Indirect Taxes

Service Tax - Statute Update

Part I – Comprehensive Circulars on Technical and Procedural issues

On Technical Issues (Circular No. 96/6/2007-ST dtd. 23rd August, 2007)

The Government has undertaken a comprehensive review of all clarifications issued since the introduction of service tax, in various forms by different authorities. This was required due to changes made in the statutory provisions, judicial pronouncements etc. The Government had appointed T. R. Rustagi Committee to undertake the review after considering comments, views and suggestions from trade and industries. This Circular is based on the recommendation of T. R. Rustagi Committee.

The Circular supersedes all earlier circulars, clarifications and communications other than Orders issued under S. 37B of the Central Excise Act, 1944. With the issue of this Circular, all earlier clarifications issued on technical issues relating to service tax are withdrawn.

The Circular further states that the TRU letters explaining provisions containing in Finance Bills and Finance Acts at the time of introduction of new services from time to time, should be read in the relevant contexts.

For the purpose of this Circular, a Coding system is followed wherein unique three digit reference code is given to each of taxable services. Three digit codes are followed by a dot and a two digits code which indicate the issue clarified under the relevant taxable service. At the end of the codes, date of issue of clarification is given.

Other three digit codes are given as under :–

996 – Services provided from outside India and received in India

997 – Export of Services

998 – Valuation of taxable services

999 – Miscellaneous purposes

In this article, an attempt is made to bring out the difference in the clarification issued now and in the earlier circulars. Also the impact of this circular on account of such difference is discussed in the following chart :–

Category	Issue	Present Circular	Earlier Circular	Impact
Banking & Other Financial Services – Cash Management (Ref. Code 034.04/ 23-8-2007)	Whether Chit Funds are included in BFS	Chit Funds are divided in two parts a) Simple Chit Funds wherein no consideration is paid for service provided. And therefore, not liable to ST b) Business Chit Funds – Cash Management service is provided for a consideration and therefore liable to ST	(Cir. No. 41/4/2002 dtd. 15-3-2002) Chit Funds are exempt under BFS	Subscription is to be paid in regular instalments and the promoters/foreman charge fees for the service provided –Such Chit Funds are chargeable to ST. (The present circular reflect change in the law after inclusion of Cash Management Services in the Banking & Other Financial Services by the Finance Act, 2007 )
Authorized Service Station (Ref. Code 036.03/ dtd. 23-8-2007)	Whether spare parts sold by a Service station during the servicing of vehicle is liable to ST	ST is not leviable on transaction treated as sale of goods & subjected to levy of ST/ VAT. Any goods used in the course of providing service are to be treated as input and form part of value of taxable service Where spare parts are used in servicing vehicles, ST should be levied on the whole amount including value of such spare parts	In Cir. No. 58/8/2003 dtd. 20-6-2003 & Cir. No. 87/6/2006 dtd. 6-11-2006, it was provided that the cost of goods or material do not form part of the value to be subjected to ST, if evidence like sale invoice/bill shows that the goods were sold	The present Cir. recognize the value of goods or material unlike cost in earlier circular. Further, charge of VAT/ Sales Tax is additional evidence to regard as sale. Spare parts used for servicing the vehicles are not to be included, if they are available for sale, (in other words, not consumed during the process of providing service).
Execution of Works Contract (Ref. Code 097.01/ 23-8-2007)	Availment of CENVAT credit of duty paid on capital goods & ST paid on input services against option to pay @ 2% of the gross amount charged for Works Contract [Works Contract (Composition Scheme for Payment of ST) Rule, 2007]	There is no restriction under N.N.32/2007-ST dtd.22-5-2007 to take CENVAT Credit of duty paid on capital goods & ST paid on input services	————	Notification 32/2007 provided for non-availment of CENVAT credit of duty paid on inputs only, this is a clarificatory Circular in favour of the tax-payers
Misc. (Ref. Code 999.02/ 23-8-2007)	Taxability of various services provided by the Department of Post	a) Postal services provided exclusively by the Department of Post to meet the  universal postal obligations & Money Orders, Postal Orders, Pension payments, Postal Saving Accounts & such other services – not liable b) However, other services such as courier (Speed Post), insurance (Postal Life Insurance), Intermediary Services commission (distribution of mutual funds, bonds, passport applications, collection of telephone & electricity bills –  liable to tax	a) Cir. No. 354/59/2006-TRU dtd. 4-7-2006, b) there was no mention of liability on such services	Earlier circular only mentioned about exemption to Banking and related Financial services provided by the Postal Department but did not specify the liability in other services. The Government has now clarify that such other services performed by the postal department is chargeable to ST.
Misc.(Ref. Code 999.03 dtd. 23-8-2007)	Whether a sub- contractor liable to pay ST who undertake only a part of the whole work of the Principal Contractor	Though there was no specific circular as regards to liability of a sub-contractor the department through some of the circulars issued in relation to certain services like, Architect’s Service, Courier Service, CHA’s service, Consulting Engineer’s Service etc., had clarified that where the principal contractor has paid ST on the entire service rendered to the client including that of the work undertaken by the sub-contractor, there is no liability of the sub-contractor to pay the ST. Further, the sub-contractor rendered service to the principal contractor and not to the client. Also in the FAQ issued, the Department had reiterated this position	A sub-contractor is a taxable service provider and the service provided by the sub-contractor to the main service provider for completion of his work, does not take away the liability of sub-contractor with regards to payment of service tax. The service provided by a sub contractor is in the nature of input service & ST is leviable on any taxable service  provided by a person in his capacity as a sub-contractor, whether or not such service is used as input service. The fact that a taxable service is intended for use as an input service by another service provider does not alter the taxability of service provided	All sub-contractors are liable to pay service tax on any taxable service rendered to the principal contractor. The principal contractor may take Cenvat credit of service tax paid to the contractor if eligible input service under CCR. The Circular is silent about the situation wherein entire work is outsourced to the sub-contractor by the  principal contractor (as it merely refer to a part of work entrusted to the sub-contractor)

