TIOL-DDT 1449 · the untouched capture
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<!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.01 Transitional//EN" "http://www.w3.org/TR/html4/loose.dtd"> <html> <head> <title>Untitled Document</title> <meta http-equiv="Content-Type" content="text/html; charset=iso-8859-1"> </head> <body> <p><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong><font color="#663399" size="3">TIOL-DDT 1449 </font><br> 21.09.2010 <br> Tuesday</strong></font></p> <p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">Whether 'composition amount' paid under Works Contract Composition Scheme eligible as CENVAT Credit and whether ECess and SHE Cess are also payable on such 'composition amount'? </font></strong></p> <p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>EVER</strong> since Service Tax was introduced in 1994 on three services and expanded over the last decade and a half to an entire gamut of services, it was afflicted with one controversy or the other. </font></p> <p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">However, none of the controversies ever come close to matching the controversies surrounding taxation of construction sector, which the Government did in right earnest in 2004 by taxing the construction activity which are of commercial nature and gradually extending it to residential sector as well in the year 2005. Thereafter the Works Contract Service and its attendant composition scheme closely replicating the existing taxation pattern in the VAT domain appeared on the horizon in June 2007, but it was meant to tax only the service component of the Works Contracts by vivisecting such composite contracts. </font></p> <p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Now there appears to be another controversy brewing and which is likely to engulf the construction sector in all its fury. When Works Contract service was introduced w.e.f June 1, 2007, the Government also introduced the ‘composition scheme' wherein a 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 <em>at the rate of four percent of the gross amount charged for the works contract</em> (for brevity let's call it ‘composition amount'). </font></p> <p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">For this purpose the gross amount charged shall include 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 the value of all the services that are required to be provided for the execution of the works contract. But it excludes the VAT or Sales tax paid on transfer of property in goods involved in execution of such works contract and the cost of machinery and tools used in the execution of such works contract except for the charges for obtaining such tools and machinery on hire. </font></p> <p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Also the service provider shall not be eligible to avail <em>CENVAT credit</em> of duties or cess paid on any inputs used in or in relation to the said works contract. Further the service provider who opts to pay <em>service tax under</em> these rules shall exercise such option prior to payment of service tax in r/o such works contract and the option so exercised shall be applicable for the entire works contract and shall not be withdrawn until the completion of such works contract. </font></p> <p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Now to the crux of the issue – whether the ‘composition amount' paid by the service providers who opt this composition scheme, is eligible as CENVAT Credit to the service recipients and whether any ECess and SHE Cess is leviable on such ‘composition amount'? </font></p> <p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">While one school of thought is of the view that the amount paid by service providers availing the benefit of this composition scheme cannot be regarded as ‘service tax' because the relevant Rules only provide <em> for payment of four percent of the gross amount charged for the works contract</em> and such ‘composition amount' paid at four percent of the gross amount charged for the works contract by itself cannot be regarded as ‘service tax' but only an amount in lieu of their service tax liability on the Works Contract service. </font></p> <p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">According to this school of thought, it therefore naturally follows that ECess and SHE Cess are not payable on such ‘composition amount' because such cesses are leviable only on service tax in terms of section 95 of the Finance Act, 2004 and section 140 of Finance Act, 2007 and further this ‘composition amount' is not eligible as CENVAT Credit since Rule 3 of <em>CENVAT Credit </em>Rules, 2004 only allows ‘service tax' and ECess/SHE Cess paid on such ‘service tax' as <em>CENVAT Credit</em> for the recipients of such Works Contract service subject to other conditions prevailing therein. </font></p> <p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">On the contrary, there is another school of thought which is of the view that the ‘composition amount' paid under the composition scheme is indeed ‘service tax' payable under section 66 of the Finance Act, 1994 on Works Contract service and this composition scheme only provides a benefit to service providers to ‘discharge their service tax liability' at a reduced rate of four percent without any CENVAT credit benefit on ‘inputs' used in or in relation to provision of such service. </font></p> <p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">In view of this, it also follows that ECess and SHE Cess are payable on such ‘composition amount' which is nothing but ‘levy of service tax at a concessional rate' by those who opt to pay ‘service tax by availing the benefit of composition scheme' and the same would be available as CENVAT credit to the service recipients. In fact this aspect is also evident from a plain reading of the clarification issued by TRU vide paragraphs 9.5 to 9.8 of TRU Circular F. No. B1/16/2007-TRU Dated: May 22, 2007 clarifying the scope of composition scheme at the time of its introduction. </font></p> <p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Before this issue snowballs into a major controversy resulting in huge litigation for the construction sector, Board should