Latest in Indirect Tax

Appeal to High Court

2011-06-14T22:23:00.000-07:00

Karnataka High Court in the case of Firepro Systems Pvt Ltd. has held that appeal involving question of interpretation of notification pertains to determination of rate of duty and therefore falls within the exception carve out under section 35G of the Central Excise Act, hence High Court cannot entertain such appeals.

Natural Justice

2011-06-14T22:11:00.000-07:00

The Karnataka High Court in the case of Milestone Aluminium Co. Pvt Ltd. held that order passed relying on the statements recorded after personal hearing and without giving an opportunity to the assessee to rebutt the same, traversing beyond the show cause natice without affording an opportunity of personal hearing is not sustainable.

Penalty

2011-06-14T22:05:00.000-07:00

In the case of Vetril Electronics Pvt Ltd, Karnataka High Court has held that penalty is not imposable when assessee is doubt about the duty liability, makes correspondence with the department and pays when informed about the duty liability. In such cases suppression cannot be alleged.

Point of Taxation Rules

2011-04-03T01:23:00.000-07:00

The Point of Taxation Rules, 2011 has come in force with effect from 1 April 2011. Service tax has become payable on accrual basis as against the cash basis. The Government has amended various provisions of the proposed rules to address concerns raised by the business community and professionals. Consequently, the Government has also amended provisions of the Service Tax Rules, 1994 and the CENVAT Credit Rules to align the same with the provisions of the Point of Taxation Rules.

Salient features of the Point of Taxation Rules, 2011 (POTR)

Point of Taxation for payment of service tax

Ø Point of taxation shall be the date of (i) issue of invoice for the service provided or to be provided, or (ii) receipt of payment whichever is earlier.

Ø Where the invoice is not issued within 14 days of the completion of the provision of the service, the point of taxation shall be date of such completion.

Ø Service shall be deemed to have been provided on the Point of taxation and service tax shall be payable on that basis

Ø Point of taxation for the following taxable services shall remain on cash basis:

· Export of taxable services provided that payment is received within the stipulated time

· The persons required to pay tax as recipients under reverse charge provided that payment is made within 6 months

· Following services provided by individuals or proprietary firms or partnership firms:

o Architect’s service

o Chartered accountant’s service

o Cost accountant’s service

o Interior decorator service

o Company secretary’s service

o Scientific or technical consultancy service

o Legal services

Point of Taxation in case of change of rate of service tax

Ø Taxable service has been provided before the change of rate

· Invoice is issued before change but payment received after change: old rate of tax and point of taxation is the date of invoice

· Payment is received before change but invoice is issued after change: old rate of tax and point of taxation is the date of payment

· Invoice is issued after change and payment also received after change: New rate of tax and point of taxation is the date of payment or invoice, whichever is earlier

Ø Taxable service has been provided after the change of rate· Invoice is issued before change but payment received after change: New rate of tax and point of taxation is the date of payment

· Payment is received before change but invoice is issued after change: New rate of tax and point of taxation is the date of payment

· Invoice is issued before change and payment also received before change: Old rate of tax and point of taxation is the date of payment or invoice, whichever is earlier

Point of Taxation in case of new services

Ø Invoice issued and payment received before levy: No tax

Ø Payment received before levy and invoice issued within 14 days: No tax

Ø Invoice issued before levy but payment received after levy: Taxable?? [Second proviso to Rule 6(1) omitted]

Ø Payment received before levy but invoice issued after 14 days: taxable??

Point of Taxation in case of continuous supply of service

Ø Continuous supply of service means any service which is provided, or to be provided continuously, under a contract, for a period exceeding three months, or where the Central Government notifies a particular service to be a continuous supply of service

Ø Point of taxation shall be the date of (i) issue of invoice for the service provided or to be provided, or (ii) receipt of payment, whichever is earlier

Ø Where the invoice is not issued within 14 days of the completion of the provision of the service, the point of taxation shall be date of such completion

Ø Where the provision of the whole or part of the service is determined periodically on the completion of an event in terms of a contract, which requires the service receiver to make any payment to service provider, the date of completion of each such event as specified in the contract shall be deemed to be the date of completion of provision of service

Point of taxation in case of associated enterprises

Ø Where the person providing the service is located outside India: Date of credit in the books of account of the person receiving the service or date of making the payment whichever is earlier.

