TIOL-DDT 1158 · the untouched capture
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<strong><font color="#663399" size="3">TIOL-DDT 1158</font><br>
21.07.2009<br>
Tuesday </strong></font> </div>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">CAG
ON A-SATYAM - CENVAT credit on input services used in non-taxable output services</font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>THE </strong>CAG’s Report No. 20/2009-10 submitted to Parliament this month states,</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">M/s
Satyam Computer Services Ltd., in Hyderabad II Commissionerate, engaged in providing
consulting engineers services, man power recruitment agency services etc., availed
of cenvat credit on several input services and used such services for rendering
taxable as well as non-taxable services (i.e. software development services
relating to information technology to various agencies located within and outside
India). Service tax credit on input services used in IT services rendered within
India/exported out of India was not admissible as IT services cannot be regarded
as output services/export of taxable services within the meaning of rule 2(p)
of the Cenvat Credit</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Rules/rule
3 of the Export of Services Rules, 2005. However, the assessee incorrectly availed
credit of the service tax paid on input services used for IT services. The credit
attributable to such ineligible IT services for the period 2004-05 to 2006-07
worked out to Rs. 8.81 Crore.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">On
this being pointed out (December 2007), the department stated (March 2008) that
a service provider who provided both taxable services and non-taxable services
(i.e. not covered under service tax act) was not prohibited from availing full
credit on common inputs/input services if the utilisation of credit was limited
to 20 per cent of the tax payable as laid down in rule 6(3)(c) of the Cenvat
Credit Rules. It also argued that availing of credit on common input goods/input
services used in software development services for home consumption/export was
permissible under cenvat provisions since these input services were not utilised
exclusively for such exempted services. The reply of the department was not
acceptable as the enabling provisions contained in section 94(2)(ccc) of the
Finance Act, 1994/section 37(2)(xvia) of the Central Excise Act, 1944, under
which cenvat credit rules were framed, limit the scope of cenvat benefits only
to taxable services and not to services which are outside the purview of the
Finance Act. The term ‘exempted</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">services’
as defined in rule 2(e) of the said rules covered only taxable services which
were covered by section 65 of the Finance Act but were not chargeable with service
tax because of exemption. The interpretation given by department for the definition
of exempted services was not correct as the word ‘includes’ appearing
in rule 2(e) should not be read in isolation but should be read in conjunction
with the word ‘taxable services’. The provisions of the Finance
Act, 1994 or the Cenvat Credit Rules could not have application to a service
which was outside the scope of the Finance Act and hence the credit availed
on corresponding input services used in software development services needs
recovery along with interest. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Reply
of the Ministry had not been received (December 2008).</font></p>
<p align="justify"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><em>Audit
recommends that Government should amend the Finance Act to include ‘IT
services’ in the list of services which are liable to service tax.</em></font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">This
is a Report submitted in July 2009. Is the CAG not aware that IT Services has
already been included in the list of taxable services with effect from 16.5.2008?
Maybe next year they can claim credit for its inclusion, though they are not
aware of it as of now!</font></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">Interest
on wrong credit of CENVAT – another A-SATYAM</font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The
CAG Report further states:</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><em>M/s
Satyam Computers Services Ltd.</em>, in Hyderabad II Commissionerate, engaged in
rendering of consulting engineers services, manpower recruitment agency services
etc., took credit of Rs. 4.15 crore during the period between February 2006
and July 2007, of the service tax paid on health insurance services obtained
from insurance companies for the welfare of their employees. The internal audit
wing of the department objected to these wrong credits in August/October 2007
and in pursuance of these objections, the assessee reversed the entire credit
on 31 August 2007. However, the interest payable on these incorrect credits
from the date of taking credit to the date of reversal, amounting to Rs. 46.37
lakh, was neither paid by the assessee nor was it demanded by the department.