Note : The Circular is posted on the website of CTC for the benefit of readers.

In the line of comprehensive circular on technical issues, the Government has issued a consolidated circular on procedural issues.

The Circular supersedes all earlier circulars, clarifications and instructions issued on these subjects.

The salient features of this circular differentiating from various earlier pronouncements are discussed below :-

1. Registration

The circular in no uncertain terms, states that the registration certificate will be granted by the Department, in Form ST-2, within seven days of filing of the Application Form duly filled up. In case, registration certificate is not issued within seven days, registration is deemed to have been granted.

Often question arises to the assessee that what would be his registration number if the certificate is not received and the registration is deemed to have been granted. It has been clarified that the registration number, also known as Service Tax Code (STC) is a fifteen digit PAN based number. First ten digits of this number are the same as the PAN of such person, next two digits are "ST" followed by three digits which is serial number indicating the number of registration taken by the service tax-payer against a common PAN. Therefore, now, the tax-payer should not have any confusion about his registration number (STC code) even if the Registration Certificate is not received and he should continue his activity considering that he is already registered after seven days of lodgment of application form.

In case of any amendment to the Registration details, he may provide such details to the jurisdictional Superintendent in Form ST-1 indicating only the amendment/rectification required to be made along with a copy of original Registration Certificate. In case, changes relate to deletion of any premises, an intimation on plain paper along with copy of Registration Certificate will suffice.

The Circular explain Registration by different kind of persons, turnover limit for registration, Input Service Distributor’s Registration and Centralised Registration.

The Circular further clarify on, Payment of service tax, E-payment of service tax (mandatory or otherwise) Issuance of invoice/ bills/ challans, Consignment notes and other documents, Service tax return and E-filing of return, assessment (provisional), Delay in payment which attract interest and levy of penalty, Audit, Adjudication of cases with monetary limits (Jurisdiction of CEO), Appeal provisions, Revision of orders and any amount recovered by any person as service tax. In case of service tax demands for short payment or non-payment up to
Rs. 1,000/- , if the service provider pays within one month on default being pointed out, the penalty should be waived u/s. 80 of the Act. In case the amount involved is more than Rs.1,000/- penal action as prescribed
u/s. 76, 77 & 79 would be attracted.

It has been stated that appropriate late fees should be paid in case of late filing of return, at the time of filing such return without waiting for any communication or notice from the Department. However, non-payment of such late fees shall not be a ground for refusal in allowing filing of return.

It has been stated that the limitation period for initiating any action for demanding the non-payment or short payment of service tax would be computed from the date of filing of revised return.

The Circular attempt of clarify department’s view on controversial issues of Cenvat credit on Goods Transport by Road Service :

1. On the issue of whether a manufacturer or taxable service provider having credit balance in his account can utilize that credit for payment of service tax on goods transport by road, as a consignor or a consignee. It clarifies that the consignor or consignee is a person liable to pay service tax on goods transport agency, by way of a legal fiction. However, it can not be said that he has actually provided any taxable service and it is not an output service for such consignor or consignee. Therefore, the service tax payable by the consignor or consignee on transportation of goods by road can not be paid through credit accumulated by such consignor or consignee.

