand success. We are sure that the course will be an enriching experience.

Naushad A. Panjwani Govind G. GoyalPresident Chairman

Indirect Taxes and Allied Laws CommitteeDated 9th June, 2014

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BCAS AT YOUR SERVICEA voluntary organisation established on 6th July, 1949, BCAS has more than 9,000 members from all over the country at present and is a principle-centred and learning-oriented organisation promoting quality service and excellence in the profession of Chartered Accountancy and is a catalyst for bringing out better and more effective Government policies & laws and for clean & efficient administration and governance.

The diverse activities of BCAS include:

BCA Journal: The Bombay Chartered Accountant Journal (BCAJ) is a publication with a track record of over 40 years and is considered as an outstanding publication by tax and accounting professionals in practice or in industry. It includes analytical articles and updates on the subjects such as Direct Tax, Indirect Tax, International Tax, Accounting and Auditing and Information Technology.

BCAS Web TV (www.bcasonline.tv): BCAS Web TV is a new initiative of BCAS based on the Internet Video Streaming Service where you can see video or hear audio recordings of select events conducted by BCAS on your computer or on your internet enabled mobile device.

Publications: Every year BCAS publishes Referencer along with a CD which is an indispensable tool for professionals as well as those in the industry. We also publish books on varied topics of professional interest such as Audit Check-list, TDS, Fraud, Transfer Pricing, FEMA, Laws & Business and Charitable Trust.

Representations: BCAS makes representations to various authorities on different laws as well as on procedural issues, with a view to making them just and friendly to the general public. The representations include pre and post budget memoranda to the Ministry of Finance, Government of India, Ministry of Company Affairs, and Central Board of Direct Taxes among others.

Educational Activities: BCAS conducts various educational activities such as seminars, workshops, residential refresher courses, study circles, lecture meetings, distant learning programmes on Service tax and TDS.

Free Advisory Clinics: BCAS conducts following free clinics: Accounts & Audit Clinic, Charitable Trust Clinic and RTI Clinic to help the members & non-members in respective areas. Eminent experts provide free advice at these clinics on pre-fixed days.

BCAS Website: The website of BCAS viz. www.bcasonline.org, apart from giving the latest news, circulars and notifications relevant for professionals, also serves as a “Knowledge Portal”, and is an excellent source of information.

Please visit us at our Cyber Addresses, and share your views

with us:

Linkedin : http://www.linkedin.com/in/bcasglobal

Twitter : http://www.twitter.com/bcasglobal

Facebook Group : http://www.facebook.com/groups/151462176123/

Our blog : http://globalcharteredaccountants.wordpress.com

Our Website : www.bcasonline.org

Our Web TV : www.bcasonline.tv

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8th Residential Study Course on Service Tax & VAT

Friday, 13th June to Sunday, 15th June, 2014 Venue: Khanvel Resort, Silvassa

Subjects & Paper Writers

Papers for Discussion

Service Tax on Cross Border Transactions Adv. Kaustuv Sen

Critical Issues in Taxation of Works Contracts

– Service Tax and VAT

Sr. Adv. N. Venkataraman

Case Studies in Valuation of Taxable Services

(including bundled services)

Adv. V. Raghuraman

Papers for Presentation

Landmark Judgments (Indian and European Courts): laying down important concepts and Principles in Indirect Taxation

Sr. Adv. V. Sridharan

Intangibles – Indirect Taxes Issues CA Bhavna Doshi

Group Leaders

I II III

Service Tax on Cross Border Transactions

Critical Issues in Taxation of Works Contracts – Service

Tax and VAT

Case Studies in Valuation of Taxable Services

(including bundled services)

Adv. Kaustuv Sen Sr. Adv. N. Venkataraman Adv. V. Raghuraman

Bishan Shah Ankit Chande Keval Shah

Leena Doshi Samir Kapadia Virendra Parwal

Nilesh Suchak Vikram Mehta Mandar Telang

Pranav Mehta Sanjay Agarwal Narendrakumar Soni

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8th Residential Study Course on Service Tax & VATFriday, 13th June to Sunday, 15th June, 2014

Venue: Khanvel Resort, Silvassa

PROGRAMME SCHEDULEFriday 13th June, 2014

11.30 am onwards : Welcome & Check-in12.30 to 02.00 pm : Lunch03.30 to 05.30 pm : Group Discussion (Paper I) – “Service Tax on Cross Border Transactions”05.30 to 06.00 pm : Hi-tea06.15 to 08.30 pm : General Assembly – 1. Inaugural Session 2. Presentation of paper and Reply to queries by Paper Writer:

Advocate Kaustuv Sen8.30 to 10.00 pm : Dinner

Saturday 14th June, 2014

07.30 to 08.15 am : Breakfast08.30 to 10.30 am : Group Discussion (Paper II) –

“Critical Issues in Taxation of Works Contracts – Service Tax and VAT”10.45 to 01.45 pm : General Assembly – 1. Presentation of paper IV by Sr. Advocate V. Sridharan “Landmark Judgments (Indian and European Courts)” 2. Presentation of paper and Reply to queries by Paper Writer: Sr. Advocate N. Venkataraman01.45 to 02.30 pm : Lunch04.30 to 05.00 pm : Hi-tea05.00 to 08.30 pm : In-house Programme08.30 to 10.00 pm : Dinner

Sunday 15th June, 2014

07.30 to 08.15 am : Breakfast08.30 to 10.30 am : Group Discussion (Paper III) –

“Case Studies in Valuation of Taxable Services (including bundled services)”10.45 to 01.45 pm : General Assembly – 1. Presentation of paper V by CA Bhavna Doshi

“Intangibles – Indirect Taxes Issues” 2. Presentation of paper and Reply to queries by Paper Writer:

Advocate V. Raghuraman01.45 to 02.30 pm : Lunch3.00 pm : Vidai

Note: The address of venue is ‘Khanvel Resort’, Next to Van Vihar Complex, Chauda Village, Silvassa - 396 230 (Union Territory of Dadra & Nagar Haveli), located on National Highway No. 8 (between Mumbai and Surat). Phone: +91-260-2677401-02-03.

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Our Faculty

Mr. Kaustuv Sen is an Executive Director with BMR & Associates LLP, in the Indirect tax practice at Mumbai. With over 13 years of experience, Kaustuv specialises in a spectrum of Indirect Tax and related regulatory matters. He has expertise and experience in a variety of sectors from financial services, e-commerce, automobile, FMCG and packaged foods, automobile, media and IT/ ITES. His practice areas also range from advisory matters, compliance, dispute resolution support to transactional complexities.

Kaustuv is a graduate in law from the National Law School, Bangalore, and is also a member of the International Bar Association.

Mr. V. Sridharan

Profession: Practising Advocate. Founder-Partner of Lakshmikumaran & Sridharan. A leading firm of advocates in Indirect Taxes, Anti-dumping & WTO laws, IPR laws.

Profile: Practicing since 1985. Has been instrumental in assisting courts in deciding important questions of law in Indirect Taxes and in development of law. A seasoned lawyer possessing vast experience and has successfully litigated on tax matters for more than a decade at the Supreme Court of India, High Courts and the Customs, Excise and Service Tax Appellate Tribunal. He specializes in Service Tax, Customs, Excise, Sales Tax and Value Added Tax (VAT), International Trade laws, Intellectual Property laws and Corporate laws. He has delivered many lectures on Service Tax and other Indirect Tax laws at various prestigious institutions. He is also frequently invited by professional institutes to give talks on Service Tax and other Indirect Tax laws. Has delivered a number of lectures on Central Excise, Customs, Service Tax and Value Added Tax. Has also been invited by Institutes of Cost Accountants and Chartered Accountants to deliver lectures on these subjects.

Qualifications: B.Sc. (Maths) from Madras University, LLB from Delhi University, Chartered Accountant & Cost Accountant

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Mrs. Bhavna G. Doshi

A Fellow member of the Institute of Chartered Accountants of India with over 25 years of professional experience in taxation and regulatory services, Bhavna is currently providing consultancy services. She serves as independent director on the Board of companies as well.

Winner of the prize for best lady candidate at CA Examination, Bhavna has served as elected member of the Council of the Institute of Chartered Accountants of India (ICAI). Prior to that, she has served as an elected member of the Western Regional Council of ICAI and has had the distinction of holding the position of Chairperson of the Region.

She is the immediate Past President of the Indian Merchants’ Chamber, second woman and first woman from the profession to have this honour in the history of 107 years of the Chamber. Her tenure saw several new initiatives and visits by Central Ministers and other dignitaries.

She takes out time for societal activities and takes keen interest in development of women and children and society at large.

Mr. N. Venkatraman, Senior Advocate

• Worked under the tutelage and guidance of Mr. C. Natarajan, Senior Advocate between May 1989 and June 2003.

• Prior to February 2006, have briefed Former Attorney General, Solicitor General, Addl. Solicitor General and other high profiled Senior Counsels in various tax matters.

• Was designated as Senior Advocate in February 2006 at the age of 40 as recommended by Mr. Harish Salve and Mr. Joseph Vellapalli.

• Have appeared so far before 21 High Courts across the country and the Hon’ble Supreme Court of India besides Tax Tribunals, Settlement Commissions, and Authority for Advance Ruling, Central Appellate Mechanism.

• Appearing on various constitutional issues relating to taxation, and leading matters in the fields of international taxation, transfer pricing, service tax and VAT.

• Was first a counsel for Ernst & Young between 2005 and 2009 and is now being engaged by all the Multinational Chartered Accountant Firms, besides leading Law Firms.

• Some of the decisions have been adjudged as the best case of the respective year by International Tax Fora.

• Have delivered lectures and made presentations in various Fora and had been advising the Trade in settling representations for seeking amendments/clarifications before the Central Government and the Ministry of Finance.

• Was based out of Chennai till September 2011. Has now shifted to New Delhi from October 2011.

• Passionate to heart in preserving and nurturing our traditions and value systems and running a Veda and Sastra Patasala at Madurai currently with 55 students and 5 teachers and infrastructure built for 125 students and 10 teachers.

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CA V. Raghuraman is a practicing advocate and specialises in the areas of Excise / Customs / Service Tax / Foreign Trade Policy / FEMA and Indirect Tax Planning.

He has obtained 1st Rank in B.Com; 24th Rank in CA Final and 25th Rank in ICWA Final.

He is a visiting faculty member of the Indian Institute of Management, Bangalore, CA Institute.

Raghuraman has addressed numerous seminars and published several papers in national magazines on Excise / Customs / Service Tax. Presently he is a member of the Indirect Tax Committee of the ICAI, New Delhi.

He is the author of the following books:—

i. ‘Landmark Decisions in Indirect Taxes’ published by international publishing house CCH.

ii. ‘Central Excise Law and Procedures’ published by R. K. Jain, New Delhi.

iii. ‘Background Material for E-Learning course on Service Tax’ published by ICAI.

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8th Residential Study Course on Service Tax & VATFriday, 13th June to Sunday, 15th June, 2014

Venue: Khanvel Resort, Silvassa

List of Participants

Sr. No.

