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TAX UPDATES SEPTEMBER ISSUE

Vol.5, Issue 4, September 2015 HSA(IDT)5(2015)4 sue _, J

HSA Advocates, a law firm based out of India, has a significant team of lawyers headed

by 19 Partners. Our principal offices are in New Delhi, Mumbai and Kolkata with a

presence in Bangalore.

HSA Advocates is a culmination of the shared visions of its Partners and brings together

the demonstrated strengths and leadership positions in diverse practice areas. HSA

Advocates is a full-service law firm engaged in providing legal services in its chosen

areas of practice. One amongst these areas is Indirect taxes. Our team of niche experts

in Indirect taxes brings to bear their significant experience in advising various large

clients on implications, optimization, planning and controversy. 015)_

HSA Advocates, a law firm based out of India, has a significant team of lawyers

headed by 16 Partners. Our principal offices are in New Delhi, Mumbai and

Kolkata with a presence in Bangalore.

HSA Advocates is a culmination of the shared visions of its Partners and brings

together the demonstrated strengths and leadership positions in diverse

practice areas. HSA Advocates is a full-service law firm engaged in providing

legal services in its chosen areas of practice. One amongst these areas is

AWARDS AND

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CONTRIBUTIONS

ANSHUL VERMA

ANKIT GULATI

RAMNATH PRABHU

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IN THIS ISSUE HIGHLIGHTS

INCOME TAX …………….………..3 - 5

CUSTOMS……………………………5 - 6

CENTRAL EXCISE ..............................6 - 8

SERVICE TAX…………….……….…8 - 10

VAT .......................................................10 - 13

GLOSSARY ……………………………13 - 14

No withholding on interest when money

borrowed through FCCB is used in

business or investment outside India

Mere provision of services to Indian

subsidiary, without imparting knowledge,

skills etc., would not amount to FTS -

Indo-Israel DTAA

Credit is available on cement used for

treatment of toxic effluent arising during the

manufacturing process

Expenses on advertisement on outdoor

hoarding and print media outside India is

not taxable in India Implementation of customized software

would amount to service and not sale

Turnkey contracts are indivisible contracts

even if the same is executed by the EPC

contractors by splitting the service and

supplies portion separately

Monthly updates on the developments in the field of taxation in India

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INCOME TAX Case laws

No withholding on interest when money

borrowed through FCCB is used in business or

investment outside India

Taxpayer borrowed money from non-residents by

issuing FCCB. The money borrowed was utilized by

the Taxpayer for the purpose of its business and

investment outside India. Taxpayer paid interest to

the non-resident in lieu of the debt raised. The

Taxpayer did not deduct TDS on the interest paid to

the non-resident on the ground that the said income

for excluded from the scope of deemed income as per

Section 9(1)(v) of the IT Act.

Department was of the view that since the Taxpayer

was a resident, therefore, the interest income on the

FCCB would deemed to have accrued in India and,

therefore, taxable in India. As a result, the Taxpayer

ought to have deducted TDS on interest paid to the

non-resident bond holders. On this basis, the

Department sought to hold Taxpayer in default and

proceeded to recover interest. Department contended

that the interest is deemed to have arisen in India by

virtue of Section 5(2)(b) and resort to Section 9(1)(v)

is not required to be taken.

The ITAT, Ahmedabad Bench held that Section

5(2)(b) should be read harmoniously with Section

9(1)(v) of the IT Act. Accordingly, the ITAT held

that Section 9(1)(v) carves out an exception in

respect of interest payable by a person who is

resident and the exception is this that where the

interest is payable in respect of his debt incurred and

the money borrowed outside India and was used for

the purposes of business carried on by such person

outside India or for the purposes of making

investment outside India. Accordingly, where the

interest is payable in respect of any debt incurred or

money borrowed and used for the purposes of a

business or investment outside India, then such

interest income cannot be said as even deemed to

accrue or arise in India.

The ITAT thus held that the Taxpayer was not liable

to deduct TDS in respect of the interest paid to the

non-resident borrowers.

Assistant Director of Income Tax vs. Adani

Enterprises; 2015 TII 151- ITAT-AHM- INTL

Withholding of tax only if an amount is owed to

the foreign entity, mere entry in books would not

be suffice to create withholding obligations

Taxpayer is a wholly owned subsidiary of TLME,

Sweden (“holding company”) and is engaged in the

business of installation and commissioning of

telecom projects and information technology

systems relating thereto. Taxpayer entered into an

agreement with the holding company for use of

TLME's Trademark 'Ericsson' and as per the said

agreement was obliged to pay royalty @1% of the

total sales to the holding company.

