SRD Legal - TAX Update Issue 7 - 20151201

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TAX Update Newsletter on Indirect Taxes

GST Central Excise

Service Tax Customs

Foreign Trade

01st December, 2015 Issue 7

TAX Update – Issue 7, 01st December, 2015

2 SRD Legal, Advocates & Consultants

Dear Readers,

Greetings from Team SRD Legal.

GST is in the air. Last week Finance Minister

said that the government is ready with the

draft of laws and also with the computer

network. The fate of the Constitution

Amendment Bill now seems to hinge around

three demands of the Congress Party.

We are including a short news item on the

logic of the three demands.

Kindly mail your suggestions to

[email protected] to make this newsletter more

relevant and useful.

Raymond George Advocate

01st December, 2015

In this issue

New Drawback Rates, and amendment to procedure for fixation of brand rate

GST – Three demands of Congress Valuation – Premature payment of

deferred Sales Tax at NPV – no additional consideration

Compounded Levy – rules for interest & penalty are ultra vires

Abuse of process of court – Department files FIR in Police Station for non payment of Service Tax

Cenvat Credit – Event management is an input service for Advertisement Agency

Service Tax is not payable on Conducting Agreement if the profit/ loss belongs to the conductor.

Joint Venture does not tantamount to Franchisee Service

Customs - Assessee entitled to file appeal against order for provisional release of goods.

SEZ – When there is no duty on import of goods, duty cannot be levied by a Customs Notification on supply of goods from SEZ into DTA



Amendments & Circulars Revised All Industry Duty Drawback Rates Announced:

Government has revised All Industry Rates (AIR) of Duty Drawback with effect from 23.11.2015.Rates prescribed under notification 110/2015-Cus, dated 16/11/2015 may be referred henceforth.

Please also refer to circular no. 29/2015-Cus

Fixation of Brand Rates of Duty Drawback – Procedure modified:

Government has amended the “Customs, Central Excise and Service Tax Drawback Rules, 1995”. Among other

things, the procedure for fixation of brand rate has been modified.

Ref: CBEC Circular No. 29/2015-Cus, and Notification No. 109/2015 –Cus(N.T.), bothdated 16/11/2015

Export – Sealing of Bulk Cargo – Board prescribes a cumbersome procedure for seeking exemption from sealing – department allowed 51 days to process the application and grant permission.

Instead of resolving the problem, the board has complicated it. It was



represented to the Board that bulk cargo for e.g. coal, iron-ore, alumina Concentrate, heavy machinery etc. are difficult to seal in packages or container. In response, the Board amended the notification 42/2001-CE (NT). Now one has to seek waiver of sealing from the Principal Chief Commissioner or Chief Commissioner of Central Excise in a four step procedure:

i. Make application to CC/ Principal CC, (with copy to AC/ DC) giving details of bulk cargo to be exported with proper justification regarding difficulties faced in sealing of the cargo.

ii. AC/ DC will forward the application to Commissioner/ Principal Commissioner within 15 days with his comments with due verification as needed.

iii. Commissioner/ Principal Commissioner to CC/ Principal with his recommendation within three weeks.

iv. CC/ Principal CC shall grant or reject the request for waiver of sealing of bulk cargo in next fifteen days

Thus, if everything goes right, the exporter can expect a permission for waiver of sealing, within 51 days of the application. So much speed in the 21st Century!! We thought export was a national priority.

Ref: Notification 23/2015-CE (NT), dated 30/10/2015; and Circular 1011/18/2015-CX., dated 30/10/2015

GST – Three demands of the Congress Party

Now, there are three issues that are holding passage of the constitutional amendment bill. These are:

Firstly, that the provision empowing State Governments to levy 1% Additional Tax should be removed. This is logical. If compensating state governments is the only goal, then the bill already provides for compensation by Centre to States for five years. In fact, this 1% tax would add to compliance cost, it would create hurdle in free movement of the goods and would take away the basic charm of GST.

