Indirect Taxes

Service Tax - Statute Update

Rajkamal Shah
CA.

1. List of accounting records maintained by the assessee to be submitted by 31-1-2008

The Government has issued notification requiring the assessee to furnish to the Superintendent of Central Excise at the time of filing of return for the first time or 31st January, 2008, whichever is later, in duplicate, the following accounting records

• providing of any service, whether taxable or exempted;

• receipt or procurement of input services and payment for such input services;

• receipt, purchase, manufacture, storage, sale, or delivery, as the case may be, in regard of inputs and capital goods;

• other activities, such as manufacture and sale of goods, if any.

• all other financial records maintained by him in the normal course of business

Earlier, the assessee was required to furnish list of all accounts maintained by the assessee in relation to service tax including memoranda received from the branch offices under Rule 5(2) of Service Tax Rules, 2004. However, the rule did not mention any specific records. This rule is now being substituted.

For information, Rule 5(3) require the assessee to preserve the records mentioned in Rule 5(2) for a period of 5 years immediately after the relevant financial year.

Rule 5(4) earlier required the assessee to make available for inspection and examination by jurisdictional AC/ DC or the audit party, at all registered premises and at all reasonable time, the records as per Rule 5(2) and Rule 5(3). For the purpose of Rule 5(4), all premises from where a taxable service is provided was regarded as registered premises.

The said sub-rule 5(4) is now omitted and Rule 5A is inserted. Under the new dispensation, it is provided that an officer authorized by the Commissioner shall have access to any registered premises for the purpose of carrying out any scrutiny, verifications or checks as may be necessary to safeguard the interest of the revenue [Rule 5A (1), newly inserted]

Under Rule 5A(2) newly inserted, every assessee is obliged to make available such authorized officer or the audit party, within a reasonable time not exceeding 15 working days from the day such demand is made or any extended period allowed by such officer or the audit party. The records that may be scrutinized include such records as mentioned in substituted Rule 5(2) and also trial balance or balance sheet and income tax audit report u/s. 44AB of the Income tax Act.

(Notification No. 45/2007-ST dated 28-12-2007)

2. The CBEC has given clarification in relation to taxability of service provided by the law firms situated outside
   
   J & K under the category of ‘Business Support Service’ in respect of property located in J & K.

The Circular states that the services provided within the territorial limits of the State of J & K only are excluded from the purview of service tax. However, since the service provider as well as recipient of service situated outside the State of J & K, the service tax is applicable.

(F. No. 137/56/2007-CX.4 dated 16-11-2007)

Writer’s comment : The Circular is in reply to Letter F.No. IV (16) Hqrs/ Technical/ 720/ S.T. /06 dated 12-3-2007. The exact nature of query is not specified in the circular and therefore it is difficult to understand the content. However, it appears that what circular emphasis is that service tax is applicable, if the provider of service is within the taxable territory. This is apposite to the theory of ‘destination based service tax’ propounded by CBEC. Also in case of Import of Service rule (Service Provided From Outside India and Received in India, Rule 2007), the liability arises on receipt of service. In case of property based services in export and import rules, the liability is based on the location of the property and not on location of the service provider.

Further the clarification also give limit that the law firms are liable to tax under Business Support Service.

3. Valuation of Taxable Service — Inclusion on reimbursable expenditure

The Commissioner of Service Tax, Chennai, has issued Trade Notice stating that the following type of reimbursable expenses by the Custom House Agent do not satisfy the definition of Pure Agent under Rule 5(2) of the Service Tax Determination of Value Rule, 2006 as the CHA is utilizing these services for providing their output service. It further states that in some case, the CHA is collecting the extra amount over and above the expenditure and thus ceases to be Pure Agent.

