Critical Analysis of Declared Services

CA. Manindar Kakarla

MEANING & SCOPEService:- means any activity carried out by a

person for another for consideration, and includes a declared service. {U/s 65B(44)}

Declared Service:- declared as such under section 66E {U/s 65B(22)}

ContinuingSection 66E contains 9 services:

Renting of immovable property

Construction services

Temporary transfer of Intellectual property

Information Technology Services

Services of the passive nature

Temporary leasing or hiring of goods

Activities in relation to HP or IP.

Works contract services

Service portion involved in supply of food or drinks

ContinuingArticle 366(29A)

Service definition U/s 65B(44) also excludes these deemed sales.

such transfer, delivery or supply of any goods which is deemed to be sale within the meaning of clause (29A) of article 366 of the Constitution

RENTING OF IMMOVABLE PROPERTY SERVICE

ScopeRenting of Immovable Property (Section 65B(41)): renting means allowing, permitting or granting

access, entry, occupation, use or any such facility, with or without the transfer of possession or control

includes letting, leasing, licensing or other similar arrangements in respect of immovable property

Includes the following other services of previous regime

Mandap Keeper Services

Convention Services

Short Term Accomodation Services

Constitutional ValidityRENTING OF IMMOVABLE PROPERTY SERVICES:

Effective from 01.06.2007.

Struck down levy in Home Solutions Retail India Ltd vs. UOI, 2009 (237) E. L. T 0209 (Del):

Retrospectively amended to include renting also.

Upheld the retrospective amendment in M/s Home Solution Retail India Ltd & Others vs UOI and Ors, 2011 (21) S.T.R. 109 (Del.)

Presently pending before SC in Retailers Association of India vs. UOI 2012(26)STRJ96(SC) stay granted for 50% of the tax dues.

ContinuingMandap & Convention Services Upheld in TN Kalyana Mandapam Onrs Asso.Vs. UOI,

2006(3)STR260 (S.C.)

Service intended to be taxed need not be a service as per common understanding.

Residuary power cannot be questioned as long as there is no encroachment.

Short Term Accomodation Services: Struck down levy in Kerala Classified Hotels & Resorts

Asso. vs. UOI, 2013-TIOL-533-HC-Kerala-ST:

Relied on Godfrey Philips India Ltd vs. UOI, 2005-TIOL-10-SC-LT-CB.

Taxes on luxuries (entry 62) means the activity of indulgence or enjoyment but not luxury goods.

ValuationRefundable Deposits collected are not subject to

service tax.

Notional interest on such deposits not includible Magarpatta Township Dev & Const. Co.Ltd vs. CCE, 2014(33)STR53(Tri-Mumbai)

Reimbursements towards electricity, water charges are not includible in value. ICC Reality (India) P.Ltd. vsCCE, 2013 (32) S.T.R. 427 (Tri. - Mumbai)

Each co-owner is a separate assesse.

Abatement & ExemptionsBundled services involving food supply & renting of

function hall

Taxable value is 70% of total amount charged.

No CENVAT Credit on goods falling under Chapter 1to22. {Entry 4 of Notfn. 26/2012-ST dt.20.06.2012}

Accommodation services

Taxable value is 60% of the gross amount.

No CENVAT Credit on inputs and capital goods. {Entry 4 of Notfn. 26/2012-ST dt.20.06.2012}

Renting to educational institutions is exempt {Entry 9 of Notfn. 25/2012-ST dt.20.06.2012}

Exemption for taxes levied & collected by local bodies. {Notfn. 29/2012-ST}

RESTAURANT & CATERING SERVICES

Meaning & ScopeSection 66E(I):

service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity.

Description of services covered within its scope:

Outdoor Catering Services

Mandap Keeper Services along with food supply.