Taxpayer, accordingly, passed entry in its books of

accounts debiting the Royalty Account and crediting

the holding company’s account in the ledger.

Taxpayer did not deduct the withholding tax on the

above credited amount. However, subsequently, the

Taxpayer realized that owing the policy of the

Central Government, no royalty was payable to the

holding company. Accordingly, the Taxpayer

reversed the entries in its ledger.

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The AO thereafter passed an order holding the

Taxpayer had defaulted in deducting withholding on

the amount of royalty credited to the account of the

holding company. On appeal, the Tribunal reversed

the order of AO and the appellate authority and held

that there was no accrual of income on account of

royalty in the hands of holding company, which

resulted in an obligation on the part of the Taxpayer

to withhold tax.

Department challenged the above order before the

Delhi HC. The Hon’ble HC following the decision of

the Hon’ble SC in the case of GE India Technology

Centre Pvt. Ltd. held that the obligation of a person

to withhold tax in respect of payment made to non-

resident would arise only if the following conditions

are met:-

a) The payer owes a sum to the non-resident on

account of interest or any other sum chargeable

to tax under the Act; and

b) Such sum is acknowledged as a debt payable

by the payer to the non-resident/foreign

company by crediting the account of such non-

resident/foreign company or is paid to non-

resident/ foreign company.

The HC further held that mere passing of the book

entries, which are reversed, would not give rise to an

obligation to deduct withholding tax by the Taxpayer

as clearly, there is no debt that can be said to be

acknowledged by the Taxpayer. Accordingly,

imposition of an obligation to withhold tax in these

circumstances would amount to enforcing payments

from one person towards a tax liability of another,

even where the person does not does not

acknowledge that any sum is payable.

Director of Income Tax vs. Ericsson

Communications Ltd.; 2015-TII-62-HC-DEL-INTL

Mere provision of services to Indian subsidiary,

without imparting knowledge, skills etc., would

not amount to FTS - Indo-Israel DTAA

Taxpayer is a developer and provider of next

generation Operations Support Systems (OSS) to

large communications service providers. The

Taxpayer had incurred expenditure on behalf of its

100% subsidiary company, TTI-India on

reimbursable basis.

The AO treated the same as FTS and held that such

receipts were taxed on the receipt basis only and

relied on the Article 13 of the Indo-Israel Treaty.

On appeal, the CIT(A) held that the Taxpayer had not

'made available' of any Technical Services and thus,

held that the incurred expenditure did not constitute

as FTS.

On Department appeal, the ITAT held that the

Taxpayer merely rendered services without

imparting any knowledge, skills etc. to TTI-India,

therefore, the said services are not “make available”

in the nature and hence not fees for technical services

within the meaning of Article 13(3) of India-Israel

Tax Treat read with clause 2 of the protocol dated

29.01.1996.

ADIT (IT), Mumbai vs. M/s TTI-Team Telecom

International Ltd; 2015-TII-154-ITAT-MUM-INTL

Withholding not required in case of payment

made to non-resident if such payment is not

taxable in India

The Taxpayer is engaged in rendering financial

services. The Taxpayer had purchased certain shares

from M/s. Suzuki Motor Corporation, Japan

(“Japanese Company”) resulting in a capital loss to

the Japanese Company.

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The AO was of the view that the Taxpayer was

required to withhold tax under Section 195 of the

ITA Act in respect of the payment made to the

Japanese Company for purchase of shares.

The CIT(A) rejected the AO’s view and allowed the

Taxpayer’s appeal. On Department’s appeal, the

ITAT reversed the CIT (A) order and upheld the

view of the AO.

On appeal by the Taxpayer, the Madras HC held that

withholding tax under Section 195 of the IT Act in

respect of payment made to a non-resident would

arise only if such amount is subject tax in India. In

the present case, the Japanese Company had earned

a capital loss and consequently not taxable under the

Indian laws. Accordingly, the HC held that there is

no requirement for the Taxpayer to withhold tax.

The Madras HC followed the decision of the

Supreme Court in the case of GE India Technology

Centre P. Ltd. vs. Commissioner of Income Tax.

