“Service Tax Law Simplified”- Session iv

Presents5th Knowledge Master Class

On

“Service Tax Law Simplified”

Conducted byDr. Sanjiv Agarwal

FCA, FCS

Wednesday,20th March, 2013Gurgaon © Dr. Sanjiv Agarwal

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Corporate Knowledge Foundation

SESSION – IV

Recent developments in Service Tax

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This Presentation Covers

Reimbursement of ExpensesRecovery of Tax


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Gross amount charged by the service provider for such services provided or to be provided (Section 67)

Service Tax (Determination of Value) Rules, 2006, Rule 5 – Inclusions in or exclusion from value of expenditure / costs Expenditure / costs incurred in course of providing

services – treated as consideration Expenditure / costs incurred as pure agent of

recipient of service – excluded conditionally RE arises where person paying is under no

obligation to pay and pays on behalf of other

Valuation of Services – Reimbursements

Only when service recipient is having obligation, (legal or contractual) to pay certain amount to any third party and such amount is paid by service provider on behalf of service recipient, question of RE arises [ Sri Bhagavathy Traders v. CCE (2011) 24 STR 290 Cestat-LB]

reimbursable charges incurred by assessee for travelling allowances to consulting engineers are not required to be included in the fees for services so paid by them for the purpose of Service Tax. But the Supreme Court did not held that Rule 5(1) is ultra vires the provisions of section 67 of the Finance Act, 1994 which provides for provisions on valuation of taxable services. [CCE & C, Rajkot v. Reliance Industries Ltd. (2012) 37 STT 359 (Supreme Court)]

Valuation of Services – Reimbursements

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Intercontinental Consultants and Technorats Pvt. Ltd. v U.O.I. 2012 (12)TMI 150 (Delhi HC- DB)

Earlier stayed (2008)12 STR 689 (Delhi) Petitioner providing consulting engineering services in respect of

highway projects to NHAI Receives payment not only for its service but also reimbursed (out of

pocket) expenses incurred on hotel, travel etc. Held not to pay service tax on reimbursed expenses Rule 5(1) of the Service Tax (Determination of Value) Rule, 2006 is

ultra vires the provisions of the Finance Act, 1994. Rule 5(1) is against the charging provision and has been struck down. Even if rules are laid before both the houses of the Parliament, such

an act cannot confer validity to the rules. Section 94(4) of the Finance Act, 1994 does not add any greater force

to the rules. They continue to be a piece of sub ordinate legislation.

Contd……….

Reimbursement of Expenses

Service Tax is levied at a particular rate (presently 12%) on the value of taxable services in terms of charging section.

Value of taxable service for levy of Service Tax has to be in consonance with the charging section.

Service Tax can be levied on the taxable service and nothing more or nothing less.

It is only the taxable service which needs to be evaluated for the purpose of valuation u/s 67 as it talks of ‘such service’.

Thus, value of taxable service shall be the gross amount charged by the service provider ‘for such service’. It has to be essentially for ‘such service’ and nothing else.

The charging section (erstwhile section 66) and valuation provisions (section 67) of the Finance Act, 1994 have to be read together and harmoniously.

If read in consonance, only the consideration paid as quid pro quo for the taxable service can be brought to charge of Service Tax.

Contd…..


The valuation rules, i.e., Service Tax (Determination of Value) Rules, 2006 are expressly made subject to the provisions of section 67(1) and as such, it cannot go beyond what is intended to be in section 67.

The common thread running through the provisions of section 66, 67 and 94 of the Finance Act, 1994 is manifest and leads to only conclusion that ‘only the services actually provided by the service provider can be valued and assessed to Service Tax’.

What has to be valued is only the output service and nothing else, i.e., not the input services or other expenses which go into rendering of such services.

If it is not held so, the rule 5(1) of valuation rule seeks to extract more as Service Tax than stipulated in section 67(1) by including in the value of service, the other costs and expenditure which are incurred by the service provider in the course of providing the taxable service.

What can be taxed as Service Tax is only the consideration which is further qualified by ‘for the taxable service’.


Recovery of any amount due to Central Government (Section 87)

Recovery proceedings by Central Excise Officer Deduct or require to deduct from any sum payable under Service

Tax / Excise / Customs Notice to other persons from whom money is due or who holds or

may hold money on account of such person to pay to the Department

Any contrary conditions for such recovery not to apply in case of banks / post offices/ insurers

Such person failing to do so shall be deemed to be assessee in default

Distrain any movable / immovable property and may cause sale of such property , if required

Recovery as arrears of land revenue through Collector.

