22nd June to 24th June, 2012

6th Residential Study Course on Service Tax & VAT

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22nd June to 24th June, 2012

Bombay Chartered Accountants’ Society


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Managing Committee 2011-12

Indirect Taxes & Allied Laws Committee

President Pradip K. Thanawala

Vice-President Deepak R. Shah

Hon. Jt. Secretary Nitin P. Shingala Chetan M. Shah

Treasurer Raman H. Jokhakar

MembersBharatkumar K. Oza Harish N. Motiwalla Himanshu V. Vasa Jayesh M. Gandhi

Krishna Kumar Jhunjhunwala Manish P. Sampat Mayur B. Nayak

Mukesh G. Trivedi Nandita P. Parekh Narayan K. Varma Narayan R. Pasari

Naushad A. Panjwani Saurabh P. Shah

Sonalee A. Godbole Sunil B. Gabhawalla

Surin S. Kapadia

ChairmanGovind G. Goyal

Ex-officioPradip K. Thanawala

Deepak R. Shah

ConvenorsSunil B. Gabhawalla Suhas S. Paranjpe

Toral N. Mehta

MembersA. R. Krishnan Ashit K. Shah Bakul B. Mody

Bharat M. Shemlani Bhavna G. Doshi

Chandrakant B. Thakar Hasmukh H. Kamdar

Janak K. Vaghani Kanu S. Chokshi

Manish R. Chokshi Manish S. Patel Naresh K. Sheth

Naushad A. Panjwani Parind A. Mehta

Pranay H. Marfatia Puloma D. Dalal Rajiv J. Luthia

Rajkamal R. Shah Raman H. Jokhakar

Ravi A. Shah Ritesh M. Mehta Sagar N. Shah

Samir L. Kapadia Santosh M. Jain

Surendra S. Gupta Tushar K. Doctor Uday V. Sathaye Udayan Choksi



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Message

We have great pleasure to welcome you to the 6th Residential Study Course on Service Tax & VAT, being organized by Indirect Taxes and Allied Laws Committee of Bombay Chartered Accountants’ Society, from 22nd June to 24th June 2012 at Rio Resort, Arpora, Goa.

This paper book, being presented to you, contains five well researched papers contributed by eminent faculty. We are thankful to our paper writers for kindly accepting our invitation and taking time to share their knowledge and experience.

We wish to acknowledge the efforts put in by Convenors and Members of Indirect Taxes and Allied Laws Committee who have made this course possible and of course, you, the participants for joining this course to make it so successful. We are confident that this study course will be an enriching and fulfilling experience.

While every effort has been made to take care of the smallest of details, we would be happy to receive your feedback and suggestions for improvements so that future courses can be still better.

Pradip K. Thanawala Govind G. Goyal President Chairman Indirect Taxes & Allied Laws Committee

Mumbai

18th June 2012


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BCAS at your serviceA voluntary organisation established on 6th July 1949, BCAS has more than 8,600 members from all over the country at present and is a principle-centred and learning-oriented organisation promoting quality service and excellence in the profession of Chartered Accountancy and is a catalyst for bringing out better and more effective Government policies & laws and for clean & efficient administration and governance.

The diverse activities of BCAS include:

BCA Journal: The Bombay Chartered Accountant Journal (BCAJ) is a publication with a track record of over 40 years and is considered as an outstanding publication by tax and accounting professionals in practice or in industry. It includes analytical articles and updates on the subjects such as Direct Tax, Indirect Tax, International Tax, Accounting and Auditing and Information Technology.

BCAS Web TV (www.bcasonline.tv): BCAS Web TV is a new initiative of BCAS based on the Internet Video Streaming Service where you can see video or hear audio recordings of select events conducted by BCAS on your computer or on your internet enabled mobile device.

Publications: Every year BCAS publishes Referencer along with a CD which is an indispensable tool for professionals as well as those in the industry. We also publish books on varied topics of professional interest such as Audit Check-list, TDS, Fraud, Transfer Pricing, FEMA, Laws & Business and Charitable Trust.

Representations: BCAS makes representations to various authorities on different laws as well as on procedural issues, with a view to making them just and friendly to the general public. The representations include pre and post budget memoranda to the Ministry of Finance, Government of India, Ministry of Company Affairs, and Central Board of Direct Taxes among others.

Educational Activities: BCAS conducts various educational activities such as seminars, workshops, residential refresher courses, study circles, lecture meetings, distant learning programs on Service tax and TDS.

Free Advisory Clinics: BCAS conducts following free clinics: Accounts & Audit Clinic, Charitable Trust Clinic and RTI Clinic to help the members & non-members in respective areas. Eminent experts provide free advice at these clinics on pre-fixed days.

BCAS Website: The website of BCAS viz. www.bcasonline.org, apart from giving the latest news, circulars and notifications relevant for professionals, also serves as a “Knowledge Portal”, and is an excellent source of information.

Please visit us at our Cyber Addresses, and share your views with us:

Linkedin : http://in.linkedin.com/in/bcasglobal

Twitter : http://twitter.com/bcasglobal

Facebook Group : globalcharteredaccountants

Our blog : http://globalcharteredaccountants.wordpress.com

Our website : www.bcasonline.org

BCAS Web TV : www.bcasonline.tv

We hope to interact with you more often, as we are truly, just a click away!!


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Group Leaders

Subjects & Paper Writers

(1) Negative List based Taxation of Services- Concept, Definitions, Exclusions, Exemptions and

Valuation(2) Case Studies in POT

Sale versus Service - Overlap of VAT and Service Tax

Indirect Tax issues in Real Estate Industry - Case

Studies

(1) CA Sunil Gabhawalla(2) CA A. R. Krishnan

Adv. P. K. Sahu Adv. K. Vaitheeswaran

A Ashit K. Shah Deepak H. Thakkar Girish Raman

B Naresh K. Sheth Janak K. Vaghani Manish Gadia

C Nilesh V. Suchak Rajat B. Talati Narendrakumar G. Soni

D Rajkamal R. Shah Sagar N. Shah Sudhir V. S.

PAPERS FOR DISCUSSION:

Topic Paper Writer

Negative List based Taxation of Services - Concept, Definitions, Exclusions, Exemptions & Valuation

CA Sunil Gabhawalla

Case Studies on Point of Taxation Rules, 2011 CA A. R. Krishnan

Sale versus Service - Overlap of VAT and Service Tax Adv. P. K. Sahu

Indirect Tax issues in Real Estate Industry - Case Studies Adv. K. Vaitheeswaran

PAPER FOR PRESENTATION

Topic Paper Writer

Analysis of Place of Provision of Services Rules CA A. R. Krishnan


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Days & Dates : Friday to Sunday 22nd June to 24th June 2012Venue : Rio Resort, Arpora, Goa

PROGRAM SCHEDULE

Friday 22nd June 2012

12.30 pm onwards : Welcome & Check-in01.00 to 03.00 pm : Lunch03.30 to 05.45 pm : Group Discussion (Paper I & II) – Issues in Negative List based Taxation

of Services, Case Studies in Valuation & Point of Taxation Rules, 201106.00 to 08.45 pm : General Assembly – Inaugural Session: Inauguration by: Shri Manohar Parrikar, Hon’ble Chief Minister of Goa Presentation of paper and Reply to queries by Paper Writer:

CA Sunil Gabhawalla9.00 to 10.00 pm : Dinner

Saturday 23rd June 2012

07.30 to 08.30 am : Breakfast08.45 to 10.30 am : Group Discussion (Paper III) – Sale versus Service – Overlap of VAT and Service Tax10.45 to 01.15 pm : General Assembly – Reply to Queries on: Valuation & POT Rules by Paper Writers: CA Sunil Gabhawalla & CA A. R. Krishnan Presentation of paper and Reply to queries by Paper Writer:

Adv. P. K. Sahu01.30 to 02.30 pm : Lunch3.00 to 8.00 pm : Visit Goa8.30 to 10.00 pm : Dinner

Sunday 24th June 2011

07.30 to 08.30 am : Breakfast08.45 to 10.30 am : Group Discussion (Paper IV) – Indirect Tax Issues in Real Estate Industry - Case Studies10.45 to 01.15 pm : General Assembly – Presentation of Paper: Analysis of Place of Provision of Services Rules by Paper Writer CA A. R. Krishnan Reply to queries by Paper Writer Adv. K. Vaitheeswaran01.30 to 02.30 pm : Lunch3.00 pm : Vidai



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CA Sunil Gabhawalla

Mr. Sunil Gabhawalla is a chartered accountant in practice (with 3rd rank at the All-India Level). He is also a cost accountant. He has an excellent academic record with ranks throughout the career.

Sunil practices in the entire field of taxation with a specialization in Indirect Taxes. He is one of the leading consultants for service tax & VAT related matters.

He is a visiting faculty at Narsee Monjee Institute of Management Studies, the Indo German Chamber of Commerce & the National Academy of Customs,

Excise & Narcotics.

He has authored books on various topics relating to service tax, NRI Taxation & computers. His comprehensive treatise on service tax published by the Bharat Law House runs in its 13th edition.

He has delivered numerous talks on topics of professional interest at various forums including industry/trade associations. He has also written articles in various professional and business journals.

He has been a member of the Study Group constituted by Maharashtra Government and the ICAI for implementing GST. At present, he is convenor of Indirect Taxation & Allied Laws Committee and also a member of the Managing Committee of Bombay Chartered Accountants’ Society.

Our Faculty

Adv. P. K. Sahu

Mr. P. K. Sahu, Advocate, is an honours graduate in Physics, M.A. in Political Science, L.L.B. and has studied management at IIM, Kolkata.

He started his career with the Income-tax Department, joined Indian Revenue Service in 1978. He was posted in various capacities in Kolkata, Cuttack, Rourkela, Bhubaneswar and New Delhi. In 1996-97 he was appointed as member of the expert group, set up by Government of India, to rewrite Income-tax Law. The group submitted a report and draft Income tax bill in 1997. He took voluntary retirement, in 1998, to start his legal practice in all branches of tax laws. At

present, he is based at New Delhi.

Service Tax happens to be a big chunk of his practice. He has already made his mark in some of the landmark service tax rulings. He has been giving lectures on various tax issues in seminars conducted by International Fiscal Association, EIRC and NIRC of ICAI, Bombay Chartered Accountants’ Society, Madras Chamber of Commerce and Industry, Associated Chamber of Commerce and Industry, etc.


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CA A. R. Krishnan

Mr. A. R. Krishnan, B.Com. (Hons.), Grad. C.W.A., F.C.A. (22nd rank in Inter CA), is practicing as a Chartered Accountant since 1981.

His present areas of expertise and practice are Service Tax. He has authored a Publication “Guide to Service Tax” published by Western India Regional Council (WIRC) of ICAI and the Continuing Professional Education Committee of the Institute of Chartered Accountants of India (ICAI), New Delhi. He has contributed to the study material on service tax when it was first introduced in CA final as a subject. He has also written a detailed paper on “Service Tax on Cross

Border Transactions” for “International Tax & Finance Conference” organized by Bombay Chartered Accountants Society (BCAS) in 2006. He has been contributing to BCAS Referencer in the area of Service Tax continuously for the past 11 years. He has been writing a regular column on service tax for the News Letter, published by Western India Regional Council of ICAI, having readership of over 40000 professionals. He lectures on service tax at various forums, seminars and sonferences and also contributes articles on service tax in various periodicals. As of now he has spoken over 1000 places all over India in various forums including at National Academy of Customs, Excise and Narcotics, Bhandup, Mumbai [a training forum for Government Officers].

He is regularly providing inputs to the ICAI, BCAS, CTC and the Government of India in the area of service tax by way of pre-budget and post-budget memorandum.

He is/has been a member of various committees of ICAI, WIRC, BCAS and CTC.

He has been featured as one of the top 10 indirect tax advisors in India based on a survey conducted by International Tax Review – an International journal published from London.


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From the Archive

1ST RESIDENTIAL STUDY COURSE ON SERVICE TAX

Dates: 6th to 8th April, 2007 Venue: Hotel Usha Ascot, Matheran

No. of Participants: 106

President: Himanshu V. Kishnadwala Chairman: Dilip V. Lakhani

Co-chairman: Govind G. Goyal

Convenors: Anup P. Shah, Raman H. Jokhakar and Sunil B. Gabhawalla

Topics Paper Writers

Papers for Group Discussion

Import and Export of Services CA Jayraj Sheth

CENVAT Credit Mechanism for Service providers Adv. Vipin Jain

Valuation of Taxable Services CA Puloma Dalal

Papers for Presentation

Impact of VAT on Service Tax : Some Issues CA Parind A. Mehta

Real Estate Transaction Service Tax Implications CA Sunil B. Gabhawalla

2ND RESIDENTIAL STUDY COURSE ON SERVICE TAX

Dates: 7th to 9th December, 2007 Venue: Treasure Island Resort, Lonavala


President: Rajesh S. Kothari Chairman: Pranay H. Marfatia

Co-Chairman: Govind G. Goyal

Convenors: Raman Jokhakar, Shardul D. Shah and Sunil B. Gabhawalla



Service Tax & VAT on Composite Transactions Adv. P. K. Sahu

Service Tax on Financial Services CA Sunil Kothare

Case Studies in Service Tax CA A. R. Krishnan

Paper for Presentation

Service Tax on Cross Border Transaction Rohan Shah, Solicitor

Applicability of excise provisions and propositions on Service tax

CA S. S. Gupta


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3RD RESIDENTIAL STUDY COURSE ON SERVICE TAX

Dates: 6th to 8th March, 2009 Venue: Treat resort, Silvassa


President: Anil Sathe Chairman: Pranay H. Marfatia

Convenors: Raman H. Jokhakar, Satish B. Kanodia and Toral C. Mathuria



Recent issues in CENVAT Credit Rules Service Tax Perspective

CA Bakul B. Mody

Case Studies on Information Technology & Software Services – VAT & Service tax perspective.

Adv. K. Vaitheeswaran

Case Studies in Service Tax Adv. V. Raghuraman

Paper for Presentation

Adjudication and Appellate Procedure in Service Tax

Adv. Naresh S. Thacker

Adv. Karthik Sundaram

Service Tax Compliance – Putting Systems & Procedures in Place

CA Nihal Kothari

4TH RESIDENTIAL STUDY COURSE ON SERVICE TAX

Dates: 2nd to 4th July, 2010 Venue: Silent Hill Resort, Manor, Palghar


President: Ameet N. Patel Chairman: Pranay H. Marfatia

Convenors: Suhas S. Paranjpe and Toral C. Mathuria


Case Study Papers for Discussion

Case Studies on Works Contracts Adv. V. Sridharan

Case Studies on Refunds & Rebates Adv. M. H. Patil

Case Studies on the Topics other than Above Adv. K. S. Ravi Shankar


GST – Way Forward Adv. Santosh Dalvi

SEZ – Indirect Tax Issues Adv. Prasad Paranjpe


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5TH RESIDENTIAL STUDY COURSE ON SERVICE TAX & VAT

Dates: Friday to Sunday, 24th to 26th June 2011 Venue: The Corinthians, Pune


President: Mayur B. Nayak Chairman: Govind G. Goyal

Convenors: Sunil B. Gabhawalla, Toral N. Mehta and Suhas S. Paranjpe


Case Study Papers for Discussion

Recent Amendments to CENVAT Credit Rules & Impact thereof

Adv. Shailesh Sheth

Indirect Tax Issues in Media & Entertainment Industry

CA Parind Mehta

Controversies in Service Tax - Case Studies Adv. G. Shivadass


Dual Taxation and Levy of Service Tax on Hotels & Restaurants

CA S. S. Gupta

Practice in Service Tax – Some Musings CA A. R. Krishnan


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Contents

Topic Paper Writer Page Nos.

1.

1.1

Negative List based Taxation of Services – Concept, Definitions, Exclusions, Exemptions & Valuation

Annexures

CA Sunil Gabhawalla 1-48

2. Case Studies in Point of Taxation Rules, 2011 CA A. R. Krishnan 49-58

3. Sale versus Service - Overlap of VAT and Service Tax Adv. P. K. Sahu 59-74

4. Indirect Tax issues in Real Estate Industry - Case Studies Adv. K.Vaitheeswaran 75-84


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Negative List based Taxation of Services — Concept, Definitions, Exclusions, Exemptions & Valuation

CA Sunil Gabhawalla

1. Introduction1.1. Ever since its introduction, the service tax law worked on the principle of ‘selective

coverage’ whereby only the services specified in clause (105) of section 65 of the Finance Act, 1994 were taxed under the charging section 66. This approach is known as “positive list”. This system had the advantage of definitiveness. However, over a period of time, with more and more services in the net, the issues of interpretation increased and the law became extremely complex.

1.2. Finance Act, 2012 has brought about a sea change in this system of charging service tax. It has replaced the existing approach of positive list of services with a new system of charging service tax on all services under the charging section 66B other than services specified in the negative list. This change in the system of charging service tax will be effective from 1-7-2012.

1.3. Effective from 1-7-2012, the earlier provisions contained in sections 65, 65A, 66, 66A (including almost all the exemptions, abatements, compositions and other rules linked with the said sections thereto) will cease to apply but will remain relevant in respect of services provided prior to the coming into force of the new provisions.

1.4. This paper introduces the new concept of negative list based taxation of services and briefly highlights some issues likely to creep on account of transition. Thereafter, the paper discusses in detail the framework of the new law and moves on to analyse the definition of service. Since exclusions and exemptions are the only saviour in the new law, some issues arising from the same are discussed thereafter. Valuation of services has always presented substantial challenges. These may get compounded due to the comprehensive definition of service. The paper touches some issues on valuation and then moves on to the concept of selective reverse charge mechanism.

2. Transition – Whether smooth?2.1. The transition from the positive list to the negative list will imply a major change in

the approach towards interpreting the provisions. Under the positive list approach, the Legislation defined the specific services which were taxable. Therefore, the onus of establishing the taxability was of the Service Tax Department. However, under the negative list approach, all services are taxable and only services specified in the negative list or exemption notification are not liable for payment of service tax. Therefore, the onus of establishing that a particular transaction is not liable for payment of service tax will now be that of the assessee.