Anusha Investments Ltd. vs. The Income Tax Officer;

2015-TII-HC-MAD-INTL

CUSTOMS

Case laws

Import of BTS along with antenna is entitled to

concessional customs duty rate under Notification

No. 21/2002-Cus

Taxpayer imported ‘Base Transreceiver Station’

(BTS) and paid concessional customs duty of 5%

availing benefit of Notification no.21/2002

dt.01.08.2002 (Sl.No.239).

Department alleged that that the antenna and

installation cables imported along with BTS were not

covered under Serial No. 239 of Notification No.

21/2002 and hence dutiable at 10%.

The Tribunal set aside the Department’s contention

and upheld the concessional rate of duty.

On Department’s appeal, the Hon’ble SC held that,

BTS which is an electronic equipment, has to be put

together with Antenna apart from other components.

Thus, Antenna becomes an integral and inseparable

part of the BTS without which it cannot function.

That though the antenna is listed at sl.no.317 of

notification no.21/2002 and chargeable to duty at

10%, the same would be applicable only when the

antennas are imported independently and not cleared

as a part of BTS. The Taxpayer’s exemption claim

under sl.no.239 of Notification no.21/2002 was held

to be legal and proper.

Commissioner of Customs, Bangalore vs. Hutchisson

Essar; 2015-TIOL-210-SC-CUS

Customs duty payable only in respect of imports

actually received and not on the basis of the

quantity stipulated in the bill of lading.

The Taxpayer imported 144 consignment of crude oil

and paid customs duty only in respect of the quantity

received and cleared for home consumption.

Department alleged that out of 144 consignments, 71

consignments have escaped payment of full customs

duty. Accordingly, the Department computed the

differential duty on the basis of the quantity of crude

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oil mentioned in various bill of lading and not on the

actual quantity received in to the shore tanks in India.

The Commissioner passed an order confirming the

demand which was upheld by the Tribunal.

On appeal, the Hon’ble SC held that, the levy of

customs duty under Section 12 of the CA is only on

goods imported into India. Goods are said to be

imported into India when they are brought into India

from a place outside India. Unless such goods are

brought into India, the act of importation which

triggers the levy does not take place. If the goods are

pilfered after they are unloaded or lost or destroyed

at any time before clearance for home consumption

or deposit in a warehouse, the importer is not liable

to pay the duty leviable on such goods. The order of

the Tribunal was accordingly set-aside.

MRPL vs. Commissioner of Customs; 2015-TIOL-

199-SC-CUS

CVD on Imported goods not meant for retail sale

should be determined on the basis of the

transaction value.

Taxpayer was licensed by the Government to provide

Direct to Home (DTH) broadcasting services. In this

regard, the Taxpayer had imported the STB’s in

packages bearing the declaration: "Not meant for

retail sale, specially packed for the purpose of

serving DTH industries. STB shall remain property

of Bharti Telemedia Limited." Accordingly, no RSP

was declared on the STBs at any time, either at the

time of import or thereafter. Taxpayer paid CVD on

the basis of the transaction value as per Section 3(2)

of the CTA read with Section 4(1) of the CEA.

Department proposed to value the STBs as per

Section 4A of the CEA on RSP basis that STBs are

notified under Section 4A of the CEA.

On Appeal, the Tribunal held that the following two

conditions have to be cumulatively met for CVD to

be levied on the basis of RSP, namely:

Under LM Act it should be required to declare on

the package the RSP.

The imported goods must be specified in the

notification issued under Section 4A(1) of the

CEA.

The Tribunal observed that in the case of the

Taxpayer since the STBs were not meant for retail

sale therefore there is no requirement under the LM

Act to declare RSP on the STBs. Accordingly, it was

held that the Taxpayer is liable to pay CVD on the

basis of valuation as per Section 4 of the CEA.

Bharti Telemedia Ltd. vs. Commissioner of Customs;

2015-TIOL-1863-CESTAT-MUM

CENTRAL EXCISE

Case laws

Credit is available on cement used for treatment

of toxic effluent arising during the manufacturing

process.

Taxpayer is engaged in the manufacture of lead, zinc

and sulphuric acid. During the manufacture of these

products toxic effluent ‘Jarosite’ is generated. The

Taxpayer, as per the pollution control norms is

treating the said ‘Jarosite’ with cement and lime

before discharging the said treated effluent as

secured landfill. Taxpayer availed cenvat credit on

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the cement used for treating the effluent Jarosite

before dumping it in the landfill.