Ø Where the both person are located inside India:

Determination of point of taxation in case of Intellectual Property:

Ø Royalties and payments pertaining to copyrights, trademarks, designs or patents: where the whole amount of the consideration for the provision of service is not ascertainable at the time when service was performed, and subsequently the use or the benefit of these services by a person other than the provider gives rise to any payment of consideration, the service shall be treated as having been provided each time when a payment in respect of such use or the benefit is received by the provider in respect thereof, or an invoice is issued by the provider, whichever is earlier.

Transitional Provisions:

Ø Nothing contained in [(this sub-rule)-should be (these rules)] shall be applicable:

· where the provision of service is completed; or

· where invoices are issued

prior to the 1 April 2011.

Ø Taxpayer has an option to determine point of taxation either on accrual basis or cash basis:

· Provision of service is completed on or before 30 June 2011; or

· Invoices are issued up to 30 June 2011.

Amendment in the Service Tax Rules, 1994

Invoice for continuous supply of services:

Ø Every person is required to issue an invoice, bill or challan within 14 days of the date when each event specified in the contract, which requires the service receiver to make any payment to service provider, is completed.

Payment of service tax:

Ø Point of taxation as determined under POTR is deemed as date of provision of service.

Ø Service tax is payable on 5/6 of the next month/quarter, as the case may be.

Adjustment of value of taxable service:

Ø Where an assessee has issued an invoice, or received any payment, against a service to be provided which is not so provided by him either wholly or partially or where the amount of invoice is renegotiated due to deficient provision of service, or any terms contained in a contract for any reason, the assessee may take the credit of such excess service tax paid by him, if the assessee:

· has refunded the payment or part thereof, so received along with the service tax payable thereon for the service to be provided by him to the person from whom it was received; or

· has issued a credit note for the value of the service not so provided to the person to whom such an invoice had been issued.

Ø There is no monetary limit on such credit.

Amendment in the CENVAT Credit Rules, 2004

Ø CENVAT credit on input service is allowed on the accrual basis provided payment of the value of input service and the service tax paid or payable thereon is made within 3 months of the date of invoice.

Ø If payment is not made within stipulated 3 months, such CENVAT credit shall be reversed and could be availed as and when payment is made.

Ø CENVAT credit of service tax paid under reverse charge is on payment basis.

Ø In case of adjustment of taxable value of service or refund, proportionate CENVAT credit shall be reversed.

Ø CENVAT credit of service tax against invoice issued before 1 April 2011 shall be on payment basis.

Ø A supplementary invoice issued by a provider of output service is an eligible document to avail CENVAT Credit.

Extended period

2011-02-09T00:59:00.000-08:00

The Ahmedabad tribunal has held that if the views of the Commissioner that the appellants should have made enquiries and done the ground work to find out the liability of service tax, are accepted to be good and just reasons for invocation of extended period, the plea of limitation would not be available to any of the assessee, inasmuch as every assessee is under an obligation to do the ground work and find out its tax liability. The reasons adopted by the Commissioner are not the criteria for invocation of longer period.

Any bonafide lapse not to make enquiries about its obligation to pay duty/tax, cannot be made reason for invocation of extended period unless there is evidence to show that such lapse was on account of malafide intention, and with guilty mind of avoiding payment of tax. There being none in the present case, we are of the view that the demand having been raised beyond the normal period of limitation, is barred by limitation.

In this case the Commissioner has invoked the extended period of limitation, by observing that when the foreign appellant entered into an agreement, it was obligatory on their part to know either from the Indian party or their country diplomatic mission and/or any other means in India about the prevailing taxes on the date of agreement in India. Though, they were at liberty to call enquiries about levy of service tax and disclose their taxable activity to the department, they did not do so. As such, he has concluded that the appellants have knowingly and willingly suppressed the fact of taxable service from the department till it was detected by Central Excise Revenue Audit authority of the Accountant General of Gujarat from the balance sheet of Indian party.