Name of the Member CityGroups

E-mailDay 1 Day 2 Day 3

1 A. R. Krishnan Mumbai A B C [email protected]

2 Abhishek P. Doshi Rajkot B A C [email protected]

3 Alok Kumar Pansari Mumbai C A B [email protected]

4 Alok P. Agarwal Mumbai D C A [email protected]

5 Amar N. Shukla Mumbai A C B [email protected]

6 Amish J. Khandhar Ahmedabad B B C [email protected]

7 Amitabh J. Khemka Mumbai C A D [email protected]

8 Anand H. Doshi Gandhidham D D A [email protected]

9 Anand R. Nahar Aurangabad A D B [email protected]

10 Ankit K. Chande Mumbai A A A [email protected]

11 Ankita Shah Pune C A C [email protected]

12 Anupma Aggarwal Delhi D B A [email protected]

13 Archit Agarwal Mumbai A B C [email protected]

14 Ashit K. Shah Mumbai A A A [email protected]

15 Atul R. Mathuria Mumbai C A B [email protected]

16 Bakul B. Mody Mumbai B C D [email protected]

17 Bharatkumar K. Oza Mumbai A D C [email protected]

18 Bhavin S. Mehta Mumbai B B D [email protected]

19 Bishan R. Shah Ahmedabad A A A [email protected]

20 Chandrakumar Baldota Solapur D A C [email protected]

21 Chirag B. Mehta Mumbai A A D [email protected]

22 Darshan J. Shah Pune D C A [email protected]

23 Daviender S. Nagpal New Delhi C D B [email protected]

24 Deepa Shreepati Hegde Mumbai D B A [email protected]

25 Deepak H. Thakkar Mumbai A C B [email protected]

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Sr. No.



26 Denis L. Sanghvi Mumbai B A C [email protected]

27 Deven B. Shah Mumbai C B D [email protected]

28 Dharmesh Vadher Mumbai D D B [email protected]

29 Durga P. Knv Hyderabad A B C [email protected]

30 G. Yashvanth Chennai B D A [email protected]

31 Ganesh Prabhu B. Chennai C A D [email protected]

32 Gaurav Sirsalewala Mumbai D C B [email protected]

33 Gaurav J. Shah Mysore A C B [email protected]

34 Girish Raman Mumbai B B C [email protected]

35 Govind G. Goyal Mumbai C A D [email protected]

36 Govind P. Rathor Agra D D A [email protected]

37 Gudipati V. V. S Vijayawada A D B [email protected]

38 H. K. A. Nahar Chennai B C C [email protected]

39 Haresh V. Kagrana Mumbai C C D [email protected]

40 Hari K. Bhonagiri Hyderabad D B C [email protected]

41 Harsh Dinesh Gupta Mumbai A C B [email protected]

42 Harsha V. Sri Hyderabad B A D

43 Hasmukh H. Kamdar Mumbai C B A [email protected]

44 Hem M. Chhajed Ahmedabad D D B [email protected]

45 Hemang R. Shah Mumbai A B D [email protected]

46 Hemant R. Shethia Mumbai B C A [email protected]

47 Hemanth H. Bhandari Chennai C A D [email protected]

48 Hemantkumar V. Shah Mumbai D D C [email protected]

49 Hukam Singh Ghaziabad A D B [email protected]

50 Jalpesh K. Vora Mumbai B B A [email protected]

51 Jatin Y. Mehta Mumbai C A D [email protected]

52 Jayesh P. Doshi Jalgaon D C A [email protected]

53 Jenish S. Shah Thane A B C [email protected]

54 Jinkesh D. Jain Mumbai B C D [email protected]

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Sr. No.



55 Karan Awtani Mumbai C C B [email protected]

56 Ketan M. Mamania Mumbai D D C [email protected]

57 Keval S. Shah Mumbai A A A [email protected]

58 Kiran P. Kapadia Mumbai B A D [email protected]

59 Leena Doshi Mumbai B B B [email protected]

60 Leena A. Talathi Mumbai D C A [email protected]

61 Mandar U. Telang Mumbai C C C [email protected]

62 Manish Garg Agra B C D [email protected]

63 Manoj Chauhan Mumbai C B A [email protected]

64 Manthan Patni Pune D B A [email protected]

65 Mehul Jivani Mumbai A C D [email protected]

66 Mrinal A. Mehta Mumbai B B C [email protected]

67 Narendrakumar G. Soni Dombivali D D D [email protected]

68 Naresh K. Sheth Mumbai B B B [email protected]

69 Neetu Gupta Gurgaon A D C [email protected]

70 Neha Malpani Ahmedabad B A D [email protected]

71 Nidhi Gupta Mumbai A D B [email protected]

72 Nilesh D. Shah Mumbai D C A [email protected]

73 Nilesh V. Suchak Ahmedabad C C C [email protected]

74 Nitesh J. Jain Ahmedabad B C D [email protected]

75 Nitin M. Furia Mumbai C B A [email protected]

76 Omprakash D. Bihani Mumbai D A B [email protected]

77 Parita D. Shah Mumbai A C B [email protected]

78 Payal R. Shah Mumbai B B D [email protected]

79 Pinninti Mohana Rao Hyderabad C D A [email protected]

80 Pooja A. Shah Thane D A C [email protected]

81 Pranav P. Mehta Mumbai D D D [email protected]

82 Prashant L. Maru Mumbai B D A [email protected]

83 Pratik P. Shah Mumbai C B D [email protected]

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Sr. No.



84 Premal H. Gandhi Mumbai D C B [email protected]

85 Puloma D. Dalal Mumbai C D A [email protected]

86 Rajdatta S. Oak Thane B D A [email protected]

87 Rajesh A. Mody Mumbai C A D [email protected]

88 Rajiv J. Luthia Mumbai D D D [email protected]

89 Rajiv M. Rao Mumbai A B C [email protected]

90 Rajkamal R. Shah Mumbai C C C [email protected]

91 Ramana Kumar B. Chennai C A D [email protected]

92 Ramesh C. Pipalawa Mumbai D D B [email protected]

93 Ranjitsingh A. Rajput Thane A B A [email protected]

94 Rashmin S. Vaja Ahmedabad B A C [email protected]

95 Raunak Garg Mumbai C D B [email protected]

96 Roopak Agarwal Ghaziabad D B A [email protected]

97 Sagar N. Shah Pune A C B [email protected]

98 Sameer M. Shah Mumbai B D C [email protected]

99 Samir D. Barot Mumbai C A D [email protected]

100 Samir L. Kapadia Mumbai B B B [email protected]

101 Sandeep N. Shah Mumbai A D B [email protected]

102 Sanjay K. Agarwal Raigad D D D [email protected]

103 Sanjaykumar S. Burad Nashik C A D [email protected]

104 Sanjeev D. Lalan Mumbai D C A [email protected]

105 Santosh M. Jain Mumbai A D B [email protected]

106 Saurabh P. Shah Mumbai B B C [email protected]

107 Shaileen V. Dalal Mumbai C C D [email protected]

108 Shantesh A. Warty Mumbai D A B [email protected]

109 Shekhar M. Kulkarni Thane A B C [email protected]

110 Shirish G. Bag Mumbai B C A [email protected]

111 Shital J. Gosalia Mumbai C A D [email protected]

112 Shreepati G. Hegde Goa D D A [email protected]

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Sr. No.



113 Shrenik A. Shah Mumbai A B C [email protected]

114 Sivadas Chettoor Palakkad B D C [email protected]

115 Smita D. Thakkar Mumbai B C D [email protected]

116 Sreenivasa Rao Guduru Hyderabad D A B [email protected]

117 Srinivas Mohan H. Erra Kakinada A A C [email protected]

118 Suhas S. Paranjpe Mumbai B C A [email protected]

119 Suhit Aggarwal Gurgaon C D B [email protected]

120 Sunil B. Gabhawalla Mumbai D A B [email protected]

121 Sunil K. R. Chennai A D B [email protected]

122 T. P. Parameswaran Thane B B C [email protected]

123 Tansukhlal K. Chheda Mumbai C C D [email protected]

124 Uday V. Sathaye Mumbai D A B [email protected]

125 Uday W. Prabhupatkar Mumbai A B C [email protected]

126 Uttamchand P. Jain Chennai B D A [email protected]

127 Varun Rathi Secunderabad C A D [email protected]

128 Vijaya B. Alaram Hyderabad D C A [email protected]

129 Vikram D. Mehta Mumbai C C C [email protected]

130 Viren R. Thakkar Mumbai A A C [email protected]

131 Virendra Parwal Jaipur B B B [email protected]

132 Vishal R. Shah Mumbai C D A [email protected]

133 Vishnu K. Thakkar Mumbai D C B [email protected]

134 Yash Dhadda Jaipur A D C [email protected]

135 Yash D. Parmar Mumbai B A D [email protected]

136 Yash M. Rathod Mumbai C B A [email protected]

xv

From the Archive

1ST RESIDENTIAL STUDY COURSE ON SERVICE TAX

Dates: 6th to 8th April, 2007 Venue: Hotel Usha Ascot, Matheran

No. of Participants: 106

President: Himanshu V. Kishnadwala Chairman: Dilip V. Lakhani

Co-Chairman: Govind G. Goyal

Convenors: Anup P. Shah, Raman H. Jokhakar and Sunil B. Gabhawalla

Topics Paper Writers

Papers for Group Discussion

Import and Export of Services CA Jayraj Sheth

CENVAT Credit Mechanism for Service providers Adv. Vipin Jain

Valuation of Taxable Services CA Puloma Dalal


Impact of VAT on Service Tax : Some Issues CA Parind A. Mehta

Real Estate Transaction Service Tax Implications CA Sunil B. Gabhawalla

2ND RESIDENTIAL STUDY COURSE ON SERVICE TAX

Dates: 7th to 9th December, 2007 Venue: Treasure Island Resort, Lonavala


President: Rajesh S. Kothari Chairman: Pranay H. Marfatia

Co-Chairman: Govind G. Goyal

Convenors: Raman Jokhakar, Shardul D. Shah and Sunil B. Gabhawalla



Service Tax & VAT on Composite Transactions Adv. P. K. Sahu

Service Tax on Financial Services CA Sunil Kothare

Case Studies in Service Tax CA A. R. Krishnan


Service Tax on Cross Border Transaction Rohan Shah, Solicitor

Applicability of excise provisions and propositions on Service tax CA S. S. Gupta

xvi

3RD RESIDENTIAL STUDY COURSE ON SERVICE TAX

Dates: 6th to 8th March, 2009 Venue: Treat Resort, Silvassa


President: Anil Sathe Chairman: Pranay H. Marfatia

Convenors: Raman H. Jokhakar, Satish B. Kanodia and Toral C. Mathuria



Recent issues in CENVAT Credit Rules Service Tax Perspective CA Bakul B. Mody

Case Studies on Information Technology & Software Services – VAT & Service tax perspective

Adv. K. Vaitheeswaran

Case Studies in Service Tax Adv. V. Raghuraman


Adjudication and Appellate Procedure in Service Tax Adv. Naresh S. Thacker Adv. Karthik Sundaram

Service Tax Compliance – Putting Systems & Procedures in Place CA Nihal Kothari

4TH RESIDENTIAL STUDY COURSE ON SERVICE TAX

Dates: 2nd to 4th July, 2010 Venue: Silent Hill Resort, Manor, Palghar


President: Ameet N. Patel Chairman: Pranay H. Marfatia

Convenors: Suhas S. Paranjpe and Toral C. Mathuria



Case Studies on Works Contracts Adv. V. Sridharan

Case Studies on Refunds & Rebates Adv. M. H. Patil

Case Studies on the Topics other than Above Adv. K. S. Ravi Shankar


GST – Way Forward Adv. Santosh Dalvi

SEZ – Indirect Tax Issues Adv. Prasad Paranjpe

xvii

5TH RESIDENTIAL STUDY COURSE ON SERVICE TAX & VAT

Dates: 24th to 26th June, 2011 Venue: The Corinthians, Pune


President: Mayur B. Nayak Chairman: Govind G. Goyal

Convenors: Sunil B. Gabhawalla, Toral N. Mehta and Suhas S. Paranjpe



Recent Amendments to CENVAT Credit Rules & Impact thereof Adv. Shailesh Sheth

Indirect Tax Issues in Media & Entertainment Industry CA Parind Mehta

Controversies in Service Tax - Case Studies Adv. G. Shivadass


Dual Taxation and Levy of Service Tax on Hotels & Restaurants CA S. S. Gupta

Practice in Service Tax – Some Musings CA A. R. Krishnan


Dates: 22nd to 24th June, 2012 Venue: Rio Resort, Arpora, Goa


President: Deepak R. Shah Chairman: Govind G. Goyal

Convenors: Santosh M. Jain, Sunil B. Gabhawalla and Suhas S. Paranjpe



Negative List based Taxation of Services, Concept Definitions, Exclusions, Exemptions and Valuation

CA Sunil Gabhawalla

Sale versus Service – Overlap of VAT and Service Tax Adv. P. K. Sahu

Case Studies on Point of Taxation Rules, 2011 CA A. R. Krishnan

Indirect Tax issues in Real Estate Industry – Case Studies Adv. K. Vaitheeswaran

Paper for Presentation

Analysis of Place of Provision of Services Rules CA A. R. Krishnan

xviii


Dates: 14th to 16th June, 2013 Venue: Express Inn, Nashik


President: Deepak R. Shah Chairman: Govind G. Goyal

Convenors: Sunil B. Gabhawalla, Suhas S. Paranjpe and Santosh M. Jain



Case Studies on CENVAT Credit Rules Adv. Bharat Raichandani

Case Studies on Negative List and Reverse Charge Mechanism under Service Tax (and Rules of Interpretation)

CA S. S. Gupta

Case Studies – Indirect Taxes on Hospitality Industry (Hotels, Restaurants, Caterers, etc.)

