TIOL-DDT 1347 · the untouched capture
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<p><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font color="#663399" size="3">TIOL-DDT 1347</font> <br>
28.04.2010<br>
Wednesday</strong></font></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">Auditing the Audit - Results are not all that Encouraging </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>HAVE</strong> you ever seen the audit report of C & AG on indirect taxes? The first chapter normally contains various data tables and colourful charts analysing the data over the last several years to rate the performance of the revenue departments. The Audit Report 2010 contained the data of the audit objections raised by the C & AG auditors and the amount of revenue detected from the year 2004-05 onwards. So we tried to do similar analysis in respect of the C & AG performance over the years. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">During the last five years, the performance of the audit was as under: </font></p>
<blockquote>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><em># Source: Para 1.9.1 - of Report No. 12 of 2009-10 - Union Government (Indirect Taxes - Central Excise) </em></font></p>
<p align="justify"><em><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Thus, when compared to the year 2004-05, during 2008-09, the number of paras raised by the Audit has decreased by 66% and the revenue detected has decreased by 980%! Does this mean the Audit is not performing or the compliance levels have gone up? </font></em></p>
</blockquote>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">Statistics conceal more and reveal less </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>THE</strong> value of output V/s the Central Excise duty collections was analysed by the Audit in para 1.2. The report reads: </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The value of output had increased by a factor of 1.36 during the years 2004-05 to 2008-09 and the corresponding increase in the central excise receipts was by a factor of 1.10. Accordingly, the central excise duties had generally kept steady pace with the value of output except for 2008-09 when there was a reduced growth in receipts compared to 2007-08. </font></p>
<p align="justify"><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">Has the Central Excise duty rate anything to do with the Central Excise collections? Perhaps not for C & AG. Or else, how they can arrive at a conclusion about the value of the output <em>vis-à-vis</em> central excise receipts without taking into account the rate of central excise duty? In 2008-09, the duty rate was reduced from 16% to 14% and in the same year again to 10%. Are the auditors ignorant of this simple fact? Who are they trying to impress with such erroneous analysis and half-baked histograms? </font></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">C & AG
reports availment of Exemption violating prescribed conditions of Notification
No. 1/2006-ST </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>M/s</strong> Tata Projects Ltd., in Hyderabad II Commissionerate had entered into two types of contracts with M/s Power Grid Corporation of India Ltd., M/s BHEL, M/s GAIL and several State Power Generation Corporations. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">In the first set of contracts involving erection of transmission line towers in civil foundations, the assessee (M/s TPL) supplied towers, tower extensions, bolts and nuts/accessories against separate supply orders and paid service tax on 33 per cent value of the contracts representing labour charges and cost of construction material like cement, sand etc., used in foundations of erection work. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">In the second set of contracts, involving supply of material as well as execution of projects on turn key basis, the assessee billed the customers for the total amount including the cost of equipment as well as labour charges and availed abatement of 67 per cent under the aforesaid notification. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">C & AG states that the exemption availed by the assessee in both the cases was not correct as the assessee had availed of <em>CENVAT Credit</em> of service tax on several input services. Moreover, in the first set of contracts, the assessee also derived the benefit of exclusion of the cost of the material viz., towers and tower parts for the purpose of service tax by bifurcation of contracts into supply contracts and erection works and reckoning only the latter for payment of tax. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">During the period from March 2006 to March 2007, the assessee availed of abatement on a turnover of Rs. 107.67 crore (being 67 per cent of the contract value of Rs. 160.70 crore on erection works and turn key projects) on which exemption of service tax of Rs. 13.14 crore availed of was incorrect. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Further, in the case of turn key construction contracts, the department stated in September 2008/March 2009 that the assessee had utilised credit only on certain common input services in its head office but not on any service which was project specific and the assessee had reversed pro-rata credit of Rs. 2.34 lakh along with interest of Rs 0.46 lakh attributable to such input services utilised in turnkey projects valued at Rs. 167.81 crore. It further stated that since the assessee had already foregone the input service credit, the abatement availed of on turn key projects was in accordance with the provisions of the exemption notification and also in line with the Supreme Court's decision in the case of <em>M/s Chandrapur Magnet Wires (P) Ltd </em></font><font size="1" face="Verdana, Arial, Helvetica, sans-serif"><em><strong><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=32&filename=legal/sc/2002/2002-TIOL-41-SC-CX.htm" target="_blank">2002-TIOL-41-SC-CX</a></strong></em></font><font size="2" face="Verdana, Arial, Helvetica, sans-serif">. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">C & AG stated that the reply of the department was not tenable as the reversal of pro-rata credit in lieu of the payment of service tax on 100 per cent value of contracts is not covered by the <em>CENVAT credit</em> rules or the relevant notification. Further, the Supreme Court's decision quoted by the department is not relevant since non-availing of input service credit itself is a requisite condition for availing of exemption in the present case whereas Supreme Court decision was in the context of availing of <em>MODVAT credit</em> on fully exempted goods covered by an unconditional exemption. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">No further reply of the Ministry was received by C & AG as on January 2010. </font></p>