Secondly, Congress has demanded an independent Dispute Settlement Authority. Under the scheme of the present Bill the GST Council is to give various recommendations. However, if any dispute arises regarding non-compliance of the recommendation, resulting into loss of revenue, the dispute is also to be resolved by the same council. This appears unfair. No one should be appointed a judge of his own action or recommendation.

Thirdly, Congress wants a cap on rate of GST as 18%. Having a low rate would be wish of everyone. But incorporating a cap in the constitution itself does not appear to be feasible. The 18% rate cannot be logical for all goods. Moreover, the rate cannot always remain static. There would arise need to change it from time to time. If would become impossible and very slow process, if a change in rate requires Constitutional amendment.



Case Laws Central Excise C. Excise – Valuation – Sales Tax deferred under incentive scheme – Premature payment of Sales Tax at NPV – Difference between deferred sales tax and NPV is not includible in the assessable value

C. Excise duty is not payable on the amount of Sales Tax/ VAT actually paid/ payable in the transaction. In other words, for the purpose of calculation of ‘Transaction Value’ the amount of sales tax is deducted.

The Government of Maharashtra announced a sales tax incentive scheme known as “Package Scheme of Incentives 1993”. Under the scheme the assessees were entitled to charge and collect sales tax at the time of sale and were required to pay the same to the Sales Tax Authorities after a specified period of time (say from 11th to 15th year) in installments. The assessee availed the scheme. They did not include the sales tax amount in the assessable value for paying C. Excise duty.



Later, the Government of Maharashtra granted an option to prematurely pay the tax. The amount of tax to be paid pre-maturely was equal to the Net Present Value (NPV) of the deferred tax calculated as per a prescribed formula. On making payment of NPV, the deferred tax was deemed to have been paid. The amount of NPV was lesser that the originally deferred amount of sales tax.

The department was of the view that the assessees are eligible only to deduct the NPV amount from the selling price and thus the difference between the deferred sale tax payable and NPV paid would form part of the assessable value. Demands were raised and confirmed by the department.

The Hon’ble Tribunal did not agree with the department and observed that

a. The Board has consistently held a view that under the deferment scheme of sales tax, the sales tax is payable though after a long period of time and since the sales tax is payable, the same will stand excluded from the normal value or the transaction value.

b. Although by paying tax after such a long duration, the assessee gets financially benefited, the board has been of the view that interest earned cannot be added to the assessable value.

c. The fact that the said amount has been paid after the clearances of the goods and before the deferred date of payment, will not make

any difference. Further, the actual amount paid is equal to NPV (which is less than originally payable), cannot make the amount actually payable at the time and place of removal different, particularly when under Sales Tax Law such a payment is considered as deemed payment of the sales tax payable. Quantum of sales tax payable does not change in the above scheme of pre-payment.

d. There can be a view that since the retention period is very long say 10 to 15 years and the value of the money changes with time. It will be appropriate to consider net present value of the sales tax payable after say 10 to 15 years and consider that as the sales tax payable at the time of clearance. However, this is not the understanding of the Central Board of Excise and Customs. Moreover, no rules or any notification has been provided for computing a net present value or how to enforce such a scheme for purpose of excise duty.

CCE, Raigad vs. Uttam Galva Steels Ltd. & Others – 2015 – TIOL – 2242 – CESTAT - MUM

C. Excise - Compounded Levy – Interest & Penalty not leviable – Rules providing for interest and penalty are arbitrary, excessive and ultra vires of the Section 3A:



Normally, C. Exicse duty is levied in terms of Section 3 of the Act at rates specified in the tariff and in accordance with the scheme contained in the act and the rules. A separate scheme of ‘compounded levy’ was provided by Section 3A of the C. Excise Act, 1944 in respect of certain goods (Ingots & Billets, Hot Rolled Products, Textile Fabrics). Under the scheme, the duty was payable based on Annual Production Capacity.

Although, the Section 3A did not provide for recovery of any interest of penalty, the rules framed by the government contained such provisions. In the event of delay in payment of duty, these rules required payment of interest at various rates, as well as penalty equal to the duty. The amount of penalty was not dependent upon the extent of delay. Thus, if duty of Rs. One Crore had been delayed by even a single day, the amount of penalty imposable was Rs. One Crore. Same would be the position if the delay was of 100 days.