1. Documentation Charges

2. Forms and Stamp Charges

3. Postage/Courier Charges

4. Fax Charges

5. Telephone Charges

6. Conveyance

7. Transportation Charges

8. Consolidation Charges

9. Palletization Charges

10. Container Weighment Charges

11. Fuel Surcharges

12. Security Charges

13. Stuffing Charges

14. Seal Fee Charges

15. B.L Charges

16. Washing Charges

17. Storage Charges

18. Trucking

19. X-Ray Charges

20. Empty Container Return Charges

21. Loading and Unloading Charges

22. Halting Charges

23. Shipment Expenses

24. Vehicle Parking Charges

25. Delivery Charges

26. Incidental Expenses

27. Steamer Agent Charges

28. LCL/FCL Charges

29. DO Charges

30. Customs Examination Charges

31. Fumigation Expenses

32. Survey Charges

33. Port Charges

34. Terminal Handling Charges

(C.No. III/10/1325/07-IA dated 7-12-2007)

Writer’s comment : From the conditions enumerated in Rule 5(2), it can be seen that whether a specific expenditure reimbursed would qualify for exemption depends on the facts and circumstance of each case and it can not be a blanket denial for a particular kind of expenditure. In particular, certain expense like shipment expense, steamer agent charges, LCL/FCL charges, DO charges, survey charges, port charges, terminal handling charges etc. may be held as qualifying for exemption under Pure Agent rule.

4. The Government is issued a Circular amending the Circular No. 96/7/2007 dtd. 23-8-2007 to incorporate the following clarifications :

1. Ref. Code No. 096.01/4-1-2008

Whether service tax paid on Commercial or Industrial Construction service or on Works Contract service used for construction of immovable property could be treated as input service for the Renting of Immovable Property Service (output service) under the Cenvat Credit Rules, 2004 ?
Clarification : The output namely, immovable property is not subjected to Central Excise Duty or service tax whereas the Commercial or Industrial Construction service or Works Contract service is an input service for construction of immovable property. Input credit of service tax can be taken only if the output is a service liable to service tax or goods liable to excise duty. Since immovable property is neither service nor goods, no input credit can be taken.

2. Ref. Code No. 097.02/4-1-2008

Whether excise duty paid on goods, subjected levy of VAT/Sales Tax under works contract service, can be taken as credit under the Cenvat Credit Rules, 2004?

Clarification : Value for the purpose of levy of service tax under Works Contract service does not include value pertaining to transfer of property in goods involved in the execution of works contract leviable to VAT/ Sales Tax. Works contract service provider is therefore not eligible to take credit of excise duty paid on such goods involved in the execution of works contract.

3. Ref. Code No. 097.03/4-1-2008 :

Whether the service provider who has paid services tax on erection, commissioning and installation or commercial or residential construction service for contracts entered into prior to 1-6-2007, can revise the classification to the works contract service and pay service tax for the amount received on or after 1-6-2007 under the Composition Scheme?

Clarification : The contract for the respective service is a single composite contract and part of the service tax liability corresponding to the payment received was discharged and balance amount of service tax is due to be paid on or after 1-6-2007 depending on the receipt of payment. Classification of taxable service is determined on the basis of nature of service provided whereas liability to pay service tax relates to receipt of consideration. Vivisection of a single composite service for classifying the same under two different taxable service depending upon the time of receipt of consideration is not legally sustainable.

In view of the above, the service provider who paid service tax prior to 1-6-2007 under above respective categories is not entitled to change the classification of single composite service for the purpose of payment of service tax on or after 1-6-2007 and is not entitled to avail the Composition Scheme.

(Circular No. 98/1/2008-ST dated 4-1-2008)

Writer’s comment : Legislature proposes, executive disposes (ek hath se le aur dusare hath se de) :

In respect of Ref. No. 096.01, if the analogy is to apply then construction service provided for construction of factory would not be eligible for Cenvat credit against excise duty payable on manufacture of goods. The rational applied by the Government runs directly opposite to the Rule 2(l) of the Cenvat Credit Rules, 2004, which inter alia state that “input service includes service used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, etc. etc.”

In respect of Ref No. 097.03, the vivisection of composite contract theory can be applied rather in a reverse manner and it can be argued that since the works contract in execution of which transfer of property in goods takes place and VAT/ Sales Tax paid on such goods, the said works contract can- not be classified under any service other than Works Contract service and since no vivisection is possible, the service tax paid earlier under respective services should be refundable and from 1-6-2007, the liability should arise under Works Contract service only.

5. FAQ issued by CBEC in November, 2007

The CBEC has issued a comprehensive FAQ (Frequently Asked Questions) on the questions of what is service tax, what is taxable service, procedural aspects, exemptions, penal provisions, Cenvat credit, export of service, import of service, Advance Ruling, Accounting Codes, Section of Central Excise applicable to service tax and abatement notification, etc. The document is voluminous and cannot be reproduced here for space constraint. The FAQ can be access from the website of CITC.