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2.2. The following table summarises the transition from positive list to negative list:

Aspect Provisions up to 30.06.2012 Provisions w.e.f. 1-7-2012

Charging Provision Section 66 read with Section 65(105)

Section 66B

Coverage of the Charging Provision

Selective Comprehensive

Definitions Section 65 Section 65B

Principles of C l a s s i f i c a t i o n /Interpretation

Section 65A Section 66F

Extent of Coverage of the Act

Section 64 Section 64

Taxability of Cross Border Transactions

Section 66A read with Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 and the Export of Services Rules, 2005

Section 66C

Service Not defined, taxable services defined individually

Specifically defined under Section 65B(44)

T r a n s a c t i o n s deemed to be service

Only Sale of Under Construction Flats/Offices

Specific List of Declared Services provided under Section 66E

Exclusions Either by non inclusion in taxable service under section 65(105) or carved out in the definition provided under section 65(105)

Provided in the definition of Service under Section 65B(44) or listed in negative list under section 66D

Exemptions Provided through multiple notifications

Consolidated in single Mega Exemption Notification 12/2012-ST dated 17.03.2012. Some general exemptions also proposed to be retained with suitable alterations

Abatements Provided through Notification 1/2006-ST subject to non claim of CENVAT Credit

Provided in some cases through Service Tax (Determination of Value) Rules, 2006 and in some case through Notification 13/2012-ST subject to differing situations of claim of CENVAT Credit

Point of Taxation Time of discharging tax and the rate of tax defined through Point of Taxation Rules, 2011.

Time, value, rate of tax and exchange rate defined through Section 67A read with Point of Taxation Rules, 2011

1. Rules enclosed as Annexure 1

2. Enclosed as Annexure 2




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2.3. Under the positive list, contractors providing services in relation to works contracts were granted an option of paying service tax under Works Contract (Composition Scheme for Payment of Service Tax) Rules, 20071. Under the said Rules, the service provider has to exercise the option in respect of the entire works contract and it is stated that the option shall not be withdrawn until the completion of the said works contract. Interestingly, the Scheme itself becomes redundant with effect from 1-7-2012. In the absence of suitable transitory provisions, there could be ambiguity in respect of ongoing works contracts specifically if such works contracts are in the nature of repairs.

2.4. Interestingly, education cess and secondary and higher education cess are imposed through Section 95 of the Finance (No. 2) Act, 20042 and Section 140 of the Finance Act, 2007 respectively3. Useful reference may be made to those provisions. In the absence of any amendment proposed in the said provisions, it may be interesting to identify the correct effective rate of service tax effective from 1-7-2012. Similarly, a reference may be made to the provisions of Section 68(1)4 which deals with payment of service tax and consider whether there is any impact due to the transition.

2. Definitions2.1. In view of the negative list approach of taxation, most of the definitions may no longer

be necessary. Perhaps with that background in mind, Section 65 (earlier definitions) is made redundant with effect from 1-7-2012 and a new set of definitions is being prescribed vide Section 65B. Further, certain terms are also defined under the exemption notification or the respective rules.

2.2. It may be important to note that in certain cases, the definitions as existing prior to 30-6-2012 under Section 65 are continued albeit under Section 65B. However, in certain cases, the definitions have been altered during the transition. Such definitions need to be carefully analysed. A comparative table of such altered definitions is provided as Annexure 4. Of particular importance may be to note the fundamental changes in the definitions of “residential complex” and “works contracts”. Similarly, the impact of the change in the definition of “goods” and “business entity” may also be observed.

2.3. The approach to provide definitions at multiple places can result in complications. For example, the word “advocate” is not defined under the Finance Act, 1994 but at Sr. 1 of Notification 12/2012-ST. Can the said definition also apply to Notification 15/2012-ST? What would be the situation wherein the same term is defined differently at different places? Consider the term “original works” being defined differently as under:


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Original Works as defined under Sr. 20 of Notification 12/2012-ST

Original Works as defined under Explanation 1 to Service Tax (Determination of Value) Rules, 2006

“original works” means—

(a) all new constructions; or

(b) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable,

(a) “original works” means—

(i) all new constructions;

(ii) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable;

(iii) erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise

2.4. Further the absence of certain definition sets can result in ambiguities in situations where there is differential tax treatment. For example, in the absence of appropriate definitions, it may be difficult to identify what constitutes a manpower supply service

3. Charging Provision3.1 The charge of service tax has been specified in section 66B of the Act. The same is

reproduced below for easy reference:

“There shall be levied a tax (hereinafter referred to as the service tax), at the rate of twelve per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.”

3.2 The entire substantive framework for the imposition of service tax under the negative list regime can be summarized in the above charging provision. The charging provision integrates within itself not only the comprehensive scope of coverage of services but also concepts of valuation, duality of persons, situs of the service, point of taxation and the collection mechanism. The essential elements of the said charging provision are tabulated hereunder and analysed in detail:

Element of Charging Provision

Brief Description

There shall be levied a tax (hereinafter referred to as the service tax), at the rate of twelve percent

The rate of service tax has already been increased to 12% with effect from 01.04.2012. Under the new legislation, the increased rate of 12% is proposed to be continued.

on the value Even currently, Section 67 of the Act read with the Service Tax (Determination of Value) Rules, 2006 exhaustively deal with the principles of valuation of taxable services. However, the valuation principles are impacted due to the deletion of Notification 12/2003 and also due to the rationalization of various abatements.


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Brief Description

of all services In view of the comprehensive coverage, the term “service” is specifically defined under section 65B(44). The said definition is also elaborately explained in Guidance Note 2 of the TRU Clarification.

other than those services specified in the negative list

Services listed in the negative list are not liable for payment of service tax. The negative list of services is defined under section 66D of the Act. Further, certain services are specifically exempted from payment of service tax. It may be noted that any transaction other than excluded/exempted services will be liable for payment of service tax.

Admission to entertainment events is excluded by virtue of Section 66D(j). Further, Sr. 15 of Notification 12/2012 exempts temporary transfer of copyrights in cinematographic films. In effect, in both the cases, tax is not payable. Is there a difference between an exclusion and an exemption or is it academic? The participants may debate this issue specifically considering the impact of the absence of a provision similar to Section 5A(1A) of the Central Excise Act, 1944 under the service tax legislation. Useful reference may also be made to the decision of CCE vs. Narmada Chematur Pharmaceuticals Limited 2005 (179) ELT 276 (SC)

provided or agreed to be provided

This phrase is linked with the Point of Taxation Rules, 2011 defining the point of time when the service tax becomes payable.

It may be interesting to analyse whether the Point of Taxation Rules will prevail over the charging provision in case of conflict in the two provisions. Specifically, if an agreement is entered into prior to the imposition of tax and the services are rendered later, when is the taxable event triggered?

Useful reference may be made to the Supreme Court decisions in the case of Wallace Flour Mills Company Limited vs. Collector of Central Excise 1989 (44) ELT 598 (SC) & Collector of Central Excise vs. Vazir Sultan Tobacco Co. Limited 1996 (83) ELT 3 (SC) to analyse the impact of the Point of Taxation Rules, 2011

in the taxable territory This phrase defines the situs of levy of service tax and combines within itself the code relating to import as well as export of services.

by one person to another This requirement of duality of persons continues in the new legislation subject to certain exceptions listed in Explanations 2 and 3 of the definition of service.


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Brief Description

and collected in such manner as may be prescribed

By virtue of Notification 15/2012-ST, the tax is collected from the person liable to pay tax as defined therein.

4. Service4.1 As stated above, under the negative list of services, all services are liable for payment

of service tax unless specifically included in the negative list or specifically exempted. It is therefore important that a concise definition of the term “service” be provided. The definition of service is provided under section 65B(44) of the Act.

4.2 On a perusal of the definition, it is evident that the definition of the term “service” consists of three limbs as under:

4.3 Judicial Interpretation

4.3.1 It is a settled position that a definition set out in terms of what the defined term “means [] and includes []” is to be interpreted as being exhaustive. It is also a settled position that what follows the phrase “includes” is by way of extension of the definition beyond what is covered by the “means” clause, i.e. to specifically include what may not fall within the “means” clause.

4.3.2 The definition also sets out exclusions from the ambit of the defined term. Whereas judicial precedents on the interpretation of such definitions are limited, the clear position is that the exclusion operates as a carve-out from the meaning of the defined term.

4.3.3 The exclusion could also operate to clarify, as a measure of abundant caution, the scope of the meaning of the defined term, to the extent of the exclusion

Service

means

any activity

carried out by a person for another

for consideration

and includes

declared service

shall not include

any activity which constitutes merely

transfer of title in goods or immoveable

property

transfer which is deemed to be a sale

transaction in money or actionable claim

provision of service by employee to employer

fees taken by Court or Tribunal


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4.3.4 In a structure of the nature presented above, it may be important to debate the situation where a particular activity is covered both within the “includes” clause as well as “shall not include” clause. For example, “construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of certificate of completion by a competent authority” is declared to be a service. However it is also stated that service shall not include an activity which constitutes merely a transfer of title in goods or immovable property. Whether a specific exclusion provided in Section 65B(44) could change the observations made by various Courts upholding the levy of service tax on under construction flats/offices?

4.4 “Means Clause”

4.4.1 The term “service” is defined to mean any activity carried out by a person for another for consideration. From the said definition, three important elements can be carved out:

4.4.1.1 There should be activity

4.4.1.2 The activity must be carried out by a person for another

4.4.1.3 The activity must be carried out for consideration

4.4.2 The term activity has not been defined in the Act. It is more than evident that the term service is a subset of a contract and therefore, essentially all services need to emanate from a contract. Having said so, it may be important to note that a contract may exist even in the absence of activity.

4.4.3 In the above context, it has been clarified that the term activity includes an act done, a work done, a deed done, an operation carried out, execution of an act, provision of a facility, etc. Activity could be active or passive and would also include forbearance to act.

4.4.4 The Revised Concept Paper on Taxation of Services Based on Negative List proposed to tax only economic activities. However, in the actual legislation, the term “economic” has been missed out. This may substantially widen the scope of coverage of service. Participants may like to debate whether the following can be considered as “services”:

4.4.4.1 Dowries received at the time of marriage

4.4.4.2 A person saving a drowning child and receiving a monetary token of appreciation from the parents of the child

4.4.4.3 A person searching a missing child against whom a cash reward was announced on television

4.4.4.4 A participant winning in reality show like “Indian Idol”

4.4.4.5 A newspaper reader completing a crossword puzzle and winning the first prize

4.4.4.6 Bribes received by a politician

5. Explanation 2 of clause (44) of section 65B


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4.4.4.7 Amounts received by a separated son from his family as a part of family settlement.

4.4.4.8 Various amounts received by a co-operative society/member thereof from the developer in case of a redevelopment project.

4.4.5 It is also clarified that the activity must be carried out by a person for another. This signifies that services provided by a person to self are outside the ambit of taxable service. Example of such service would include a service provided by one branch of a company to another or to its head office or vice versa.

4.4.6 However, there are two exceptions5 to this concept of duality of persons:

• an establishment of a person located in taxable territory and another establishment of such person located in non-taxable territory are treated as establishments of distinct persons

• an unincorporated association or body of persons and members thereof are also treated as distinct persons

4.4.7. It is clarified that ‘consideration’ means everything received in return for a provision of service which includes monetary payment and any consideration of non-monetary nature as well as deferred consideration.

4.4.8. When the “means clause” is interpreted in entirety, it means that a contract where an activity is undertaken for a consideration, service tax is triggered. However, what happens in cases where there is a flow of money but the activity is not apparent? Consider cases like insurance claims, slump sale of businesses, donations, refunds and drawbacks received from the Government, penalties, etc. Can these be brought under the service tax net?

4.4.9. Similarly, the Guidance Paper provides various illustrations to suggest that an entry in the books of account to write back certain amounts could trigger the liability towards service tax. For example, it is clarified that if excess payment is received and retained by the service provider, it becomes a part of the value and is liable for service tax. The participants may debate whether the said clarification reflects the correct interpretation of the law.

4.5 “Inclusive Clause”

4.5.1 The definition of the term “service” is further expanded on account of inclusion of certain activities defined under section 66E as declared services. The concept of declared services therefore expands the scope of taxation of services

4.5.2 The following nine activities have been specified in section 66E:

a) renting of immovable property;

b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of certificate of completion by a competent authority;


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c) temporary transfer or permitting the use or enjoyment of any intellectual property right;

d) development, design, programming, customization, adaptation, up gradation, enhancement, implementation of information technology software;

e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;

f) transfer of goods by way of hiring, leasing, licensing or any such manner without transfer of right to use such goods;

g) activities in relation to delivery of goods on hire purchase or any system of payment by installments;

h) service portion in execution of a works contract;

i) service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as part of the activity

4.5.3 It is clarified that if the above activities are carried out by a person for another for consideration it would amount to provision of service.

4.6 Exclusive Clause

4.6.1 The definition of service further provides that certain transactions shall be excluded from the definition.

4.6.2 Mere transfer of title in goods by way of sale, gift or in any other manner for a consideration does not constitute service. For the said purpose, the term “goods” has been defined in section 65B of the Act as ‘every kind of movable property other than actionable claims and money; and includes securities, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under contract of sale’

4.6.3 It may be important to note that the term “goods” includes “securities” which is also very widely defined. Further, under the CENVAT Credit Rules, 2004, exempted services include trading in goods. The impact of the wider definition of goods on the claim of CENVAT Credit may be examined especially in the context of companies which have huge cash surpluses regularly invested in mutual funds and shares.

4.6.4 With a very specific exclusion for sale of goods, it may be important to analyse whether sale of software can be a subject matter of service tax. This may be all the more relevant in view of the fact that while the definition of declared service retains clauses (i) to (iii) of the erstwhile definition of information technology software service, clauses (v) and (vi) have not been retained.

4.6.5 Mere transfer of title in immovable property by way of sale, gift or in any other manner for a consideration does not constitute service. The term Immovable property has not been defined in the Act. Therefore the definition of immovable property in the General Clauses Act, 1897 will be applicable which defines


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immovable property to include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth

4.6.6 Transactions only in money or actionable claims do not constitute service

4.6.7 Provision of services by an employee to the employer is outside the ambit of services. However, services provided outside ambit of employment for a consideration would be a service. The participants may discuss the impact of service tax in the following cases:

4.6.7.1 Sitting Fees/Commission/Remuneration received by Non Employee Directors

4.6.7.2 Persons employed on “retainership” basis exclusively for a company

4.6.7.3 Various amounts received by an employee like joining bonus, referral incentive, marketing incentive, overtime, special deputation fee, living allowance, etc.

4.6.7.4 Recoveries made by the employer from the employee on various accounts like house rents, guest houses, staff canteen, bus transportation, accidental damages, notice period pay, etc.

4.6.8 It is further clarified that fees taken by Court or Tribunal shall not be included in the definition of service

4.6.9 Explanation 1 clarifies that ‘service’ does not cover functions or duties performed by Members of Parliament, State Legislatures, Panchayat, Municipalities or any other local authority, any person who holds any post in pursuance of the provisions of the Constitution or any person as a Chairperson or a Member or a Director in a body established by the Central or State Governments or local authority and who is not deemed as an employee

5. Negative List – Exclusions and Exemptions5.1 17 Services are specifically listed in the negative list of services under section 66D and

are kept outside the purview of service tax. The same is reproduced as Annexure 6

5.2 Over and above these 17 services specifically excluded through the negative list concept, certain existing service specific exemptions are consolidated and proposed to be retained through a mega exemption notification 12/2012-ST. The said exemption notification is reproduced as Annexure 7

5.3 Further, certain general exemption notifications would be continued with suitable modifications. The said exemptions are listed as Annexure 8

5.4 It may be noted that any transaction other than the ones listed in the above Annexures will be liable for payment of service tax

5.5 For ease of reference, the services listed in the negative list and the exemption notification are grouped as per the relevant sectors in Annexure 9


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6. Principles of Classification & Interpretation6.1 The existing principles of classification embodied in Section 65A would no longer be

applicable under the negative list of services. This is because there is no need to classify the services into respective service categories.

6.2 Having said so, it would still be important to classify the transaction as either a service or not a service. Further, in cases where the transaction involves a bundle of services, some in the positive list and some in the negative list, the principles of classification would still be relevant

6.3 While the broad test for characterizing a transaction as a sale or service has not been defined under the Statute, the Guidance Paper clearly accepts the dominant intention test laid down by the Supreme Court in the case of BSNL vs. Union of India 2006 (2) STR 161 (SC).

6.4 Therefore, principles have been laid down in section 66F of the Act for interpretation wherever services have to be treated differentially for any reason and also for determining the taxability of bundled services

6.5 It has been provided that unless otherwise specified, reference to a service shall not include reference to a service which is used for providing the main service. Thus, it is clearly stated that the nature of the output service will not determine the nature of input service. By an illustration, it is clarified that ‘Provision of access to any road or bridge on payment of toll’ is a specified entry in the negative list in section 66D of the Act. Any service provided in relation to collection of tolls or for security of a toll road would be in the nature of service used for providing such specified service and will not be entitled to the benefit of the negative list entry

6.6 It is further stated that where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description.

6.7 ‘Bundled service’ means a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of any other service or services. An example of ‘bundled service’ would be air transport services provided by airlines wherein an element of transportation of passenger by air is combined with an element of provision of catering service on board. Each service involves differential treatment as a manner of determination of value of two services for the purpose of charging service tax is different

6.7.1 If various elements of a bundled service are naturally bundled in the ordinary course of business, it shall be treated as provision of a single service which gives such bundle its essential character

6.7.2 If various elements of a bundled service are not naturally bundled in the ordinary course of business, it shall be treated as provision of a service which attracts the highest amount of service tax

7 Issues in Exemptions and Exclusions7.1 Analyse the impact of service tax on the following payments made to Government/

Government Agencies:

7.1.1 Ground Rent Paid to Municipal Corporations


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7.1.2 Payments made to the State Police for Protection

7.1.3 Payments made to CISF

7.1.4 Payments made to major/minor/private ports for import or export of goods

7.1.5 Payments for filing eTDS Returns/ RoC Returns

7.1.6 Administration Charges paid to EPFO

7.1.7 Fees paid by Government companies to CAG

7.2 ABC Limited is a contractor undertaking various contracts. It is worried about the service tax implications under the new law for the following contracts awarded to him .Please guide him the correct tax position including the effective rate of service tax and availability of CENVAT Credit:

7.2.1 Repairs of Government Building used as Income Tax Office

7.2.2 Construction of Government Hospital (undertaken by ABC Limited as sub contractor for PQR Limited who had been awarded the main contract by the Government)

7.2.3 Construction of Highway (undertaken by ABC Limited as sub contractor for PQR Limited who had been awarded the main contract by the NHAI)

7.2.4 Construction of Hospital owned by a charitable trust registered under Section 12AA of the Income Tax Act, 1961

7.2.5 Site Formation Work pertaining to ports

7.2.6 Electrification Project for metro rail

7.3 DEF Limited is a company into research pertaining to the medical sector. It provides services of cord blood banking to its’ patients. The service of cord blood banking involves the storage of the cord blood at the time of child birth. The stored blood can be later used to either recreate blood cells or various organs which can be transfused into the child at any time in case of need. Examine whether the charges collected by DEF Limited for storage of the cord blood and subsequent recreation of the cord blood into normal blood cells or organs is taxable or exempt from payment of service tax

7.4 XYZ Limited is a company into the business of media and entertainment. It has created unique combinations of service offerings for its’ customers as under:

7.4.1 Under the “Everywhere” Plan, it offers space to its’ customers for advertisement across various platforms like print, radio, television, outdoor hoardings, websites, etc. It charges a composite amount for the advertisement services provided by it

7.4.2 Under the “Hear it Free” Plan, it offers space in newspapers to its’ customers for a price. It is also said that proportionate time slot on radio will be provided free to the customer

7.4.3 Under the “Back to Back” Plan, it offers not only space in newspapers but also designs the advertisement for the customers


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7.4.4 Under the “Pat your Own Back” Plan, the customer can provide information about events at its’ place. These events are covered as news stories in the newspapers.