Department denied the credit alleging that cement is

used by the Taxpayer exclusively in the treatment of

effluent and it was not used in the manufacture of

final product and therefore the Taxpayer is not

entitled to take cenvat credit on cement.

On appeal the Tribunal held that the Taxpayer had

used cement for stabilization of hazardous waste

‘jarosite’ as toxic effluent at secured landfill which is

part and parcel of their manufacturing activity and

accordingly held that the Taxpayer has correctly

taken the credit.

Hindustan Zinc Ltd., vs. Commissioner of Central

Excise and Service Tax; 2015-TIOL-2075-CESTAT-

DEL

Duty paid by job worker is available to be

principal manufacturer

The Taxpayer provided plastic materials to a job

worker after availing credit but without payment of

duty. The job worker after completion of work raised

invoice for amount including excise duty. The duty

paid by the job worker was availed as credit by the

Taxpayer.

The Department contended that job worker was not

liable to pay duty and consequently, the credit was

wrongly availed by the Taxpayer. Further that the

credit was availed twice by the Taxpayer.

The HC observed that the Taxpayer did not avail

credit twice. That the Taxpayer availed credit at the

time when the goods were supplied and later of the

duty paid to the job worker. Since, the job worker

had collected it from the Taxpayer and paid it, what

the Taxpayer availed was only the duty that was paid

on account of mistake committed by the job worker.

CCE vs. Sundaram Auto Components Ltd.; 2015-

TIOL-2192-HC-MAD-CX

Credit on input services received by head office

allowed even if such office is not registered as ISD

The Taxpayer is engaged in the manufacturer of ball

bearing and has three units at Jaipur, Manesar and

Newai. The head office is located at Jaipur. The

Taxpayer availed certain input services on which

service tax was paid and invoices were raised by the

service providers in the name of the head office. The

Jaipur unit of the Taxpayer availed credit on all these

services.

The Department denied credit on the ground that the

head office is not registered as an ISD and therefore

is not entitled to take credit on the services which are

received at the other locations.

On appeal, the Tribunal relying upon the decision of

the Tribunal in the case of Demosha Chemicals Pvt.

Ltd. 2014-TIOL-534-CESTAT-AHM and Doshion

Ltd. 2013-TIOL-395-CESTAT-AHM held that in the

present case, credit cannot be denied in the absence

of registration of the Head Office as ISD.

National Engineering Industries Ltd. vs. CCE- ;

2015-TIOL-1976-CESTAT-DEL

Unutilized credit on conversion of DTA to 100%

EOU will not lapse.

The Taxpayer, a DTA unit was converted into a 100

per cent EOU. At the time of conversion from DTA

unit to 100 per cent EOU, the Taxpayer had

unutilized cenvat credit balance.

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The Department was of the view that the unutilized

credit would stand lapsed in view of Board Circular

No. 77/99- Cus dated 18.11.1999.

The Tribunal observed that Board Circular no.77/99-

Cus does not clarify the provision under which the

unutilized credit will stand lapsed. Further that the

said circular was issued under Rule 100H of Central

Excise Rules, 1944 and at that point of time 100 per

cent EOU were outside the scheme of

modvat/Cenvat Credit. However, this is not the case

after the Cenvat Credit Rules, 2004 have come into

existence. The order was accordingly set-aside.

Privi Organics Ltd. vs. CCE; 2015-TIOL-1859-

CESTAT-MUM

Past unpaid taxes of a Company pursuant to its

winding up cannot be recovered from the

purchaser of its assets

State Cement Corporation Limited (SCCL) suffered

heavy losses and the High Court passed order for its

winding up. The Official Liquidator issued an

advertisement in August, 2005 for sale of the cement

plant and other assets of the Corporation. The

Taxpayer’s bid for the same was accepted. The

central excise department issued notice contending

that Rs.15.97 crore was due from SCCL and since the

Taxpayer has purchased the running business of

SCCL, the said dues has to be cleared by the

Taxpayer.

The Taxpayer filed a writ petition before the

Allahabad High Court. The court held that the

Taxpayer had purchased only the assets of SCCL in

pursuance of the winding up order passed by the

High Court and had not taken over a running

business of the SCCL. Therefore, the past central

excise dues payable by the SCCL cannot be fastened

nor recovered from the Taxpayer.

Jaiprakash Associates Ltd. vs. UOI; 2015-TIOL-

2013-HC- ALL - CX

SERVICE TAX Case laws

Order confirming demand beyond the allegations

made in the SCN, not sustainable.