Restaurant Services

Constitutional ValidityClause (f) of Article 366(29A):a tax on the supply, by way of or as part of any

service or in any other manner whatsoever, of goods, being food or any other article for human

consumption or any drink (whether or not intoxicating),

where such supply or service, is for cash, deferred payment or other valuable consideration, and

such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and

a purchase of those goods by the person to whom such transfer, delivery or supply is made;

Continuing K. Damodaraswamy Naidu & Othrs vs. UOI, AIR

1999 SC 3909

Article 366(29)(f) permits the State to impose a tax on supply of food and drink.

It is not relevant that the supply is by way of a service or as part of a service.

Held VAT is payable on entire value.

Tamil Nadu Kalyana Mandapam Owners Association vs. UOI, 2004-TIOL-36-SC-ST :

Upheld the levy on catering services stating that Article 366(29A)(f) does not conceptually or otherwise includes the supply to services within the definition of sale and purchase of goods.

ContinuingLevy was struck down by Kerala Classified Hotels

and Resorts Association vs. UOI, 2013-TIOL-533-HC-Kerala-ST.

Two High Courts upheld the levy

Indian Hotels & Restaurant Association vs. UOI, 2014-TIOL-498-HC-MUM-ST

Hotel East Park vs. UOI, 2014-TIOL-758-HC-Chattigarh-ST

ValuationRule 2C of VALUATION Rules:

Supplies in a Restaurant Taxable value is 40% of total amount charged.

Supplies by Outdoor Caterer Taxable value 60% of total amount

No CENVAT Credit on goods classifiable under Chapter 1 to 22.

Issues for Consideration:

Rule 2C uses the word Restaurant alone Whether lounge, eating joints, canteens etc can take this abatement?

Is Rule 2C assessment mandatory?

Abatement & ExemptionsEntry 4 of Notification 26/2012-ST:

Bundled service involving supply of food & drinks along with renting of premises Taxable value of 70%

Condition: same as applicable to Rule 2C.

Catering services for students (Entry 9)

Services of Non-AC restaurants, eating joints, mess. (Entry 19)

Canteen maintained under Factories Act having AC facility.(Entry 19A)

Circular 173/8/2013-ST

TEMPORARY LEASING OR HIRING OF GOODS

Covers two entries of the Declared Services

Temporary transfer or permitting the use or enjoyment of any intellectual property right (clause c)

Transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods (clause f)

VAT/ST levy is mutually exclusive

Coverage:

BSNL VS. UOI, 2006(002) STR 161(SC):

1. There must be goods available for delivery;

2. There must be a consensus ad idem as to the identity of the goods;

3. The transferee should have a legal right to use the goods;

4. During the period of transfer, such legal right of transferee should be to the exclusion of even the transferor.

5. Having transferred the right to use the goods during the period of such transfer, the owner cannot again transfer the same rights to others

Transfer of right to use

GS Lamba & Sons vs State of Andhra Pradesh, 2012-TIOL-49-HC-AP-CT: Tax is on transfer of right to use goods but not on

delivery of goods.

Delivery of goods is not the essential condition but may be one of the elements of transaction.

Goods must be made available for effective use of transferee.

the effective or general control does not mean always physical control.

It means the right to decide the manner, method, modalities and time of use of goods.

The economic benefits of the asset flows to lessee only.

Continuing

Description of Transaction

Analysis to Determine the Nature of Transaction

Vehicle given on hire by a person to a company along with driver on payment of charges per month/mileage basis

Vehicle is under effective control of company. Cannot be used for any purpose other than

for lessee.

Hire charges collected by banks for the facility of bank lockers

May individually constitute a transaction of transfer of right to use,

But is part of a composite banking services provided by bank.

The substance is a bailment contract.

Some Examples on Right to Use

Description of Transaction Analysis to Determine the Nature of Transaction

Erection of pandals/shamiana on land building essentially involving supply of materials on rent

Such erection do not constitute transfer of effective control or possession.

The pandal is allowed only for specified purpose.

Lease of bus to a STC Complete control over the vehicle is transferred.