CA Parind Mehta


Implications of Service Tax on Logistic Sector Adv. Prasad Paranjpe

Power to Arrest, Offences, Prosecution and Recoveries under Service Tax law

CA Girish Raman

xix

Topics Paper Writer Page No.

1. Service Tax on Cross Border Transactions

Shri Kaustuv Sen Advocate

1-26

2. Critical Issues in Taxation of Works Contracts – Service Tax and VAT

Shri N. Venkataraman Sr. Advocate

27-32

3. Case Studies in Valuation of Taxable Services (including bundled services)

Shri V. Raghuraman Advocate

33-38

Contents

1

INTRODUCTION

Open a newspaper today and you are bound to read about the next wave of emerging or high-growth markets. Whether it be a headline on Turkey becoming the third fastest-growing country in the world by 2017, the passing of a new foreign investment law in Myanmar, or a new acronym touting a group of countries as the next BRICS; there is no doubt the global economy is rapidly evolving.

Liberalisation of the economy and a growing need for investment, particularly in infrastructure and industry, have resulted in a more investor-friendly climate in India. The Government of India has undertaken a series of modest economic reforms since September 2012 to tackle the fiscal deficit and boost foreign investment. Nearly all sectors of the economy (with the exceptions of nuclear energy, gambling and some forms of retail and services) are now open to foreign investment, although in varying degrees. The economy of India is the tenth largest in the world by nominal gross domestic product and the third largest by purchasing power parity1.

Due to the general increase in cross-border transactions in services (as the world economy becomes increasingly integrated), the tax authorities are inclined to scrutinise tax positions to ensure that revenues in respect of such transactions are optimal. Of course, it is a fair expectation that the Government should consider the view of all stakeholders and develop a model law that is easy to implement, does not lead to double taxation and is not mired in a dilemma of interpretational concerns resulting in prolonged litigations.

Evolution of Service tax in IndiaService tax as a levy which was introduced with mere 3 services in 1994, had since then climbed up to around 120. Over a period of time this method of taxation of services turned cumbersome with competing and overlapping categories, and has, over the years in recent times, assumed the character of a responsive approach under which newer categories were often introduced to address exclusions identified by judicial rulings from an existing category2. Coupled with this was the penchant for the Government to retrospectively clarify the scope of a particular service category in the wake of a judicial ruling, thereby interpreting legal provisions contrary to its intent. It is also generally perceived that most services are already taxable and taxed under the comprehensive definitions drafted for the currently taxable services. On the lighter side, the legislators must have realised that they were running out of sub-clause reference for notifying new taxable services, with the current references having reached zzzzu!

The Finance Act, 2012, introduced certain conceptual changes to the Finance Act, 1994 by levying service tax on all services except those listed in the negative list under Section 66D (17 items) and

Service Tax on Cross Border Transactions

Adv. Kaustuv Sen

1. “India” International Monetary Fund Retrieved 2014-04-082. Information technology software services, copyright services


2

specifically exempted by the mega exemption notification number 25/ 2012 dated June 20, 2012 (39 items). It was (only) under this new service tax regime, that the term ‘service’ was defined and the erstwhile approach of classifying over 120 services through specific definitions was discontinued.

Given the above, the new system is heralded as a more pragmatic way to administer the already existing levy by carving out exclusion to services that deserve to be kept out of the tax net on socio-economic, political, religious and other similar grounds. While the approach per se is worthy and not faulty, its success would depend largely upon its implementation in a wholesome manner and overall reduction in litigation which inherently challenges Adam Smith canon of taxation (of certainty).

Place of provision of servicesFor any cross-border transaction, the Place of Provision of Services Rules, 2012 (‘PPSR’) becomes relevant since it specifies the manner to determine taxing jurisdiction for a service. Hitherto, the task of identifying the taxing jurisdiction was largely limited through a separate set of import and export of services rules. These import/ export rules, which handled the subject of place of provision of services, somewhat indirectly confined to define the circumstances in which a provision of service would constitute import or export.

PPSR, on the other hand, determines the place where a service shall be deemed to be provided; thus, taxability of a service will be determined based on its “place of provision”. PPSR has replaced the earlier rules, ie the Export of Services Rules, 2005 and Taxation of Services (Provided from outside India and Received in India) Rules, 20063. PPSR is therefore (primarily) meant for cross-border transactions4, to objectively determine whether a particular provision/ receipt of service should be taxed in India or otherwise.

The basic philosophy of PPSR stems from the essence of indirect taxation, that a service should be taxed in the jurisdiction of its consumption. In terms of this principle, exports are not chargeable to tax, as the consumption is elsewhere. Likewise, services imported into the country are taxed, as the consumption is in the importing country. However, like all rules, there are certain exceptions.

PPSR is modelled largely around the European Union (‘EU’) VAT legislation and the Place of Supply of Service Rules; through these changes, India has taken a big step towards aligning its indirect tax system for taxation of services with those prevailing in some of the more mature economies in the EU, with the UK, Australia, etc, and (hopefully) ushering in the much awaited GST regime.

The overall expectation of the scope and intent of PPSR was that once a service has been determined to have not been provided in India, it would not be taxable in India. However, there is more to it than meets the eye. Implementation of PPSR has left various questions unanswered and led to several additional issues that were not envisaged at the drafting stage.

Given the newness of the negative list regime and lack of judicial precedence in this regard, there are several issues around taxability of transactions, especially in the context of cross border transaction. This paper seeks to discuss some of the topical issues/debates/questions in respect of service tax implications arising out of cross border transactions.

3. Para 5.1.1 of the Taxation of Services: CBEC’s Education Guide dated June 20, 2012 (‘Education Guide’)4. Para 5.1.2 of the Education Guide

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Netting off receivables against payables – Whether ‘export’ claim available?

1. Background

It is not uncommon for companies located in separate jurisdiction to utilise each other’s expertise in their respective businesses; this leads to a situation where a company has (2) separate arrangements with another: an arrangement for provision of services and an arrangement for receipt of services. Hence, several companies located in India, providing services which are treated as ‘export’ under service tax provisions5, also receive services from the overseas company to which the export services are provided.

A key issue under consideration for such arrangements is whether the company can consider adjusting (netting off) the amounts payable to the overseas entity against export receivables, and receive net consideration subsequent to such netting off.

2. Analysis

This issue is of essence since the key condition for a service to qualify as ‘export’ is that the service provider should receive payment in convertible foreign exchange. The relevant extract of Rule 6A of the Service Tax Rules, has been provided below:

Quote(1) The provision of any service provided or agreed to be provided shall be treated as

export of service when,—

….

(e) the payment for such service has been received by the provider of service in convertible foreign exchange, and

….

UnquoteIn case the company chooses to adjust the export receivable against import payable by passing a book entry in the books of account, there would be no actual inflow of foreign exchange to the extent of the adjustment entry. This is also because from a regulatory standpoint, the RBI has recognised and allowed6 ‘set-off’ of export receivables/ import payables from the same party, subject to the banker’s (i.e. authorised dealers) consent and subject to fulfilment of certain conditions/ compliances. However, the lower authorities (primarily) rely on Foreign Inward Remittance Certificates (‘FIRCs’) as proof of receipt of convertible foreign exchange in the context of export of services.

Therefore, can a book adjustment of payables against receivables be construed as a payment for services, and thus not jeopardise the export position?

5. Rule 6A of the Service Tax Rules, 1994 (‘Service Tax Rules’)6. RBI/2011-12/264 AP (DIR Series) Circular No. 47 dated November 17, 2011


4

Can book adjustments amount to constructive receipt/ payment of foreign exchange, which satisfies the intent of the policy makers to extend the ‘export’ benefit to service exporters?a) The concept of book-adjustment being treated as ‘payment’ has been recognised and

acknowledged under the service tax provisions; for example book adjustment was also treated as a form of payment under service tax law7 for valuation of taxable services for charging service tax, which was subsequently made applicable to transactions between associated enterprises8.

b) The Delhi Tribunal in Air India Limited vs CCE9, while deciding a stay application passed an interim order and observed that when money is deducted by one person from amounts due to another and such adjustments are agreed upon, these adjustments can be considered as payment made by one person to another.

c) In National Engineering Industries Limited vs CCE10, the Appellant was an agent of a foreign vendor and sought orders for vendor’s goods from Indian Railways; for such services the Appellant received a commission from foreign vendor. However, instead of remitting direct payments to the agent for commission, the foreign vendor requested Indian Railways to deduct the commission amount from payments due to them (i.e. foreign vendor) towards purchase of goods and remit such commission amount to Appellant in Indian Rupees. The Appellant claimed refund of service tax on such services on the premise that the services qualified as ‘export’. However, the Revenue authorities rejected the refund claim on the ground that commission was received in Indian rupees and not foreign exchange.

The Delhi Tribunal observed that earnings of the Appellant had conserved foreign exchange (to the extent of commission amount) which would otherwise have to be repatriated from India towards payment of goods. Such arrangement (between foreign vendor, Appellant and Indian Railways) therefore had fulfilled the object of export of service. Accordingly, they ruled in favour of the Appellant and upheld the refund claim.

d) Regulatory approval from a RBI/FEMA perspective, through delegation of the said power delegated to the AD (authorised dealer) supports this view. Also, if adjustments can result in a tax liability (as per the Air India Limited judgment), the converse benefit should be allowed on principles of equity.

Adopting the position discussed above would have certain concerns (highlighted below), though a positive view appears feasible:a) There is no direct precedent addressing the exact issue involved; given the increasing volume

of services exchanged between cross border companies, it is expected that there should be some clarity on this issue in the near future.

b) Substantiating a no-tax position would have to cross the hurdle of explaining the realisation difference from a documentation perspective, as the service tax returns would report gross billings (prior to book adjustments) and FIRCs would reflect net foreign exchange received after the adjustment.

7. Finance Act 2006 — with effect from April 18, 20068. Finance Act 2008 — with effect from May 10, 2008 9. 2013 (30) STR 64410. 2011 (24) STR 683

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Outbound logistics on “cash collect” – Whether export of services

1 Background

Indian logistics service providers are engaged inter alia in providing international courier services; the services are provided to customers located both within India and outside India. The services involve door-to-door transportation of time sensitive documents, goods or articles utilising the services of a person, either directly or indirectly to carry or accompany such documents, goods or articles.