The Taxpayer is engaged in the activity of supplying

scaffolding on rental basis. The Department was of

the view that the said activity would amount to

rendering of service under ‘maintenance and repair

service (MRS)’

On appeal Commissioner (Appeals), held that for the

period 2004-05 to 15.05.2008 the activity of

supplying scaffold will not fall under the category of

MRS but confirmed the demand for the period

16.05.2008 to 31.03.2009 under the category of

“supply of tangible goods service (STGS)”.

On Appeal, the Tribunal observed that the notice was

issued to determine whether the services rendered

were classifiable under MRS. There was no proposal

for classification of the services under STGS.

Consequently, it was held that the Commissioner

(Appeals) has gone beyond the SCN and therefore

the demand is not sustainable.

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Metal Craft Enterprises vs CCE; 2015-TIOL- 2042-

CESTAT-MUM

No suppression can be alleged in case of demand

raised during the second audit for the same period

The Taxpayer is engaged in providing ‘installation

and commissioning of plant and equipment services’

and obtained registration in February 2005. During

audit, it was observed that for the period from

November 2004 to February 2005, Taxpayer had

charged service tax on invoices raised only to those

clients who agreed to pay service tax. Accordingly, a

SCN was issued in 2009 seeking recovery of service

tax on the taxable services provided by them during

the period 01.07.2003 to September 2005 along with

interest and penalties.

The adjudicating authority dropped the demand for

the period 1.7.2003 to 31.3.2004 on the ground of

limitation and confirmed the rest.

The Commissioner (Appeals) confirmed the lower

authorities order.

On appeal, the Tribunal held that the entire demand

is barred by limitation since the records of the

Taxpayer were audited in 2006 for the period from

01.04.2003 to 31.12.2006 and no objections were

raised. It was only after the second audit conducted

in 2008, the Department came to conclusion that

there was short payment of service tax. The second

audit party, doing the audit of same period or over

lapping period, cannot allege that Taxpayer has

misstated or suppressed the facts from the

department. The appeal of the Taxpayer was

accordingly allowed.

Trans Engineers India Pvt. Ltd. vs. Commissioner of

Central Excise; 2015-TIOL-1947-CESTAT- MUM

Refund of tax paid on cum duty basis is hit by the

bar of unjust enrichment

The Taxpayer is engaged in the activity of extraction

of iron ore. During the period from June 2005 to May

2007, the Taxpayer paid service tax wrongly under

the category of ‘Business Auxiliary Service (BAS)’

under pressure from the Department.

The Taxpayer later filed a refund claim, seeking

refund of the service tax wrongly paid.

The Department rejected the refund claim.

On appeal, the Commissioner (Appeals) agreed with

the Taxpayer on the question of non-taxability under

BAS but rejected the claim on the ground of unjust

enrichment.

On further appeal, the Tribunal held that though it

can be seen from the bills that the Taxpayer has not

charged any service tax separately but when the

department directed them to pay the service tax under

the category of BAS, the Taxpayer has discharged

the same considering the amount recovered from

their customers as cum-tax amount and worked out

the service tax liability. Therefore, the amount which

has been billed by the Taxpayer to their customers

and paid by their customers includes service tax

liability and the same has to be held as being passed

on to the customers. The appeal was accordingly

dismissed on the ground of unjust enrichment.

Hardesh Ores Pvt. Ltd. vs. Commissioner of Central

Excise; 2015-TIOL-1872-CESTAT- MUM

Expenses on advertisement on outdoor hoarding

and print media outside India is not taxable in

India

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The Taxpayer is an advertising agency registered

with the service tax department. They had

undertaken an advertisement campaign for Ministry

of Tourism, Govt. of India for campaign “India as

tourist destination” in print and electronic media and

outdoor holdings in London, New York and Paris

and discharged the service tax liability on the amount

of agency commission received from Govt. of India.

The Department was of the view that the Taxpayer is

also required to discharge service tax on the amount

of rent and expenses incurred in respect of hoardings

etc. under the category of “Advertising Agency

services” and accordingly issued a SCN.

The adjudicating authority confirmed the demand

made in the SCN.

On appeal, the Tribunal relying on the decision of

Cox and Kings; 2013-TIOL-1907-CESTAT-DEL

held that the media costs incurred by the Taxpayer

beyond the territorial waters of India is not includible

in the taxable value and not liable to service tax.