Transfer of shuttering material

Goods are completely dedicated for use by builders during the period of lease which is not on temporary basis.

Continuing

Why is the question of Constitutional Validity arose?:

Malabar Gold Pvt. Ltd vs. CTO, 2012-TIOL-1032-HC-KERALA-VAT.

License to use trademark under franchise agreement amounts to transfer of right to use.

Would not make any difference even if right to grant such licenses in other places is completely retained.

Principle of exclusivity of use is not applicable.

Reversed the single member decision Malabar Gold Pvt. Ltd vs. CTO, 2013-TIOL-512-HC-KERALA-ST .

Intellectual Property Rights

AGS Entertainment Pvt Ltd & otrs vs UOI, 2013-TIOL-521-HC-MAD-ST

Considered various film copyright models viz. Outright assignment, Lease, Percentage of share, Profit share.

Held that in all such transactions, as long as there is no complete relinquishment of rights, it is only a temporary transfer

Producer retains the right to transfer in other areas with respect to same rights and other rights everywhere.

Continuing

What about assignments in perpetuity Assigning a particular right globally

in perpetuity viz television rights, Internet rights

Vehemently argued that VAT is leviable.

Madras HC declined to express any view.

All conditions of BSNL case for transfer of right to use appears to be satisfied.

Bottom Line: Ambiguity rescued partly

Continuing

Copyrights in original literary, dramatic, musical, artistic works and cinematograph films are exempted. {Notfn 25/2012-ST}

Amended to exempt only copyrights in cinematograph films for exhibition in a cinema hall or cinema theatre. {Notfn 2/2013-ST}

Exemptions

Construction & Other Works Contract Services

Scope

Two entries covers the entire gamut of construction services.

Entry 66E(b):

construction of a complex, building, civil structure or a part thereof,

including a complex or building intended for sale to a buyer, wholly or partly,

except where the entire consideration is received after issuance of completion certificate by the competent authority.

Continuing

Entry 66E(h): Service portion in the execution of a works contract

Works Contract u/s 65B(44):

means a contract wherein transfer of property in goods involved in the execution of such contract

is leviable to tax as sale of goods and

such contract is for the purpose of carrying out

construction, erection, commissioning, installation,

completion, fitting out, repair, maintenance, renovation, alteration

of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property

Builder ServicesIn Magus Construction Pvt Ltd vs UOI,

2008(11)STR225(Gau.), held that no levy of Service Tax on builder constructing and selling a completed flats.

Deeming Fiction is brought w.e.f. 01.07.2010.

In the previous regime, deeming fiction is applicable to builder or any other authorised by him.

Now it is applicable for all persons.

Circular 151/2/2012-ST clarified that levy is effective from 01.07.2010

LCS City Makers Pvt Ltd vs. CST, 2012-TIOL-282-CESTAT-Mad

Constitutional Validity of Deeming FictionG S Promoters vs UOI, 2013-TIOL-813-HC-P&H-ST:

Petitioner argued that explanation widens the levy beyond the concept of service and amounts to levy on self service.

Held that measure of levy is different from character of levy.

Argument of Self Service rejected stating that levy is on service but not SP.

As long as there is no encroachment, Parliament power cannot be questioned.

Continuing

Maharashtra Chamber of Housing Industry vs. UOI, 2012(25)STR305(Bom):

Contended that amendment is beyond legislative competence & encroaches entry 49 of list II

Levy of ST for entering into AOS before completion certificate is for uniform application of law.

As long as there is no encroachment, Centre power is unquestionable.

What about entry 6 of List III Transfer of property other than agricultural land, registration of deeds and documents

Continuing

L&T Ltd vs UOI, 2013-TIOL-46-SC-CT-LB

Para 115:

It may, however, be clarified that activity of construction undertaken by the developer would be works contract only from the stage the developer enters into a contract with the flat purchaser. The value addition made to the goods transferred after the agreement is entered into with the flat purchaser can only be made chargeable to tax by the State Government.