Unjust Enrichment

2011-02-09T00:54:00.000-08:00

Where the sale price of imported goods are fixed by Government, there cannot be a question of unjust enrichment.
Rely on M/s Hindalco Industries Co.[2008 (231) ELT 36 (Guj.)]

Classification of Trichup Oil

2011-02-09T00:45:00.000-08:00

Gujarat High Court has held that Trichup Oil is classifiable under Tariff Heading 3003.39.

Trichup Oil is a hair care oil enriched with Bhringraj, Amalaki, Neem, Gunja and other hair rejuvenating herbs which are processed in Sesame and Coconut oil.

Tariff Heading 3003.90 is applicable to the Ayurvedic, Unani, Homoeopathic, Siddha or Bio-chemic systems medicaments.

SC stays the stay order on rent

2011-01-12T20:56:00.000-08:00

Supreme Court has stayed the stay order of Delhi High Court on Service Tax on Renting of Immovable Property

On 11 January 2011, the Hon’ble Supreme Court of India (SC) has granted an interim stay of the operation of the judgment in WP No. 3398/2010 of High Court (HC) of Delhi till the next date. Next hearing is scheduled for 20 January 2011.

Union of India has challenged the stay grated by the HC of Delhi to M/s Home Solutions Retails India & Others in WP No. 3398/2010.

SC stay order on HC stay order amounts to vacation of HC stay till next hearing. Consequently, the service tax authorities can resort to coercive recovery of service tax from the Petitioner as per law.

Similar petitions at other High Courts are at various stages of hearing. The SC stay order will hinder interim relief from High Courts. In view of the SC order, Government is likely to move to various courts for vacation of stay wherever petitioners have obtained interim relief

Cryptic Orders not good

2010-04-28T23:29:00.001-07:00

Apex Court in the case of Assistant Commercial Tax Officer vs M/s. Rijhumal Jeevandas took strong exception to the manner in which High Courts are passing cryptic non-speaking orders and remanded the same with following observations:

"With some regret, we are constrained to notice that the cryptic orders like the above, have not only been passed in the present appeals, but identical orders had even been passed by the High Court in large number of cases from which the appeals have been preferred before this Court. Identical orders, though in different revision petitions dealing with different facts, parties and questions of law, running into 4 lines, like the present one, have been passed, even without variation of a coma or a full stop. It also needs to be noticed that the grounds raised by the Department before us cannot be said to be frivolous or untenable which required discussion by the High Court. The orders, besides being cryptic, suffer from basic infirmity of non application of mind and non-speaking orders in law. This ground need not detain us any further as even in other cases where identical orders were passed, this Court had the occasion to consider the same grounds at some length. Reference, in this regard, can be made to the judgment of the date, the Bench, in the case of Assistant Commissioner v. M/s Shukla & Brothers (SLP (C) No. 16466 of 2009) decided on the same day, where after discussing the law at some length, the order passed by the High Court was set aside and the case was remanded to the High Court for hearing the case de novo and passing of an order in accordance with law afresh."

Despleasure of the apex court is evident for all to see.