Grey Worldwide (India) Pvt. Ltd vs Commissioner of

Service Tax; 2015-TIOL-2057-CESTAT-MUM

VALUE ADDED TAX (VAT) Case laws

Diesel used in generators for producing electricity

used for running machinery is entitled to

concessional rate of tax under the UPTTA

Taxpayer is engaged in the manufacture of goods

notified under the UPTTA. Taxpayer uses diesel as

fuel in their generator sets for producing electricity

which was used to run the plant and machinery to

manufacture notified goods. As per Section 4-B(2) of

the UPTTA, manufacturers of notified goods were

entitled for concessional rate of tax on purchase of

goods used in the manufacture of such goods.

Accordingly, the Taxpayer was purchasing diesel on

concessional rate of tax.

The Department, however, rejected the Taxpayer’s

claim for concessional rate of tax on the ground

that—

i. the diesel is not a raw material used in the

manufacture of notified goods but is used in

generator sets for generating electricity

ii. electricity itself is a notified goods and therefore

diesel may be raw material to produce electricity

but is not a raw material for use in the

manufacture of the final product of the Petitioners

and

iii. the diesel oil has not been directly used in the

manufacture of the final product by the

Petitioners.

The Taxpayer challenged the above stand of the

Department by way of writ petition before the

Allahabad HC.

The HC on examining the scope of the expression

“for use in the manufacture of notified goods” held

that in order to run the plant and machinery, power is

essential which is produced by the generators.

Further, generator uses diesel to generate the power.

Thus, manufacture of notified goods is directly

dependent on the use of diesel oil in the generator

sets. The court accordingly held that the diesel oil

used in generator sets was eligible for concessional

rate of tax.

Shree Bhawani Paper Mills Ltd. vs. State of UP -

2015-VIL-396-ALH

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Implementation of customized software would

amount to service and not sale

Taxpayer is engaged in the business of development

and sale of information technology software.

Taxpayer developed a banking software solution

known as ‘finacle’, which was sold to the bank as

transfer of right to use and accordingly, the Taxpayer

discharged the appropriate VAT on such sales. Apart

from sale of the said software, the Taxpayer is also

engaged in assisting in installing and implementing

finacle in the existing IT systems of the Banks. The

agreement for this purpose was being separately

entered into by the Taxpayer with the banks. Further,

the banks had the option to buy finacle from the

Taxpayer but engaged services of third party to get

the software implemented.

In respect of the implementation services, the

Taxpayer was discharging service tax on the

consideration.

Department proposed to impose VAT on the

consideration for the implementation service on the

ground that implementation was integrally connected

to and is a value addition to finacle and hence would

form part of value / price of finacle.

The Karnataka HC on examining the agreements

entered by the Taxpayer with various customers held

that the packaged software i.e. finacle purchased

cannot be used by the banks and hence the

customization of the same is required to be done.

Taxpayer has the copyright not only in the packaged

software but also in the customized software and

what is transferred to the bank is only the transfer of

right to use the software which is deemed sales

exigible to VAT. After the installation of customized

software, for the activity of implementation separate

service contract is entered by the Taxpayer. The

terms of the agreement entered by the Taxpayer with

the banks makes it clear that it is not obligatory for

the bank/customer to have the service rendered only

by the Taxpayer as a part of contract of sale or a

condition of sale. It is also open to the customers to

have the implementation done by any other person.

Therefore, such implementation is a service and not

exigible to VAT. The impugned order levying VAT

on such implementation was set-aside.

Infosys Ltd. vs. DCCT; 2015-VIL-394-KAR

Input tax credit not available even on packing

material when the goods are stock transferred

and not sold

Taxpayer was engaged in the manufacture of soaps,

detergents etc., in the state of Uttarakhand. Taxpayer

used raw materials and packing materials within the

state and claimed ITC thereon. In respect of stock

transfer of certain manufactured products outside the

State, the Taxpayer claimed the benefit of ITC on

packing material.

Department issued notice to the Taxpayer alleging

that as per the proviso to section 6(3)(d) of the

Uttarakhand Value Added Tax Act, 2005 (Act) the

Taxpayer is not entitled to claim input tax credit on

packing materials used in the manufacture of goods

that were stock transferred to place out the state.

The Taxpayer contended that as per proviso to

section 6(3)(d) of the VAT law of the State, the

restriction on availment of input tax on stock transfer

of finished goods outside the State is only for raw

materials and not to packing materials.