Examine the service tax implications of each of the above plans considering the exemptions and also the new rules relating to bundled services.

8. Valuation Rules8.1 Even currently, Section 67 of the Act read with the Service Tax (Determination of Value)

Rules, 2006 exhaustively deal with the principles of valuation of taxable services. However, in view of the introduction of the negative list, certain changes have been introduced in the said Rules and the abatement notification. The same are discussed hereafter

8.2 Rule 2A of the Valuation Rules is proposed to be substituted to define the value of works contract services, as follows:

8.2.1 As at present, first determination will be the value of service being the total amount charged for the contract reduced by the value of property transferred in goods for State VAT purpose;

8.2.2 If value of goods is not intimated to State VAT Authorities, the assessee can still calculate the actual value of goods and the same will be relevant to deduce the value of the service involved in the works contract;

8.2.3 If the value is not so deduced, and not merely as an option, the value shall be specified percentage of the total value as follows:

a) for original works: 40% of the total amount;

b) for works contracts pertaining to moveable properties: 70% of the total amount

c) other contracts: 60% of the total amount;

8.3 For the said purpose, original works will include all new constructions and all types of additions and alterations to abandoned or damaged structures to make them workable. The total amount will be gross amount plus the value of any material supplied under the same contract or any other contract less the amount charged for the supply of the said materials or services.

8.4 Rule 2C has been introduced, for determination of value of taxable service involved in supply of food and drinks in a restaurant or as outdoor catering. The value is being adjusted such that the industry is able to utilize credit on capital goods, specified inputs (other than chapter 1 to 22 i.e. foods and beverages) and input services. Thus the taxable portion is being raised but the move is expected to be business-friendly

8.5 Certain changes are proposed to be introduced in the abatements along with negative list. The increase in taxable portion of value are accompanied with liberalization in input tax credits following the principle of neutrality of taxes that the burden of taxes should not raise the cost per se but passed on to the point of consumption.

8.6 The comparative analysis of the abatements and the valuation provisions is provided below:


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Sl. No.

Description of taxable service New Taxable Portion

Old Taxable Portion

Eligibility of CENVAT Credit on

Input Service

Capital Goods

Inputs

(1) (2) (3) (5) (7) (8) (9)

1 Financial leasing services including equipment leasing and hire purchase

10 10 Yes Yes Yes

2 Transport of goods by rail 30 30 Yes Yes Yes

3 Transport of passengers, with or without accompanied belongings by rail

30 New Service Yes Yes Yes

4 Supply of food or any other article of human consumption or any drink, in a premises, including hotel, convention centre, club, pandal, shamiana or any place specially arranged for organizing a function

70 70 (for Pandal & Shamiana)

60 (for Convention)

60 (for Mandap Keeper)

Yes Yes No (for Chap 1 to 22), Yes, for o t h e r Chap.

5 Transport of passengers by air, with or without accompanied belongings

40 New Service Yes No No

6 Renting of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes

60 50 Yes No No

7 Transport of goods by road by Goods Transport Agency

25 25 No No No

8 Services provided in relation to chit 70 70 No No No

9 Renting of any motor vehicle designed to carry passengers

40 40 No No No

10 Transport of goods in a vessel from one port in India to another

50 75 No No No

11 (i) Services provided or to be provided to any person, by a tour operator in relation to a package tour

25 25 No No No

(ii) Services provided or to be provided to any person, by a tour operator in relation to a tour, if the tour operator is providing services solely of arranging or booking accommodation for any person in relation to a tour

10 10 No No No


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Sl. No.

Description of taxable service New Taxable Portion

Old Taxable Portion

Eligibility of CENVAT Credit on

Input Service

Capital Goods

Inputs

(1) (2) (3) (5) (7) (8) (9)

(iii) Services, other than services specified in (i) and (ii) above, provided or to be provided to any person, by a tour operator in relation to a tour

40 40 No No No

8.7 Rule 6 of Valuation Rules prescribes inclusions and exclusions to the taxable value. Following changes are being made in the said Rules:

8.7.1 Any amount realized as demurrage, or by any other name, for the provision of a service beyond the period originally contracted or in any other manner relatable to the provision of service will be included in the value of taxable service

8.7.2 Interest on (a) deposits; and (b) delayed payment of any consideration for the provisions made (services/goods) will be excluded from the value of taxable service. However, for the purposes of CENVAT Credit, interest on loans will now be an exempt income rather than an exclusion from value.

8.7.3 Accidental damages due to unforeseen actions not relatable to the provision of service will be excluded from the value of taxable service

8.8 Rule 7 of Valuation Rules is being deleted since the provisions of import of services are consolidated with the domestic services.

8.9 Section 67A has been inserted to provide that the point of taxation shall determine the rate, value and the foreign exchange rate for the purposes of discharging service tax. Accordingly, the current Rule 5B of the Service Tax Rules, 1994 has been deleted. Further amendments have been carried out in the Point of Taxation Rules, 2011 and the Service Tax Rules, 1994. These changes are effective from 01.04.2012. It is clarified that the exchange rate shall be as referred to in Explanation to Section 14 of the Customs Act, 1962

9. Issues in Valuation9.1 M/s ABC, Chartered accountants is operating from client’s place for which he is not

paying any rent and provides consultancy service free of cost to that client. Above transactions are not entered in the books of any one. Whether Service tax will be payable on consultancy fees, if yes, at what value?

9.2 M/s. Milavat Pvt. Ltd. a pharmaceutical company is a subsidiary of M/s. Impure Inc., USA and sells its products in the trade mark of ‘IM – guaranteed cure’ which belongs to Impure Inc. As per the agreement M/s. Milavat Pvt. Ltd. is to pay a royalty of 5% of sales to Impure Inc. Milavat Pvt. Ltd. has also kept an interest free advance of Rs. 5 crores with Impure Inc. for due compliance of conditions of the trademark agreement. The deposit shall be returned after the term of agreement. Would the notional interest on deposit kept with Impure be added to the value of taxable service? If yes how to determine the notional interest – US interest rates or Indian Interest rates?


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9.3 M/s Red Hot Ltd is in the business of manufacture and sale of Air Conditioners. At the time of sale, the company offers free installation and one year comprehensive maintenance support. Is there any service tax implication? Would it make a difference if a small portion of the price is agreed to be towards installation and maintenance support? In the above example if in the subsequent years the company enters into an AMC but the rates are subsidized on the expectation of future orders, would there be any valuation issue?

10. Place of Provision of Services Rules10.1 Under the current scheme of taxation, the services provided in India are taxable. There

are provisions to tax services provided from outside India and received in India (known as import of services) and to grant exemption for services provided from India but received outside India (export of services). Further, the provisions of the service tax law (including provisions relating to import and export of services) do not apply to the state of Jammu & Kashmir

10.2 The above concept is proposed to be changed by removing the entire concept of import and export of services and instead defining the scope of taxation to be based on the place of provision of services.

10.3 Section 66C of the Act empowers the Central Government to prescribe rules for determination of place of provision of service. As per the Place of Provision of Services Rules, 2012 so prescribed, if the services are deemed to be provided in the taxable territory, tax has to be paid, otherwise tax is not attracted. Interestingly, Section 66C(2) provides that the law will not be invalid merely because either or both the service provider and service recipient are located outside the taxable territory.

10.4 In case tax is attracted, one has to then refer to Notification 15/2012-ST dealing with the person liable to pay service tax.

10.5 In line with the principle of service tax being a destination based consumption tax, it is provided that the general rule for determining the place of provision of service shall be the place of location of the service receiver. This is subject to certain exceptions. Since a separate paper is being presented on this topic, the same is not discussed in detail here.

11. Person Liable to Pay11.1 Section 68 of the Act defines the person liable to pay service tax. It empowers the

Central Government to notify certain persons other than service providers who would be liable for payment of service tax

11.2 It had been noticed that a number of registrants collect the tax but do not pay the same to the Department. This is a serious loss of the revenue even though the compliant section at the recipient end is often not benefitted. To ensure proper collection, while not inconveniencing small business, a new scheme is proposed to be introduced

11.3 To give effect to this new reverse charge mechanism, some changes are being proposed: firstly, a proviso is being added to sub-section (2) of section 68 and both the service provider and service receiver will be considered as persons liable to pay the tax on notified taxable services and to the extent specified against each one of them. The


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scheme is being introduced for three services where the service provider is either an individual or a firm or LLP and the recipient is a body corporate

11.4 It is clarified that the liability of the two persons is for respective amounts and is not influenced by compliance or the lack of it by the other side. Service provider is allowed Cenvat credit of tax paid by him on inputs and input services. The respective portions have been attempted such that the credits available will be well below the amount required to be paid by such persons. In extreme situations the small service provider is also being allowed the refund of unutilized Cenvat credit if any, available with him. Suitable changes will be made in Cenvat Credit Rules, to this effect

11.5 Notification No. 15/2012 covers following kind of services under reverse charge along with the percentage of tax liability payable by service provider and service receiver respectively. The services covered by the Notification are divided under four categories for ease of reference.

a) Services already covered under reverse charge:

S. No.

Description of a service Service Provider Service Recipient

Component of Tax

Liability Payable

Effective Tax Rate Payable

Component of Tax

Liability Payable


1 in respect of services provided or agreed to be provided by an insurance agent to any person carrying on insurance business

Nil Nil 100% 12.36%

2 in respect of services provided or agreed to be provided by a goods transport agency in respect of transportation of goods by road

Nil Nil 100% 3.09%

3 in respect of services provided or agreed to be provided by way of sponsorship

Nil Nil 100% 12.36%

4 In respect of any taxable services provided or agreed to be provided by any person who is located in a non-taxable territory and received by any person located in the taxable territory

Nil Nil 100% 12.36%

b) Services earlier covered under reverse charge but now exempted from applicability of service tax:

Services by a mutual fund agent or distributor to mutual fund or Asset Management Company for distribution or marketing of mutual fund.


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c) Services covered under Reverse Charge for the first time vide Notification No. 15/2012 w.e.f.01/07/2012 which are applicable to all the cases –

S. No.


Component of Tax

Liability Payable


Component of Tax

Liability Payable


1. in respect of services provided or agreed to be provided by an arbitral tribunal

Nil Nil 100% 12.36%

2. in respect of services provided or agreed to be provided by individual advocate

Nil Nil 100% 12.36%

3. in respect of services provided or agreed to be provided by way of support service by Government or local authority

Nil Nil 100% 12.36%

d) The following are the cases where the reverse charge mechanism is applicable only if the service recipient is a company (Ltd/Pvt Ltd) or a body corporate and the service provider is a non body corporate (For eg. an Individual / Firm or LLP)

S. No.


Component of Tax

Liability Payable


Component of Tax

Liability Payable


1. (a) in respect of services provided or agreed to be provided by way of renting or hiring any motor vehicle designed to carry passenger on abated value.

Nil Nil 100% 4.944%

(b) in respect of services provided or agreed to be provided by way of renting or hiring any motor vehicle designed to carry passenger on non abated value.

60% 7.416% 40% 4.944%

2. in respect of services provided or agreed to be provided by way of supply of manpower for any purpose

25% 3.09% 75% 9.27%

3. in respect of services provided or agreed to be provided by way of works contract

50% Various 50% Various


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11.6. Participants may debate the impact of the following aspects

11.6.1. In the case of rent a cab operators, manpower supply services, etc., the applicability of reverse charge (total/partial) depends on the status of the service recipient. How should the service provider satisfy himself that the service recipient is governed by the partial reverse charge? Is he required to ensure that the service recipient pays his component of the service tax? If the service recipient does not pay his component, whether the Service Tax Department can demand recovery from the service provider? What if the service recipient disclaims the transaction at a later date?

11.6.2. How should the service recipient be determined especially in cases where the payment is made by employees on behalf of the company and later on claimed as reimbursement from the company?


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Negative List based Taxation of Services — Concept, Definitions, Exclusions, Exemptions & Valuation

ANNEXURESCA Sunil Gabhawalla

ANNEXURE 1: WORKS CONTRACT (COMPOSITION SCHEME FOR PAYMENT OF SERVICE TAX) RULES, 2007

Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007

Notification No. 32/2007-ST [F. No. B1/7/2007-TRU], dated 22-5-2007In exercise of the powers conferred by sections 93 and 94 of the Finance Act, 1994 (32 of 1994), the Central Government hereby makes the following rules, namely:—

1. Short title and commencement.

(1) These rules may be called the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007.

(2) They shall come into force with effect from the 1st day of June, 2007.

2. Definitions.—In these rules, unless the context otherwise requires,—

(a) “Act” means the Finance Act, 1994 (32 of 1994);

(b) “section” means the section of the Act;

(c) “works contract service” means services provided in relation to the execution of a works contract referred to in sub-clause (zzzza) of clause (105) of section 65 of the Act;

(d) words and expressions used in these rules and not defined but defined in the Act shall have the meanings respectively assigned to them in the Act.

3. (1) Notwithstanding anything contained in section 67 of the Act and rule 2A of the Service (Determination of Value) Rules, 2006, the person liable to pay service tax in relation to works contract service shall have the option to discharge his service tax liability on the works contract service provided or to be provided, instead of paying service tax at the rate specified in section 66 of the Act, by paying an amount equivalent to 1[4.8 per cent] of the gross amount charged for the works contract.

2[Explanation.—For the purposes of this sub-rule, gross amount charged for the works contract shall be the sum,—

1. Substituted for “four per cent” by the Works Contract (Composition Scheme for Payment of Service Tax) (Amendment) Rules, 2012, w.e.f 1-4-2012, which was earlier substituted for “two per cent” by Works Contract (Composition Scheme for Payment of Service Tax) (Amendment) Rules, 2008, w.e.f. 1-3-2008.

2. Substituted by the Works Contract (Composition Scheme for Payment of Service Tax) (Amendment) Rules, 2009, w.e.f. 7-7-2009, for the following:

“Explanation.—For the purposes of this rule, gross amount charged for the works contract shall not include Value Added Tax (VAT) or sales tax, as the case may be, paid on transfer of property in goods involved in the execution of the said works contract.”


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(a) including,—

(i) the value of all goods used in or in relation to the execution of the works contract, whether supplied under any other contract for a consideration or otherwise; and

(ii) the value of all the services that are required to be provided for the execution of the works contract;

(b) excluding—

(i) the value added tax or sales tax as the case may be paid on transfer of property in goods involved; and

(ii) the cost of machinery and tools used in the execution of the said works contract except for the charges for obtaining them on hire:

Provided that nothing contained in this Explanation shall apply to a works contract, where the execution under the said contract has commenced or where any payment, except by way of credit or debit to any account, has been made in relation to the said contract on or before the 7th day of July, 2009.]

(2) The provider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004.

3[(2A) The CENVAT credit of tax paid on taxable services as referred to under sub-clauses (zzd), (zzq) and (zzzh) of clause (105) of section 65 of the Finance Act, 1994, shall be available only to the extent of 40% of the service tax paid when such tax has been paid on the full value of the service after availing CENVAT credit on inputs.]

(3) The provider of taxable service who opts to pay service tax under these rules shall exercise such option in respect of a works contract prior to payment of service tax in respect of the said works contract and the option so exercised shall be applicable for the entire works contract and shall not be withdrawn until the completion of the said works contract.

4[(4) The option under sub-rule (3) shall be permissible only where the declared value of the works contract is not less than the gross amount charged for such works contract.]

ANNEXURE 2: PROVISIONS RELATING TO EDUCATION CESS

91. Education Cess. (1) Without prejudice to the provisions of sub-section (11) of section 2, there shall be

levied and collected, in accordance with the provisions of this Chapter as surcharge for purposes of the Union, a cess to be called the Education Cess, to fulfil the commitment of the Government to provide and finance universalised quality basic education.

3. Inserted by the Works Contracts (Composition Scheme for Payment of Service Tax) (Amendment) Rules, 2011, w.e.f. 1-3-2011.

4. Inserted by the Works Contract (Composition Scheme for Payment of Service Tax) (Amendment) Rules, 2009, w.e.f. 7-7-2009.


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(2) The Central Government may, after due appropriation made by Parliament by law in this behalf, utilise, such sums of money of the Education Cess levied under sub-section (11) of section 2 and this Chapter for the purposes specified in sub-section (1), as it may consider necessary.

95. Education Cess on taxable services(1) The Education Cess levied under section 91, in the case of all services which are taxable

services, shall be a tax (in this section referred to as the Education Cess on taxable services) at the rate of two per cent., calculated on the tax which is levied and collected under section 66 of the Finance Act, 1994 (32 of 1994).