Constitutional validity of Entry Tax

2010-04-28T23:21:00.000-07:00

In the case of Jindal Stainless Ltd vs State of Haryana, five member bench of the Supreme Court has referred the Entry Tax case to the Chief justice for constituting a suitable larger constitutional bench to consider, inter alia, following questions:
1) Revisit the interpretation of Part XIII of the Constitution including the various tests propounded in the judgments of the Constitution Bench of in Atiabari Tea Co.[(1961) 1 SCR 809] and Automobile Transport (Rajasthan) Ltd [(1963) 1 SCR 491] .
2) Interplay/interrelationship between Article 304(a) and Article 304(b).
3) The significance of the word "and" between Article 304(a) and 304(b).
4) The significance of the non obstante clause in Article 304.
5) The balancing of freedom of trade and commerce in Article 301 vis-`-vis the States' authority to levy taxes under Article 245 and Article 246 of the Constitution read with the appropriate legislative Entries in the Seventh Schedule, particularly in the context of movement of trade and commerce.
6) Whether Article 304(a) and Article 304(b) deal with different subjects?
7) Whether the impugned taxation law to be valid under Article 304(a) must also fulfil the conditions mentioned in Article 304(b), including Presidential assent?
8) Whether the word "restrictions" in Article 302 and in Article 304(b) includes tax laws?
9) Whether validity of a law impugned as violative of Article 301 should be judged only in the light of the test of non-discrimination?
10) Does Article 303 circumscribe Article 301?
11) Whether "internal goods" would come under Article 304(b) and "external goods" under Article 304(a)?
12) Whether "per se test" propounded in Atiabari's case (supra) should or should not be rejected?
13) Whether tax simpliciter constitutes a restriction under Part XIII of the Constitution?
14) Whether the word "restriction" in Article 304(b) includes tax laws?
15) Is taxation justiciable?
16) Whether the "working test" laid down in Atiabari makes a tax law per se violative of Article 301?
17) Inter-relationship between Article 19(1)(g) and Article 301 of the Constitution?

Earlier, in the case of Jaiprakash Associates Ltd. vs State of M.P.[ 2008 (16) SCALE 90], two member bench of the Supreme Court had referred the Entry Tax case to Chief justice for constituting a suitable larger constitutional bench to consider, inter alia, following questions:

(1) Whether the State enactments relating to levy of Entry Tax have to be tested with reference to both Clauses (a) and (b) of Article 304 of the Constitution for determining their validity and whether Clause (a) of Article 304 is conjunctive with or separate from Clause (b) of Article 304?
(2) Whether imposition of Entry Tax levied in terms of Entry 52 List II of 7th Schedule is violative of Article 301 of the Constitution? If the answer is in the affirmative whether such levy can be protected if Entry Tax is compensatory in character and if the answer to the aforesaid question is in the affirmative what are the yardsticks to be applied to determine the compensatory character of the Entry Tax.
(3) Whether Entry 52, List II, 7th Schedule of the Constitution like other taxing entries in the Schedule, merely provides a taxing field for exercising the power to levy and whether collection of Entry tax which ordinarily would be credited to the Consolidated Fund of the State being a revenue received by the Government of the State and would have to be appropriated in accordance with law and for the purposes and in the manner provided in the Constitution as per Article 266 and there is nothing express or explicit in Entry 52, List II, 7th Schedule which would compel the State to spend the tax collected within the local area in which it was collected?
(4) Will the principles of quid pro quo relevant to a fee apply in the matter of taxes imposed under Part XIII?
(5) Whether the Entry Tax may be levied at all where the goods meant for being sold, used or consumed come to rest (standstill) after the movement of the goods ceases in the `local area'?
(6) Whether the Entry Tax can be termed a tax on the movement of goods when there is no bar to the entry of goods at the State border or when it passes through a local area within which they are not sold, used or consumed?
(7) Whether interpretation of Articles 301 to 304 in the context of Tax on vehicles (commonly known as `transport') cases in Atiabari's case and Automobile Transport's case apply to Entry Tax cases and if so, to what extent.
(8) Whether the non discriminatory indirect State Tax which is capable of being passed on and has been passed on by traders to the consumers infringes Article 301 of the Constitution?
(9) Whether a tax on goods within the State which directly impedes the trade and thus violates Article 301 of the Constitution can be saved by reference to Article 304 of the Constitution alone or can be saved by any other Article?
(10) Whether a levy under Entry 52, List II, even if held to be in the nature of a compensatory levy, it must, on the principle of equivalence demonstrate that the value of the quantifiable benefit is represented by the costs incurred in procuring the facility/services (which costs in turn become the basis of re-imbursement/recompense for the provider of the services/facilities) to be provided in the concerned `local area' and whether the entire State or a part thereof can be comprehended as local area for the purpose of Entry Tax?