<p align="justify"><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif">Now what further reply would the Ministry give if C & AG is not ready to honour the Supreme Court judgment on the subject matter? For once the department took shelter under a Supreme Court judgment and is at the receiving end of the C & AG for doing so. </font></p>
<p align="justify"><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif">Ironically, in Chapter II of Report No. 12 of 2009-10 (Indirect Taxes – Central Excise) at Para No. 2.2.1, C & AG on another occasion has relied on Supreme Court judgment in the case of <em>Bombay Dyeing & Mfg. Co. Ltd. </em></font><font color="#663399" size="1" face="Verdana, Arial, Helvetica, sans-serif"><em><strong><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=32&filename=legal/sc/2007/2007-TIOL-141-SC-CX.htm" target="_blank">2007-TIOL-141-SC-CX</a></strong></em></font><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif"> wherein it was held that if CENVAT Credit is reversed before utilisation, it would amount to not taking of credit. </font></p>
<p align="justify"><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif">Even if C & AG holds that Apex Court judgment in Chandrapur Magnet Wires cannot be made applicable to the facts of this case, the judgment in the case of Bombay Dyeing & Mfg. Co. Ltd may still apply. But again C & AG could disregard this judgment as well on the ground that it was delivered in the context of inputs and not input services because they have developed a habit of picking and choosing judgments that suits their cause. Can we call it a case of selective amnesia? </font></p>
<p align="justify"><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif">Also there are innumerable <em>CESTAT</em> judgments wherein it was held that turn key projects are not at all liable to service tax prior to June 1, 2007. Notable among them being <em>M/s L & T LTD Vs CCE, VADODARA – II </em></font><font color="#663399" size="1" face="Verdana, Arial, Helvetica, sans-serif"><em><strong><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=44&filename=legal/cestat/2007/2007-TIOL-744-CESTAT-AHM.htm" target="_blank">2007-TIOL-744-CESTAT-AHM</a></strong></em>.</font> </p>
<p align="justify"><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif">When C & AG has utter disregard for an Apex Court judgment, why would they care for orders from <em>CESTAT</em> on taxability of turnkey projects during the relevant period. </font></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">Commerce Ministry releases Strategy Paper on Engineering Exports </font></strong></p>
<p align="justify"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">UNION Minister of Commerce and Industry Mr. Anand Sharma released the Strategy Paper on the Growth of Engineering Exports commissioned by EEPC and prepared by Ernst & Young. On this occasion, the Minister said that engineering exports from India have grown considerably in the last few years with a growth rate that has been much higher than the world average. The Strategy Paper has set a target of USD 110 Billion by 2014 for total engineering exports. The Minister said that it is a robust target and if engineering is able to maintain its share of nearly 22% in total exports, then by 2014, India's total exports should be in the range of USD 500 Billion. </font></strong></p>
<p align="justify"><strong><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif">A case of reverse engineering the export targets based on a single sector's expectations. </font></strong></p>
<p align="justify"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The Minister stated that the DGFT is carrying a sectoral review of the exporting scenario, wherein all aspects of the policy related problems and major hurdles are being looked into sector by sector. And he added that the amendments to the new FTP will reflect the concerns of the exporting community and initiate steps within our means to help exporters reach greater heights of glory. </font></strong></p>
<p align="justify"><strong><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif">We only hope that the steps would be taken in consultation with the Finance Ministry so that both Ministries speak with one voice for providing export related benefits and avoid the ugly spats that occurred in UPA-I </font></strong></p>
<p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">Service Tax Not paid by Service Recipients </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>C & AG </strong>in his report at Para 2.2 of Report No. 13 of 2009-10 (Indirect taxes - Service Tax) states that Rule 2 (1) (d) (iv) of the Service Tax Rules, 1994, stipulates that in respect of taxable service provided by a person, who is a non-resident or is from outside India and does not have an office in India, the person receiving the taxable service in India is liable to pay service tax. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Based on this the Audit has raised several objections involving service tax running into crores of rupees. The objections were raised in the taxable service category of ‘intellectual property rights service', ‘banking & other financial services', ‘business auxiliary services', ‘management consultants service', ‘consulting engineer's service. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The
issues were raised under this head covering a period both prior to and after
18.04.2006, the date from which Section 66A was brought onto the statute
book. It is common knowledge in the field that this date is regarded as the
date from which service recipients are taxable for import of services as
has been held by the Mumbai High Court in <em>M/s Indian National Shipowners
Association case </em></font><font size="1" face="Verdana, Arial, Helvetica, sans-serif"><em><strong><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=43&filename=legal/hc/2008/2008-TIOL-633-HC-MUM-ST.htm" target="_blank">2008-TIOL-633-HC-MUM-ST</a></strong></em></font><font size="2" face="Verdana, Arial, Helvetica, sans-serif"> which
was also upheld by the Supreme Court by dismissing the SLP filed by Revenue </font><font size="1" face="Verdana, Arial, Helvetica, sans-serif"><em><strong><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=42&filename=legal/sc/2009/2009-TIOL-129-SC-ST.htm" target="_blank">2009-TIOL-129-SC-ST</a></strong></em></font><font size="2" face="Verdana, Arial, Helvetica, sans-serif">.