In a normal courier transaction, the Indian company collects a consignment from the shipper in India and undertakes to deliver the same to a specified overseas destination. For delivering the consignment to the consignee in destination country, the Indian courier company procures air transport services and logistics services of a third party vendor/ group companies. In Outbound Consignee Collect (‘Outbound CC’) transactions, however, the courier (or say freight) charges are collected from the consignee located in the destination country though the shipment is booked by the consignor (in India).

Under the erstwhile service tax regime, such Outbound CC transactions could qualify as an export, as the primary condition was that the services were required to be partly performed outside India, and consideration should be received in convertible foreign exchange. The Indian courier service provider, provided a service of moving a courier from India to an overseas destination. Therefore, the services involved performance of a courier service within India as well as outside India, either personally in India or through a third party service provider outside India. Courier charges were collected in convertible foreign exchange from the consignee located outside India. Given this, an Outbound CC transaction could qualify as ‘export of services’ under the positive list regime.

However, the issue being faced by logistics companies under the negative list regime introduced w.e.f. July 1, 2012 is that part performance of service outside India is no longer a requirement to obtain an export benefit, as the PPSR changed the basis/ determination criteria of taxation of cross border transactions.

2 Analysis

Conditions for Outbound CC to now qualify as export under negative list regime:a) Under the Negative List Regime, services qualify as ‘export of services’11, if:

Condition 1 – The service provider is located in the taxable territory;

Condition 2 – The service recipient is located outside India;

Condition 3 – The service is not specified in the negative list of service;

Condition 4 – Place of provision of service is outside India; and

Condition 5 – Payment has been received in convertible foreign exchange

b) The Indian courier service provider is located in the taxable territory, courier service is not specified in the negative list of services and consideration is received in convertible foreign exchange; therefore Conditions 1, 3 and 5 are satisfied. As regards, location of the service recipient, applying the parameters laid down in the service tax provisions12, the service recipient could be construed as located outside; therefore Condition 2 is also satisfied.

11. Rule 6A of Service Tax Rules, 199412. Rule 2(h) of the PPSR and para 5.3.3 of the Education Guide


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Place of provision of courier services?a) The issue therefore being faced by courier companies is on account of Condition 4, which

requires the place of provision of courier service to be outside India. Determination of place of provision of courier service is governed by Rule 413 read with Rule 714 of PPSR.

b) According to Rule 4 of PPSR, place of provision shall be the location where services are “actually performed”15. Further, Rule 7 provides that if the services are provided at more than one location, including a location in the taxable territory, the place of provision of service shall be the taxable territory ie India (excluding Jammu & Kashmir).

c) It is not doubted that some part of the courier service will always be performed in India by the Indian courier service provider. Therefore, does this mean that under the negative list regime, the conditions for availing export benefits have been changed, resulting in complete denial of the benefit being availed under the positive list regime?

d) Also, applying the same logic, there have been no corresponding changes in the taxability of inbound couriers, which continue to remain taxable.

Outbound freight forwarders qualify as exporta) A larger issue is the differential tax treatment prescribed vis-à-vis other international logistics

service providers such as freight forwarders, cargo airlines, shipping lines, etc., although these service providers are also engaged in transportation of goods and articles.

b) Except for courier services, taxability of services provided by other logistic service providers is determined under Rule 1016 of PPSR, based on the destination of goods. As per this Rule, ‘place of provision of a service of transportation of goods in the place of destination of goods’(except in case of services by a goods transportation agency for transportation of goods by road). So, in case of exports, the place of provision of goods transportation service will be outside India, at the place of overseas destination which is outside India and hence not liable to service tax.

c) Therefore, despite providing similar services, Outbound CC courier service providers are likely to be liable to service tax as per the current construct of the regulation. Therefore, this anomaly seems to be a fit case to be rectified in the future tax budgets and GST regime as:

1) Services are largely (factually) performed outside India;

2) Courier services are increasingly used to export high value goods and this would bring tax parity (with air shipments etc.);

3) Earnings are in convertible foreign exchange.

13. Rule 4 of PPSR – Place of provision of performance based services14. Rule 7 of PPSR – Place of provision of services provided at more than one place15. Asclarifiedbypara5.4.1oftheEducationGuide16. Rule 10 of PPSR – Place of provision of goods transportation services

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Project office set up by a Foreign Service provider in India – Whether liable to pay service tax

1. Background

It is a common practice for foreign companies to set up a project office (‘PO’) in India for the purpose of ease of correspondence and fulfilment of certain compliance requirements under various Indian laws or at the specific request of Indian service recipient. In most cases, at best, the PO is involved in incidental administrative/ ancillary activities, but not connected with the actual provision of services to service recipients located in India. The complex issue is in identifying/determining the actual service provider for the purpose of levy of service tax in such arrangements, i.e. whether the PO would be construed as the service provider located in India.

2. Analysis

In terms of Explanation 2 to Section 65B(44) of the Finance Act, an “establishment” of a person outside the taxable territory is a person distinct from an establishment in a taxable territory. Thus, services, provided from overseas are to be carefully judged whether they are being rendered by establishment outside the taxable territory or within the taxable territory.

What is the location of the service provider?a) Generally, the onus to deposit services tax lies on the service provider; however where the

services are provided by a non-resident servicer provider and received by a resident service receiver, this burden is shifted to the service receiver17.

b) The ‘location of service provider’18 is defined as under:

Quote(a) where the service provider has obtained a single registration, whether centralised or

otherwise, the premises for which such registration has been obtained;

(b) where the service provider is not covered under sub-clause (a):

(i) the location of his business establishment; or

(ii) where the services are provided from a place other than the business establishment, that is to say, a fixed establishment elsewhere, the location of such establishment; or

(iii) where services are provided from more than one establishment, whether business or fixed, the establishment most directly concerned with the provision of the service; and

(iv) in the absence of such places, the usual place of residence of the service provider.

17. Rule (2)(1)(d) of the Service Tax Rules, 199418. Rule 2(h) of PPSR


8

Unquotec) The Education Guide, has explained the above key terms used as under:

• A business establishment19 is explained as “the place where the essential decisions concerning the general management of the business are adopted, and where the functions of its central administration are carried out. This could be the head office, or a factory, or a workshop, or shop/ retail outlet. Most significantly, there is only one business establishment that a service provider or receiver can have”.

• A fixed establishment20 is explained as “a place (other than the business establishment) which is characterized by a sufficient degree of permanence and suitable structure in terms of human and technical resources to provide the services that are to be supplied by it, or to enable it to receive and use the services supplied to it for its own needs”.

• Various (case specific) facts and supporting documents need to be considered21 for determining the establishment most specific concerned with the supply”, for instance:

- the contract(s) between the service provider and receiver;

- where there are no written contracts, any written account (documents, correspondence/e-mail etc.) between parties which sets out in detail their understanding of the oral contract;

- in particular, for suppliers, from which establishment the services are actually provided;

- in particular, for receivers, at which establishment the services are actually consumed, effectively used or enjoyed;

- details of how the business fits into any larger corporate structure;

- the establishment whose staff is actually involved in the execution of the job;

- performance agreements (which may be indicative both of the substance and actual nature of work performed at a particular establishment)

Thus, normally in the case of multiple establishments of a person, it will be the establishment that actually provides, or receives (i.e. uses or consumes), a service that would be treated as ‘directly concerned’ with the provision of service, notwithstanding the contractual position, or invoicing or payment.

d) The term ‘permanent establishment’ is defined under Section 92F(iii)(a) of The Income Tax Act, 1961 which defines permanent establishment (‘PE’) as “Permanent Establishment includes a fixed place of business, through which the business of the enterprise is wholly or partly carried on”.

e) Given this definition, can the PO be construed to be a PE, and thus be liable to pay service tax? Reference is made to the Mumbai CESTAT ruling in Jet Airways (India) Limited22, where the Tribunal held that it is not appropriate to adopt definitions under income tax provisions for the purpose of determining levy of service tax.

19. Para 5.2.5 of the Education Guide20. Para 5.2.6 of the Education Guide21. Para 5.2.7 of the Education Guide22. Jet Airways (India) Limited vs Commissioner of Service Tax, Mumbai Order No. S/143-147/14/CSTB/C-I

9


f) Reference can also be made to the Foreign Exchange Management Act, 1999 which has defined ‘project office’ as a place of business to represent the interests of foreign company executing a project in India but excludes a Liaison Office.

Here, liaison office means a place of business to act as a channel of communication between principle of business or head office by whatever name called and entities in India but which does not undertake any commercial/ trading/ industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channel.

g) From the above it becomes critical to analyse, whether the PO does any act to trigger any of the above mentioned conditions, which would result obtaining registration and discharging service tax liability, especially on account of the following reasons:

- The PO is required to obtain registration with the Registrar of Companies;

- The PO (generally) applies for an Importer Exporter Code;

- Technical and skilled personnel are present in India, for long periods and on several occasions also operate out of the PO; and

- Co-ordination of services required to be provided, is managed by a Project Manager, again stationed in India.


10

Marketing services in India – Whether taxable?

1. Background

Many service providers located abroad engage services of their group companies or third parties located in India to promote and market their service offerings to customers in India. These sales and marketing companies in India typically undertake a host of marketing and sales promotion activities (such as road shows, customer events, door to door marketing, etc.) with a view to identify prospective customers for the service provider abroad; the leads (if any) are then passed on to the service provider located abroad.

The sales and marketing companies in India are typically paid on a “cost-plus” basis for their sales and marketing efforts under transfer pricing regulation irrespective of whether the service provider abroad and the prospective customer/ lead in India conclude a contract for the provision/receipt of a main service.

Under the negative list regime, where the sales and marketing companies in India qualify to be “intermediaries”, their services shall be taxable in India, ie based on the location of the intermediary.

Introduction of the “intermediary” provisions under the negative list regime has left the marketing companies in a flurry; services that were treated as “exports” under the erstwhile law now face exposure of being subject to service tax, should the services qualify as an “intermediary”.

2. Analysis

Given the new concept of “intermediary” under service tax, it is relevant for marketing companies in India to determine taxability under service tax by carefully analysing the roles and responsibilities under the marketing arrangements; such analysis would help determine whether the companies qualify as intermediaries.

Scope of intermediary servicesa) An ‘intermediary’ is defined23 as “a broker, an agent or any other person, by whatever name

called, who arranges or facilitates a provision of a service (hereinafter called the ‘main’ service) between two or more persons, but does not include a person who provides the main service on his account’”.

b) The Education Guide24 has clarified some aspects of an ‘intermediary service’ given as under:

Quote Generally, an ‘intermediary’ is a person who arranges or facilitates a supply of goods, or

a provision of service, or both, between two persons, without material alteration or further processing. Thus, an intermediary is involved with two supplies at any one time:

i) the supply between the principal and the third party; and

ii) the supply of his own service (agency service) to his principal, for which a fee or commission is usually charged.

For the purpose of this rule, an intermediary in respect of goods (such as a commission agent i.e. a buying or selling agent, or a stockbroker) is excluded by definition.

23. Rule 2(f) of the PPSR24. Para 5.9.6 of the Education Guide

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Unquotec) It has also been clarified that persons such as call centres, who provide services to their clients

by dealing with the customers of the client on the client’s behalf, but actually provided these services (i.e. the main service) on their own account, will not be categorised as intermediaries.