(2) The Education Cess on taxable services shall be in addition to the tax chargeable on such taxable services, under Chapter V of the Finance Act, 1994 (32 of 1994).

(3) The provisions of Chapter V of the Finance Act, 1994 (32 of 1994) and the rules made thereunder, including those relating to refunds and exemptions from tax and imposition of penalty shall, as far as may be, apply in relation to the levy and collection of the Education Cess on taxable services, as they apply in relation to the levy and collection of tax on such taxable services under Chapter V of the Finance Act, 1994 or the rules, as the case may be.

ANNEXURE 3: PROVISIONS RELATING TO SECONDARY AND HIGHER EDUCATION CESS

136. Secondary and Higher Education Cess. Without prejudice to the provisions of

(1) sub-section (12) of section 2, there shall be levied and collected, in accordance with the provisions of this Chapter as surcharge for purposes of the Union, a cess to be called the Secondary and Higher Education Cess, to fulfil the commitment of the Government to provide and finance secondary and higher education.

(2) The Central Government may, after due appropriation made by Parliament by law in this behalf, utilise, such sums of money of the Secondary and Higher Education Cess levied under sub-section (12) of section 2 and this Chapter for the purposes specified in sub-section (1) as it may consider necessary.

140. Secondary and Higher Education Cess on taxable services. (1) The Secondary and Higher Education Cess levied under section 136, in the case of

all services which are taxable services, shall be a tax (in this section referred to as the Secondary and Higher Education Cess on taxable services) at the rate of one per cent., calculated on the tax which is levied and collected under section 66 of the Finance Act, 1994 (32 of 1994).

The Secondary and Higher Education Cess on taxable (2) services shall be in addition to the tax chargeable on such taxable services, under Chapter V of the Finance Act, 1994 (32 of 1994) and the Education Cess chargeable under section 95 of the Finance (No. 2) Act, 2004 (23 of 2004).

(3) The provisions of Chapter V of the Finance Act, 1994 (32 of 1994) and the rules made thereunder, including those relating to refunds and exemptions from tax and imposition of penalty shall, as far as may be, apply in relation to the levy and collection of the


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Secondary and Higher Education Cess on taxable services, as they apply in relation to the levy and collection of tax on such taxable services under Chapter V of the Finance Act, 1994 or the rules made thereunder, as the case may be.

ANNEXURE 4: SECTION 68(1) OF THE FINANCE ACT, 1994 AS AMENDED FROM TIME TO TIME(1) Every person providing taxable service to any person shall pay service tax at the rate specified

in section 66 in such manner and within such period as may be prescribed.

ANNEXURE 5: COMPARISON OF SELECT DEFINITIONS UNDERGOING CHANGE DUE TO TRANSITION

Old Definition up to 30.06.2012 New Definition w.e.f. 01.07.2012

Advertisement (2) advertisement includes any notice, circular, label, wrapper, document, hoarding or any other audio or visual representation made by means of light, sound, smoke or gas;]

(2) advertisement means any form of presentation for promotion of, or bringing awareness about, any event, idea, immovable property, person, service, goods or actionable claim through newspaper, television, radio or any other means but does not include any presentation made in person;

Business Entity

(19B) business entity includes an association of persons, body of individuals, company or firm but does not include an individual;

(17) business entity means any person ordinarily carrying out any activity relating to industry, commerce or any other business

Clinical Establishment

(25A) clinical establishment means

(i) a hospital, maternity home, nursing home, dispensary, clinic, sanatorium or an institution, by whatever name called, owned, established, administered or managed by any person or body of persons, whether incorporated or not, having in its establishment the facility of central air-conditioning either in whole or in part of its premises and having more than twenty-five beds for in-patient treatment at any time during the financial year, offering services for diagnosis, treatment or care for illness, disease, injury, deformity, abnormality or pregnancy in any system of medicine; or

(ii) an entity owned, established, administered or managed by any person or body of persons, whether incorporated or not, either as an independent entity or as a part of any clinical establishment referred to in sub-clause (i), which carries out diagnosis of diseases through pathological, bacteriological, genetic, radiological, chemical, biological investigations or other diagnostic or investigative services with the aid of laboratory or other medical equipment, but does not include an establishment, owned or controlled by—

(a) the Government; or

(b) a local authority;

As defined in the Mega Exemption Notification 12/2012-ST Sr. 8

“clinical establishment” means a hospital, nursing home, clinic, sanatorium or an institution by, whatever name called, that offers services or facilities requiring diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognized system of medicine, established and administered or maintained by any person or a place established as an independent entity or a part of an establishment to carry out diagnostic or investigative services of diseases,


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Goods (50) “goods” has the meaning assigned to it in clause (7) of section 2 of the Sale of Goods Act, 1930 (3 of 1930);

As per section 2(7) of SOGA goods is defined as (7) “goods” means every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale;

(25) “goods” means every kind of movable property other than actionable claim and money; and includes securities, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale;

R e s i d e n t i a l Complex

(91a) residential complex means any complex comprising of —

(i) a building or buildings, having more than twelve residential units;

(ii) a common area; and

(iii) any one or more of facilities or services such as park, lift, parking space, community hall, common water supply or effluent treatment system,

located within a premises and the layout of such premises is approved by an authority under any law for the time being in force, but does not include a complex which is constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex is intended for personal use as residence by such person.

Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this clause,—

(a) “personal use” includes permitting the complex for use as residence by another person on rent or without consideration;

(b) “residential unit” means a single house or a single apartment intended for use as a place of residence;]

As defined in the Mega Exemption Notification 12/2012-ST Sr. 27

Residential complex means any complex comprising of a building or buildings, having more than one single residential unit

Renting of I m m o v a b l e Property

(90a) “renting of immovable property” includes renting, letting, leasing, licensing or other similar arrangements of immovable property for use in the course or furtherance of business or commerce but does not include—

(i) renting of immovable property by a religious body or to a religious body; or

(ii) renting of immovable property to an educational body, imparting skill or knowledge or lessons on any subject or field, other than a commercial training or coaching centre;

Explanation [(1)].—For the purposes of this clause, “for use in the course or furtherance of business or commerce” includes use of immovable property as factories, office buildings, warehouses, theatres, exhibition halls and multiple-use buildings;]

(41) “renting” means allowing, permitting or granting access, entry, occupation, use or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property;


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[Explanation 2.— For the removal of doubts, it is hereby declared that for the purposes of this clause “renting of immovable property” includes allowing or permitting the use of space in an immovable property, irrespective of the transfer of possession or control of the said immovable property;

Works contracts

Explanation to Section 65(105)(zzzza)

“works contract” means a contract wherein,—

(i) transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and

(ii) such contract is for the purposes of carrying out,—

(a) erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluids, heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators; or

(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or

(c) construction of a new residential complex or a part thereof; or

(d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or

(e) turnkey projects including engineering, procurement and construction or commissioning (EPC) projects;

Section 65B(54)

“works contract” means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property;

ANNEXURE 6: ITEMS IN THE NEGATIVE LIST:

66D. Negative list of services. The negative list shall comprise of the following services, namely:––

(a) services by Government or a local authority excluding the following services to the extent they are not covered elsewhere—

(i) services by the Department of Posts by way of speed post, express parcel post, life insurance and agency services provided to a person other than Government;


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(ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;

(iii) transport of goods or passengers; or

(iv) support services, other than services covered under clauses (i) to (iii) above, provided to business entities;

(b) services by the Reserve Bank of India;

(c) services by a foreign diplomatic mission located in India;

(d) services relating to agriculture or agricultural produce by way of—

(i) agricultural operations directly related to production of any agricultural produce including cultivation, harvesting, threshing, plant protection or seed testing;

(ii) supply of farm labour;

(iii) processes carried out at an agricultural farm including tending, pruning, cutting, harvesting, drying, cleaning, trimming, sun drying, fumigating, curing, sorting, grading, cooling or bulk packaging and such like operations which do not alter the essential characteristics of agricultural produce but make it only marketable for the primary market;

(iv) renting or leasing of agro machinery or vacant land with or without a structure incidental to its use;

(v) loading, unloading, packing, storage or warehousing of agricultural produce;

(vi) agricultural extension services;

(vii) services by any Agricultural Produce Marketing Committee or Board or services provided by a commission agent for sale or purchase of agricultural produce;

(e) trading of goods;

(f) any process amounting to manufacture or production of goods;

(g) selling of space or time slots for advertisements other than advertisements broadcast by radio or television;

(h) service by way of access to a road or a bridge on payment of toll charges;

(i) betting, gambling or lottery;

(j) admission to entertainment events or access to amusement facilities;

(k) transmission or distribution of electricity by an electricity transmission or distribution utility;

(l) services by way of—

(i) pre-school education and education up to higher secondary school or equivalent;

(ii) education as a part of a curriculum for obtaining a qualification recognised by any law for the time being in force;

(iii) education as a part of an approved vocational education course;

(m) services by way of renting of residential dwelling for use as residence;


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(n) services by way of—

(i) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount;

(ii) inter se sale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange or amongst banks and such dealers;

(o) service of transportation of passengers, with or without accompanied belongings, by—

(i) a stage carriage;

(ii) railways in a class other than—

(A) first class; or

(B) an airconditioned coach;

(iii) metro, monorail or tramway;

(iv) inland waterways;

(v) public transport, other than predominantly for tourism purpose, in a vessel, between places located in India; and

(vi) metered cabs, radio taxis or auto rickshaws;

(p) services by way of transportation of goods—

(i) by road except the services of—

(A) a goods transportation agency; or

(B) a courier agency;

(ii) by an aircraft or a vessel from a place outside India up to the customs station of clearance in India; or

(iii) by inland waterways;

(q) funeral, burial, crematorium or mortuary services including transportation of the deceased.

ANNEXURE 7: EXEMPTION NOTIFICATION 12/2012-ST DATED 17-3-2012In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994) (hereinafter referred to as the said Finance Act), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts the following taxable services from the whole of the service tax leviable thereon under section 66 B of the said Finance Act, namely:-

1. Services provided to the United Nations or a specified international organization;

2. Health care services by a clinical establishment, an authorised medical practitioner or para-medics;

3. Services by a veterinary clinic in relation to health care of animals or birds;

4. Services by an entity registered under section 12AA of the Income-tax Act, 1961 (43 of 1961) by way of charitable activities;


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5. Services by a person by way of—

(a) renting of precincts of a religious place meant for general public; or

(b) conduct of any religious ceremony;

6. Services provided to any person other than a business entity by -

(a) an individual as an advocate; or

(b) a person represented on and as arbitral tribunals;

7. Services by way of technical testing or analysis of newly developed drugs, including vaccines and herbal remedies, on human participants by a clinical research organisation approved to conduct clinical trials by the Drug Controller General of India;

8. Services by way of training or coaching in recreational activities relating to arts, culture or sports;

9. Services provided—

(a) to an educational institution by way of catering under any centrally assisted mid-day meals scheme sponsored by Government;

(b) to or by an institution in relation to educational services, where the educational services are exempt from the levy of service tax, by way of transportation of students or staff;

(c) to or by an institution in relation to educational services, where the educational services are exempt from the levy of service tax, by way of services in relation to admission to such education;

10. Services provided to a recognised sports body by—

(a) an individual as a player, referee, umpire, coach or manager for participation in a tournament or championship organized by a recognized sports body;

(b) another recognised sports body;

11. Services by way of sponsorship of tournaments or championships organised,—

(a) by a national sports federation, or its affiliated federations, where the participating teams or individuals represent any district, state or zone;

(b) by Association of Indian Universities, Inter-University Sports Board, School Games Federation of India, All India Sports Council for the Deaf, Paralympic Committee of India, Special Olympics Bharat;

(c) by Central Civil Services Cultural and Sports Board;

(d) as part of national games, by Indian Olympic Association; or

(e) under Panchayat Yuva Kreeda Aur Khel Abhiyaan (PYKKA) Scheme;

12. Services provided to the Government or local authority by way of erection, construction, maintenance, repair, alteration, renovation or restoration of —

(a) a civil structure or any other original works meant predominantly for a non-industrial or non-commercial use;


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(b) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);

(c) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment;

(d) canal, dam or other irrigation works;

(e) pipeline, conduit or plant for (i) drinking water supply (ii) water treatment (iii) sewerage treatment or disposal; or

(f) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Finance Act;

13. Services provided by way of erection, construction, maintenance, repair, alteration, renovation or restoration of,—

(a) road, bridge, tunnel, or terminal for road transportation for use by general public;

(b) building owned by an entity registered under section 12AA of the Income tax Act, 1961(43 of 1961) and meant predominantly for religious use by general public;

(c) pollution control or effluent treatment plant, except located as a part of a factory; or

(d) electric crematorium.

14. Services by way of erection or construction of original works pertaining to,—

(a) airport, port or railways;

(b) single residential unit otherwise as a part of a residential complex;

(c) low-cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;

(d) post-harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or

(e) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages;

15. Temporary transfer or permitting the use or enjoyment of a copyright covered under clause (a) or (b) of sub-section (1) of section 13 of the Indian Copyright Act, 1957 (14 of 1957), relating to original literary, dramatic, musical, artistic works or cinematograph films;

16. Services by a performing artist in folk or classical art forms of (i) music, or (ii) dance, or (iii) theatre, excluding services provided by such artist as a brand ambassador;

17. Services by way of collecting or providing news by an independent journalist, Press Trust of India or United News of India;

18. Services by way of renting of a hotel, inn, guest house, club, campsite or other commercial places meant for residential or lodging purposes, having declared tariff of a room below rupees one thousand per day or equivalent;


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19. Services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, other than those having the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year, and which has a licence to serve alcoholic beverages;

20. Services by way of transportation by rail or a vessel from one port in India to another of the following goods —

(a) petroleum and petroleum products falling under Chapter headings 2710 and 2711 of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986);

(b) relief materials meant for victims of natural or man-made disasters, calamities, accidents or mishap;

(c) defence or military equipments;

(d) postal mail, mail bags or household effects;

(e) newspaper or magazines registered with Registrar of Newspapers;

(f) railway equipments or materials;

(g) agricultural produce;

(h) foodstuff including flours, tea, coffee, jaggery, sugar, milk products, salt and edible oil, excluding alcoholic beverages; or

(i) chemical fertilizer and oilcakes;

21. Services provided by a goods transport agency by way of transportation of —

(a) fruits, vegetables, eggs, milk, food grains or pulses in a goods carriage;

(b) goods where gross amount charged on a consignment transported in a single goods carriage does not exceed one thousand five hundred rupees; or

(c) goods, where gross amount charged for transportation of all such goods for a single consignee in the goods carriage does not exceed rupees seven hundred fifty.

22. Services by way of giving on hire —

(a) to a state transport undertaking, a motor vehicle meant to carry more than twelve passengers; or

(b) to a goods transport agency, a means of transportation of goods.

23. Transport of passengers, with or without accompanied belongings, by —

(a) air, embarking or terminating in an airport located in the State of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, or Tripura or at Baghdogra located in West Bengal; or

(b) a contract carriage for the transportation of passengers, excluding tourism, conducted tour, charter or hire;

24. Services by way of motor vehicle parking to general public excluding leasing of space to an entity for providing such parking facility;


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25. Services provided to the Government or a local authority by way of -

(a) repair of a ship, boat or vessel;

(b) effluents and sewerage treatment;

(c) waste collection or disposal;

(d) storage, treatment or testing of water for drinking purposes; or

(e) transport of water by pipeline or conduit for drinking purposes;

26. Services of general insurance business provided under following schemes -

(a) Hut Insurance Scheme;

(b) Cattle Insurance under Swarnajaynti Gram Swarozgar Yojna (earlier known as Integrated Rural Development Programme);

(c) Scheme for Insurance of Tribals;

(d) Janata Personal Accident Policy and Gramin Accident Policy;

(e) Group Personal Accident Policy for Self-Employed Women;

(f) Agricultural Pumpset and Failed Well Insurance;

(g) premia collected on export credit insurance;

(h) Weather Based Crop Insurance Scheme or the Modified National Agricultural Insurance Scheme, approved by the Government of India and implemented by the Ministry of Agriculture;

(i) Jan Arogya Bima Policy;

(j) National Agricultural Insurance Scheme (Rashtriya Krishi Bima Yojana);

(k) Pilot Scheme on Seed Crop Insurance;

(l) Central Sector Scheme on Cattle Insurance;

(m) Universal Health Insurance Scheme;

(n) Rashtriya Swasthya Bima Yojana; or

(o) Coconut Palm Insurance Scheme;

27. Services provided by an incubatee up to a total business turnover of fifty lakh rupees in a financial year subject to the following conditions, namely:—

(a) the total business turnover had not exceeded fifty lakh rupees during the preceding financial year; and

(b) a period of three years has not lapsed from the date of entering into an agreement as an incubatee;

28. Service by an unincorporated body or an entity registered as a society to own members by way of reimbursement of charges or share of contribution -

(a) as a trade union;


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(b) for the provision of exempt services by the entity to third persons; or

(c) up to an amount of five thousand rupees per month per member for sourcing of goods or services from a third person for the common use of its members in a housing society or a residential complex.

29. Services by the following persons in respective capacities —

(a) a sub-broker or an authorised person to a stock broker;

(b) an authorised person to a member of a commodity exchange;

(c) a mutual fund agent or distributor to mutual fund or asset management company for distribution or marketing of mutual fund;

(d) a selling or marketing agent of lottery tickets to a distributor or a selling agent;

(e) a selling agent or a distributor of SIM cards or recharge coupon vouchers; or

(f) a business facilitator or a business correspondent to a banking company or an insurance company in a rural area;

30. Carrying out an intermediate production process as job work in relation to -

(a) agriculture, printing or textile processing;

(b) cut and polished diamonds and gemstones; or plain and studded jewellery of gold and other precious metals, falling under Chapter 71 of the Central Excise Tariff Act, 1985 (5 of 1986);

(c) any goods on which appropriate duty is payable by the principal manufacturer; or

(d) processes of electroplating, zinc plating, anodizing, heat treatment, powder coating, painting including spray painting or auto black, during the course of manufacture of parts of cycles or sewing machines up to an aggregate value of taxable service of the specified processes of one hundred and fifty lakh rupees in a financial year subject to the condition that such aggregate value had not exceeded one hundred and fifty lakh rupees during the preceding financial year;

31. Services by an organiser to any person in respect of a business exhibition held outside India;

32. Services by way of making telephone calls from —

(a) departmentally run public telephones;

(b) guaranteed public telephones operating only for local calls; or

(c) free telephone at airport and hospitals where no bills are being issued.