Hon'ble Supreme Court has held that since Section 3A which provides for a separate scheme for availing facilities under a compound levy scheme does not itself provide for the levying of interest, Rules 96 ZO, 96 ZP and 96 ZQ cannot do so. The court agreed with the judgment of Gujarat High Court reported in Krishna Processors v. Union of India, 2012 (280) ELT 186 (Guj.) which found these provisions to be arbitrary and excessive. Hon'ble court further observed that under Section 37(3), the statute itself provides in all cases where no other penalty is provided by the Act that

a penalty not exceeding Rs.5,000/- alone can be levied.

Hon'ble Supreme Court held that these provisions are violative of Article 14 (right to equality), 19(1)(g) (as being an unreasonable restriction on the right to carry on trade or business) and are ultra vires the Central Excise Act (which did not provide for such penalty).

Shri Bhagwati Steel Rolling Mills vs. CCE [2015 – TIOL -283 – SC – CX]



SERVICE TAXAbuse of process of Court – FIR in Police Station for non-payment of Service Tax

Section 406 of the Indian Penal Code says

“Whoever commits criminal breach of trust shall be punished with imprisonment of either description for a term which may extend to three years, or with fine, or with both.”

It was alleged that the assessee had failed to pay service tax of Rs. 1,05,705/-. The department registered an FIR at Police Station under above section 406 of IPC. The assessee paid the tax and approached High Court for quashing the FIR.

Hon'ble High Court quashed the FIR holding that the Finance Act of 1994 dealing with Service Tax was a special and complete Code in itself,wherein even the procedure for penalty has been provided. Therefore, registration of the FIR was nothing but abuse of process of Court.

Ajay Kumar Sandhu Vs State of Haryana – 2015 – TIOL – 2564 – P&H – ST

Cenvat Credit – Assessee used Event Management Service for providing Advertisement Service – Credit available

In general, an activity is considered ‘input service’ only if it is used to provide the output service (although the definition includes and excludes certain



specific services/activities). A service provider is required to be registered for his ‘output service’ and not for the ‘input service’.

The appellant in the present case, is an Advertising Agency. It obtained services of ‘event management’ concerns. The event management concerns conduct event likes shows, exhibitions etc. for displaying, exhibiting various consumer goods. The venue, stage, space for display and exhibition isarranged by these event management concerns. The appellant obtains spaces for advertisement in such shows, exhibition's etc by availing the service of event management concerns.

Department sought to deny credit of the service tax paid on event management service on the ground that it is not related to their output service; that event management services are not essential for earning commission from print media; that the assessee is not registered under the category ‘event management’

The Hon'ble Tribunal found that the advertising activity of the appellant is not confined to print media alone. The appellant as an advertising agency procure spaces fit for advertisement through the event management concerns. The service of advertising agency includes exhibition, display etc.

Hon'ble Tribunal also held that, the denial of credit on the ground that they are not registered for event management services is not tenable.

Shakun Advertising Agency Pvt. Ltd. vs. CCE & ST, Jaipur – I [2015 – TIOL – 2515 – CESTAT – DEL]

Service Tax – Business Support Service – Conducting agreement – When the assessee is responsible for its profit & loss and is paying a fixed sum to the owner of the factory & infrastructure, it cannot be said that the assessee is providing any service to the factory owner.

M/s. Kolhapur Sugar Mills Ltd. (KSM) have a factory for manufacture of liquor. M/s. Karan Agencies (KA) entered into a contract with them for manufacturing and sale of liquor in the name of M/s. KSM in the said factory of KSM. The plant and machinery is owned by M/s. KSM, who allowed KA to use the entire infrastructure for a consideration of Rs.30 lacs per annum.