</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">On
this being pointed out (December 2007), the department stated (May 2008) that
since the assessee did not utilise the excess availed amount, charging of interest
on the credit lying unutilised was not warranted in view of a plethora of judicial
decisions of Tribunals/High Courts. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The
fact, however remains that under rule 14 of the Cenvat Credit Rules, 2004, it
was statutorily required that where cenvat credit had been taken or utilised
wrongly, the same along with interest was recoverable. The anomalous situation
that had cropped up due to judicial pronouncements needs to be remedied by Government
by making the relevant provisions more explicit and unambiguous, as otherwise
the provisions of the said rule with regard to recovery of interest were not
enforceable even though the assessees commit breach of cenvat provisions by
taking wrong credits on ineligible services.</font></p>
<p align="justify"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><em>Audit
recommends that Government should amend the Rules, in view of past judicial
pronouncements, to bring the provisions of the rules, consistent with these.
</em> </font></strong></p>
<p align="left"><strong><font color="#000000" size="2" face="Verdana, Arial, Helvetica, sans-serif">Is
the CAG suggesting yet another retrospective legislation?</font></strong></p>
<p align="center"><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Sixth
Pay Commission Arrears - Taxability of second instalment in the FY 2008-09</strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Consequent
to the acceptance of the recommendations of the Sixth Pay Commission, the Department
of Expenditure vide its O.M.F.No. 1/1/2008-IC dated 30-8-2008 issued an instruction
that the first instalment of the salary arrears, amounting to 40% of the total
arrears would be paid in the financial year 2008-09, and that separate orders
will be issued in respect of payment of second instalment of salary arrears.
</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">CBDT
has considered the question of taxability of the second instalment of salary
arrears in the financial year 2008-09, i.e., the assessment year 2009-10. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Section
15(1)(c) of the Income-tax Act, 1961, provides that arrears of salary shall
be chargeable to tax in the previous year in which they are paid or allowed.
</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">It
has accordingly been decided that the second instalment of salary arrears, comprising
of 60%, arrears of salary, cannot to be brought to tax in the assessment year
2009-10 as the arrears had neither been paid nor allowed up to March 31, 2009.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">What
if the DDOs had considered the second instalment of salary arrears also for
the purpose of taxable income and deducted the tax at source during FY, 2009?
While CBDT can afford to issue a clarification on TDS pertaining to FY 2008-09
i.e. AY 2009-10 at leisure, DDOs cannot afford to have that luxury of waiting
for this long pending clarification to decide on TDS deductions. After all TDS
deductions cannot be withheld by the DDOs, lest they should be held liable for
penal action. CBDT could have come up with this two line clarification much
before March 31, 2009.</font></p>
<p align="justify"><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=67&filename=notification/cbdt/2009/letter9001.htm" target="_blank"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">CBDT
Instruction F.No. 173/163/2008/IT(A-1), dated 26-6-2009</font></strong></a></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">Plight
of Textile Sector in getting Refund/Rebates – CBEC should provide prompt
Clarification</font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><a href="http://www.taxindiaonline.com/RC2/inside2.php3?filename=bnews_detail.php3&newsid=9275" target="_blank">In
DDT 1146 03.07.2009</a>,</strong> we highlighted the plight of manufacturer-exporters
of textile goods falling under Chapter 63, who endured a lot of pain and suffering
for getting rebate of duty paid on goods exported, from Central Excise authorities
and failed miserably. This was due to an anomaly in duty rates by virtue of
Notification 58/2008-CE which prescribed Nil duty whereas Notification 59/2008-CE
which prescribed a duty of 4%. </font></p>
<p align="justify"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">A
brief recap:</font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The
assessee, who is leading textile export house, was keen to avail the benefit
of Notification 59/2008-CE which would facilitate them in getting rebate of
duty paid on export goods while allowing them to avail CENVAT benefit on inputs/input
services. Departmental authorities rejected their plea on the ground that when
finished goods are absolutely exempted by virtue of an exemption notification
they are bound to avail that exemption and not pay duty in terms of another