33. Services by way of slaughtering of bovine animals.

34. Services received from a service provider located in a non-taxable territory by —

(a) the Government, a local authority or an individual in relation to any purpose other than industry, business or commerce; or

(b) an entity registered under section 12AA of the Income-tax Act, 1961 (43 of 1961) for the purposes of providing charitable activities.


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2. Definitions.– for the purpose of this notification, unless the context otherwise requires, –1. “advocate” has the meaning assigned to it in clause (a) of sub-section (1) of section 2

of the Advocates Act, 1961 ( 25 of 1961),

2. “appropriate duty” means duty payable on manufacture or production under a Central or a State Act, but shall not include ‘Nil’ rate of duty or duty wholly exempt,

3. “arbitral tribunal” has the meaning assigned to it in clause (d) of section 2 of the Arbitration and Conciliation Act, 1996 (26 of 1996),

4. “authorised medical practitioner” means any medical practitioner registered with any of the Councils of the recognised system of medicine and includes medical professional having the requisite qualification to practice in any recognised system of medicine as per any law for the time being in force,

5. “authorised person” means and includes any person whether being an individual, partnership firm, limited liability partnership or body corporate, who is appointed as such either by a stock broker including trading member or by a member of commodity exchange and who provides access to trading platform of a stock exchange or a commodity exchange, as an agent of the stock broker or member of a commodity exchange,

6. “banking company” has the meaning assigned to it in clause (a) of section 45A of the Reserve Bank of India Act,1934 (2 of 1934),

7. “business facilitator or business correspondent” means an intermediary appointed under business facilitator model or business correspondent model by a banking company or an insurance company under the guidelines issued by Reserve Bank of India,

8. “clinical establishment” means a hospital, nursing home, clinic, sanatorium or an institution by, whatever name called, that offers services or facilities requiring diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognised system of medicine, established and administered or maintained by any person or a place established as an independent entity or a part of an establishment to carry out diagnostic or investigative services of diseases,

9. “charitable activities” means activities relating to —

(a) public health by way of —

(I) care or counselling of (i) terminally ill persons or persons with severe physical or mental disability, (ii) persons afflicted with HIV or AIDS, or (iii) persons addicted to a dependence-forming substance such as narcotics drugs or alcohol; or

(II) public awareness of preventive health, family planning or prevention of HIV infection;

(b) advancement of religion;

(c) advancement of educational programmes or skill development relating to,-

(I) abandoned, orphaned or homeless children;

(II) physically or mentally abused and traumatized persons;

(III) prisoners; or


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(IV) persons over the age of 65 years residing in a rural area;

(d) preservation of environment including watershed, forests and wildlife; or

(e) advancement of any other object of general public utility up to a value of twenty five lakh rupees in a financial year subject to the condition that total value of such activities had not exceeded twenty five lakhs rupees during the preceding financial year.

Explanation:— For the purpose of this clause, ‘general public’ means the body of people at large sufficiently defined by some common quality of public or impersonal nature.

10. “commodity exchange” means an association as defined in section 2(j) and recognized under section 6 of the Forward Contracts (Regulation) Act,1952 (74 of 1952),

11. “contract carriage” has the meaning assigned to it in clause (7) of section 2 of the Motor Vehicles Act, 1988 (59 of 1988),

12. “declared tariff” includes charges for all amenities provided in the unit of accommodation (given on rent for stay) like furniture, air-conditioner, refrigerators or any other amenities, but does not include any discount offered on the published charges for such unit,

13. “distributor or selling agent” has the meaning assigned to them in clause (c) of the rule 2 of the Lottery (Regulation) Rules, 2010 notified by the Government of India in the Ministry of Home Affairs published in the Gazette of India, Extraordinary, Part-II, Section 3, Sub-section (i), vide number G.S.R. 278(E), dated the 1st April, 2010 and shall include distributor or selling agent authorised by the lottery organising State,

14. “general insurance business” has the meaning assigned to it in clause (g) of section 3 of General Insurance Business (Nationalisation) Act, 1972 (57 of 1972),

15. “goods carriage” has the meaning assigned to it in clause (14) of section 2 of the Motor Vehicles Act, 1988 (59 of 1988),

16. “health care services” means any service by way of diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognised system of medicine and includes services by way of supply of meals for the patient or transportation of the patient to and from a clinical establishment, but does not include hair transplant or cosmetic or plastic surgery, except when undertaken to restore or to reconstruct anatomy or functions of body affected due to congenital defects, developmental abnormalities, injury or trauma,

17. “incubatee” means an entrepreneur located within the premises of a Technology Business Incubator (TBI) or Science and Technology Entrepreneurship Park (STEP) recognised by the National Science and Technology Entrepreneurship Development Board (NSTEDB) of the Department of Science and Technology, Government of India and who has entered into an agreement with the TBI or the STEP to enable himself to develop and produce hi-tech and innovative products,

18. “insurance company” means a company carrying on life insurance business or general insurance business,

19. “life insurance business” has the meaning assigned to it in clause (11) of section 2 of the Insurance Act, 1938 (4 of 1938),


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20. “original works” means —

(a) all new constructions; or

(b) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable,

21. “principal manufacturer” means any person who gets goods manufactured or processed on his account from another person,

22. “recognized sports body” means (i) the Indian Olympic Association, (ii) Sports Authority of India, (iii) a national sports federation recognised by the Ministry of Sports and Youth Affairs of the Central Government, and its affiliate federations, (iv) national sports promotion organisations recognised by the Ministry of Sports and Youth Affairs of the Central Government, (v) the International Olympic Association or a federation recognised by the International Olympic Association or (vi) a federation or a body which regulates a sport at international level,

23. “religious place” means a place which is primarily meant for conduct of prayers or worship pertaining to a religion,

24. “residential complex” means any complex comprising of a building or buildings, having more than one single residential unit,

25. “rural area” means the area comprised in a village as defined in land revenue records, excluding,—

(i) the area under any municipal committee, municipal corporation, town area committee, cantonment board or notified area committee; or

(ii) any area that may be notified as an urban area by the Central Government or a State Government,

26. “single residential unit” means an independent residential unit with specific facilities for living, cooking and sanitary requirements,

27. “specified international organisation” means an international organisation declared by the Central Government in pursuance of section 3 of the United Nations (Privileges and Immunities) Act, 1947 (46 of 1947), to which the provisions of the Schedule to the said Act apply,

28. “state transport undertaking” has the meaning assigned to it in clause (42) of Section 2 of the Motor Vehicles Act, 1988 (59 of 1988),

29. “sub-broker” has the meaning assigned to it in sub-clause (gc) of clause 2 of the Securities and Exchange Board of India (Stock Brokers and Sub-brokers) (Second Amendment) Regulations, 2006,

30. “trade union” has the meaning assigned to it in clause (h) of section 2 of the Trade Unions Act, 1926 (16 of 1926).

3. This notification shall come into force from the date on which section 66B of the Finance Act, 1994 comes into effect.


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ANNEXURE 8: OTHER EXEMPTIONS PROPOSED TO BE CONTINUED

A. Small scale exemption1. For the service provider for the taxable services of aggregate value not exceeding ten

lakh rupees in a financial year subject to certain conditions.

B. Exporters/ SEZ2. Transportation of export goods by Goods Transport Agency in a goods carriage received

by an exporter for transport of the said goods directly from —

i. any container freight station or inland container depot to the port or airport, from where the goods are exported;

ii. his place of removal, to an inland container depot, a container freight station, a port or airport, from where the goods are exported.

3. Refund of service tax paid on certain specified taxable services received by an exporter of goods and used for export of goods, subject to certain specified conditions.

4. Taxable services, received by a unit located in a Special Economic Zone or Developer of SEZ for the authorised operations.

C. Import of technology5. Taxable service involving import of technology, from so much of service tax, as is

equivalent to the extent of amount of cess payable on the said transfer of technology under the provisions of section 3 of the Research and Development Cess Act, 1986.

D. Services to foreign diplomatic mission6. Taxable services provided for the official use of a foreign diplomatic mission or consular

post in India, or for personal use or for the use of the family members of diplomatic agents or career consular officers posted therein.

E. Services by TBI or STEP7. Taxable services provided by a Technology Business Incubator (TBI) or a Science and

Technology Entrepreneurship Park (STEP) recognized by the National Science and Technology Entrepreneurship Development Board (NSTEDB) of the Department of Science and Technology, Government of India.

F. Renting of an immovable property8. Taxable service of renting of an immovable property, from so much of the service

tax leviable thereon, as is in excess of the service tax calculated on a value which is equivalent to the gross amount charged for renting of such immovable property less taxes on such property, namely property tax levied and collected by local bodies.

Annexure 9: Sector wise grouping of the exclusions and exemptions In this note, the exclusions and exemptions are grouped in terms of the relevant sectors and presented for easy analysis. In the said grouping, the following abbreviations are used for reference:

NL – Specific sub clause of the service in the negative list under Section 66D


37

ME – Specific serial number of the exemption provided by the mega exemption notification 12/2012-ST.

GE – Specific entry in the general exemption proposed to be retained in the future with suitable modifications

Relevant Definitions have been provided at appropriate places with the reference to the section by way of footnotes.

Government Related Services:Services Provided by Government:

A. Tax Payable by Government

NL (a)

(i) Services by the Department of Posts by way of speed post, express parcel post, life insurance and agency services provided to a person other than Government;

(ii) Services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;

(iii) Transport of goods or passengers; or

B. Tax Payable by Service Recipient

(iv) Support services, other than services covered under clauses (i) to (iii) above, provided to business entities.

“Support services” means infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis.5

Services Provided to Government:ME 1: Services provided to the United Nations or a specified international organization;

ME 25: Services provided to the Government or a local authority by way of -

(a) repair of a ship, boat or vessel;

(b) effluents and sewerage treatment;

(c) waste collection or disposal;

(d) storage, treatment or testing of water for drinking purposes; or

(e) transport of water by pipeline or conduit for drinking purposes;

5. Section 65B (49) of the Finance Act, 1994


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ME 34: Services received from a service provider located in a non- taxable territory by —

(a) the Government, a local authority or an individual in relation to any purpose other than industry, business or commerce; or

Construction & Real EstateNL (h): Service by way of access to a road or a bridge on payment of toll charges.

ME 12: Services provided to the Government or local authority by way of erection, construction, maintenance, repair, alteration, renovation or restoration of —

(a) a civil structure or any other original works meant predominantly for a non-industrial or non-commercial use;

“Original works” means —

(a) All new constructions; or

(b) All types of additions and alterations to abandoned or damaged structures on land that are required to make them workable,6

(b) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);

(c) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment;

(d) canal, dam or other irrigation works;

(e) pipeline, conduit or plant for (i) drinking water supply (ii) water treatment (iii)sewerage treatment or disposal; or

(f) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Finance Act;

ME 13: Services provided by way of erection, construction, maintenance, repair, alteration, renovation or restoration of,-

(a) road, bridge, tunnel, or terminal for road transportation for use by general public;

(b) building owned by an entity registered under section 12 AA of the Income tax Act, 1961(43 of 1961) and meant predominantly for religious use by general public;

(c) pollution control or effluent treatment plant, except located as a part of a factory; or

(d) electric crematorium;

ME 14: Services by way of erection or construction of original works pertaining to,-

(a) airport, port or railways;

6. Clause 20 of the definition part of Mega Exemption Notification 12/2012 ST


39

(b) single residential unit otherwise as a part of a residential complex;

“single residential unit” means an independent residential unit with specific facilities for living, cooking and sanitary requirements 7

“residential complex” means any complex comprising of a building or buildings, having more than one single residential unit,8

(c) low- cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;

(d) post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or

(e) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages;

“works contract” means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, improvement, repair, renovation, alteration of any building or structure on land or for carrying out any other similar activity or a part thereof in relation to any building or structure on land9

NL (m): Services by way of renting of residential dwelling for use as residence;

“renting” means allowing, permitting or granting access, entry, occupation, use or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property;10

GE (F): Renting of an immovable property

8. Taxable service of renting of an immovable property, from so much of the service tax leviable thereon, as is in excess of the service tax calculated on a value which is equivalent to the gross amount charged for renting of such immovable property less taxes on such property, namely property tax levied and collected by such bodies.

Not For Profit OrganizationsME 4: Services by an entity registered under section 12AA of the Income tax Act, 1961 (43 of 1961) by way of charitable activities;

“Charitable activities” means activities relating to–

a) public health by way of –

I. care or counseling of (i) terminally ill persons or persons with severe physical or mental disability, (ii) persons afflicted with HIV or AIDS, or (iii) persons addicted to a dependence-forming substance such as narcotics drugs or alcohol; or

7. Clause 28 of the definition part of the Mega Exemption Notification No. 12/2012-ST

8. Clause 27 of the definition part of the Mega Exemption Notification No. 12/2012- ST




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II. public awareness of preventive health, family planning or prevention of HIV infection;

b) advancement of religion;

c) advancement of educational programmes or skill development relating to,-

i. abandoned, orphaned or homeless children;

ii. physically or mentally abused and traumatized persons;

iii. prisoners; or

iv. persons over the age of 65 years residing in a rural area;

d) preservation of environment including watershed, forests and wildlife; or

e) advancement of any other object of general public utility up to a value of twenty five lakh rupees in a financial year subject to the condition that total value of such activities had not exceeded twenty five lakh rupees during the preceding financial year; or

Explanation:— For the purpose of this clause, ‘general public’ means the body of people at large sufficiently defined by some common quality of public or impersonal nature,11

ME 5: Services by a person by way of—

(a) renting of precincts of a religious place meant for general public; or

(b) conduct of any religious ceremony;

“religious place” means a place which is primarily meant for conduct of prayers or worship pertaining to a religion12

ME 28: Service by an unincorporated body or an entity registered as a society to own members by way of reimbursement of charges or share of contribution -

(a) as a trade union;

(b) for the provision of exempt services by the entity to third persons; or

(c) up to an amount of five thousand rupees per month per member for sourcing of goods or services from a third person for the common use of its members in a housing society or a residential complex;

ME 34: Services received from a service provider located in a non- taxable territory by —

(b) an entity registered under section 12AA of the Income tax Act, 1961 (43 of 1961) for the purposes of providing charitable activities.

11. Clause 9 of the definition part of Mega Notification No. 12/2012-ST

12. Clause 26 of the definition part of Mega Notification No. 12/2012-ST


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Education ServicesProvided by an educational institution

NL (l): Services by way of —

(i) pre-school education and education up to higher secondary school or equivalent;

(ii) education as a part of a curriculum for obtaining a qualification recognized by law;

(iii) education as a part of an approved vocational education course.

ME 8: Services by way of training or coaching in recreational activities relating to arts, culture or sports;

Provided to an educational institutionME 9: Services provided—

(a) to an educational institution by way of catering under any centrally assisted mid – day meals scheme sponsored by Government;

(b) to or by an institution in relation to educational services, where the educational services are exempt from the levy of service tax, by way of transportation of students or staff;

(c) to or by an institution in relation to educational services, where the educational services are exempt from the levy of service tax, by way of services in relation to admission to such education;

Health Care ME 2. Health care services by a clinical establishment, an authorised medical practitioner or para-medics;

ME 3. Services by a veterinary clinic in relation to health care of animals or birds;

ME 7. Services by way of technical testing or analysis of newly developed drugs, including vaccines and herbal remedies, on human participants by a clinical research organisation approved to conduct clinical trials by the Drug Controller General of India;

“health care services” means any service by way of diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognised system of medicine and includes services by way of supply of meals for the patient or transportation of the patient to and from a clinical establishment, but does not include hair transplant or cosmetic or plastic surgery, except when undertaken to restore or to reconstruct anatomy or functions of body affected due to congenital defects, developmental abnormalities, injury or trauma13

Entertainment & Media NL (g) Selling of space or time slots for advertisements other than advertisements broadcast by radio or television.

“advertisement” means any form of presentation for promotion of, or bringing awareness about, any event, idea, immovable property, person, service, goods or actionable claim through

13. Clause 16 of the definition part of Mega Exemption Notification No 12/2012 ST


42

newspaper, television, radio or any other means but does not include any presentation made in person14

NL (j): Admission to entertainment events or access to amusement facilities.

ME 15: Temporary transfer or permitting the use or enjoyment of a copyright covered under clause (a) or (b) of sub-section (1) of section 13 of the Indian Copyright Act, 1957 (14 of 1957), relating to original literary, dramatic, musical, artistic works or cinematograph films;

ME 16: Services by a performing artist in folk or classical art forms of (i) music, or (ii) dance, or (iii) theatre, excluding services provided by such artist as a brand ambassador;

ME 17: Services by way of collecting or providing news by an independent journalist, Press Trust of India or United News of India;

Sports & Games NL (i): Betting, gambling or lottery.