Concept of “intermediary” under EU and UK VAT lawsa) The concept of “intermediary” has been the subject matter of several landmark decisions in

European and UK courts, where the question that often arose was whether it was sufficient for an “intermediary” to carry out an activity of mere introduction of a service provider to a prospective customer.

b) Certain rulings25 across European courts held that an intermediary ought to play an active role in the capacity of an agent of the insurance/ finance company and a mere introductory role or generation of leads on prospective customers shall not suffice. However, the Court of Appeal or High Court26, expressed a contrary view, where it held that an introducer is an intermediary. It stated that an introducer does not have to be a negotiator to qualify as an intermediary; nor does an introducer necessarily require a direct relationship with both parties, as long as he is part of a chain of introduction between customer and insurer.

c) The above-mentioned rulings of European courts have been in the context of specific directives containing a specific definition of an “intermediary” or “intermediary service”. Pertinently, the words and expressions used in these directives are dissimilar in many aspects when compared to the terminology used in the PPSR. Given this, its relevance and applicability in the Indian context may need to be determined with restraint and caution.

Can marketing services qualify as intermediary services?a) If a company were to be engaged on a standalone basis for direct marketing, restricted to

meeting and identifying the prospective customers, can it be said that merely marketing services (not coupled with services during and post provision of main services ie without arrangement or facilitation of the actual provision of main service) qualify as ‘intermediary services’?

b) With regard to the marketing services, currently, there is an ambiguity as to whether marketing services per se would qualify as an ‘intermediary service’. The term ‘marketing’ has not been defined under the service tax regulations; the dictionary meaning of marketing has a wide connotation and it includes the activity of promotion and selling products, as well as market research and advertising.

c) With reference to the Education Guide and from a holistic reading of the provisions, a potential view emerges that marketing services provided to overseas client and related support services should not qualify as intermediary services on the basis that this is comparable/ analogous to the call centre services (who deal with their clients’ customers) which have been clarified as not qualifying as ‘intermediary’ services as per the Education Guide.

d) The Education Guide also clarifies that the term ‘intermediary’ would cover services such as travel agents, tour operators, commission agent for a service and recovery agents. Thus, based

25. Bookit Ltd. vs Customs and Excise [(2004) UK V18626 (28th May, 2004)] and Leadx vs Revenue & Customs [(2008) UKVAT V20904 (19th December, 2008)]

26. HMRC vs InsuranceWide.com Services Ltd.; Trader Media Group Ltd. [(2010) EWCA Civ 422]


12

on the clarification, an inference can be drawn that persons who play a key role and actively close and confirm (on behalf of the main service provider) the transaction would be covered within the ambit of an intermediary since, travel agent (and other parties) usually have the capacity to confirm arrangements.

e) At the time of provision of marketing services, there are no (2) supplies involved as provision of services from overseas entity commences after the customer is identified and the service arrangement is finalised.

13


Brokerage on sale or purchase of securities for overseas clients

1. Background

Stock brokers, offer various services in relation to sale and purchase of securities for their domestic and overseas clients and charge a fee (brokerage) for such services. Such transactions are executed in various segments such as equity markets, debt instruments, futures and options, etc.

As per SEBI guidelines, securities cannot be bought and sold (in an open market) in any form except in demateralised form. Demat account functions like a bank account, where bank balance is a mere entry in the bank passbook and cash is not physically held. Securities too are held in an electronic form (demateralised form), in a similar manner and debited/credited without being made available physically. Even if securities are physically bought or sold (which is very rare now), it is mandatory to open a demat account.

All institutional trades including FII trades are required to be settled by custodians. Custodians provide a range of security services, including safekeeping and settlement, reporting, corporate actions, dividend collection and distribution, fund administration, providing market news and information, etc.

The issue under consideration is whether the broking services provided to overseas clients, especially FII’s operating through custodians in India, would be subject to service tax, if not, whether the benefit of export would be available?

2. Analysis

Taxability of stock broking transactionsa) The execution of transactions for sale and purchase of securities are not covered under the

exclusions in the negative list/exemption list, and would qualify as services under the Finance Act, 1994. Thus, when stock broking services are rendered to overseas clients, the key issue is whether such services are provided in India; as required to be determined under the PPSR, and therefore is there a possibility to claim an export/ non-taxable status.

b) As per the default rule, i.e., Rule 327 of PPSR, when services are rendered to an overseas customer, the place of provision of services is deemed to be location of the service recipient. Such services would enjoy a tax free status since Section 66B of the Finance Act, 1994 would not apply to such services.

c) Brokerage income earned would be tax free (since the service recipient i.e. FII’s, are located outside India), unless certain exceptions created in PPSR are triggered.

One such exception is the concept of an intermediary; whether a stock broker can be an intermediary?a) An ‘intermediary’28 is defined as a broker, agent or any other person who arranges or facilitates

a provision of service or both between two or more persons but does not include a person who provides the main service on his account.

27. Rule 3 of PPSR – Place of provision generally28. Rule 2(f) of PPSR


14

b) From the above definition, (all) ‘brokers’ appear to be covered and implies that a stock broker could be covered as well. However, a cognate reading of the definition indicates that only brokers who facilitate provision of service between two people are covered, while in the case of stock broking, the underlying transaction is of trading in securities (which are equivalent to trading in goods under service tax regulations). The underlying activity arranged/ facilitated by the broker should necessarily be a service in order to trigger the exception.

c) As per the draft document of Union Budget 2012, the term ‘intermediary’ was defined as ‘a broker, an agent or any other person, by whatever name called, who arranges or facilitates a provision of service between two or more persons’. But the final definition excluded a person who provided the main service on his account. The Education Guide29 clarifies that a stock broker is not covered under the definition of intermediary. Thus, Rule 930 of PPSR shall not apply in case of stock broking services i.e. the exception created through an ‘intermediary’, is not triggered.

The next exception is Rule 431 of PPSR i.e. whether the stock broking services are rendered in respect of goods i.e. the securities?a) Under Rule 4 of PPSR, the location where services are actually performed is treated as the place

of provision of services. This rule applies to situations where ‘goods’ are required to be made physically available by the recipient of service (to the service provider), for rendition of service.

b) The essential characteristic of a service to be covered under this rule is that the goods temporarily come into physical possession or control of the service provider, and without this happening, the service cannot be rendered.

c) The issue is whether this exception would apply for trading in securities which are goods for service tax laws. Since trading in securities is done only in a dematerialised form, they cannot be physically provided to the service provider; therefore, this essential requirement appears not to be fulfilled.

d) The Education Guide32 clarifies that ‘the essential characteristic of a service to be covered under this rule is that the goods temporarily come into the physical possession or control of the service provider, and without this happening, the service cannot be rendered. Thus, the service involves movable objects or things that can be touched, felt or possessed. Examples of such services are repair, reconditioning, or any other work on goods (not amounting to manufacture), storage and warehousing, courier service, cargo handling service (loading, unloading, packing or unpacking of cargo), technical testing/inspection/certification/analysis of goods, dry cleaning etc.

If it is assumed that brokerage services should not be covered under either of the above exceptions, the taxability of such transactions would continue to be governed by the primary rule, i.e. where the service recipient is located. Hence, brokerage fees earned from overseas customers would be tax free.

29. Para 5.9.6 of the Education Guide30. Rule9ofPPSR–Placeofprovisionofspecifiedservices31. Rule 4 – Place of performance of performance based services32. Para 5.4.1 of the Education Guide

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Export of servicea) Under the service tax regulations, even if a service rendered to a service recipient located

overseas is tax free, the same does not qualify as an ‘export’, unless all the conditions specified in Rule 6A of the Service Tax Rules, 1994 are fulfilled.

b) As per RBI/ FEMA/SEBI regulations, a non-resident undertaking trades in securities needs to operate through a custodian; where brokerage fees for ‘buy’ transactions are paid in Indian Rupees and fees for ‘sell’ transactions are netted off from the proceeds. Effectively, fees is not received in convertible foreign exchange.

c) Since brokerage fees are received in Indian Rupees through the custodian (acting for the FII), an argument whether such amounts could be treated as foreign exchange (given that its definition under section 2(n) of Foreign Exchange Management Act, 1999 (‘FEMA’) includes money ‘payable’ in foreign exchange) can be explored. Judicial pronouncements on this issue are divided33, though a positive view for an export status appears more tenable/ agreeable based on in principle reliance on the J.P. Boda ruling.

33. National Engineering India Limited vs CCE Jaipur [2010 (258) ELT 97 (Tribunal – Delhi)] and J.P Boda & Co. Pvt. Ltd vs CBDT [(1997) 223 ITR 271 (SC)] have approved this approach, though ETA Travel Agency Private Limited vs CCE, Chennai [2007 (7) STR 454 (Tribunal Bangalore)] is a negative ruling


16

Remittance charges deducted by foreign banks as commission/ fees – Whether liable to service tax under reverse charge

1. Background

Exporters regularly request payment through letters of credit for their routine business transactions and to protect themselves from the risks of non-payment by foreign buyers. Working with an overseas buyer can be risky because the seller would not necessarily know the credentials. In addition, communication can be difficult across thousands of miles and different time zones. A letter of credit spells out the details to provide assurance to the seller. Financial institutions offer services for meeting payment obligations for such international trade.

Consider a transaction in which the foreign customer approaches its bank (‘Foreign Bank’ or ‘Issuing Bank’) to issue a letter of credit in favour of the advising bank (‘Indian Bank’) where the Indian exporter is the beneficiary. When the Foreign Bank remits the export proceeds, an amount is deducted from the invoice amount and only the balance amount is remitted to the Indian Bank which is in turn further remitted to the beneficiary (as explained in Annexure 1). The key issue is:

a) Whether service tax is required to be discharged under reverse charge mechanism on such commission/ fees deducted by the Foreign Bank;

b) Who is the actual recipient of such services; Indian bank, Indian exporter; or Overseas importer.

2. Analysisa) Generally, service tax is payable by the service provider. However, where services are imported/

received in India, service tax is payable by the recipient of services under reverse charge mechanism34.

b) On this issue, the Mumbai Commissionerate has recently issued a trade notice35 addressing the issue of taxability of such transactions. The trade notice states that in cases where the Foreign Bank recovers certain charges for processing of import/export documents regarding remittance of foreign currency, the Indian bank would be treated as recipient of service and therefore required to pay service tax. The primary reasoning of the Mumbai Commissionerate are as under:

• Based on the terms of internationally accepted arrangements between banks, there is an implied contract between an Indian Bank and a Foreign Bank, whereby, the Foreign Bank recognises only the bank in India for providing their services and for collection of their charges36.

• The amount of charges collected by the Foreign Bank is informed only to the Indian Bank. In fact, the Indian exporter is not even aware of the quantum of charges charged by the Foreign Bank.

• Given this, since the Indian exporter is not even aware of who the service provider is, the views of the Indian banks that the importer/exporter is the service recipient is not legally

34. Section 68(2) of the Finance Act35. Trade Notice No. 20/13-14-ST-I dated February 2, 201436. Article Nos. 4, 8, 10, 11, 16, 21 and 26 of URC 522 and Article Nos. 3, 4, 7, 8, 9, 13, 37 of UCP 600

17


correct. Further, the Tribunals have prima facie held that in such cases, services are not provided by the Foreign Bank to the Indian exporter37 and hence there is sufficient cause for grant of stay.

Who is the service receiver?a) The Education Guide clarifies that the person legally entitled to receive the service, regardless

of whether he himself makes the payment, would be considered as the service receiver. The relevant text has been extracted below:

Quote

5.3.3 Who is the service receiver? Normally, the person who is legally entitled to receive a service and, therefore, obliged to make

payment, is the receiver of a service, whether or not he actually makes the payment or someone else makes the payment on his behalf.

Illustration A lady leaves her car at a service station for the purpose of servicing. She asks her chauffer to

collect the car from the service station later in the day, after the servicing is over. The chauffer makes the payment on behalf of the lady owner and collects the car. Here the lady is the ‘person obliged to make the payment’ towards servicing charges, and therefore, she is the receiver of the service.