The Uttarkhand HC held that as per section 6(3) (d)

input tax credit shall be allowed only on sale or re-

sale within the state or on interstate sale and

interstate sale does not include stock transfer.

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Therefore, input tax on packing materials used in the

packing of finished goods which are stock

transferred was held to be ineligible though the same

was not specifically provided under the proviso.

Hindustan Unilever Ltd. vs. State of Uttarakhand;

2015-VIL-418-UTR

Turnkey contracts are indivisible contracts even

if the same is executed by the EPC contractors by

splitting the service and supplies portion

separately

The Taxpayer is engaged in the execution of

Engineering, Procurement and Construction (EPC)

works contract on turnkey basis. The goods for use

in the turnkey projects were supplied by the

Taxpayer to the Owner as transit sales under section

6(2) and import sales under section 5(2) of the CST

Act and thereby claiming exemption from payment

of VAT. The same materials were supplied back by

the Owner to the Taxpayer on free issue basis for use

in the project. Separate agreements were entered by

the Taxpayer with the Owner, one for supply of

materials and other for erection.

The Commercial Tax department issued notice to the

Taxpayer alleging that the contracts entered by the

Taxpayer were composite contracts/indivisible

works contract even though they are styled as two

contracts i.e. supply and erection contracts.

The High court inter alia held as under:

Cross fall breach clause

The Court rejected the contentions of Taxpayer that

the supplies were made directly to the Owner by

vendors and that the goods were supplied back to

Taxpayer as free supplies for incorporation. The

Court held that one has to look into the substance of

the contract rather than the form. Thus, even if there

is free supplies of goods for incorporation, Taxpayer

is responsible for both supply and incorporation of

the supplies into the project. Hence, the contract

between the Owner and Taxpayer cannot be seen

separately as supplies and services but has to be

viewed as works contract

Section 6(2) of CST Act no applicable in turnkey

projects

For the purpose of transportation of supplies from the

Vendor, Taxpayer was adopting the following

procedure:

a) Taxpayer placed a purchased order on the

Vendor for the supplies;

b) During the movement of goods, Taxpayer

transferred the supplies in favour of the

Owner by transfer of documents

On the basis of the above, it was claimed that the

subsequent sale between Taxpayer and the Owner

was exempted under Section 6(2) of the CST.

The High Court rejected the above contentions and

held that as per the terms of the contract:

a) The agreement between Owner & Taxpayer for

supply of goods was already in existence; and

b) The transfer of title in the goods took place

only when the goods were incorporated in the

works / the plant being set up by the Taxpayer

Thus, in both the above scenario the transfer of

property did not occur during the movement of

goods from one State to another. Accordingly,

the exemption under of Rule 6(2) is not

applicable.

Benefit of interstate sale is available to Works

contract

The Department had contended that though the

supplies have been received from outside the State,

13 | P a g e

however, since the goods are being incorporated

inside the State of Andhra, therefore, the supplies

would be intra state sales as against interstate sale as

contended by the Taxpayer.

The High Court rejected the contention and held that

interstate sale is possible even in case of works

contract scenario. In the present case, the Court held

that the contract between the Owner and the

Taxpayer occasioned movement of goods from

outside the State of Andhra Pradesh into the State of

Andhra Pradesh and hence the sale would qualify as

interstate sale.

Hence, the contracts being works contract and

exigible to tax under CST Act.

M/s Larsen and Toubro vs. State of Andhra Pradesh;

2015-VIL-411-AP

GLOSSARY OF TERMS

AO Assessing Officer

CCR Cenvat Credit Rules, 2004

CEA Central Excise Act, 1944

CESTAT Customs, Central Excise and Service Tax Tribunal

CIT (A) Commissioner of Income Tax (Appeals)

CST Act Central Sales Tax Act, 1956

CTA Customs Tariff Act, 1975

CUS Customs

CVD Countervailing Duty

DCCT Director of Commercial Taxes

DTA Domestic Tariff Area

DTAA Double Taxation Avoidance Agreement

EOU Export Oriented Unit

FCCB Foreign Currency Convertible Bond

FTS Fees for Technical Services

HC High Court

INTL International

ISD Input Service Distributor

IT Act Income Tax Act, 1961

ITAT Income Tax Appellate Tribunal

LM Act Legal Metrology Act, 2009

Ltd. Limited

14 | P a g e

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