ME 10: Services provided to a recognised sports body by—

(a) an individual as a player, referee, umpire, coach or manager for participation in a tournament or championship organized by a recognized sports body;

(b) another recognised sports body;

ME 11: Services by way of sponsorship of tournaments or championships organised,-

(a) by a national sports federation, or its affiliated federations, where the participating teams or individuals represent any district, state or zone;

(b) by Association of Indian Universities, Inter-University Sports Board, School Games Federation of India, All India Sports Council for the Deaf, Paralympic Committee of India, Special Olympics Bharat;

(c) by Central Civil Services Cultural and Sports Board;

(d) as part of national games, by Indian Olympic Association; or

(e) under Panchayat Yuva Kreeda Aur Khel Abhiyaan (PYKKA) Scheme;

Travel & Tourism NL (o): Service of transportation of passengers, with or without accompanied belongings, by

(i) a stage carriage;

(ii) railways in a class other than –

(A) first class; or

(B) an air conditioned coach;

(iii) metro, monorail or tramway;

(iv) inland waterways;

14. Section 65B(2) of the Finance Act, 1994


43

(v) public transport in a vessel of less than fifteen tonne net, other than predominantly for tourism purpose; and

(vi) metered cabs, radio taxis or auto rickshaws;

ME 18: Services by way of renting of a hotel, inn, guest house, club, campsite or other commercial places meant for residential or lodging purposes, having declared tariff of a room below rupees one thousand per day or equivalent;

ME 19: Services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, other than those having the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year, and which has a licence to serve alcoholic beverages;

ME 22: Services by way of giving on hire —

(a) to a state transport undertaking, a motor vehicle meant to carry more than twelve passengers; or

ME23: Transport of passengers, with or without accompanied belongings, by —

(a) air, embarking or terminating in an airport located in the state of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, or Tripura or at Baghdogra located in West Bengal; or

(b) a contract carriage for the transportation of passengers, excluding tourism, conducted tour, charter or hire;

ME 24: Services by way of motor vehicle parking to general public excluding leasing of space to an entity for providing such parking facility;

Transport & Logistics NL (p): Services by way of transportation of goods –

(i) by road except the services of –

(A) a goods transportation agency; or

(B) a courier agency;

(ii) by an aircraft or a vessel from a place outside India to the first customs station of landing in India; or

(iii) by inland waterways;

“inland waterway” means national waterways as defined in clause (h) of section 2 of the Inland Waterways Authority of India Act, 1985 or other waterway on any inland water, as defined in clause (b) of section 2 of the Inland Vessels Act, 191715

ME 20: Services by way of transportation by rail or a vessel from one port in India to another of the following goods -

(a) petroleum and petroleum products falling under Chapter heading 2710 and 2711 of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986);



44

(b) relief materials meant for victims of natural or man-made disasters, calamities, accidents or mishap;

(c) defence or military equipments;

(d) postal mail, mail bags or household effects;

(e) newspaper or magazines registered with Registrar of Newspapers;

(f) railway equipments or materials;

(g) agricultural produce;

(h) foodstuff including flours, tea, coffee, jaggery, sugar, milk products, salt and edible oil, excluding alcoholic beverages; or

(i) chemical fertilizer and oilcakes;

ME 21: Services provided by a goods transport agency by way of transportation of —

(a) fruits, vegetables, eggs, milk, food grains or pulses in a goods carriage;

(b) goods where gross amount charged on a consignment transported in a single goods carriage does not exceed one thousand five hundred rupees; or

(c) goods, where gross amount charged for transportation of all such goods for a single consignee in the goods carriage does not exceed rupees seven hundred fifty;

ME 22: Services by way of giving on hire —

(b) to a goods transport agency, a means of transportation of goods;

Business & Marketing NL (e): Trading of goods.

ME 29: Services by the following persons in respective capacities —

(a) a sub-broker or an authorised person to a stock broker;

(b) an authorised person to a member of a commodity exchange;

(c) a mutual fund agent or distributor to mutual fund or asset management company for distribution or marketing of mutual fund;

(d) a selling or marketing agent of lottery tickets to a distributor or a selling agent;

(e) a selling agent or a distributor of SIM cards or recharge coupon vouchers; or

(f) a business facilitator or a business correspondent to a banking company or an insurance company in a rural area;

ME 31: Services by an organiser to any person in respect of a business exhibition held outside India;

Job Work NL (f): Any process amounting to manufacture or production of goods.

ME 30: Carrying out an intermediate production process as job work in relation to —

(a) agriculture, printing or textile processing;


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(b) cut and polished diamonds and gemstones; or plain and studded jewellery of gold and other precious metals, falling under Chapter 71 of the Central Excise Tariff Act, 1985 (5 of 1986);

(c) any goods on which appropriate duty is payable by the principal manufacturer; or

(d) processes of electroplating, zinc plating, anodizing, heat treatment, powder coating, painting including spray painting or auto black, during the course of manufacture of parts of cycles or sewing machines upto an aggregate value of taxable service of the specified processes of one hundred and fifty lakh rupees in a financial year subject to the condition that such aggregate value had not exceeded one hundred and fifty lakh rupees during the preceding financial year;

“process amounting to manufacture or production of goods” means a process on which duties of excise are leviable under section 3 of the Central Excise Act, 1944 or any process amounting to manufacture of alcoholic liquors for human consumption, opium, Indian hemp and other narcotic drugs and narcotics on which duties of excise are leviable under any State Act for the time being in force;16

Banking, Financial & Insurance NL (n): Services by way of –

(i) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount;

(ii) inter-se sale or purchase of foreign currency amongst banks or authorized dealers of foreign exchange or amongst banks and such dealers;

ME 26: Services of general insurance business provided under following schemes -

(a) Hut Insurance Scheme;

(b) Cattle Insurance under Swarnajaynti Gram Swarozgar Yojna (earlier known as Integrated Rural Development Programme);

(c) Scheme for Insurance of Tribals;

(d) Janata Personal Accident Policy and Gramin Accident Policy;

(e) Group Personal Accident Policy for Self-Employed Women;

(f) Agricultural Pumpset and Failed Well Insurance;

(g) premia collected on export credit insurance;

(h) Weather Based Crop Insurance Scheme or the Modified National Agricultural Insurance Scheme, approved by the Government of India and implemented by the Ministry of Agriculture;

(i) Jan Arogya Bima Policy;

(j) National Agricultural Insurance Scheme (Rashtriya Krishi Bima Yojana);

(k) Pilot Scheme on Seed Crop Insurance;

(l) Central Sector Scheme on Cattle Insurance;



46

(m) Universal Health Insurance Scheme;

(n) Rashtriya Swasthya Bima Yojana; or

(o) Coconut Palm Insurance Scheme;

Agriculture NL (d): Services relating to agriculture by way of –

(i) agricultural operations directly related to production of any agricultural produce including cultivation, harvesting, threshing, plant protection or seed testing;

(ii) supply of farm labour;

(iii) processes carried out at an agricultural farm including tending, pruning, cutting, harvesting, drying, cleaning, trimming, sun drying, fumigating, curing, sorting, grading, cooling or bulk packaging and such like operations which do not alter essential characteristics of agricultural produce but make it only marketable for the primary market;

(iv) renting or leasing of agro machinery or vacant land with or without a structure incidental to its use;

(v) loading, unloading, packing, storage or warehousing of agricultural produce;

(vi) agricultural extension services;

(vii) services by any Agricultural Produce Marketing Committee or Board or services provided by a commission agent for sale or purchase of agricultural produce.

“agriculture” means the cultivation of plants and rearing of all life-forms of animals, except the rearing of horses, for food, fibre, fuel, raw material or other similar products17

“agricultural produce” means any produce of agriculture on which either no further processing is done or such processing is done as is usually done by a cultivator or producer which does not alter its essential characteristics but makes it marketable for primary market;18

Miscellaneous

GE A: Small Scale Exemption:1. For the service provider for the taxable services of aggregate value not exceeding ten lakh

rupees in a financial year subject to certain conditions.

GE B: Exporters/ SEZ:2. Transportation of export goods by Goods Transport Agency in a goods carriage received by an

exporter for transport of the said goods directly from -

i. any container freight station or inland container depot to the port or airport, from where the goods are exported;

ii. his place of removal, to an inland container depot, a container freight station, a port or airport, from where the goods are exported.




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3. Refund of service tax paid on certain specified taxable services received by an exporter of goods and used for export of goods, subject to certain specified conditions.

4. Taxable services, received by a unit located in a Special Economic Zone or Developer of SEZ for the authorised operations.

NL (b): Services by the Reserve Bank of India.

NL (c): Services by a foreign diplomatic mission located in India.

GE (D): Services to foreign diplomatic mission:

6. Taxable services provided for the official use of a foreign diplomatic mission or consular post in India, or for personal use or for the use of the family members of diplomatic agents or career consular officers posted therein

NL (k): Transmission or distribution of electricity by an electricity transmission or distribution utility.

ME 27: Services provided by an incubatee up to a total business turnover of fifty lakh rupees in a financial year subject to the following conditions, namely:—

(a) the total business turnover had not exceeded fifty lakh rupees during the preceding financial year; and

(b) a period of three years has not lapsed from the date of entering into an agreement as an incubatee;

GE (E): Services by TBI or STEP:

7. Taxable services provided by a Technology Business Incubator (TBI) or a Science and Technology Entrepreneurship Park (STEP) recognized by the National Science and Technology Entrepreneurship Development Board (NSTEDB) of the Department of Science and Technology, Government of India.

ME 32: Services by way of making telephone calls from —

(a) departmentally run public telephones;

(b) guaranteed public telephones operating only for local calls; or

(c) free telephone at airport and hospitals where no bills are being issued;

ME 33: Services by way of slaughtering of bovine animals;

ME 6: Services provided to any person other than a business entity by -

(a) an individual as an advocate; or

(b) a person represented on and as arbitral tribunals;

NL (q): Funeral, burial, crematorium or mortuary services including transportation of the deceased.

GE C: Import of Technology:

5. Taxable service involving import of technology, from so much of service tax, as is equivalent to the extent of amount of cess payable on the said transfer of technology under the provisions of section 3 of the Research and Development Cess Act, 1986


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22nd June to 24th June, 2012


ANALYSIS OF PLACE OF PROVISION OF SERVICES RULES

CA A. R. Krishnan


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Sale versus Service – Overlap of VAT and Service Tax

P. K. Sahu, Advocate

Sale and Service – Interpretation by Courts1. In this residential study course, we will be discussing conflict areas in characterization of

transaction as sale or service under VAT and service tax laws. Our focus will be on features of sale vis-à-vis service that should be kept in mind while classifying commercial dealings under these tax laws. In this write-up, I am citing some interesting court rulings on the subject. We should not try to use court rulings merely as weapons in tackling tax litigation. Our attempt should be to understand the subject and logic in these court rulings. At the end of the write-up, I have selected six case studies for discussion during our stay at Goa.

2. With increasing complexities in business, trade and commerce, many a time it becomes difficult to identify whether a particular transaction is sale or service. In many cases, the dividing line between sale and service is very thin leading to litigation. VAT and service tax authorities are prone to interpret tax laws to tax service as sale and vice versa. Professionals are confronted with possibilities of a transaction falling under both the legislations. Further, there may be odd situations where a transaction may not be subject to either law. Whether an arrangement needs to be divided so as to tax components as sale and service is also not free from controversy. In a number of cases, Courts have gone on to examine the intent of the parties to the contract to decide the character of the transaction. Sometimes, Courts have decided the matter taking into account which aspect is dominant and which is incidental.

Sale3. The term “sale” has been defined in different ways under different statutes. However, according

to its ordinary meaning, “sale” is a transfer of property for price. [CIT vs. Dewas Cine Corporation (1968) 68 ITR 240 (SC), CIT vs. Motors and General Stores (P) Ltd., (1967) 66 ITR 692 (SC)]. In every transaction of sale, there is bound to be a seller at one hand and a buyer at the other, and transfer of title in the goods takes place for a consideration. The total amount set out in the bill of sale charged as the consideration for sale is to be taken into account. It may include excise duty, sales tax or any other item, besides the cost of the goods and the profit element of the vendor. [McDowell & Co. Ltd., vs. CTO (1985) 154 ITR 148].

4. There are three essential components to constitute transaction of sale:

(i) an agreement to transfer title

(ii) supported by consideration and

(iii) an actual transfer of title in goods.

In the absence of any one of these elements it was held that there was no sale [State of Madras vs. Gannon Dunkerley & Co. (Madras) Ltd., (1958) 9 STC 353 (SC)]. According to this decision, if the words of “sales of goods” have to be interpreted in their legal sense, that sense can only be by what it has to be in the law relating to sale of goods.


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5. As per Article 366(12) of the Constitution of India, “goods” includes all materials, commodities and articles. Under Sale of Goods Act, 1930, “goods” means every kind of movable property other than actionable claims and money and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. [Sec.2(7)]. A reading of the scheme of the Sale of Goods Act in India would show that the law covers transfer of property in goods which have individual existence, property in the whole of which is transferred from the seller to the buyer. Section 2(11) of the Act defines ‘property’ to mean the general property in goods, and not merely a special property. Advanced Law Lexicon by P. Ramanatha Aiyar, 3rd Edition, 2005 gives the following meaning of “special property”:

Special property. That of a bailee, or officer in possession of the goods.That property in a thing which gives a qualified or limited right.

A property, right or qualified interest in property (as the interest of a ballot) subordinate to the general or absolute interest or ownership [S. 2(11), Sale of Goods Act (3 of 1930)]

6. What is essential for an article to become “goods” is its marketability. The test is not whether the property is tangible or intangible, but whether the item in question is capable of abstraction, consumption and use and whether it can be transmitted, transformed or delivered, stored, possessed etc. [Tata Consultancy services vs. State of Andhra Pradesh, (2004) 271 ITR 401 (SC) and Bharat Sanchar Nigam Ltd. vs. Union of India, (2006) 152 Taxmann 135 (SC)]In Shree Chamundi Mopeds Ltd. v. Church of South India Trust Assn., (1992) 3 SCC 1, the Supreme Court analysed the nature of right of a statutory tenant. Even though it is valuable to the tenant, the question was whether it could be considered as property. The Court held that the interest of the statutory tenant is not assignable or transferable and, therefore, the interest of a company which is continuing in occupation of the premises as a statutory tenant by virtue of the protection conferred by the Karnataka Rent Control Act, cannot be regarded as a property of the company. In Sangramsihn P. Gaekwa vs. Shantadevi P. Gaekwad, (2005) 11 SCC 314 : AIR 2005 SC 809, the Supreme Court held that the allotment of shares is not a “transfer” of property, but a creation of property rights.

7. Forty-sixth amendment in the Constitution introduced fiction by which six instances of transactions were treated as deemed sale of goods. Article 366 was amended by inserting a definition of “tax on the sale or purchase of goods” in clause (29A) of Article 266. The definition reads as follows:

“(29A) ‘tax on the sale or purchase of goods’ include:

(a) A tax on the transfer of, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;

(b) a tax on the transfer of property in any goods (whether as goods or in some other form) involved in the execution of a works contract;

(c) a tax on the delivery of goods on hire purchase or any system of payment by instalments;

(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;


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(e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;

(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration,

and such other transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.

Service 8. The term “service” has a variety of meanings. It may mean any benefit or any act resulting in

promoting interest or happiness. The concept of service is very wide. It may be contractual, professional, public, domestic, legal, statutory, etc. How it should be understood and what it means depends on the context on which it has been used in the enactment. [Lucknow Development Authority vs. M.K. Gupta, (1994) 80 Comp. 714 (SC)].

9. The basic distinction between a service transaction and the goods transaction is whether the customer acquires property from the vendor. In a transaction for service, ownership of any property is not the dominant objective. If a customer engages a vendor to create an item of property that the customer will own from the moment of its creation, then no property will have been transferred from the vendor to the customer. This is a transaction of service, irrespective of the vendor having made use of his property and transferred it in the process. The predominant nature of the transaction is not transfer of the property itself but the provision of service. Mere passing the property in an article or commodity during the performance of the transaction of rendition of service does not render the transaction to be a transaction of sale. For example, in a contract for repairing a coat the parties cannot be regarded as having entered into a contract for the sale of thread which was stitched in the coat and which thereby becomes part of the coat in the process of carrying out repairs.

10. Encyclopaedia Britannica, in its article on “services marketing”, has explained the nature of service in the following words:

Services can be distinguished from products because they are intangible, inseparable from the production process, variable, and perishable.

A service is an act of labour or a performance that does not produce a tangible commodity and does not result in the customer’s ownership of anything

Services are inseperable from their production because they are typically produced and consumed simultaneously.

Finally, services are perishable because they cannot be stored

11. With effect from 01.07.2007, Finance Act, 1994, defines service as under:

44) “Service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include—


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a) an activity which constitutes merely,

(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

(ii) a transaction in money or actionable claim.

b) a provision of service by an employee to the employer in the course of or in relation to his employment.

c) fees taken in any Court or tribunal established under any law for the time being in force.

Explanation 1.— For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply to,––

(A) the functions performed by the Members of Parliament, Members of State Legislative, Members of Panchayats, Members of Municipalities and Members of other local authorities who receive any consideration in performing the functions of that office as such member; or

(B) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or

(C) the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or State Governments or local authority and who is not deemed as an employee before the commencement of this section.

Explanation 2.–– For the purposes of this Chapter,—

(a) an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons;

(b) an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons.

Explanation 3.— A person carrying on a business through a branch or agency or representational office in any territory shall be treated as having an establishment in that territory.

Sale vs. Service 12. The Supreme Court in several cases relating to issue of sale vs. service has quoted two foreign

rulings:

i. Lee vs. Griffin, (1861) 1 B & S272 : 30 LJAB 252 : 4LT 546 — The plaintiff had contracted to make a set of artificial denture to fit them into his patient’s mouth. The patient died after the denture was made without having accepted the denture though he had an opportunity of doing so. The plaintiff sued the executor for the goods bargained and sold. It was held in that case that wherever a contract is entered into for the manufacture of a chattel there the subject-matter of the contract is a sale and delivery of the chattel. Blackburn, J., specifically observed as follows:


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“If the contract be such that, when carried out, it would result in the sale of a chattel, the party cannot sue for work and labour but, if the result of the contract is that the party has done work and labour which ends in nothing that become the subject of a sale, the party cannot sue for goods sold and delivered. The case of an attorney employed to prepare a deed is an illustration of this latter proposition, it cannot be said that the paper and ink he uses in the preparation of the deed are goods sold and delivered. I do not think that the test to apply these cases is whether the value of the work exceeds that of the material used in its execution for, if a sculptor were employed to execute a work of art, greatly as his skill and labour, supposing it to be of the highest description, it might exceed the value of the marble on which he worked, the contract would in my opinion, nevertheless, be a contract for the sale of chattel.”

ii. Robinson vs. Graves, (1935) 1 KB 579 : 104 LJKB 441 : 153 LT26 — It was held that a contract by an artist to paint a portrait of a lady was a contract for work and labour and not for the sale of goods as the substance of the contract was that skill and labour should be exercised upon the production of the portrait and that it was only ancillary to the contract that there would pass from the artist to his customer some material.