Unquoteb) The Delhi CESTAT, in Paul Merchants Limited & Ors. vs CCE, Chandigarh38, held that the

place of the person on whose instructions the service had been provided would be treated as the destination of service. Hence, the person contractually responsible for making payment is the service receiver.

c) Article 37 of UCP 600 states that a bank instructing another bank to perform services is liable for any charges incurred by that bank in connection with its instructions. If a credit states that the charges are for the account of the beneficiary and charges cannot be collected/deducted from the proceeds, the issuing bank becomes liable for payment of the charges.

d) Since the bank charges are deducted by the Foreign Bank and balance amount remitted to the Indian Bank, can it be said that the Indian Bank has instructed the Foreign Bank and made payment for such charges? Or since the ultimate cost of all bank charges is eventually borne by the Indian exporter, can he be held liable as a service recipient?

e) In such a scenario, whether the views expressed in trade notice can be challenged; it is believed that exposure to Indian banks, on account of this trade notice, is significant for the past 5 years. One key ground is that this charge is neither an expense nor a revenue for the advising bank or Indian bank. Therefore, banks in India are likely to face an extended level of litigation on this issue.

37. Gracure Pharmaceuticals Limited vs CCE, Jaipur [2013 (32) STR 249 (Tri.-Del.)] and Gujarat Ambuja Exports Limited vs Commissioner of Service Tax, Ahmedabad [2013 (30) STR 667 (Tri.-Ahm.)]

38. 2011 TIOL 1448 CESTAT Del.


18

ANNEXURE 1

Applicant

(Foreign Customer)

Issuing bank

(Foreign Bank)

Beneficiary

(Indian Exporter)

Advising bank

(Indian Bank)

19


Credit card payments by foreign nationals for restaurant services – Whether export?

1. Background

Differences in international monetary standards make spending money abroad often confusing and even downright difficult. When it comes to travelling overseas, consumers must not only determine the acceptable methods of payment for the countries they plan to visit, but also figure out a way to avoid foreign transaction fees and get the best exchange rates. On the other hand, international businesses tasked with tackling the logistics of accepting international credit cards often need to establish international merchant accounts and join international credit card processing networks.

Foreign companies generally send their employees for executing business transactions in India. Such employees consume services offered by air-conditioned restaurants; such restaurants accept payments either in cash or by card (i.e. international debit/credit card).

The issue under debate is whether restaurant services availed by foreign nationals, where payment is made by swiping an international credit card, can be treated as export of services?

2. Analysis

Place of provision of restaurant services to foreign nationals – Outside India?a) Service tax is applicable on all services as defined under Section 65B(44) of the Finance Act,

1994, unless the said service falls under the negative list39 or otherwise exempted specifically. Services by air-conditioned restaurants are neither listed in negative list nor are specifically exempted.

b) As per the default rule, i.e., Rule 340 of PPSR, the place of provision of services is deemed to be location of the service recipient unless certain exceptions carved out in PPSR are triggered.

c) As per Rule 441 of PPSR, the place of provision of service is the location where the services are actually performed; where the services provided to an individual, represented either as the service recipient or a person acting on behalf of the recipient for which the service recipient or any person acting on his behalf needs to be physically present.

d) As per the Education guide42, ‘certain services like cosmetic or plastic surgery, beauty treatment services, personal security service, health and fitness services, photography service (to individuals), internet café service, classroom teaching, are examples of services that require the presence of the individual receiver for their provision. As would be evident from these examples, the nature of services covered here is such as are rendered in person and in the receiver’s physical presence. Though these are generally rendered at the service provider’s premises (at a cosmetic or plastic surgery clinic, or beauty parlour, or health and fitness centre, or internet café), they could also be provided at the customer’s premises, or occasionally while the receiver is on the move (say, a personal security service; or a beauty treatment on board an aircraft)’. Restaurant services are not specified under the illustrations provided in the Education Guide, as services sought to be covered under Rule 4.

39. Section 66D of the Finance Act, 199440. Rule 3 of PPSR – Place of provision generally41. Rule 4 of PPSR – Place of provision of performance based services42. Para 5.4.3 of the Education Guide


20

e) If the above rule does not apply, Rule 543 of PPSR need to be tested. As per Rule 5 of PPSR, the place of provision of services shall be the place where the immovable property is situated for provision of services directly in relation to an immovable property. It includes services by experts and agents, hotel accommodation, grant of rights to use immovable property, services by architects/ interior decorators in relation to an immovable property.

f) A restaurant is a commercial establishment committed to serving of food and beverages. Such services rendered in restaurants are not in connection with rendering of services in relation to an immovable property. In such a scenario, Rule 5 should not be applicable.

g) Hence, as per the default rule (i.e. Rule 3), the location of service recipient will be considered as the place of provision of service. The complex issue lies in determining the location of the service receiver as the service receiver is the foreign company located outside India, whereas the service is consumed say by its employee in India or is an independent traveller in India in his/ her personal capacity.

h) The ‘location of service recipient’44 is defined as under:

Quote(a) where the recipient of service has obtained a single registration, whether centralised or

otherwise, the premises for which such registration has been obtained;

(b) where the recipient of service is not covered under sub-clause (a):

(i) the location of his business establishment; or

(ii) where services are used at a place other than the business establishment, that is to say, a fixed establishment elsewhere, the location of such establishment; or

(iii) where services are used at more than one establishment, whether business or fixed, the establishment most directly concerned with the use of the service; and

(iv) in the absence of such places, the usual place of residence of the recipient of service.

Unquotei) In most cases, it is seen that the employee uses its corporate credit card offered by its employer

to meet all expenses incurred in relation to the business trip. Hence, for all practical purposes, it can be said that the service recipient would be the foreign company situated outside India, in whose name the invoices are usually raised. Accordingly, can it be said that under the default rule, the place of provision of restaurant services to employees of foreign companies is outside India?

Whether export of services?a) Assuming that the above-mentioned transactions get covered under Rule 3 of the PPSR, i.e.

the place of provision of services is outside India, and hence not taxable, the next question that arises for analysis is whether such services could avail the benefit of export?

43. Rule 5 of PPSR – Place of provision of services relating to immovable property44. Rule 2(i) of PPSR

21


b) Under the service tax regulations, even if a service rendered to a service provider located overseas is tax free, the same does not qualify as an ‘export’, unless all the conditions specified in Rule 6A of the Service Tax Rules are fulfilled.

c) The critical issue here is to analyse whether the requirement that payment for consideration is received in convertible foreign exchange is met.

d) Generally, when foreign exchange is received or credited to the recipient’s bank account, the bankers issue a certificate called Foreign Inward Remittance Certificate (‘FIRC’) containing the details of the foreign currency received. The service tax authorities rely heavily on such FIRCs as evidence that payment is received in foreign exchange, to accept an export position.

e) However, in the instant case, where payments are effected using credit cards, even though payments are made from overseas, can it be said that the restaurants receive foreign currency? The fact remains that there would be no FIRC issued as underlying documents for effecting payments.

f) The moot question, hence would be whether the amount received by credit card be construed as payment in foreign currency and hence considered as an export of services?

g) Also, there could be instances where the employee/ consumer, discharges the restaurant bill in cash (i.e. through payment of foreign exchange); is there a manner in which such convertible foreign exchange be considered for the purposes of exports.

h) Given the approach of tax officers, there may be possible litigation, since the restaurant may not be able to correlate in absence of FIRCs.


22

Cloud Computing

1. Background

Technology is a changing phenomenon. With cost cutting and revenue generation being the motive which drives companies, new ideas and concepts emerge which promise to achieve the above twin objective. However such changes pose another challenge, that is, the tax implications that arise from the same and the impact on the profits of the company.

Cloud computing is one such evolving technology. It follows the principles of an Electronic Commerce transactions and is a technology that uses the internet and central remote servers to maintain data, software and a variety of applications. Cloud computing allows consumers and businesses to use applications without installation and access their personal files at any computer with internet access. This technology allows for much more effective computing by centralising storage, memory, processing and bandwidth.

A simple example of cloud computing is yahoo, gmail or hotmail. All a consumer would need is just an internet connection to start sending e-mails. The server and e-mail management software is all on the cloud (internet) and is totally managed by the cloud service provider yahoo, google, etc. The consumer gets to use the software alone and enjoy the benefits.

Several companies in India have migrated their data centres using the cloud computing technology provided by foreign vendors. The cloud servers are usually situated outside India; however, domestic vendors are ramping up operations and foreign vendors are setting up server locations in India to serve the region. The issue under analysis is whether payments made by Indian companies to foreign cloud service providers would be subject to service tax under reverse charge.

2. Analysis

In order to attract service tax liability, the service should be deemed to be provided in India as per the PPSR. As per the default rule of PPSR45, the place of provision for cloud computing services would be in India i.e. the place of the service recipient, provided none of the exceptions apply.

However, should the cloud computing services qualify as online information and database access or retrieval services (‘OIDAR services’), the place of provision of services would be the place of the service provider46, i.e. outside India, and such services would not be subject to service tax.

Hence, it is important to analyse the nature of cloud computing services to evaluate whether the same could qualify as OIDAR, and thus be outside the ambit of service tax, for services received from a foreign service provider.

Cloud computing services = OIDAR services?a) OIDAR services has been defined47 as “providing data or information, retrievable or otherwise,

to any person, in electronic form through a computer network”. The scope of OIDAR services covers provision of data or information access or retrieval in an electronic form, through a computer network.

45. Rule 3 of PPSR – Place of provision generally46. Rule9(b)ofPPSR–Placeofprovisionofspecifiedservices47. Rule 2(l) of PPSR

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b) The terms ‘data’ and ‘information’ are not defined in the Finance Act or PPSR. However, the same are defined under the Information Technology Act, 2000 as under:

Quote “‘data’ means a representation of information, knowledge, facts, concepts or instructions

which are being prepared or have been prepared in a formalised manner, and is intended to be processed, is being processed or has been processed in a computer system or computer network, and may be in any form (including computer printouts magnetic or optical storage media, punched cards, punched tapes) or stored internally in the memory of the computer”.

“’information’ includes data, text, images, sound, voice, codes, computer programmes, software and databases or micro film or computer generated micro fiche”.

Unquotec) The Education Guide48 has clarified the scope of OIDAR which has been extracted below:

Quote 5.9.5 What are “Online information and database access or retrieval services”?

“Online information and database access or retrieval services” are services in relation to online information and database access or retrieval or both, in electronic form through computer network, in any manner. Thus, these services are essentially delivered over the internet or an electronic network which relies on the internet or similar network for their provision. The other important feature of these services is that they are completely automated, and require minimal human intervention

Examples of such services are:—

(i) online information generated automatically by software from specific data input by the customer, such as web-based services providing trade statistics, legal and financial data, matrimonial services, social networking sites;

(ii) digitised content of books and other electronic publications, subscription of online newspapers and journals, online news, flight information and weather reports;

(iii) Web-based services providing access or download of digital content.

The following services will not be treated as “online information and database access or retrieval services”:-

(i) Sale or purchase of goods, articles etc. over the internet

(ii) Telecommunication services provided over the internet, including fax, telephony

(iii) Audio conferencing, and videoconferencing

(iv) A service which is rendered over the internet, such as an architectural drawing

(v) Management consultancy through e-mail

48. Para 5.9.5 of Education Guide


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(vi) Repair of software, or of hardware, through the internet, from a remote location

(vii) Internet backbone services and internet access services

Unquote

d) In a cloud computing arrangement, the underlying information/ data may or may not be owned by the service recipient, and only the service of providing access to such cloud technology is provided by the service provider.

e) There have been several rulings in the context of OIDAR services, which have been summarised below:—

• The Tribunal in United Telecom Limited vs Commissioner of Service Tax49 held that since the service provider was not involved in generation or usage of data but was only maintaining and supplying the network, the service provider could not be said to be providing OIDAR services.