step in and nip this controversy in the bud by issuing a detailed clarification in this regard. </font></p> <p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">SEZ Rules Amended - SEZ unit/Developer may procure prohibited items and SEZ unit may export prohibited items </font></strong></p> <p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>RULE</strong> 27 (1) of SEZ Rules, 2006 was amended to insert a proviso which stipulates that a SEZ unit or Developer may procure prohibited items by way of import from a place outside India into the SEZ with the prior approval of the Board of Approval. </font></p> <p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">Further Rule 45 (1) of the SEZ Rules, 2006 was amended by insertion of two provisos which provide that a unit situated in SEZ may also export prohibited items to a place outside India with prior approval of the Board of Approval. However, it was further provided that such prohibited items cannot be procured from DTA. </font></p> <p><a href="http://www.taxindiaonline.com/RC2/pdfdocs/sez_amendment_rules.pdf" target="_blank"><strong><font size="2" face="Verdana, Arial, Helvetica, sans-serif">SEZ Notification Dated: September 7, 2010 </font></strong></a></p> <p align="center"><strong><font color="#006600" size="2" face="Verdana, Arial, Helvetica, sans-serif">GST Roll Out finding it tough to clear Hurdle Race! </font></strong></p> <p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>TODAY'S</strong> meeting of Empowered Committee of State Finance Ministers to discuss the revised draft Bill did not arrive at any consensus with BJP ruled States still opposing the draft on the grounds that it would encroach upon State's fiscal autonomy. UPA II Government is in a precarious situation because it could not even convince its ally DMK, which is also learnt to be opposing this revised draft. BSP ruled Uttar Pradesh is also sitting on the other side of the fence. </font></p> <p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif">The onerous task of bringing on board all the States for a unified approach to GST still rests on the Chairman of the Empowered Committee on GST Mr. Asim Dasgupta and ultimately on Pranab babu. As for the real stakeholders, the suspense will continue for some more time while political haggling will go on for a while to arrive at that elusive consensus to meet the deadline of April 1, 2011. </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"> – Wednesday's cases</font></strong></font></strong></font></p> <p><font 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"><strong><font color="#663399">Service Tax </font></strong></font></p> <p align="justify"><strong><font color="#FF6633" size="2" face="Verdana, Arial, Helvetica, sans-serif">Commercial Training or Coaching Service - Explanation added by Finance Act, 2010 with retrospective effect from 01.07.2003 in definition clarifies that term ‘commercial' appearing in relevant definition only means that such training or coaching is being provided for a consideration whether or not such training or coaching is conducted with a profit motive - No prima facie case on merits or on limitation - Pre-deposit ordered of Two Crores: CESTAT </font></strong></p> <p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>THE</strong> appellant is a society registered under the Societies Registration Act, 1860 and is also registered under Bombay Public Trusts Act 1962. The society runs numerous educational institutions, 21 of which were taken note of by the Department in the proceedings. In a show-cause notice dated 12.12.06, the department invoking the extended period of limitation required the appellant to pay service tax of over Rs. 35.65 crores for the period from 1.7.03 to 31.3.06 in terms of section 65(105)(zzc) of the Finance Act, 1994 read with section 65(27) of the Act. </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">Income tax - Sec 194H - Discount offered by cellular companies to distributors of SIM cards and Recharge coupons in terms of lower MRP for promoting pre-paid connections amounts to commission - Revenue's demand for TDS and interest upheld: Kerala HC</font></strong></p> <p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>A</strong> streak of bad luck continues for the Vodafone Essar Cellular Ltd. Close on the heels of the Bombay HC decision, it has lost the battle over the issue of Whether discount paid by it to distributors on SIM Cards and Recharge Coupons is for sale of goods or for service rendered. Whether such discount offered by charging lower MRP of SIM cards and Recharge Coupons amounts to 'commission' within the meaning of the term contained under Explanation (i) to Sec 194H. And the HC has held that it is nothing but commission u/s 194H. </font></p> <p align="justify"><strong><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">Central Excise - Manufacture - Whether process of cutting or matting in rollform and stitching edges so as to convert them into floor mats would amount to manufacture - Matter referred to Larger Bench in view of conflictingdecisions : CESTAT </font></strong></p> <p align="justify"><font size="2" face="Verdana, Arial, Helvetica, sans-serif"><strong>THE</strong> assessee is engaged in the manufacture of ‘floor mats' out of tufted carpet rolls. The Commissioner (Appeals) upheld the demand by classifying the goods under CET Sub heading 5702.19 and denying the benefit of exemption under Notification No 8/2002 CE. The assessee contended that they only carry out the process of cutting of matting in roll form and stitching the edges so as to convert them into floor mats and this process does not amount to manufacture. However matter goes to Larger Bench due to conflicting decisions on this issue. </font></p> <p><strong><font color="#663399" size="2" face="Verdana, Arial, Helvetica, sans-serif">See our columns Tomorrow for the judgements </font></strong></p> <p><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Until tomorrow with more <strong>DDT</strong></font></p> <p><font color="#FF6666" size="2" face="Verdana, Arial, Helvetica, sans-serif">Have a nice DAY </font></p> <p><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"><strong>vijaywrite@taxindiaonline.com </strong></a></font></p> </body> </html>