Thinks to ponder

Both the cases stated that levy cannot be questioned as long as there no encroachment of State List.

Only entry 54 & entry 49 are alone tested.

But transaction involving transfer of property are covered by entry 6 of List III.

L& T case recognizes the concept of self service upto the date of agreement.

Valuation

Rule 2A(i) provides for regular valuation i.e. deducting the value of material from the GAC.

Wherever regular valuation is not possible, Rule 2A(ii) provides for valuation:

Original works: 40% of TAC

Works contract for maintenance, repair, reconditioning, restoration, servicing of any goods 70% of TAC.

Other works contracts 60% of TAC.

TAC is total of GAC + FMV of material & services supplied free of cost amount charged for such goods & services-VAT/CST

Continuing

Original Works means

all new constructions;

all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable.

erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise;

Exemptions Entry 12

Services provided to the Government or local authority by way of erection, construction, maintenance, repair, alteration, renovation or restoration of -a civil structure or any other

original works meant predominantly for a non-industrial or non-commercial use;

a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under Ancient Monuments and Archaeological Sites and Remains Act, 1958

a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment;

canal, dam or other irrigation works;pipeline, conduit or plant for (i) drinking

water supply (ii) water treatment (iii)sewerage treatment or disposal; or

a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to section 65 B(44) of the said Finance Act

Entry 13

Services provided by way of erection, construction, maintenance, repair, alteration, renovation or restoration of,-

road, bridge, tunnel, or terminal for road transportation for use by general public;

building owned by an entity registered under section 12 AA of the Income tax Act, 1961 and meant predominantly for religious use by general public;

pollution control or effluent treatment plant, except located as a part of a factory; or

electric crematorium;

Entry 14

Services by way of erection or construction of original works pertaining to,- airport, port or railways; single residential unit otherwise as a

part of a residential complex; low- cost houses up to a carpet area

of 60 square metres per house in a housing project approved by competent authority empowered under the Scheme of Affordable Housing in Partnership framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;

post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or

mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages;

Services of Passive Nature

Meaning and ScopeCovers activities of the nature of agreeing to

the obligation

to refrain from an act

to tolerate an act or situation.

to do an act.

May include the following

Non-Compete Fee

Liquidated damages

Forfeiture of shares, deposits

Demurrage charges

Booking cancellation charges

Continuing Activity carried out for consideration presupposes

contractual relationship.

The phrase activity carried out for consideration presupposes contractual relationship.

Agreements in restraint of trade

Void under section 27 of IC Act.

Exception is the restraint pursuant to sale of goodwill of such business.

Cancellation Charges Agreeing to the obligation to tolerate an act.

Continuing Forfeiture of Deposit when adjusted against

Outstanding consideration

Accidental damages not relatable to provision of service {Rule 6(2)(vi)}

Demurrage Charges includible as per Valuation Rules {6(1)(x)}

Liquidated Damages

Recognized as penal charges under Section 74 of IC Act.

Rule 6(1)(x) of Valuation Rules provides for inclusion of such charges relatable to provision of service.

THANK YOU

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Ph: 97-00-734-609

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Slide 1MEANING & SCOPEContinuingContinuingSlide 5ScopeConstitutional ValidityContinuingValuationAbatement & ExemptionsSlide 11Meaning & ScopeConstitutional ValidityContinuingContinuingValuationAbatement & ExemptionsSlide 18Coverage:Transfer of right to useContinuingSome Examples on Right to UseContinuingIntellectual Property RightsContinuingContinuingExemptionsSlide 28ScopeContinuingBuilder ServicesConstitutional Validity of Deeming FictionContinuingContinuingThinks to ponderValuationContinuingExemptions Entry 12Entry 13Entry 14Slide 41Meaning and ScopeContinuingContinuingTHANK YOU

email id: ;

Ph: 97-00-734-609