The twist in the tale was that KA did not conduct business in its own name, but in the name of KSM. The sales and recovery of the sale proceeds were made in the name of M/s. KSM. The books of account were maintained in the name of M/s. KSM and sale proceeds were also credited to the account of M/s. KSM. At the end of each financial year, after settlement of accounts, the balance in Profit and Loss Account was paid by M/s. KSM to the Respondent after retaining an amount of Rs.30 lacs being the consideration agreed against use of infrastructure. This amount is termed as "conducting charges" in the books of account. KSM is paying service tax on



this amount under the category ‘Franchisee Service’.

Thus, effectively, KSM received Rs. 30 lakh per year and the remaining profit went to KA. The department wanted to levy tax on this profit, alleging that KA provided ‘Business Support Service’ to KSM.

Tribunal had decided the matter in favour of the assessee holding that there is no evidence on record to show that they had received any amount from KSM for providing any service.

Hence the department was before High Court which agreed with the Tribunal’s finding and observed that:

The Assessee is therefore responsible for any profits being generated or losses sustained. The nature of the transaction therefore would not fall within the meaning of support services for business or commerce.

CCE & ST, Kolhapur vs. Karan Agencies – 2015-TIOL- 2693-HC-MUM-ST

Service Tax – Royalty for Use of Logo – Joint Venture does not tantamount to providing franchisee service

The Aurangabad Municipal Corporation entered into an agreement of joint venture with M/s Akola Pravasi & Malvahatuk Sahakari Sanstha Maryadit, Aurangabad (APMSS) to run buses in Aurangabad city. The buses

were run by APMSS. A logo ‘AMT’ was used on the buses. The Municipal Corporation received a royalty.

The department held that the Municipal Corporation provided ‘Franchisee Service’ to APMSS and they were required to pay Service Tax on the royalty received.

On going through the terms of the contract, the Hon'ble Tribunal held:

We find that it clear reflects to a joint venture to run buses in the city. Even the logo is to be decided by both parties. There is no relationship of franchisor and franchisee. We did not find any representational right having been granted by appellant to APMSS to provide any service identified with the franchisor.

CCE, Aurangabad vs. M/S Aurangabad Municipal Corporation [2015-TIOL-2514-CESTAT-MUM]



CUSTOMSCustoms - Provisional Release – Appeal lies before Tribunal - Department is incorrect in asserting that Tribunal has no power to deal with appeal against order of Commissioner:

Certain violations under Customs Law lead to confiscation of goods. When the Customs Officers book a case, they initially seize the goods. Later, through adjudication proceedings it is decided whether the goods are to be confiscated or not. The adjudication and appeal proceeding may take several years. What happens to the goods meanwhile?

There is a provision (Section 110A) which allows for provisional release of

these goods pending adjudication. It reads as under:

Section 10A: Provisional release of goods, documents and things seized pending adjudication - Any goods, documents or things seized under Section 110, may, pending the order of the adjudicating authority, be released to the owner on taking a bond from him in the proper form with such security and conditions as the adjudicating authority may require.

What happens if the authority demands an unreasonably high amount of security



or imposes very unreasonable conditions for provisional release? Can the assessee file appeal before Tribunal? The department was of the view that the order under Section 110A was administrative or interim in nature and no appeal can be filed against the same.

When this question came up before the Tribunal, there emerged disagreement between two benches. Therefore, a five member bench was constituted. All the five members unanimously held that the order is not administrative or interim in nature and an appeal lies before this Tribunal against an order passed by Commissioner of Customs under Section 110A of the Customs Act, 1962 for provisional release of the goods.

M/s Gaurav Pharma Ltd v/s. CCE & ST, Rohtak, Delhi [2015-TIOL-2541-CESTAT-DEL-LB]

Supply of goods from SEZ into DTA – Duty is imposed under SEZ as equal to Customs Duty – When no customs duty is payable on goods imported into India, no duty would be payable on similar goods transferred from SEZ to DTA

Electrical Energy is ‘goods’ classified under Tariff Item 2716 0000 and is subject to Customs Duty on import. Customs Duty is levied vide section 12 of the Customs Act, 1962 on ‘goods imported into India’ and section 25

empowers the Central Government to grant exemption from the duty levied under section 12 by issuing notification.