• In State Bank of India vs Commissioner of Service Tax50, State Bank of India (‘SBI’) had entered into a contract with a third party vendor for receiving Virtual Private Network (‘VPN’) to retrieve or access data from their data centre maintained in Indian and overseas locations. In an interim order, it held that the service provided by the third party vendor is not that of an OIDAR as SBI is retrieving its own database in various locations, the third party vendor is merely a VPN facilitator. However, this ruling was not followed due to interim status.

• In Nestle India Limited vs CCE51, the Delhi Tribunal validated the in-principle application of the decision in United Telecom Limited.

• In British Airways vs Commissioner (Adjn), Central Excise, Delhi52 British Airways had arrangements with computerized reservation system companies (‘CRS companies’); the CRS companies were obtaining data/ information regarding flight schedules, fares, seat availability, etc. from British Airways, creating and storing the information in computer database, and making available the structured/ processed information on a real time basis for access or retrieval by the IATA agents undertaking bookings, etc. The Tribunal held the services provided by the CRS companies to British Airways were classifiable as OIDAR on the basis that the ownership of data was immaterial in the determination of whether a given transaction is OIDAR. It may be noted that this ruling has been referred to a larger bench on a technical issue which does not relate to the finding on classification (which both members of the bench argued on).

• In a recent decision of Jet Airways (I) Limited53, the Mumbai Tribunal Bench held that flight reservations/ booking services availed by Jet Airways from foreign based CRS companies were classifiable as OIDAR services, the key reasons being that since the

49. 2009-TIOL-595-CESTAT-BANG50. 2013-TIOL-767-CESTAT-Mum51. 2011-TIOL-256-CESTAT-DEL52. 2013-TIOL-1161-CESTAT-DEL53. 2014 (4) TMI 363 – CESTAT Mumbai

25


airlines not only provide the data to the CRS but also retrieve/receive the data with regard to booking/ cancellation of air tickets.

f) The criteria based on which the above rulings were decided would be a deciding factor to conclude on whether cloud computing services qualify as ‘OIDAR services’.

List of cases referred to:1. Air India Limited vs CCE [2013 (30) STR 644]

2. National Engineering Industries Limited vs CCE [2011 (24) STR 683]

3. Jet Airways (India) Limited vs CST [Order No. S/143-147/14/CSTB/C-I]

4. Bookit Ltd. vs Customs and Excise [(2004) UK V18626 (May 28, 2004)]

5. Leadx vs Revenue & Customs [(2008) UKVAT V20904 (December 19, 2008)]

6. HMRC vs InsuranceWide.com Services Ltd.

7. Trader Media Group Ltd [(2010) EWCA Civ 422]

8. National Engineering India Limited vs CCE Jaipur [2010 (258) ELT 97 (Tri.– Del.)]

9. J.P Boda & Co. Pvt. Ltd vs CBDT [(1997) 223 ITR 271 (SC)]

10. ETA Travel Agency Private Limited vs CCE, Chennai [2007 (7) STR 454 (Tri. - Bang.)]

11. Gracure Pharmaceuticals Limited vs CCE, Jaipur [2013 (32) STR 249 (Tri. - Del.)]

12. Gujarat Ambuja Exports Limited vs CST, Ahmedabad [2013 (30) STR 667 (Tri. - Ahm.)]

13. Paul Merchants Limited & Ors. vs CCE, Chandigarh [2011 TIOL 1448 CESTAT Del]

14. United Telecom Limited vs CST [2009-TIOL-595-CESTAT-Bang]

15. State Bank of India vs CST 2013-[TIOL-767-CESTAT-Mum]

16. Nestle India Limited vs CCE [2011-TIOL-256-CESTAT-Del]

17. British Airways vs Commissioner (Adjn), Central Excise, Delhi [2013-TIOL-1161-CESTAT-Del]

18. Jet Airways (I) Limited [2014 (4) TMI 363 – CESTAT Mum.]

qq


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INTRODUCTION1. Commencing from the Constitutional Bench Judgment in Gannon & Dunkerley to the latest

Constitutional Bench Judgment in Kone Elevators, Tax on works contract has indeed thrown up a spate of litigations, occupying the judiciary to over 60 years. Though a great degree of doctrinal stability has been achieved over the years, finality still remains elusive.

2. The Constitutional Bench of the Hon’ble Supreme Court through the first Gannon Dunkerley vs State of Madras 1958 (9) STC 353 asserted that it is impossible to maintain that there is implicit in a building contract, a sale of materials as understood in law. There is neither an agreement to sell the materials used in a construction, nor does property pass as movable. Under law there cannot be an agreement relating to one kind of property and a sale regarding another.

3. This necessitated the 46th Constitutional Amendment bringing to existence for the first time ‘deemed sale’ and through Article 366(29A)(b) of the Constitution transfer of goods in the execution of works contract was made taxable.

4. Post the 46th Amendment State Legislations amending the definition of sale incorporating deemed sales along with associated issues including ratification by the States came up for consideration in the second Constitutional Bench Judgment on Works Contract i.e. Builders Association of India vs Union of India 1989 (2) SCC 645 wherein it was held that prior to 46th amendment, sales tax could not be levied when the contract in question was a single and indivisible works contract. After the 46th Amendment, the works contract which was an indivisible one is by a legal fiction altered into a contract which is divisible into one for sale of goods and the other for supply of labor and services. After the 46th Amendment, it has become possible for the State to levy sales tax on the value of goods involved in the works contract in the same way in which the sales tax was leviable on the price of the goods and materials supplied in a building contract which has been entered into in two distinct and separate parts.

The power and restriction of the State legislature to levy tax including the mode and manner of prescribing the measure of tax, came up for consideration before the Constitutional Bench in Gannon Dunkerley vs State of Rajasthan 1993 (1) SCC 364 through which the court prescribed the measure of taxation as to what would stand excluded from the purview of State legislature, the need to prescribe formula in case assessees do not maintain books of account or what is maintained is not found to be credible. The court also observed that since works contract involves wider categories and segments of transactions it is open to the State Legislature to prescribe formulas with varying rates. The value of goods which can constitute the measure for the levy of the tax has to be the value of goods at the time of incorporation of the goods in the works and not the cost of acquisition of the goods by the Contractor. However, the cost of incorporation of the goods cannot be made a part of the measure for levy of tax contemplated under Article 366(29A)(b) of the Constitution.

The Larger Bench of the Supreme Court in the case of Larsen & Toubro Limited vs State of Karnataka 2013 (65) VST 1 (SC) held the following:

Critical Issues in Taxation of Works Contract – Service Tax and VAT

Sr. Adv. N. Venkataraman


28

A) To sustain the levy on works contract, there must be a works contract, goods should have been involved in its execution and the property must be transferred to a third party either as goods or in some other form.

B) When a contract comprises both as works contract and a transfer of immovable property, such contract does not denude it of its character as works contract. Article 366 (29A)(b) takes within its fold all genre of works contract and is not restricted to one species of contract to provide for labour and services alone.

C) Building contracts are species of works contract. Dominant Nature Test has no application.

D) The single and indivisible contract, now by the 46th Amendment, has been brought on par with a contract containing two separate agreements and States have now power to levy sales tax on the value of the material in execution of works contract.

E) Article 366(29A)(b) serves to bring transactions where essential ingredients of sale defined in the Sale of Goods Act, 1930 are absent, within the ambit of sale or purchase for the purposes of levy of sales tax. In other words, transfer of movable property in a works contract is deemed to be sale even though it may not be a sale, within the meaning of Sale of Goods Act.

F) Taxing the sale of goods elements in a works contract under Article 366(29A)(b) read with Entry 54, List II is permissible even after incorporation of the goods provided tax is directed to the value of the goods and does not purport to tax the transfer of immovable property.

Through the recent decision of the Constitutional Bench in the case of Kone Elevators vs State of Tamil Nadu, the Court reaffirmed the principle that dominant theory pales into insignificance post the 46th Amendment. It rejected the submission that the element of labour and service can be deducted from the total contract value without treating the composite contract as works contract, as an innovative subterfuge since it would frustrate the constitutional provisions.

In the service tax front, the taxability of works contract service, prior to 1-6-2007 is yet to settle down. The Tribunal, in the case of Daelim Industrial held that an indivisible contract cannot be vivisected and revenue’s SLP before the Supreme Court was rejected. The Division Bench of the Karnataka High Court in Commissioner of Service Tax vs Turbotech Precision Engineering Pvt. Ltd. 2010 (18) STR 545 (Kar.) held that since the charging provision got created, only with effect from 1-6-2007, service tax is not leviable for the prior periods. The Madurai Bench of the Madras High Court in Strategy Engineering Pvt. Ltd. vs Additional Commissioner of Central Excise 2011 (24) STR 387 (Mad) expressed similar view.

However, the Division Bench of the Delhi High Court on the strength of the concession given by the assessee held that service tax on works contract service is leviable both prior and subsequent to 1-6-2007.

The three Larger Benches of the Tribunal comprising three Members each in the case of Jyothi Limited vs CCE, 2008 (9) STR 373 (T), Commissioner of Central Excise vs Indian Oil Tanking Ltd. 2010 (18) STR 577 (T) and in CCE vs BSBK 2010 – TIOL – 646 – CESTAT – Del – LB decided the issue of taxability by expressing conflicting views. The first two Larger Benches in the case of Jyothi Limited and Indian Oil Tanking held that service tax is not leviable prior to 1-6-2007 whereas BSBK held a contrary view. In view of the conflicting views by Benches of equal strength, on the basis of a referral order in the case of Larsen & Toubro Ltd. vs Commissioner of Service Tax, Delhi, the Tribunal has constituted a Five Member Larger Bench to decide the taxability.


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CASE STUDIES

Case Study — 1“A” owns land. “B” is a Developer. “A” and “B” enters into a joint agreement for development of flats. In exchange of the land, by “A” to “B”, “B” undertakes to allot 50% of the Flats without receiving any additional consideration. The rest of the 50% of flats belonging to “B” is sold to various customers. The allotted flats of “A” partially is retained by “A” for self use and the rest of the Flats are sold to third parties.

QUESTIONS FOR CONSIDERATION

a) Is the transaction between “A” and “B” exchange of land and flats liable to sales tax?

b) Whether “B” has rendered any service to “A” so as to be liable to service tax?

Case Study — 2 “A” owns land. “B” is a Developer. “A” and “B” enter into a joint agreement for development of flats. In exchange of the land, by “A” to “B”, “B” undertakes to allot 50% of the flats without receiving any additional consideration. The rest of the 50% of Flats belonging to “B” is sold to various customers. The allotted Flats of “A” partially is retained by “A” for self use and the rest of the flats are sold to third parties. 50% of the Flats sold by “A” and “B” to third parties where post the issuance of completion certificate. In the case of the balance 50% both “A” and “B” had entered into sale and building agreements during the course of the construction of the Flats.


a) Whether the sale of flats post completion certificate liable to a works contract tax under VAT?

b) Whether the transaction is liable to service tax?

c) Whether the agreement to sell during construction is liable to VAT and service tax? If so, what is the point and measure of taxation?