13. Referring to the cases of Robinson v. Gravesand Lee v. Griffinin Benjamin’s Contract for Sale of Goods, 3rd Edn., states as follows:

“In Robinson v. Graves however, the Court of Appeal reintroduced, purportedly as a qualification to this rule, what is in effect the criterion of relative importance as between work and materials which had been rejected in Lee v. Griffin although the court professed to be considering what was the substance of the contract rather than the more substantial component in the product ultimately delivered. In Robinson v. Graves Greer, L.J. said: ‘If you find ... that the substance of the contract was the production of something to be sold ... then that is a sale of goods. But if the substance of the contract, on the other hand, is that skill and labour have to be exercised for the production of the article and that it is only ancillary to that that there will pass from the artist to his client or customer some materials in addition to the skill involved in the production of the portrait, that does not make any difference to the result, because the substance of the contract is the skill and experience of the artist in producing the picture.’ This statement, with respect, overlooks the fact that what passes to the client is not the materials but the finished picture, of which both the work and the materials are components. Lee v. Griffin and Robinson v. Gravescannot be reconciled: the reasoning in each case could have been applied to the facts of the other. It has yet to be appreciated that a decision of this problem can be reached only by adopting one or the other of these equally arbitrary rules.”

[Emphasis added]

14. The Supreme Court in STO vs. B.C. Kame, (1977) 1 SCC 634 : 1977 SCC (Tax) 225, was called upon to decide the question that when a photographer undertakes to take a photograph and thereafter supplies prints to his clients whether it could be said that he had entered into a contract for sale of goods. The question which the Supreme Court posed was whether the contract is a contract of work and labour or a contract for sale. It held that a contract for sale is one whose main object is the transfer of property in, and the delivery of the possession of, a chattel as a chattel to the buyer where, however, the principal object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one of work and labour. After referring to the earlier decisions of the Supreme Court in the case of State of Punjab vs. Associated Hotels of India Ltd., (1972) 1 SCC 472 : (1972) 29 STC 474, and State of Madras v. Gannon Dunkerley& Co. (Madras) Ltd. (1958) 9 STC 353 : AIR 1958 SC 560, in which case the Constitution Bench had held that in a building contract the property in


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materials do not pass to the other party as in a contract for sale of moveable property.It was concluded that when a photographer takes a photograph, develops the negative or does some other photographic work and thereafter supplies the prints to his clients, then it could not be said that he had entered into a contract for sale of goods. The question of levy of sales tax, therefore, did not arise.

15. The principle enunciated in STO vs. B.C. Kame, (1977) 1 SCC 634 : 1977 SCC (Tax) 225, case was followed by the Supreme Court in State of T.N. vs. Anandam Viswanathan, (1989) 1 SCC 613 : 1989 SCC (Tax) 1098. In this case, the Court held that a contract for printing of question paper for educational institutions constituted a contract for work and labourand was, therefore, exempted from tax. In Everest Copiers v. Stateof T.N., (1996) 5 SCC 390, in respect of Assessment Year 1978-79, the Court has held that making photostat copies on paper with xerox machine and delivering the same to the customer for payment was a contract for work or service and not a contract of sale. The transfer of paper was only incidental and hence such transaction was not exigible to sales tax.

16. In Hindustan Shipyard Ltd. vs. State of A. P. (2000) 119 STC 533, the Supreme Court was called upon to decide whether the transaction of building of a ship after an order had been placed amounted to sale as defined under the A.P. General Sales Tax Act or was it a works contract. While coming to the conclusion that the transaction in question had amounted to a sale, the Court observed that in order to decide whether such a transaction is a contract of sale or contract for works or service the same had to be culled out from the terms of the contract. The Court observed as under:

1. Transfer of property of goods for a price is the linchpin of the definition of “sale”. Whether a particular contract is one of sale of goods or for work and labour depends upon the main object of the parties to be established from an overview of the terms of the contract, the circumstances of the transactions and the custom of the trade. The court may form an opinion that the contract is one whose main object is transfer of property in a chattel as a chattel to the buyer, though some work may be required to be done under the contract as ancillary or incidental to the sale, then it is a sale. If the primary object of the contract is the carrying out of work by bestowal of labour and services and materials are incidentally used in execution of such work then the contract is one for work and labour.

2. If the thing to be delivered has any individual existence before the delivery as the sole property of the party who is to deliver it, then it is a sale. If A may transfer property for a price in a thing in which B had no previous property then the contract is a contract for sale. On the other hand where the main object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one for work and labour.

3. The bulk of material used in construction belongs to the manufacturer who sells the end-product for a price, then it is a strong pointer to a conclusion that the contract is in substance one for the sale of goods and not one for work and labour. However, the test is not decisive. It is not the bulk of the material alone but the relative importance of the material qua the work, skill and labour of the payee which have to be weighed. If the major component of the end-product is the material consumed in producing the chattel to be delivered and the skill and labour are employed for converting the main components into the end-products, the skill and labour are only incidentally used and hence the delivery of the end-product by the seller to the buyer would constitute a sale. On the other hand, if the main object of the contract is to avail the skill and labour of the seller though some material or components may be incidentally used during the


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process of the end-product being brought into existence by the investment of skill and labour of the supplier, the transaction would be a contract for work, and labour.

Deemed Sale17. All the aforesaid decisions related to the period prior to the Forty-sixth Amendment of the

Constitution when Article 366(29-A) was inserted. At that time in the case of a works contract it was held that the same could not be split and the State Legislature had no legislative right to seek to levy sales tax on a transaction which was not a sale simpliciter of goods. Rainbow Colour Lab vs. State of M.P., (2000) 2 SCC 385 was, however, a case relating to the definition of the word “sale” in the M.P. General Sales Tax Act, 1958 after its amendment consequent to the insertion of Article 366(29-A). The question there was whether the job rendered by a photographer in taking photographs, developing and printing films would amount to works contract for the purpose of levy of sales tax. This Court held that the work done by the photographer was only a service contract and there was no element of sale involved. After referring to earlier decisions of this Court, it was observed at p. 391 as follows:

“15. Thus, it is clear that unless there is sale and purchase of goods, either in fact or deemed, and which sale is primarily intended and not incidental to the contract, the State cannot impose sales tax on a works contract simpliciter in the guise of the expanded definition found in Article 366(29A)(b) read with Section 2(n) of the State Act. On facts as we have noticed that the work done by the photographer which as held by this Court in Kame case2 is only in the nature of a service contract not involving any sale of goods, we are of the opinion that the stand taken by the respondent State cannot be sustained.”

18. But in Associated Cement Companies Ltd. vs. Commr. of Customs, (2001) 4 SCC 593, the Supreme Court doubted the decision in Rainbow Colour Lab case. It observed that Forty-sixth Amendment was made precisely with a view to empower the State to bifurcate the contract and to levy sales tax on the value of the material involved in the execution of the works contract, notwithstanding that the value may represent a small percentage of the amount paid for the execution of the works contract. Even if the dominant intention of the contract is the rendering of a service, which will amount to a works contract, after the Forty-sixth Amendment the State would now be empowered to levy sales tax on the material used in such contract. Therefore, in Associated Cement Companies case, the larger bench held that the conclusion arrived at in Rainbow Colour Lab case, in our opinion, runs counter to the express provision contained in Article 366(29A) as also of the Constitution Bench decision of this Court in Builders’ Assn. of India vs. Union of India, (1989) 2 SCC 645 : 1989 SCC (Tax) 317.

19. In Bharat Sanchar Nigam Limited vs. UOI, (2006) 3 SCC 1, the Supreme Court has referred to the major rulings which the Forty-Sixth Constitution Amendment sought to overcome. All the sub-clauses of Article 366(29-A) serve to bring transactions where one or more of the essential ingredients of a sale as defined in the Sale of Goods Act, 1930 are absent, within the ambit of purchase and sales for the purposes of levy of sales tax.Sub-clause (a) covers a situation where the consensual element is lacking. This normally takes place in an involuntary sale. Sub-clause (b) covers cases relating to works contracts. This was the particular fact situation which the Court was faced with in Gannon Dunkerley case and which the Court had held was not a sale. The effect in law of a transfer of property in goods involved in the execution of the works contract was by this amendment deemed to be a sale. To that extent the decision in Gannon Dunkerley case was directly overcome. Sub-clause (c) deals with hire-purchase where the title to the goods is not transferred. Yet by fiction of law, it is treated as a sale. Similarly the title to the goods under sub-clause (d) remains with the transferor who only transfers the right to use


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the goods to the purchaser. In other words, contrary to A.V. Meiyappan vs. CCT, (1967) 20 STC 115 (Mad) a lease of a negative print of a picture would be a sale. Sub-clause (e) covers cases which in law may not have amounted to sale because the member of an incorporated association would have in a sense begun as both the supplier and the recipient of the supply of goods. Now such transactions are deemed sales. Sub-clause (f) pertains to contracts which had been held not to amount to sale in State of Punjab vs. Associated Hotels of India Ltd. case. That decision has by this clause been effectively legislatively invalidated.

20. The Court, in this case, has explained that Gannon Dunkerley survived the Forty-sixth Constitutional Amendment in two respects. First with regard to the definition of “sale” for the purposes of the Constitution in general and for the purposes of Entry 54 of List II in particular except to the extent that the clauses in Article 366(29-A) operate. By introducing separate categories of “deemed sales”, the meaning of the word “goods” was not altered. Thus the definitions of the composite elements of a sale such as intention of the parties, goods, delivery, etc. would continue to be defined according to known legal connotations. The word “goods” has not been altered by the Forty-sixth Amendment. That ingredient of a sale continues to have the same definition. The second respect in which Gannon Dunkerley has survived is with reference to the dominant nature test to be applied to a composite transaction not covered by Article 366(29-A). Transactions which are mutant sales are limited to the clauses of Article 366(29-A). All other transactions would have to qualify as sales within the meaning of the Sales of Goods Act, 1930 for the purpose of levy of sales tax.

21. The Supreme Court, in Bharat Sanchar Nigam Limited case, has explained that the deemed sale, which is known as transfer of right to use goods must have the following attributes:

(a) there must be goods available for delivery;

(b) there must be a consensus ad idem as to the identity of the goods;

(c) the transferee should have a legal right to use the goods—consequently all legal consequences of such use including any permissions or licences required therefor should be available to the transferee;

(d) for the period during which the transferee has such legal right, it has to be the exclusion to the transferor—this is the necessary concomitant of the plain language of the statute viz. a “transfer of the right to use” and not merely a licence to use the goods;

(e) having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.

Actionable Claim 22. Whether sale of lottery tickets is exigible to sales tax came to be considered by Supreme Court

twice with a gap of 30 years. First time in 1986, it held that it was taxable. Every dealer of lottery tickets was paying sales tax for thirty years thereafter till2006, when the Supreme Court took a completely opposite view. In H. Anraj vs. Government of Tamil Nadu, (1986) 1 SC 414, the Tamil Nadu and West Bengal enactments were challenged on the ground of lack of legislative competence. The plea was that lottery ticket is actionable claim and, therefore, not goods under section 2(7) of the Sale of Goods Act, 1930,the concept of sale in which is applicable in sales tax law. The court observed that a lottery was composed of three essential elements, namely; (1) chance, (2) consideration; and (3) prize. A sale of a lottery ticket conferred on the purchaser two rights viz., (a) the right to participate in the draw and (b) the right to claim a prize contingent upon the purchaser being successful in the draw. Both are beneficial interests in movable property, the former “in praesenti”, the latter in futuro depending on the contingency.


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If an incorporeal right like copyright or an intangible thing like electric energy can be regarded as goods exigible to sales tax there is no reason why the entitlement to a right to participate in a draw which is beneficial interest in movable property of incorporeal or intangible character should not be regarded as ‘goods’ for the purpose of levying sales tax. Lottery tickets which comprise such entitlement do constitute stock-in-trade of every dealer and, therefore, his merchandise which can be bought and sold in the market. Lottery tickets comprising such entitlement, therefore, would fall within the definition of ‘goods’ given in the Tamil Nadu Act and the Bengal Act, the Court ruled.

23. In this ruling, the Supreme Court noted the following commentary in Salmond’s Jurisprudence, 12th Edn. at pages 338-39 under the heading ‘The Classes of Agreements’:

“Agreements are divisible into three classes, for, they either create rights, or transfer them, or extinguish them. Those which create rights are themselves divisible into two sub-classes, distinguishable as ‘contracts’ and ‘grants’. A contract is an agreement which creates an obligation or right in personam between the parties to it. A grant is an agreement which creates a right of any other description; examples being grants of leases, easements, charges, patents, franchises, powers, licences, and so forth. An agreement which transfers a right may be termed generically an ‘assignment’. One which extinguishes a right is a ‘release’, ‘discharge’, or ‘surrender’.

It often happens that an agreement is of a mixed nature, and so falls within two or more of these classes at the same time. Thus the sale of a specific chattel is both a contract and an assignment, for it transfers the ownership of the chattel and at the same time creates an obligation to pay the price.”

The Court held that the delivery of a lottery ticket issued under the rules governing the Raffle Schemes in the instant case to a purchaser thereof is obviously not a mere contract creating an obligation or right in personam between parties to it but would be in the nature of a grant.

24. Like lottery tickets, there was controversy on taxability of sale of REP licenses. The objective behind the licences was to provide to the registered exporters the facility of importing the essential inputs required for the manufacture of the products exported. The essential idea was to encourage exports and for that purpose import licences called REP licences were issued equal to the prescribed percentage of the value of exports. These licences were made freely transferable. It was provided that the transfer of such licences did not require any endorsement or permission from the licensing authority. It was clarified that such would be “governed by the ordinary law”. It only required a letter from the transferor recording and evidencing the transfer. On that basis, the transferee became the due and lawful holder of the licence and could either import the goods permitted thereunder or sell it to another in turn.

25. The Supreme Court in Vikash Sales Corpn. vs. Commissioner of Commercial Taxes, (1996) 4 SCC 433, has held that REP licences have their own value. They are bought and sold as such. The original licensee or the purchaser is not bound to import the goods permissible thereunder. He can simply sell it to another and that another to yet another person. In other words, these licenceshave an inherent value of their own and are traded as such. They are treated and dealt with in the commercial world as merchandise, as goods. A REP licenceis neither a chose-in-action nor an actionable claim. It is also not in the nature of a title deed. It has a value of its own. It is by itself a property — and it is for this reason that it is freely bought and sold in the market. For all purposes and intents, it is goods. On that footing, the Supreme Court held that sale of REP licenses is exigible to sales tax.


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26. The Constitution Bench of Supreme Court revisited the taxability of lottery tickets in Sunrise Associates vs. Govt. of NCT of Delhi, (2006) 5 SCC 603, and held that these are actionable claims, which are excluded from the definition of goods for the purpose of sales tax. It deduced distinct elements from the definition of “actionable claims” in section 3 of the Transfer of Property Act. An actionable claim is of course as its nomenclature suggests, only a claim. A claim might connote a demand, but in the context of the definition it is a right, albeit an incorporeal one. Every claim is not an actionable claim. It must be a claim either to a debt or to a beneficial interest in movable property. The beneficial interest is not the movable property itself, and may be existent, accruing, conditional or contingent. The movable property in which such beneficial interest is claimed, must not be in the possession of the claimant. An actionable claim is, therefore, an incorporeal right.

27. The Court referred to section 130 of the Transfer of Property Act, which provides that an actionable claim may be assigned for value. The Supreme Court gave the following examples of actionable claim:

i. A right on fulfillment of certain conditions to call for delivery of goods mentioned in a contract

ii. Negotiable instruments

iii. Right to recover insurance money

iv. Right to credit in a Provident Fund

v. Railway ticket and a ticket to see a cinema

Since lottery ticket is only an evidence of the right to participate and have a chance to win prize, the Constitution Bench characterized it as an actionable claim and not goods for the purpose of sales tax. It explained that transferability for a consideration is not what distinguishes goods from actionable claim. Actionable claim can be transferable and are considered as goods under the general law, but not for the purpose of sales tax.

28. Though, it did not specifically overrule the three judge bench ruling in Vikas Sales Corporation case, it made the following comments:

What then is the distinction between actionable claims and other goods on the sale of which sales tax may be levied? The Court in Vikas Sales Ltd. said:

When these licences/scrips are being bought and sold freely in the market as goods and when they have a value of their own unrelated to the goods which can be imported thereunder, it is idle to contend that they are in the nature of actionable claims.”

It was assumed that actionable claims are not transferable for value and that that was the difference between “actionable claims” and those other goods which are covered by the definition of “goods” in the Sale of Goods Act, 1930 and the sales tax laws. The assumption was fallacious and the conclusion insofar as it was based on this erroneous perception, equally wrong.

Subsequently, in M/s Yasha Overseas vs. Commissioner of Sale Tax, (2008) 8 SCC 681, a three member bench of the Supreme Court has held that DEPB like REP license is “goods” and not “actionable claim”, as it has its own intrinsic value and the purchaser, on payment of consideration, buys something for its value. In this case, the three member bench of the Supreme Court has distinguished the DEPB from lottery tickets considered by the constitution


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bench in Sunrise Associates case by observing that the lottery tickets do not have any intrinsic value whereas REP licenses do have as the same are freely marketable.

29. According to the three judgebench in this case, the decision in Vikas Sales Corporation case was not overruled by the Constitution Bench in Sunrise Associates case. It held that the content of REP licences / DEPB was far more substantial and real than that of a lottery ticket. DEPB like REP licence has its own intrinsic value and the purchaser on payment of consideration, buy something for its value. DEPB credit is thus clearly “goods” within the meaning of sales tax laws and its sale is clearly exigible to tax. It observed that if DEPB / REP license is to be compared with a lottery ticket, it can only be compared with a lottery ticket that has won the prize. The prize winning lottery ticket ceases to be a mere piece of paper having no value itself. It acquires inherent value and becomes itself a thing of value. One might compare DEPB with prepaid meal tickets or prepaid petrol coupons or accumulated flying miles. If permitted free transferability, those would soon become market commodities and would be sold and bought for their value as “goods”.


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CASE STUDIES

CASE STUDY 1 — SALE OF FRACTIONAL OWNERSHIP Fast Flight is a private limited company having its registered office at Delhi. It has imported an aircraft – Lear Jet 45-XR and has entered into all necessary arrangements for running the aircraft including commercial arrangements for availing services of a pilot/crew, air craft maintenance, arrangement with a third party service provider for co-coordinating airport and air traffic control bookings to operate flights across India. It has approached a few corporate groups for co-ownership (fractional ownership) of the aircraft. Two corporate groups have shown interest to acquire 50% and 25% ownership with the balance 25% being retained by the Fast Flight.