Customs Act does not impose any duty on the goods removed from an SEZ into DTA (because it is not import of goods into India). But Section 30 of SEZ Act, 2005 requires payment of customs duties on such supplies. Thus, although removals from SEZ into DTA is not ‘import’, the treatment to such supplies is given as if it were an import and Customs Duty is accordingly levied.

The C. Government issued a notification (25/2010-Cus) wholly exempting import of electrical energy. However, the notification contained a proviso to the effect that it won’t apply to electrical energy removed from SEZ into DTA or into non-processing zone of the SEZ, thus creating a disparity between actual import and supply from SEZ. The Customs notification amounted to levy of customs duty on electricity supplied from SEZ into DTA. In fact, the government also made a retrospective amendment to notification 21/2002-Cus levying this duty w.e.f. 26/06/2009.

The assessee M/s. Adani Power Ltd. approached Hon'ble High Court of Gujarat challenging the notification. In a detailed order, the High Court quashed the proviso to the said notification holding it ultra vires Article 14 (right to equality) and 265 (no tax without authority of law) of the Constitution. The said judgment was published at [2015-TIOL-2673-HC-AHM-CUS].



Hon'ble High Court held that levy of duty on the goods transferred from SEZ to DTA is not under Customs Act. A notification issued under Customs Act can exempt only the duties that are levied under Customs Act. The duty on DTA supplies from SEZ has been imposed under Sec 30 of SEZ Act and that duty is equal to the Customs duty on import of such goods. When no customs duty is payable on Electrical energy imported into India, no duty would be payable on similar goods transferred from SEZ to DTA in view of Section 30 read with Section 51 of the SEZ Act. Duty on SEZ supplies cannot be levied vide a Customs notification.

Hon'ble High court also noted that the duty levied vide the notification creates a disparity between Mega Power Projects situated in DTA and those situated in SEZ. While both are exempted from payment of duty on Capital Goods and both are required to pay duty on raw materials, in case of SEZ supplies, the duty on electricity supplied would become an extra burden.

High Court also held that a tax cannot be levied with retrospective effect. Hon'ble Court held “any amendment which seeks to levy tax or custom duty for the first time can only be prospective as it amounts to substantive law. Such law cannot be retrospective”.

Accordingly, the proviso to notification 25/2010-Cus as well as the retrospective amendment to notification 21/2002-Cus was quashed.

Now, the department’s Special Leave Petition has been dismissed by the Supreme Court by order dated 20th November, 2015.

Union of India vs. Adani Power Ltd. [2015-TIOL-281-SC-CUS-LB]



About SRD LEGAL:

SRD LEGAL was established in 2007 by Sanjay Dwivedi, Advocate and has grown into a team headed by four Advocates. The firm handles litigations on C. Excise, Service Tax & Customs matters up to High Court. It also renders legal advisory services.

Contact: 512, Business Park, Citi of Joy, J. S. D. Road, Mulund (West), Mumbai - 400 080.

Tel. : +91-22-25 6565 47/ 48 +91- 9004825702/ 8767661950 Fax : +91-22-25 6565 49 e-mail: [email protected]

Team SRD Legal Mr. Sanjay Dwivedi, Advocate – 9320456555 Mr. ManojKasale, Advocate – 96190 29095 Mr. Raymond George, Advocate – 98204 80597 Mrs. Savita Dwivedi, Advocate – 9987370673

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The information contained in this publication is intended for informational purposes only and does not constitute legal opinion or advice. The views & information contained herein are of general nature and are not intended to address the circumstances of any particular person or entity. The contents are not comprehensive or sufficient for taking decisions. Please do not act on the information/ views provided in this newsletter without obtaining professional advice after a thorough examination of the facts and circumstances of a particular situation. There can be no assurance that the judicial/quasi judicial authorities may not take a position contrary to the views mentioned herein. Although we endeavour to provide accurate and timely information, there is no assurance or guarantee in this regard.

SRD LEGAL neither accepts nor assumes any responsibility or liability arising from any decision or action taken or to be taken or refrained to be taken, by anyone on the basis of this publication.

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SRD Legal - TAX Update Issue 7 - 20151201