notification. When they approached us we suggested that there is a TRU clarification
dated 29.02.2008 which addressed this problem in their favour. </font></p>
<p align="justify"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Budget
amendment:</font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Immediately
thereafter, in the Budget 2009, Notification 11/2009-CE dated 07.07.2009 was
issued amending Notification 29/2004-CE dated 09.07.2004 as amended, by virtue
of which, goods attracting Nil duty hitherto shall attract 4%. So, to an extent
the anomaly of dual effective duty rates for finished products of Chapter 63
was resolved. </font></p>
<p align="justify"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Did
this really solve the problem:</font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">While
the problems faced by the assessees are perennial, the solutions come only in
a trickle. This seems to be the case with the above amendments as well. Yesterday,
we received an email from a leading textile manufacturer and exporter citing
our commentary in <a href="http://www.taxindiaonline.com/RC2/inside2.php3?filename=bnews_detail.php3&newsid=9275" target="_blank"><strong>DDT
1146</strong></a>, followed by the Budget amendment immediately thereafter and
came up with the following poser:</font></p>
<p align="justify"><em><font size="2" face="Verdana, Arial, Helvetica, sans-serif">“Now
with this budget, this problem is solved by amending the said notification (58/2008-CE)
by Notification 11/2009-CE. But what about the intervening period i.e. from
07.12.2008 to 06.07.2009. CBEC should clarify”</font></em></p>
<p align="justify"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">A
possible solution:</font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">In
this case, it appears the assessee was availing Nil duty benefit in terms of
Notification 29/2004-CE as amended by Notification 58/2008-CE which is in contrast
to the problem highlighted by us in <strong><a href="http://www.taxindiaonline.com/RC2/inside2.php3?filename=bnews_detail.php3&newsid=9275" target="_blank">DDT
1146</a>. </strong></font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">In
our view, if finished goods attracted Nil duty during the intervening period
and if such exempted goods are exported, even then there is no bar for such
exporters in availing the refund of unutilized input tax credits in terms of
Rule 5 of CENVAT Credit Rules, 2004.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The
phrase used in the opening sentence of this Rule is ‘any input or input
service is used in the manufacture of final product which is cleared for export
under bond or letter of undertaking…’. So if a manufacturer-exporter
is engaged in the manufacture of final products which are cleared for export
under bond or LUT, then credit availed on inputs or input services can be utilized
for payment of duty of excise on any <strong><font color="#FF6633">final product</font></strong> cleared
for home consumption or ‘for export on payment of duty’ or as service
tax on output service. In case such utilization (or adjustment as indicated
in the Rule) is not possible, such manufacturer-exporter shall be allowed refund
of such unutilized credits. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Refund
of unutilized credit is a substantive benefit provided by the CENVAT scheme
for exporters and there are a plethora of judicial pronouncements which have
held that substantive benefits accruing to an assessee cannot be denied on flimsy
grounds. Further, this Rule when read with Rule 6(6) (v) ibid clearly allows
availment of CENVAT credit and refund of unutilized credit. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">This
is also supported by judicial pronouncements as in the case of <em>Repro India Ltd
vs. Union of India & Anr </em></font><font size="1" face="Verdana, Arial, Helvetica, sans-serif"><em><strong><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=33&filename=legal/hc/2007/2007-TIOL-795-HC-MUM-CX.htm" target="_blank">2007-TIOL-795-HC-MUM-CX</a></strong></em></font><font size="2" face="Verdana, Arial, Helvetica, sans-serif"> where
Mumbai High Court held that the phrase ‘excisable goods’ employed
in Rule 6(6) ibid has a wider connotation and includes both dutiable and exempted
goods. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Also,
in <em>Neo Foods Pvt Ltd vs. CC (Appeals) </em></font><font size="1" face="Verdana, Arial, Helvetica, sans-serif"><em><strong><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=34&filename=legal/cestat/2009/2009-TIOL-976-CESTAT-BANG.htm" target="_blank">2009-TIOL-976-CESTAT-BANG</a></strong></em></font><font size="2" face="Verdana, Arial, Helvetica, sans-serif">,
CESTAT held that Rule 6(1) of CENVAT Credit Rules, 2004 is not a bar to avail
CENVAT credit on inputs/input services utilized in export of exempted goods
by 100% EOU. The CESTAT also exhorted that the <strong><em>principle of excise
taxation envisages only export of goods/services but not taxes</em></strong>