The owners will enter into an arrangement with Fast Flight, to operate, run and maintain the aircraft for and on behalf of the co-owners. The flights will be run and operated by Fast Flight. The net profit generated out of the surplus flying hours through third party charters after deducting the agreed variable cost per hour (which will be paid to Fast Flight) will be shared between the Co-owners.The aircraft is presently parked in the hangar at Indore. Even after the proposed transaction, it would continue to be parked in the hangar in Indore, except when it is out of station.

Queries i. Would the transfer of 75% interest in the aircraft, be regarded as a ‘sale’ for levy of sales tax /

VAT in Delhi or MP?

ii. If the aircraft is on a commercial flight to Dubai, can the delivery / transfer of the aircraft there be disregarded for the purposes of Delhi / M.P. VAT? Any precautions to be considered for ensuring that the sale takes place in the specified locations?

iii. Can the transaction of passing on fractional ownership be regarded as transfer of right to use tangible goods or any other category mentioned in section 65(105) of Finance Act, 1994?

CASE STUDY 2 — INPUT SERVICE TAX CREDIT ON OUTWARD TRANSPORTATION Maharashtra Cement Company (MCC) is in the business of manufacturing cement. At the time of clearance of cement from the factory duty is paid on the basis of MRP printed on the bags under section 4A of the Excise Act. For the payment of excise duty on cement, MCC wants to take credit of service tax paid on outward transportation from the factory when sale is made on FOR destination basis.

MCC has cited the following definition, circular and rulings:

i. “Input services” means any service, used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal and includes services used in relation to inward transportation of inputs or capital goods and outward transportation upto the place of removal.

ii. Board Circular No. 97/8/2007-S.T., dated 23-8-2007 clarifies that for a manufacturer/consignor, the eligibility to avail credit of the service tax paid on the transportation during removal of excisable goods would depend upon the place of removal as per the definition of ‘place of removal’ as defined under section 4 of Central Excise Act.Service tax on transportation of goods from the factory / depot to the destination point would be available if the assessee can establish that sale and transfer of property in goods occurred at that place.


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iii. Relevant case laws - Ambuja Cements Ltd. v. Union of India in 2009 (14) S.T.R. 3 (P&H);CCE vs. Parth Polywooven Pvt. Ltd. 2012 (25) S.T.R. 4 (Guj.), C.C.E & S.T. vs. ABB Ltd., 2011 (23) STR 97( Kar.)

Do you agree with MCC? Give reasons.

CASE STUDY 3 — TAXABILITY OF LOYALTYCOUPONS/ REWARD POINTS M/s Super Saver is proposing to launch a loyalty programme, wherein it shall issue cards to individuals (referred to as ‘members’) on which the latter can accumulate points while shopping with the dealers (referred to as ‘sponsors’) registered with M/s Super Saver.

These points can be redeemed by the members against gifts (such as retail discount coupons, talk time, consumer goods, spa vouchers etc.)

The scheme would operate as under:

— On every point earned by a member while shopping at a sponsor’s outlet, the sponsor would pay `0.145 to M/s Super Saver.

— Out of the total amount of ` 0.145 per point received by M/s Super Saver, ` 0.045 shall be towards running the loyalty scheme/ marketing activities (referred to as “service fee”) and `0.1 shall be used for rewarding the members (referred to as “gift financing cost”)

— For redemption, a member would be required to place a request with M/s Super Saver wherein the member will specify the gift against which he wants his points to be redeemed.

— M/s Super Saver will engage a third party (organiser) for procuring the gifts/ managing logistics on its behalf from various vendors located across India.

— Ownership of the gifts will pass on by the vendors to M/s Super Saver and then from M/s Super Saver to the members.

— The organiser will charge a fee for his services (that will include identification & negotiation with vendors, placing orders & making payments, logistics for receipt & dispatch of goods, etc.) on which it would charge service tax.

— Gifts may be in the form of tangible goods (like mobile phones, cameras, etc.) or in the form of vouchers (like telecom recharge vouchers, service vouchers, discount vouchers, product specific vouchers).

— There is a possibility that the members (in some cases) do not come for redemption and hence ` 0.1 is not utilised. To that extent, this would be the income for M/s Super Saver against which no gift would be provided.

QueriesGiven the above facts, please give your opinion on the following aspects from an indirect tax perspective (VAT and services tax)

• Applicability of service tax/VAT on ` 0.1 and ` 0.045

• Which type of tax would be paid on the vouchers/gifts on redemption of reward points, by whom and at what stage?


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CASE STUDY 4 — ROYALTY PAYMENT UNDER TECHNICAL COLLABORATION AGREEMENT TOI is a private limited company, registered in India and is a wholly owned subsidiary of TOG of Germany. These two companies have entered into a technical collaboration agreement. They jointly bid for and supply grinding mills to cement companies in India. Critical equipments are supplied by TOG from Germany. Indigenous equipment are either bought out or fabricated by TOI for supply to the cement plant customers. The grinding mills are installed at the premises of the customers by the customers themselves using the equipment supplied by TOI and TOG, but under the supervision of some specialist engineers provided by TOG. Testing of the materials to be processed in the grinding mills is done in Germany, after which TOG decides about the design and equipment. Taking into account the critical equipment to be supplied by TOG, the balance of the equipment are to be procured or fabricated by TOI. For this, TOG provides the drawings and designs to TOI. The drawings and selection of the mills are done by TOG, since it has the requisite know-how for such mills, which are installed at various locations across the world. The customers pay to TOG directly in foreign currency for the equipment imported from it. TOI is separately paid in India in rupees for the balance of the equipment supplied by it for the mills. TOI pays royalty @ 5% of its domestic turnover under the technical collaboration agreement to TOG, for which it has got requisite permission from RBI. TOI has been paying R&D cess on the royalty paid to TOG. The service tax authorities have conducted an audit of TOI and have issued a show cause notice asking TOI to pay service tax under the reverse charge mechanism in the taxable category of service by consulting engineer.

TOI has sought your help in devising a suitable response to the show cause notice. Please state the broad arguments.

CASE STUDY 5 — SALE OF RECHARGE COUPONS BY CELLULAR TELEPHONE COMPANY Bharat Skytell Ltd. (BSL) provides cellular telephone service. It sells recharge coupons to pre-paid customers through chain of distributors and retailers. It sells recharge coupons of ` 100 (MRP) at ` 90 to the distributors, who sell these to the retailers at `95. The retailers sell these to the customers at ` 100.

QueryWhich type of tax (service tax or VAT) is payable by BSL, distributor and retailer and on what amount?

CASE STUDY 6 — IMMOVABLE PROPERTY FOR COMMERCIAL USE City Development Authority (CDA) has allotted a commercial plot to Vardhman Plaza Limited (VPL) for 60 years. VPL has paid ` 200 crores up front and is paying ` 1 crore per year to CDA. VPL has constructed shops on the commercial plot and allotted these to shop owners for a period co-terminus with the arrangement with CDA. It has collected from the shop owners lumpsum amount per square foot of area allotted before the start of construction of the shops.

Please advise about service tax/VAT implications for the parties involved in this arrangement.


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Indirect Tax isues in Real Estate Industry – Case Studies

K. Vaitheeswaran, Advocate

CASE STUDY – 1Priya Developers is engaged in developing residential projects in Tamil Nadu and follows the system of execution of two documents. The sale deed for undivided share of land is executed in favour of the customer and the construction of the apartment is carried out under a construction agreement executed with the customer.

Priya Developers has awarded the construction contract to a contractor and makes available cement and steel to the said contractor. The purchase of cement and steel has been recorded in the books of Priya Developers and the materials are given free of cost to the contractor without any value adjustment in the contract price. The contract price is independent of the free supply portion.

Priya Developers have registered under the category ‘Construction of Complex Services’ and have been charging service tax on 33% of the value specified in the construction agreement and VAT has not been paid on the ground that service tax has been discharged and entire work is done only by the contractor.

Discuss Service Tax and VAT applicability.

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CASE STUDY – 2Blue Ocean Ltd. is engaged in the business of construction and promotion of residential and commercial complexes. It has entered into a Joint Development Agreement dated 1-1-2006 with Zameen Ltd. who is the landowner. Possession of the lands was handed over on the same date and the landowner executed a power of attorney for dealing with the property and to apply for all permissions in favour of Blue Ocean. In terms of the Agreement, Blue Ocean will have to bear the entire cost and expenses relating to construction of the entire building complex and the provision of all amenities and facilities including cost of materials, labour, etc. 100 Apartments are to be constructed and Zameen Ltd. is entitled to 48 Apartments including proportionate undivided share of land. Blue Ocean will be entitled to 52 Apartments including proportionate undivided share of land. Blue Ocean has paid a sum of ` 1 crore as advance to the landowner, which will be refunded by the landowner without interest at the time of completion of the Development. The residential project was completed and possession handed over to both the landowner and customers on 1-1-2010. Advice on service tax applicability taking into account the following:-


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(i) Initially apartments were sold at the time of project launch at the rate of ` 5,000/- per sq. ft.

(ii) Average selling rate of apartments is ` 6,000/- per sq. ft.

(iii) Cost of construction of each apartment works out to ` 2,500/- per sq. ft.

(iv) Guideline value for the purpose of stamp duty in respect of undivided share of land attributable to 52 Apartments is at the rate of ` 2,000/- per sq. ft. and each Apartment qualifies for undivided share of 200 sq. ft.

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CASE STUDY – 3Road Runner Ltd. is engaged in the business of executing Road Construction Contracts and has been awarded the work on sub-contract for ‘construction of six lanes on Pune Satara Section of NH4. Road Runner is a sub-contractor to Freeway Ltd. who is the contractor for India Infrastructure Ltd. to whom the work was awarded by NHAI on a Design, Build, Finance, Operate, Transfer basis. Advice on service tax applicability for Road Runner as well as contractors engaged by Road Runner who are required to make available machinery and equipment for hire along with personnel for operating the machinery and equipment. Will there be any difference after the provisions of Finance Act, 2012 are notified?

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CASE STUDY – 4Vidya Contractors are specialized in construction of buildings for educational institutions. Work has been done for M/s. Vinayak Trust which is a public charitable trust having registration under Section 12A of the Income Tax Act. The contractors executed a contract for the trust which involve construction of an engineering college at Mangalore. The Department is of the view that Circular No.96/7/2007 dated 23.08.2007 has superseded all earlier circulars and therefore the Circular dated 17.09.2004 should be treated as withdrawn. The view expressed is that once works contract service has become taxable, works contract executed for educational institutions are also taxable. Advise.

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CASE STUDY – 5ABC Ltd. a public sector undertaking based in Coimbatore has awarded three contracts during the years 2007-2008 and 2008-2009 to M/s. Sarkar Constructions Ltd. All the works were completed during August 2010. During the contract period, ABC had released payments towards the bills and service tax has been discharged on receipt basis. ABC had deducted some amounts towards security deposit for due performance of the contract. After completion of work this amount has been released during March 2011. The Company had paid service tax based on receipts. ABC is of the view that service tax should not have been paid by Sarkar and is also of the view that the amount paid as service tax is not eligible for cenvat credit in the hands of ABC since it pertains to the work completed during August 2010.

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CASE STUDY – 6Jasmine Properties (JP) and Jasmine Builders (JB) have entered into an agreement whereby JP authorizes JB to construct a building on land owned by JP. JP has obtained necessary approvals and permits for construction of building and is also the owner of the land. JP would authorise JB to construct the building on the land and would execute a power of attorney to enable JB to carry out the construction activities. Both parties would be entitled to identify buyers and market the land / undivided share of land subject to the buyer entering into a builder’s agreement with JB. The Agreement provides that the consideration for sale of land shall be paid to JP whereas the consideration for the cost of construction of built up area shall be paid by the buyer to JB. If at the end of the project, any built-up areas are not marketed and the corresponding undivided share is left unsold, JP shall own such unsold undivided share of land and JB shall own such unsold built-up areas. The two firms have been created for business purposes so that the consideration pertaining to land remains with JP and consideration pertaining to development remains with JB. The project is located in Tamil Nadu. Advise on service tax implications if any for JB / JP or both.

Assuming the project is not in Tamil Nadu but in Maharashtra, what are the VAT implications for both parties.

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CASE STUDY – 7M/s. Klub Sandwich Ltd. has constructed a sports complex for Gandhi Nagar Club. The Company has charged service tax and the Club has communicated to the contractor that service tax is not applicable as construction of sports complex for the club is not for commerce or industry. Advise.

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CASE STUDY – 8M/s. Tranquility Estates is proposing to put up a residential project in a hill station which would have the following features:-

(i) The project would involve 50 independent villas.

(ii) Approval has been obtained for the project as a layout.

(iii) Individual building plan is approved by the local authorities.

(iv) The project would have common sump and sewerage tank.

(v) There would be a club house and there will be a separate charge recovered from buyers. The land pertaining to the club house would be owned by the developer.

(vi) Publicity materials would specify all the features.

(vii) Sale Deed would be executed for the divided portion of the land in the favour of the customer.

(viii) Construction Agreement would be entered into in favour of each customer for the building constructed on their land.

Advise on service tax and VAT applicability.

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CASE STUDY – 9M/s. Platinum Promoters LLP entered into a Joint Development Agreement with a landowner for construction of 6 Apartments. The Agreement was executed on 1-1-2012 and possession of the lands was handed over to the LLP. The application before the planning authorities is still pending.

Finance Bill, 2012 provisions indicated that the concept of construction of more than 12 units as criteria for levy of service tax would not exist in the future. With the permission of the landowner an Assignment Agreement was executed on 01.04.2012 whereby all rights, benefits and obligations of


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Platinum Promoters LLP were assigned in favour of Platinum Promoters Pvt. Ltd. which was already executing number of construction projects. The assignment was for a consideration of ` 5 crores. Advise on service tax applicability.

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CASE STUDY – 10Vishal entered into an agreement for purchase of land for an agreed consideration of ` 1 crore in the year 2000 and paid an advance of `10 lakhs to Shyam. Even though Shyam was ready to execute the Sale Deed, Vishal did not come forward due to finance constraints. Unfortunately, the agreement was not well drafted and Shyam could not sell to any other person and was not advised properly with reference to termination of the Sale Agreement with Vishal. 10 years later, the property was valued at `50 crores and Vishal was ready for execution of the Sale Deed at the agreed value of ` 1 crore. After rounds of discussions, a third party M/s. Ground Reality Ltd. agreed to purchase the property for `50 crores out of which ` 30 crores was paid to Shyam and `20 crores was paid to Vishal for relinquishing his rights under the original Agreement executed in 2000. Sale Deed was executed by Shyam for a consideration of ` 50 crores and stamp duty was discharged on ` 50 crores. Vishal offered ` 20 crores as capital gains in his IT returns. The Service Tax Department is of the view that the amount of ` 20 crores is taxable in the hands of Vishal under ‘Real Estate Agency Service’. Also comment on service tax applicability under the provisions of Finance Act, 2012 assuming such a transaction takes place after the notified date.

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CASE STUDY – 11M/s Hotconcrete Pvt. Ltd. manufactures RMC and discharges excise duty at the rate of 2% under Notification No.16/2012. The company wants to avail CENVAT Credit on cement used for manufacturing RMC. The buyer is a construction company and wants to avail Credit on RMC which is being used by the construction company for both residential and commercial projects. Advise on credit eligibility both under the existing and proposed law.

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CASE STUDY – 12M/s. Lake View Realty Ltd. constructs a beautiful corporate office with artificial lakes, transparent glass walls, green thickets and a specially designed roof which reflects the sky. The company is engaged in real estate development and avails cenvat credit on the goods used for construction and on service tax charged by sub-contractors. M/s. Lake View Realty is registered under works contract service. The Department is of the view that none of the credits availed are eligible credits and has issued a Show Cause Notice for the period April 2011 to March 2012.

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Case Study – 13M/s. East India Co. Ltd. obtains separate orders from customers as follows:-

(i) Supply of equipments

(ii) Service Contract which comprises of

(a) Erection and commissioning;

(b) Structural fabrication and erection;

(c) Civil Works.

The Company has opted for works contract composition scheme and is discharging service tax at the rate of 4.94% on the value of civil construction and 12.36% on the value of erection, commissioning and fabrication. The Company has not chosen to follow Rule 2A which facilitates deduction of material since most of the contracts are based on back to back arrangement with sub-contractors. In the civil work portion the company supplies, cement and steel which is used in construction and the value of cement and steel have been included in the value for the purpose of calculation of service tax under the works contract composition.

The Department is of the view that the value of equipment supplied has to be included in the value for the purpose of calculating service tax under the compounding scheme. There is no umbrella contract linking the various separate contracts executed by the Company.

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CASE STUDY – 14M/s. Simple and Complex Constructions has awarded a Contract to M/s. AKB Contractors, Bangalore for supply and installation of pre-fabricated building / pre-fabricated structure at their facility located in Neyveli, Tamil Nadu. The total value of the contract is in excess of ` 100 crores. Simple and Complex had not deducted any tax at source on the works contract in respect of the work done by the contractor on the ground that the transaction is in the nature of the inter-state works contract and the fact that CST has been discharged by M/s. AKB. A notice has also been issued by the Assistant Commissioner (Commercial Taxes) referring to the contract as well as the non-deduction of tax at source. Advise.

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CASE STUDY – 15M/s. Dream View Constructions Ltd. entered into a Joint Development Agreement with the landowner on 1-1-2011 for Joint Development of a residential project and under the Agreement 40% of the total built up area was to be allocated to the landowner and 60% was available to the developer.

The parties entered into a Supplementary Agreement dated 1-2-2011 whereby the terms were converted into a monetary format. Under the revised agreement, which is effective from inception, the Developer had the sole right to market all the apartments and the entire amounts received from customers would be deposited in an escrow account. Banking instructions were given for automatic transfer of 40% of all receipts to the Bank Account of the landowner. Service tax has been paid in respect of the entire set of apartments by the Developer. The Department is of the view that the Developer is still liable to pay service tax in respect of the landowner share. Advise.

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22nd June to 24th June, 2012

Documents

Transcript of 22nd June to 24th June, 2012