Wednesday, 20 January 2016

Recent caselaws in Service Tax

Latest Case Laws:
 Adopt same yardstick for establishing nexus between input and output service for deciding availability of cenvat credit or refund of credit. Pipavav Shipyard Ltd v/s Commissioner of Central Excise, Bhavnagar 2016 (41) STR 151 (Tri-Ahmedabad).
 No service tax to be levied where an activity has been undertaken in India but the ultimate purpose is for rendering service outside India. International Overseas Services v/s Commissioner of Service Tax, Mumbai 2016(41) STR 230 (Tri- Mumbai).
 No Input Tax Credit available where nexus between input and output is not proved, even if the input services is received by the service provider himself. Kilburn Chemicals Ltd. v/s Commissioner of Central Excise, Tirunelveli 2016 (41) STR 131 (Tri- Chennai)
 Even if input service is received at premises other than from where output service is executed, taxpayer can claim refund of the same. Exfo Electro-Optical Engineering (P) Ltd v/s Comissioner of Central Excise, Pune 2016 (41) STR 65

 Where the taxpayer has obtained registration under Service Tax, plea of being unaware of tax payment or filing of return will not tantamount reasonable cause under section 80 of Finance Act 1994. Midas Events v/s Commissioner of Service Tax, Mumbai 2016 (41) STR 233 (Tri- Mumbai). Articles:
 Applicability of Service Tax on Penal Charges.
Editor’s Pick:
 No Service Tax can be charged on undecided amount received by service provider. Facinate Advertising & Marketing v/s Commissioner Central Excise, Chandigarh 2013 (31) STR 77 (Tri-Delhi).
 No Separate Books of Accounts under Rule 6 is to be maintained where the assessee is providing output service and doing other activities which is neither service nor manufacture. Krishna Auto Sales v/s Commissioner Central Excise, Chandigarh 2015(40) STR 1121 (Tri- Delhi)

Latest Case Laws: Pipavav Shipyard Limited: It was the case of 100% Export Oriented Unit (EOU) where service tax department held that the phrases used in Cenvat Credit Rules, permitted credit on services used “whether directly or indirectly, in or relation to the manufacture of final product” or “for providing output service”. The field information which tends to take a view that for eligibility of refund, the nexus between input/input services and the final product/services has to be closer and more direct than that is required for taking credit. The Bench held that as regards the extent of nexus, it must be borne in mind that the purpose is to refund the credit that has already been taken. There cannot be different yardstick for establishing the nexus between taking of the credit and for refund of credit. Even if different phrases are used under different rules of Cenvat Credit Rules, they have to be read in a harmonious manner. International Overseas Services:
It was a case of Manpower Recruitment Agency wherein the Agency was recruiting the employees in India on behalf of the overseas company situated outside India. It was found that the employees were recruited by the appellant for clients abroad for working, salaries are paid by the clients of the appellant and the services of the appellant was engaged by the foreign clients for identifying the potential employees who can work abroad. It is to be seen that though the services of the appellant was carried out in India, but the ultimatepurpose of recruitment was for working abroad and not in India. This as per the considered view of the bench fell under the ambit of export of service and hence no service tax could be charged on the same. Kilburn Chemicals Limited: It was recorded that the appellant claims Cenvat Credit on Security Services rendered at the Guest House of the appellant situated in Kolkata and Erection and Commissioning Services of the two Wind Turbine Generators situated in Sankran Koil Taluk and Tirunelveli Taluk. Recording that these services were no way connected with the manufacture of the final product of the appellant in respect of the factory situated in Tuticorin, the authorities disallowed the service tax paid on such services. So far as the Cenvat Credit on Security Services on Guest House is concerned that is no way related to manufacture, for which, assessee shall not get the Cenvat Credit thereon. So far as erection and construction services are concerned, that has direct bearing on the power generation. Even though the power generated at a place was availed to use the same in manufacture, which establishes a vital link between input/input service used and manufactured. Accordingly, appellant is entitled to the Cenvat Credit on the Erection and Commissioning Services availed. Exfo Electro-Optical (P) Ltd.
The only dispute in this case was regarding the services rendered by the service provider is in the premises for which registration was not granted to the appellant. It was seen from the records that the appellant has specifically pleaded before the lowerauthorities that the output services which are provided by them is from their registered premises and that has got centralized accounting system. Subsequently, it was found that the appellant has registered or added the addresses from wherein the services were received for providing export services; in the registration certificate, which is an indication that the appellant is eligible to avail input service credit and having exported the services is eligible for the refund of the amount lying unutilized. Midas Events: On the issue of extended time period and penalty, we note that the appellant was very well aware of their responsibility and liability, having taken service tax registration in Feb 2003. But the appellant still chose to avoid all Legal obligations cast on them after taking registration and not complying with the requirement of filing ST-3 returns on periodical basis for a long period of time. Considering that the appellant had service tax registration but did not receive the show cause notice (SCN), did not submit reply to SCN, did not even appear for personal hearings on various dates can only lead to conclusion that their intentions were not bonafide. It is certainly not a case for waiver of penalties u/s 80 of the Finance Act. Penalty may not be imposed in terms of Section 80 if the assessee proves that there was reasonable cause for failure to pay service tax and file returns. No “reasonable cause” whatsoever has been shown to us to deserve the benefit of Section 80.

