Comments on the Draft Circular on procedural issues in Service Tax Law
These are the comments from our core team, which we hope the CBEC would consider before making the circular official.
Service tax Return:
Para 9.3 states that persons who are not liable to pay service tax because of exemption including threshold exemption are not required to file ST-3 returns on the reasoning that that an ‘assessee’ is defined as a person liable to pay service tax. Going by this reasoning, the service providers who are between Rs 7 and 8 lakhs also need not file any ST-3 returns though they have obtained a registration. It would be of great help to such service providers who have obtained a registration but are within the threshold exemption, if CBEC clarifies explicitly that they do not have to file any ST-3 Returns. Board had In F.No. 137/58/2007-CX.4 dated 29.3.2007 clarified as follows:-
it has been stated that a large number of show cause notices are pending adjudications that have been issued for non-filing of ST-3 returns. It has also been pointed out that many of these cases pertain to ST registrants, whose annual turnover fall under the exempted limit of Rs. 4 lacs p.a (now raised to Rs. 8 lacs p.a). The issue requiring resolution is whether such notices can be dropped to reduce the pendency of adjudication.
02. The issue has been examined. The service tax return is required to be filled under Section 70 of the FA, 1994 by 'Every person liable to pay the service tax'. Similarly, as per Rule 7 of the ST Rules, 1994, 'Every assessee' is required to submit service tax return. By definition, an 'assessee' is a person liable to pay service tax. Thus, it can be concluded that for persons, who are not liable to pay service tax (because of the exemption) are also not required to file ST-3 returns. Pending show cause notices may be disposed of taking into consideration the view as above.
The Circular needs to clarify this issue more emphatically.
E-Filing of Returns:
Para 9.4 states that assessees can file returns electronically. A simple directive to the field formations that they should not insist a manual return from those assessees who have filed returns electronically would be of great help to those assessees who file returns electronically. It would indeed save a lot of time for such assessees from duplicating this job of filing returns. Another aspect of this electronic filing of returns is that whenever the Ministry intends to revise/amend the return and issues a notification to that effect, it should ensure that the software meant for e-filing is also updated before issuing notifications for such revision/amendment of returns.
Assessment:
Para 10.1 states that where an assessment is provisional and the Assistant Commissioner/Deputy Commissioner finalizes the assessment, the assessee is required to pay the differential amount of service tax with interest. The interesting part is, as per Rule 6(4) of the Service Tax Rules,
Assistant Commissioner of Central Excise or the Deputy Commissioner of Central Excise, as the case may be, on receipt of such request, may allow payment of service tax on provisional basis on such value of taxable service as may be specified by him and the provisions of the Central Excise (No.2) Rules, 2001, relating to provisional assessment, except so far as they relate to execution of bond, shall, so far as may be, apply to such assessment.
Now first of all the Central Excise (No.2) Rules, 2001 do not exist now and if they do, the interest rate is a huge 24%. Don’t you think you need to amend the Service Tax Rules to bring in the Central Excise Rules, 2002?
Cenvat Credit:
Para 11.1(a) states that cenvat credit A/c cannot be utilized for payment of service tax on outward freight paid to a GTA on the ground that though there is a deemed legal fiction of a person liable for paying service tax becomes a provider of taxable service in the Cenvat Credit Rules 2004, the GTA’s service to a manufacturer is still an output service and hence they cannot utilize their cenvat credit A/c for paying the service tax leviable on outward freight. It seems the Board has conveniently ignored a recent judgment of CESTAT Principal bench which allowed utilization of cenvat credit A/c by a manufacturer for paying service tax on GTA service. Before the Board can come out with a clarification on the ineligibility of utilization of cenvat credit A/c for paying service tax on GTA service by a manufacturer, it should amend the rules and wipe out that deemed fiction. This can’t be done because it will have an impact on the definition of ‘input service’.