2. On the issue that whether a consignee can take credit of amount paid as service tax either by himself (as consignee or by consignor, or by GTA). It clarify that if the consignee is manufacturer of excisable goods or a provider of taxable service and the service is in nature of input service, service tax paid by any person either consignor or consignee or GTA would be eligible for utilizing the credit.

3. On the controversial issue of up to what stage a manufacturer/consignor can take credit on service tax paid on goods transport by road (arising from the language of Rule 2(l) of CCR, "outward transportation up to the place of removal or service used in relation to the clearance from the place of removal") after a discussion at great length, it clarify as follows:–

The credit of service tax paid would be allowed to a manufacturer/consignor on outward transportation of goods up to the place of removal and not beyond that.

To arrive at this conclusion, it takes help of the decision of Delhi Cestat in case of M/s. Gujarat Ambuja Cements Ltd vs. CCE Ludhiana [2007 (06) STR 0249] and M/s. Ultratech Cements Ltd. vs. CCE Bhavnagar [2007 TIOL 429] Cestat Ahmedabad.

It further states that in case of factory gate sale or sale from a warehouse or depot from where the goods are sold after clearance from the factory, the place of removal does not pose any problem and credit is admissible up to such place of removal. However, where it can establish that the sale and transfer of property in goods (in terms of definition u/s. 2 of CEA as also in terms of the provisions of Sale of Goods Act, 1930 occurred at such place, the credit of service tax paid on transportation up to the destination point of sale is allowed.

Writer’s Note

In this respect, it may be noted that the Bangalore Bench of Cestat has recently referred decision of Delhi Cestat in Gujarat Ambuja Cement’s case to a larger Bench (ref. India Cements Ltd. & Others, 2007-TIOL-1248) and the issue is not free from doubt as yet.

4. In case of mobile phone, the Circular states that the service tax paid is admissible as Cenvat credit provided the mobile phone is used for providing output service or manufacture of finished goods.

5. In relation to input service distributor which receive bills, invoice etc. of input service, the credit can be distributed to any unit of the manufacturer or any premise or office of taxable service provider.

Exemption to Residential Welfare Association (RWA)

The Government has issued Circular F.No. 137/68/2007-CX.4 dated 8-5-2007 to clarify the applicability of exemption Notification No. 8/2007-ST dated 1-3-2007 to RWA. Accordingly, it has been clarified that,

• The RWA, even if registered as co-operative society with Registrar of Co-operative Societies, is eligible to avail exemption

• The sole criterion for membership of the RWA is the residential status of the person in a residential complex or locality; i.e., the membership of the association should be restricted only to the residents of the complex or the locality.

• The value of total consideration received from an individual member by the association for providing the service should not exceed Rs. 3,000/- per month.

Note : RWA are covered under Club or Association Service.

It was expected that some clarifications would be given on chargeability of service tax on co-operative housing societies (CHS). However, the impugned circular raises more doubts, than clarifying the issues relating to CHS. It is obvious that all RWAs are not registered CHS.

Applicability of service tax on entry and exist load charged by the Mutual Fund

The Government has issued Circular No. 94/5/2007-ST dated 15-5-2007, clarifying as follows:

• Entry and exist load charged by an Asset Management Company (AMC) are not towards Funds Management Service but to meet the initial issue expense and other specified expenses incurred by the Mutual Fund and therefore not liable to service tax under the category of Fund Management Service

• The investment advisory fee (periodic recurring fees), in accordance with SEBI Regulations, charged by AMC to the mutual fund is chargeable to service tax under Fund Management Service.

• Service provided by the distributors, selling agents, brokers, custodians, trustees etc. to the mutual funds is taxable under respective taxable service such as Business Auxiliary Service, Stock Broking Service and Banking and Other Financial Services

Withdrawal of certain circulars

The Board has withdrawn 48 circulars/ instructions with immediate effect, based on Rustagi Report on review of service tax circulars as it is felt that they had lost the relevance due to change in law etc.

Some of the important circulars that have been withdrawn :–

Circular No./ F. No.	Date	Subject
38/1/2002-ST	7-2-2002	Audit of service tax assessees/records
56/5/2003-ST	25-4-2003	Non levy of service tax on export of services
57/6/2003-ST	20-5-2003	Irregular levy of service tax by the service providers @ 8% after budget; i.e., 1-3-2003 – regarding
65/14/2003-ST	5-11-2003	Payment of service tax in case of advance payment of value of services
70/19/2003-ST	17-12-2003	Clarification on the taxability of maintenance of computer software
354/106/2005-TRU	8-8-2005	Centralised registration

Many of the withdrawn circulars are unknown to trade and industry and also not available on CBEC website. It is therefore futile to give the list of all circulars that have been withdrawn. However, some of the important circulars that have been withdrawn are given above.