Recovery Provisions

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CBEC Circular No. 967/1/2013 dated 1.1.2013 [based on Collector of Customs, Bombay v Krishna Sales Pvt. Ltd. (1993) 9 TMI 124(SC)]

Recovery proceedings to be initiated against a confirmed demand if–

Appeal to Commissioner (Appeal)No appeal is filed against OIO - after expiry of

60 days for filling appealAppeal filed without stay application – after

such an appeal has been filedAppeal filed with stay application– within 30

days from the day of appeal filed or if heard and no stay is granted , whichever is earlier

Recovery Proceedings

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Appeal to Tribunal No appeal is filed against OIO - after expiry of 90

days from OIO Appeal filed without stay application– after appeal

has been filed Appeal filed with stay application– within 30 days

from the date of appeal filed or if heard and no stay is granted , whichever is earlier

No appeal is filed against OIA confirming demand for first time - after expiry of 90 days from OIA

Appeal filed against OIA confirming demand for first time without stay application to CESTAT – immediately after appeal has been filed


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Appeal filed against OIA conforming demand for first time with stay application to CESTAT – with in 30 days from the day of appeal filed or if heard and no stay is granted , whichever is earlier

All cases where Commissioner (Appeals) confirms demand in OIO – Immediately on the issue of OIA

Tribunal or high court confirms the demand – immediately , if no stay is in operation


Earlier Judicial Pronouncements against Coercive Recovery B.G. Chitale (1992) 42 ECR 279 (Cestat) – Recovery cannot be pursued during

pendency of appeal.

Manu Udyog Pvt. Ltd. (1992) 43 ECR 689 and Indodan Industries (1992) 43 ECR 717 (Allahabad) - Recovery to be suspended during pendency of stay application.

Packwell Associates (1998) 98 ELT 601 (Karnataka) – Recovery proceedings to remain suspended pending final orders on stay applications.

Cascade Systems (2004) 165 ELT 400 (Karnataka) – Authorities not to resort to recovery proceedings for a period of one month from the date of adverse orders, should issue notice to initiate recovery proceedings within one month of the order so that the party is kept on guard for further steps and moving to appellate forums.

CC&CE, Ahmedabad v. Kumar Cotton Miles Pvt. Ltd. (2005) 180 ELT 434 (SC) – Assessee cannot be punished for matters which may be completely beyond their control. Assessee cannot be held liable for stay application not disposed off within specified time.

Recovery Provisions

Larsen & Toubro Ltd. v. Union of India & Others (2013) 29 STR 449 (Bombay) – Judgment dated 7.2.2013

Circular dated 1.1.2013 is arbitrary and violative of Article 14 of the Constitution of India.

If an assessee has done everything in his control by moving a stay application, it would not be justified if recovery proceedings are allowed to be initiated, where the appeal had remained pending for reasons not attributable to the assessee.

Initiation of recovery proceedings without allowing the assessee, the time which is otherwise allowed by law to file an appeal or apply for waiver of pre-deposit or for filing appeal before high court is not justified.

The Circular deprives the assessee of a remedy to move to appellate authority viz, Tribunal, High Court or Supreme Court against an order of adjudication.

Contd……

Circular on Recovery Proceedings Stayed / Quashed

It is not justified to commence recovery or demand immediately following an appellate order where limitation period for filing an appeal against such order has not expired.

It is not justified for the revenue authorities to argue that field offices do not have means to enquire / verify the status of stay applications.

MOF to ensure steps for recording of proceedings before all authorities in electronic form.

The only relief to the revenue authorities is that if the failure to dispose of the stay application is on account of assessee’s conduct or actions, revenue would be justified in commencing the recovery proceedings against the assessee.


Ultra Tech Cement Ltd. v. Union of India (2013) 29 taxmann.com 427 (AP) – Interim stay of recovery of amount till the appellate authority disposes application.

Bharat Hotels Ltd. v. Union of India (2013) 288 ELT 509 (Delhi) – Coercive measures to recover demand to be stayed till disposal of the appeal.

Texonic Instruments v. Union of India (2013) 288 ELT 510 (Karnataka) – Till disposal of stay application, department restrained from taking coercive measures to recover demand.

RSWM Ltd. v. Union of India (2013) 288 ELT 511 (Karnataka) - Appeal / stay application was pending for over 6 months; Recovery of dues by coercive means stayed.


Patel Engineering Ltd. (2013) TIOL – 150 (Mumbai) – Recovery proceedings stalled; directed to issue a Circular based on L & T judgment.

PML Industries Ltd. v. Union of India (P&H) – CBEC tax recovery circular is untenable, misconceived, wholly illegal and arbitrary.


Kautilya in Arthsasthra

“Just as fruits are gathered from a garden as often as they become ripe, so revenue shall be collected as often as it becomes ripe. Collection of revenue or of fruits, when unripe, shall never be carried on, lest their source may be injured, causing immense trouble.”

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ATTENTION

Dr. Sanjiv Agarwal

FCA, FCS, Jaipur

[email protected]

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Education

“Service Tax Law Simplified”- Session iv