This judgment effectively buried Rule 2 (1)(d)(iv) in so far as it relates
to leviability of service tax on import of services. </font></p>
<p align="justify"><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">It is another matter whether the services received by the recipients in India in the cases highlighted by the C & AG are taxable at all or not under the respective taxable service categories mentioned by C & AG, because it depends on individual facts and circumstances of each case. But the date from which import of services in the hands of recipients is liable for service tax was settled once and for all by the Apex Court in the Indian National Shipowners Association case . Now in this backdrop what is the point in raising issue of taxability of imports prior to 18.04.2006? Is this another case of selective amnesia? </font></p>
<p align="center"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><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"> – Thursday's cases</font></strong></font></strong></font></p>
<p><strong><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif"><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">Central Excise</font></strong></p>
<p align="justify"><strong><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">Central Excise – Appeal is remedy against stay order of Tribunal, no writ: High Court </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>WHAT</strong> is the remedy for an appellant against a stay order passed by the <em>CESTAT</em>? It appears the answer is ‘none'. </font></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Recently we had reported a Supreme Court case <em><strong><a href="http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=50&filename=legal/sc/2010/2010-TIOL-29-SC-FEMA.htm" target="_blank"><font size="1">2010-TIOL-29-SC-FEMA</font></a></strong></em> wherein the court had held that there is no writ remedy against a stay order of the tribunal – only remedy is appeal. But if you remember, an appeal is only on a question of law. What could be the question of law in a stay order? </font></p>
<p align="justify"><strong><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif">Income Tax </font></strong></p>
<p align="justify"><strong><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">Referral fee – commission - referral fee is eligible as business deduction in line of business activities. It is settled law that, when facts of appellant are same both in preceding year and succeeding year and even in the instant year and unless there is change in position of law, there is no warrant to disallow claim of expenditure made by appellant company: ITAT </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>ONCE</strong> this fundamental fact of payment of commission and allowability of commission as referral fee has been permeated through all the assessment years including the instant assessment year then the hypothesis adopted by the authorities below to hold that, commission is not an eligible deduction is not tenable solely on the principles of consistency alone. It is settled law that, when the facts of the appellant are same both in the preceding year and succeeding year and even in the instant year and unless there is change in the position of law, there is no warrant to disallow the claim of expenditure made by the appellant company. It is settled law that, in absence of any change either in facts or in law, principles of consistency itself can be made a basis to uphold the claim of the appellant company. </font></p>
<p align="justify"><strong><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif">Service Tax </font></strong></p>
<p align="justify"><strong><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">Security Agency Service - In a company which is mainly providing manpower services and having a turn over of crores of rupees and is required to pay salary etc., it is difficult to believe that no proper accounts are maintained – appellant has no case whatsoever – Pre-deposit ordered of Rs.3 Crores: CESTAT </font></strong></p>
<p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif" align="justify"><strong>THE</strong> appellants are engaged in providing Security Agency's services and are liable to pay Service Tax w.e.f 16.10.1998. The Revenue officers found on investigation that the appellants had not paid full amount of Service Tax on security charges collected by them. As the appellant failed to submit the details of the amount on the basis of figures in the Profit & Loss account, show-cause notices were issued demanding a total amount of Service Tax of Rs. 6,31,60,945/-. The amount was confirmed by the Commissioner of Service Tax, Mumbai along with penalties under sections 76 and 78 of the Finance Act, 1994. </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="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Until Tomorrow with more <strong>DDT</strong></font></p>
<p align="justify"><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Have a nice day. </font></p>
<p align="justify"><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Mail your comments to</font><font size="2" face="Verdana, Arial, Helvetica, sans-serif"> <a href="mailto:vijaywrite@taxindiaonline.com">vijaywrite@taxindiaonline.com </a></font></p>
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