Therefore the alternative mechanism is put a bar in Rule 3 of the Cenvat Credit Rules, 2004 to the effect that manufacturers who are availing GTA service and pay outward freight cannot utilize their cenvat credit A/c for paying service tax thereon. Alternatively they should know the fate of the CESTAT judgment as to whether the Department has preferred any appeal in the High Court of Madras against that judgment. In Board’s own words (Para 2) wherever there is inconsistency in the circular with a provision of the Rule or the Act then such provision in Rule or Act will prevail. In such a case the manufacturer can still utilize the cenvat credit A/c notwithstanding anything contained in this circular.
Further it was stated in Para 11.1(b) that manufacturers cannot take credit of the service tax paid on the outward transportation from the place of removal citing the judgments of Hon’ble CESTAT in re Gujarat Ambuja Cements and NHK springs. An elaborate dissection on the definition of ‘place of removal’ was made in this circular (also quoted NHK springs judgment). After all this it was concluded that outward transportation upto the ‘place of removal’ can only be treated as an input service and hence credit of service tax to this extent only can be allowed. Unfortunately the phrase ‘place of removal’ is also present in the main part of the definition of ‘input service’ which reads as follows: “used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products from the place of removal”. Now this ‘place of removal’ as per Section 4 (3) (c) means a factory, depot, premises of a consignment agent or any other premises from where the goods are sold after their clearance from the place of removal.
So when a depot is also a ‘place of removal’ and if a manufacturer uses ‘any service’ to clear his goods for sale from such ‘place of removal’ then such service qualifies as an input service as per the definition of ‘input service’ in the Cenvat Credit Rules 2004. And the service which any manufacturer uses for clearance of goods from such place of removal (depots) is GTA service only. Merely because it was not explicitly stated in the main part of the definition regarding ‘outward transportation’ for clearance of goods from such place of removal (depots) it does not mean that a manufacturer cannot take any credit of service tax paid on the outward freight at their depots.
Moreover to extrapolate what is stated in an inclusive definition that follows the main definition and impose it on the main definition and override what is stated in the main definition is not legally tenable (though Hon’ble CESTAT has precisely done this in Gujarat Ambuja judgment). If the Board can name any other taxable service that can be utilized by a manufacturer for clearance of his goods for sale from the ‘place of removal’ (read depots) other than GTA service then they can advise the manufacturers not to take credit of service tax paid on the outward freight at their depots etc. Till such time the manufacturers are legally eligible to take such service tax as credits. Moreover there is another view on this at the Bangalore CESTAT though the order was delivered only at the stage of stay application and pre-deposit.
CBEC’s inclination to latch on to orders which are favourable to the cause of revenue ignoring contrary stands is well known and the clarification with regard to availability of credit of service tax paid on outward transportation is not in tune with the Rule and needs reconsideration (notwithstanding the two CESTAT judgments which in any case will be appealed against by the aggrieved assessees).
It was also further clarified that if the contract for sale and supply of goods transfers the right of property in such goods to the buyer only after they are delivered at the buyer’s premises then any service tax paid on such outward freight will be allowed as input credit. This is a logic which was relevant in excise law (now redundant in view of Rule 5 of Central Excise Valuation Rules) and it is not understood as to how this can be made applicable to decide the fate of credit of service tax paid on outward freight. Is it not ironical for the Board to propose such an irrelevant proposition in service tax law and overturn its own clarification and provide recipe to assessees to revise their freight contracts with transporters and in turn with their buyers?
Revision of Orders:
Para 16.1 states that Section 84 provides a Commissioner with an authority to review the orders passed by the subordinate officers within a span of two years from the date of passing such orders. Recently an amendment was brought in the Excise law to curtail the time limit for review under 35E was reduced from one year to three months and for filing of appeals after such review from three months to one month. It is suggested that Ministry/CBEC brings in a similar amendment to curtail the time limit under Section 84 of the Finance Act 1994 and make the lives of the assessees easier rather put an issue decided by a subordinate officer in a state of suspended animation for two years by a Commissioner.
OTHER SUGGESTIONS:
RECOVERY OF ARREARS:
By virtue of an amendment through Finance Act 2006, Section 73C was introduced in Chapter V of the Finance Act 1994 to provide for provisional attachment of property to protect revenue. The Ministry is yet to specify the procedure (either by way of Rules or a Circular) to be adopted by the field formations for provisional attachment of property. All will be happy if you forget about this.