Case Study — 3 “A” owns land. “B” is a Developer. “A” and “B” enter into a joint agreement for development of flats. In exchange of the land, by “A” to “B”, “B” undertakes to allot 50% of the flats without receiving any additional consideration. The rest of the 50% of Flats belonging to “B” is sold to various customers. The allotted flats of “A” partially is retained by “A” for self use and the rest of the Flats are sold to third parties. 50% of the flats sold by “A” and “B” to third parties where post the issuance of completion certificate. In the case of the balance 50% both “A” and “B” had entered into sale and building agreements during the course of the construction of the Flats.


a) Whether the cost of land is liable for exclusion for payment of VAT and service tax?

b) Whether the cost of land is liable for exclusion even if the assessee opts for composition scheme?

c) If the cost of land is excludible, how should the measure be fixed and what should be the measure?


30

Case Study — 4Contractor “A” enters into an agreement with Employer “B” for constructing railway terminus and commercial complexes in the land belonging to railways. Contract is entered into on 25.5.2005 and was completed on 28-10-2008.


a) Is this transaction taxable for service tax before 1-6-2007?

b) Is “A” entitled to opt for composition scheme post 1-6-2007?

Case Study — 5An Indian company (ICo) enters into an EPC contract with a multinational group. Individual contracts have been entered into with separate companies in the group for offshore supplies, offshore services, onshore supplies and onshore services as also construction and erection. The offshore supply agreement is with the US company, and, offshore services agreement with a subsidiary at Singapore. The onshore supplies and onshore services are with Indian subsidiary [of US co.] viz., Indian Subsidiary 1 and construction and erection contract is with another Indian subsidiary [of US Co.] viz., Indian Subsidiary 2. In addition there is an umbrella agreement for the entire contract with the US head office. A summary of the various contracts is as follows:

Description of scope Agreement Between In Indian Rupees Million

In US Dollars Million

Offshore supply ICO – US CO Nil 800/-

Offshore services ICO – Singapore CO Nil 200/-

Onshore supply ICO – Indian Subsidiary 1 400/- Nil

Onshore services ICO – Indian Subsidiary 1 100/- 100/-

Construction & erection ICO – Indian Subsidiary 2 100/- 100/-

Total 600/- 1,200/-


a) Discuss service tax liability for the above contract.

b) Will there be a difference if there is no umbrella agreement?

c) How can the service tax liability be minimised?

Case Study – 6‘A’ provides architect services. He enters into a works contract with B for doing the interiors of his office. The interior work would inter alia include furniture, fixtures and fittings, wall finishing, floor tiling, painting and other such miscellaneous works.


a) Whether the service tax paid on the contractor’s bill would be eligible for CENVAT credit?

b) Would it make a difference if the interior is done for the first time or it is a follow on work in the nature of repair or refurbishment?

c) Would it make a difference if the service provider is not an architect but is a company operating a business centre?

[Reference material – (i) Rule 2(l) of CENVAT Credit Rules, 2004; (ii) ‘works contract’ section 65B(54)]


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Case Study – 7‘A’ of Maharashtra enters into a ‘works contract’ for setting up a captive power plant for ‘B’ of Gujarat who is a manufacturer. ‘A’ pays service tax on the labour component after deducting the value of materials as disclosed in the sales tax returns following Explanation (c) to rule 2A(i) of the Service tax (Determination of Value) Rules, 2006. Most of the materials supplied in the course of works contract are purchased by ‘A’ from ‘S’ of Andhra Pradesh and directly delivered at the site at Gujarat. ‘B’ issues a C form to ‘A’ being purchase of goods used in ‘manufacture’ and ‘A’ issues a C form to ‘S’ being goods purchased for ‘resale’ and takes an E1 form from ‘S’. ‘A’ claims CENVAT credit on all the input services which includes

(i) Outsourced labour;

(ii) Banking services for issuing performance guarantee for the entire contract;

(iii) Office rent etc.

(iv) Commission for procurement of orders from prospective customers.

The department contends that since ‘A’ excludes the value of materials for the purpose of levy of service tax, the value of materials transferred in the execution of works contract is in the nature of ‘trading’ and hence there should be proportionate reversal of CENVAT credit on all the above input services, under rule 6(3) of the CENVAT Credit Rules, 2004, attributable to the trading.

It appears that the department considers the works contract not as a single contract of work and labour (involving a deemed sale) but as 2 transactions –

(i) sale of goods simpliciter and

(ii) labour.


Discuss tenability of the department’s stand?

[Reference material – (i) Rule 6 of CENVAT Credit Rules, 2004; (ii) ‘works contract’ section 65B(54)]

Case Study – 8ABC & Co has obtained a contract from PQR Limited. As per the contract terms, ABC & Co is required to provide detailed designs, fabricate, supply and install pipelines for transport of gas across 5 States. For the said purpose, the pipelines are provided free of cost by PQR Limited. Various other materials required for the said project is either imported by ABC & Co. or domestically procured.


a) Whether the value of the pipelines has to be added to calculate the service tax liability under Rule 2A of Service Tax (Determination of Value) Rules, 2006 (i) if the value of the service is identifiable? or (ii) if the value is not so identifiable?

b) How to determine the appropriate State where the sales tax should be discharged by ABC & Co.?

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CASE STUDIES

1. Mr Santhust a senior citizen owned a house and a piece of land adjoining the house near the city of Bhopal. Mr. Santhust agreed with ‘Arogya Pradanam’, a charitable trust to allow the trust to build a ayurvedic hospital on the land, without any rent on long-term lease basis. However, the Managing Committee of the Trust, appreciating the charity and also considering the fact that Mr. Santhust does not have any source of income for his living, decided to construct three residential houses instead of the existing house, two of which he could rent out and have income for his family living.

Service tax department would like to tax this activity as rental from immovable property and taking the lease rental value of the land in adjoining places has demanded service tax on such lease rentals computed. Alternatively, they would like to demand the tax on the lease rental received from the letting out of the two houses.

Whether valuation adopted by the department is correct? Where instead of constructing houses, if the Trust pays an amount of ` 25,000/- per month towards his expenses, what would be your answer.

2. Wholesale Retails Pvt. Ltd. is engaged in retail sales of consumer products. It has decided to open its online shopping segment. In order to make a big launch and marketing of its online sales wing, it entered into an arrangement with M/s AdMedia Network, a group/associate company, to organise a grand event to launch and also manage news coverage in television and other media. In terms of the arrangement, in consideration of the above services of organising the event and also managing the media coverage, M/s AdMedia was allowed by Wholesale Retails Pvt. Ltd. to display their advertisement on the prime location of the new website launched for online sale by them.

Statutory auditor of both the companies are insisting on accruing income and expenditure in the respective books and payment of service tax.

Is there any Service tax implications on Wholesale Retails Pvt. Ltd. and on M/s. AdMedia Network?

3. M/s. Swadist Caterers were engaged by Everest Group of Companies to supply and serve food for their annual employee conference. In terms of the agreement, Swadist shall have to provide services of preparation and serving food at the event along with supply of sweets and non-alcoholic beverage of one type. The goods for preparation of food, other than sweets and non-alcoholic items, would be supplied by another agency appointed by Everest.

The department has computed his service tax liability as below:

Case Studies in Valuation of Taxable Services (Including Bundled Services)

Adv. V. Raghuraman


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Service charges received from Everest 12,50,000

Add: Fair market value of goods supplied by other agency 60,00,000

Sub-Total 72,50,000

Less: Amount charged by other agency towards supply of such goods

50,00,000

Total 22,50,000

Value as per Rule 2C of valuation rules (60% of total value) 13,50,000

Whether the above computation is correct?

4. Chanakya Co-operative Bank Ltd., has 50 branches in the state of Rajasthan. Bank appointed ABJ & Associates, Chartered Accountants, for undertaking internal and revenue audit on quarterly basis. Fee is fixed based on the basis of the advances and deposits of each branch. Though the appointment letter specifies that it is the obligation of the Bank to provide lodging, conveyance and boarding charges, a consolidated amount of fee inclusive of the expenses is fixed.

ABJ raises bills in the following manner:

Fee as agreed XXXXXX

Less: Expenses towards travel, boarding, lodging and conveyance

xxxx

Fee towards services provided xxxxxx

Service tax @ 12.36% Xxx

Expenses at actual (bills enclosed) xxxx

Total XXXXXX

Whether the above practice is correct?

5. Urban Water Supply Board engages Cone Elevators to maintain lifts in its office building, on AMC basis. AMC includes servicing, maintenance and replacement of parts (specified parts). Consideration for the AMC for entire year is ` 24 lakhs which shall be billed and paid on monthly basis.

It is agreed that, the parts which are not covered within AMC shall either be procured by Board or same is chargeable separately if supplied by Cone. However, Cone would undertake the services of replacement of such parts also without any additional service charges. In one month Cone supplied such parts and charged VAT on such supplies.

Cone, adopted composition rate of 70% of the AMC value for 8 out of 12 months. However, for balance 4 months it paid service tax on actual basis as the value of goods used for AMC in such months was substantial.

Following issues were raised by the Service Tax audit party:

1. Service Tax shall be paid on all months under composition scheme

2. The value of supplies for which consideration is separately charged shall also be included for valuation of the AMC.


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How do you respond to the above audit issues?

6. Real Estates Pvt. Ltd. (REPL) owns a commercial complex having 20 rented out units. Rental agreement with each of the tenant specifies that it is the liability of the tenant to pay charges towards consumption of water and electricity to the supply authorities. However, since there is a single common meter installed by power and water distribution authorities, because of the revised policy of the Government, REPL has installed sub-meters at each unit to arrive at usage of the water and power by each unit. Based on such usage, the power and water charges are collected from each tenant and remitted to the authorities.

Apart from renting activity, REPL also supplies chilled water, at the option of tenant, for the purpose of running centralised air-conditioning in the units.

REPL collects and remits service tax only on the amount of rent collected and not on the amounts collected towards electricity, water and chilled water.

Department is insisting on including the above amounts also for the purpose of payment of service tax. Whether department is right in its view?

7. Global Photo Colour Labs, is engaged in providing photography services and are holders of service tax registration number AAAAA12345ST001. During the period prior to 1-7-2012, they have been deducting the cost of material sold (film or paper as the case may be) for discharging service tax liability under the Notification No. 12/2003-ST.

As the notification No. 12/2003-ST stands rescinded w.e.f., 1-7-2012, they want to know whether the value of material sold along with photography services (whether show separately or not in invoice) would be eligible for deduction from value of taxable service.

In the above scenario:—

a. Whether the value of material sold along with photography services would be liable to service tax w.e.f. 1-7-2012?

b. What is the position regarding deduction of material value during the period prior to 1-7-2012?

8. BLF Developers is engaged in construction of Villas. For a particular project, BLF has entered into ‘Joint Development Agreement’ with Mr. Balaji being the land owner wherein it is agreed as follows:

a. Land owner has granted the rights to BLF for development of land

b. BLF undertakes development of Villas on the land given by the land owner

c. BLF agrees to handover 40% of Villas to the land owner against the developmental rights granted.

Assuming that the land owner’s share of Villas constructed by BLF would be liable to service tax w.e.f. 1-7-2012, what is the valuation to be adopted for valuing the land owner’s share of Villas constructed?

9. ABC Constructions Pvt. Ltd., is engaged by T&L Cements Ltd. to construct a new factory and adjoining office premises Nature of arrangement is as below:—

a. ABC is engaged to construct the entire building by using the required materials


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b. However, T & L would supply Cement required for the purpose of construction of the factory at mutually agreed rates.

ABC adopted 70% of the value billed by them as goods in terms of the provisions of State VAT Act. On the balance 30%, service tax is paid.

Department is of the view that the service tax shall be paid on 40% of the value as determined below:

Value= Total value of contract+ market price of cement supplied by T&L- actual consideration charged for supply of cement

Which of the above methods is correct ? Whether both the above methods are incorrect?

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bombay chartered accountants’ society · adv. v. raghuraman papers for presentation landmark...

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