and therefore refund of unutilized credit by a 100% EOU is allowable in terms
of Rule 5 ibid.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The
principles enunciated by the Bombay High Court and the Bangalore Bench of
CESTAT would certainly hold good for the issue on hand. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>DDT</strong>
hopes that the benign <strong>CBEC</strong> will come out with a suitable clarification
for the benefit of trade and industry. </font></p>
<p align="center"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font color="#006600">Jurispruden</font><font color="#FF6633" size="5">tiol</font><font color="#006600">–</font></strong></font><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Wednesday's cases</strong></font></strong></p>
<p align="justify"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><strong><strong><strong><strong><strong><strong><b><img src="http://www.taxindiaonline.com/RC2/image/stories/ddt_hammer.jpg" alt="Legal Corner Icon" width="100" height="84" hspace="5" border="0" align="left"></b></strong></strong></strong></strong></strong></strong></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font></strong></font><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif">Central
Excise </font></strong></p>
<p align="justify"><strong><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">No
jurisdiction with authorities to impose penalty lesser than mandatory penalty,
which has to be co-extensive with duty payable – SC orders in Dharamendra
Textile case and Rajasthan Spinning & Weaving Mills followed: Bombay High
Court </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>THE</strong> question, therefore, of having paid the amount before issuance of the show cause
notice or after issuing the show cause notice cannot result in holding that
there is no requirement of determination. That argument, therefore, must be
rejected. </font></p>
<p align="justify"><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Income
Tax</strong></font></p>
<p align="justify"><strong><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">Cash
payments in excess of Rs 20,000 made to employees working in rigs - covered
by exceptions provided in rule 6DD(j) and not liable to be disallowed under
section 40A(3): ITAT </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">There
is no dispute that all the employees in the present case were posted for a continuous
period of 28 days on Rigs, which was more than the minimum period of 15 days
stipulated in rule 6DD(j) and they were not maintaining any bank there. As such,
considering all the facts of the case, the payments in question made by the
assessee-company in cash in excess of Rs. 20,000 were duly covered by the exceptions
provided in rule 6DD(j) and this being so, the same were not liable to be disallowed
under section 40A(3). </font></p>
<p align="left"><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>Service
Tax</strong></font></p>
<p align="justify"><strong><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">Construction
service – Service to self not taxable – No tax on ‘works contract’
prior to 1.6.2007 – matter remanded: CESTAT</font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Appellants
employed its own labour for execution of the various projects and are not a
contractor doing construction work for another person. In respect of constructed
property sold by the appellants to various buyers it cannot be held that PFL
rendered ‘commercial or industrial construction service’ and ‘construction
of complex service’ to the buyers. Appellants rendered such services to
itself.</font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">No
tax on ‘works contract’ prior to 1.6.2007 – Appellants carried
out the construction activity, finishing work etc., in respect of which demands
have been raised, in execution of works contracts. ‘Works contract service’
was brought under tax net on 1.6.2007, after the impugned activities were undertaken
by PFL. As rightly argued by the appellants, the Tribunal had held in Diebold
Systems case that activity such as erection/commissioning forming part of a
works contract could not be taxed under erection/commissioning service prior
to 1.6.2007. The contracts basic to the construction of commercial premises/residential
premises were indivisible and involved a service element. In view of the ratio
of the decision of the Tribunal, prima facie, the impugned demand is not sustainable.</font></p>
<p align="justify"><strong><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif">See
our columns Tomorrow for the judgements</font></strong></p>
<p align="justify"><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">Until
Tomorrow with more <strong>DDT </strong></font></p>
<p align="justify"><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">Have
a nice day.</font></p>
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your comments to</font><font size="2" face="Verdana, Arial, Helvetica, sans-serif">
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