Applicability of Service Tax on Penal Charges. Service Tax is an indirect tax which is levied on consumption of service provided by service provider to the service recipient. In order to charge service tax we first need to analyze the meaning of term service under Finance Act 1994 in order to establish as to when and how the service tax has to be levied. As per Section 65B (44) of Finance Act 1994 “Service means any activity carried out by a person for another for a consideration and includes a declared service but shall not include………….”. Therefore on plain reading of the section it is evidently clear that to charge service tax it there must be some sort of activity involved. As per: 1. Black‟s Law Dictionary activity means “work performed to create a result”; 2. Merriam Webster activity means “state of being active, something that is done as work” ; 3. Business activity means “measurable amount of work performed”; 4. Oxford Dictionary activity means “the condition in which things are happening or being done”. Upon analyzing the meaning of activity from all prospective it is vitally clear that it must involve an active action which could be measured in terms of work performed and create a result. Any participation which is of passive nature shall not be covered under the term activity. Therefore such workwhich does not qualify as an activity shall not be termed as “service” defined by Section 65B(44) of the Finance Act 1994. The penal charges levied by the service provider are the result of the violation of a particular contract or non fulfillment of vested responsibilities by the service recipient. By any stretch of imagination it cannot be established that such penal charges have been collected out of an activity provided or agreed to be provided by the service provider (SP). It is penal action which has been taken by the SP which in no manner could be co-related with the consideration of the actual service provided or agreed to be provided by him. And in cases of penal charges, no activity is performed and hence there arises no question of service tax being charged in this regards. CBEC had released various circulars which substantiate our view. Vide its Circular No 96/7/2007 dated 23-08-2007 CBEC had made it clear that amount collected for delayed payment of telephone bill is not to be treated as consideration charged for provision of telecom service and therefore does not form a part of the value of taxable service under section 67 read with Service Tax (Determination of Value) Rules, 2006. Again vide Circular No: 121/02/2010 ST dated 26.04.2010 it has been clarified that detention charges in respect of detained containers are not in respect of service provided on behalf of client and such charges must be called “Penal Rent” and hence it is not chargeable to service tax. More so adopting the same analogy CBEC had clarified vide F No: 137/25/2011- ST dated 03-08-2011 that delayed payment charges received by the stock brokers are also therefore not includible in taxable value as the same are not the charges for providingtaxable service. Such charges are on account of delay in making payments by the service recipient to the service provider and are in the nature of penal charges for not making payment within stipulated time. Further CBEC did not restrict this principle to stock brokers, it has categorically mention that same principle shall be applied to other services as well provided that the amount recovered towards penal charges should be separately mentioned in the invoice. In case the penal charges are not mentioned separately, only then these would be covered by “gross amount charged” by the service provider otherwise by no means service tax can be charged on penal charges. Further as per Section 67 of Finance Act what is chargeable to service tax is the gross amount charged for the provision of service and hence in order to establish that it is necessary that first an activity should qualify as a service and then the role of section 67 shall come into ambit. Also as per 66E of the Act wherein some activities have been categorically covered under the definition of “Declared Service” the activities which includes agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act is covered. It is to be noticed that in order to qualify any activity under this entry there must be an agreement which is entered into by both the parties in order to refrain from the act. It is important that the very motive of this agreement should be to refrain or conduct any activities mentioned under this entry. Any penal charges which are charged due to violation of any other agreement shall not qualify under such entry. More so merely refraining from an act without agreeing to refrain has also been kept out of the ambit of this entry. For instance, if a contractor delays theconstruction of a project and some penalties are recovered from him, it does not mean that the company has agreed to tolerate the delay and the penalties recovered is consideration for said toleration of act. It has also been established that any amount received in settlement of dispute cannot be considered as a “service” liable to service tax. From the above discussion it is clear that since penal charges does not qualify as consideration for service and also they do not fall under “declared Services”, no service tax can be charged/recovered on the penal charges made by the service provider. Editor’s Pick: Facinate Advertising & Marketing: Delhi bench of CESTAT held that incentive is a receipt for appreciation of performance of services provided. How such forms part of taxable service remains unexplained. We are unable to find how the revenue shall succeed saying that incentive shall be brought to tax when such incentive whether shall be payable was not known to the respondent while providing service. Therefore, the dispute on that count is resolved against the revenue. Therefore it is held that any consideration which is not pre determined shall not be charged to service tax. Krishna Auto Sales
The assessee was using common input services for trading activity as well as for other output services. Delhi Bench of CESTAT held that as per Rule 6(2) of Cenvat Credit Rules, 2004, the assessee isrequired to maintain separate accounts only in respect of exempted services and dutiable service. Since prior to 01.04.2011 trading activity was not at all a service and hence the appellant was not required to maintain separate books of accounts. The view of the department that the appellant is not entitled to credit for want of maintaining of separate accounts is not correct. At the same time, credit cannot be allowed against trading as it is neither a „service‟ nor „manufacture‟. Therefore that portion of the input service availed for trading is not admissible. The question as to how to derive at that portion of input service has been dealt in the case of Orion Appliances Ltd. v/s Commissioner of Service Tax 2010 (19) STR 205 (Tri-Ahmedabad) .

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