Constitutional Bench will seek to strike a balance between the "freedom of trade and commerce" under Article 301 of the Constitution and the States' authority to levy taxes under Articles 245 and 246 of the Constitution read with the appropriate Legislative Entries in the Seventh Schedule to the Constitution of India.

Service received before 18 April 2006

2010-04-26T22:43:00.000-07:00

CESTAT in Appeal No. ST/65,88/08 [Commissioner of Central Excise Pune-II vs I.J. Mathu Foods Pvt. Ltd.] has held that the recipient of overseas service is not liable to pay service tax for period prior to 18.4.2006.

In the instant case the revenue demanded service tax on interest and penalty on advertising, publicity and promotion expenses incurred in foreign exchange towards for evaluation of prospective customers situated outside India during the period 2004-05 and 2005-06. The demand was made as service receiver under Rule 2(1)(d) (iv) of Service Tax Rules, 2004 as ‘Business Auxiliary Service’ provided by a non-resident person providing services to Indian Client.

The respondent argued that the recipient of overseas service is not liable to pay service tax for period prior to 18.4.2006 before insertion of Section 66A of the Finance Act, 1994 as held in Pashupati Spg.&Wvg. Mills Ltd. Vs. Commr. Of C. Ex. [2009 (15) S.T.R. 274 (Tri.- Del.)], and Anant Spinning. Mills Vs. Commissioner of Central Excise, [2009 (14) S.T.R. 184 (Tri.-Del.)], Indian National Shipowners Association Vs. Union of India [2009 (13) STR 235 (Bom.)] as confirmed by Apex Court [2010 (17) STR J57(SC)]

Payment of ST on GTA

2010-04-26T22:22:00.000-07:00

CESTAT in Appeal No. ST/50-51/10 [Indorama Synthetics (I) Ltd.vs Commissioner of Central Excise, Nagpur held that the appellant was entitled to pay service tax, during the period of dispute, on GTA service (which was availed for outward transportation of their final products), by making use of CENVAT credit taken on input services.

It was contended by the appellant that the GTA service availed for outward transportation of the final products is an “output service” for purposes of Rule 2(p) of the Cenvat Credit Rules, 2004, and relied on India Cements Ltd. vs. Commissioner of Central Excise, Salem [2007 (7) S.T.R. 569 (Tri.)], Mahindra Ugine Steel Co. Ltd. vs. CCE, Raigad [2008 (12) S.T.R. 159 (Tri)],larger bench in Panchmahal Steel Ltd. vs. Commissioner [2008 (12) S.T.R. 447 (Tri)].

CENVAT credit on jobwork

2010-04-26T22:14:00.000-07:00

CESTAT in appeal No.ST/119/09-MUM [Multi Organics Pvt. Ltd. vs Commissioner of Central Excise, Nagpur] held that service tax paid by the job worker can be availed as CENVAT credit by the principal manufacturer. In the instant case, the assessee had got certain inputs processed by a job worker and paid duty on the final products manufactured out of the job-worked goods. The job worker paid service tax on the job charges and CENVAT credit thereof was availed by the assessee.

Department sought to deny the CENVAT credit as the job worker was not required to pay service tax by virtue of exemption Notification and therefore the principal manufacturer was not entitled to take credit of any service tax paid by the job worker.

Tribunal negated the contention of the department relying on judgements in:
1) Commissioner of Central Excise, Mumbai.III vs. DIL Ltd [ 2008(9)STR 411 (Tri-Mumbai)]
2) SPIC (HCD) Ltd vs Commissioner of Central Excise, Chennai [ 2006 (201) ELT 386 (Tri-Chennai)].
3) Commissioner of Central Excise & Customs vs. MDS Switchgear Ltd.[2008(229) ELT 485 (S.C.).

CESTAT held that decision in Bombay Dyeing & Manufacturing Co.Ltd. vs. CCE, Mumbai [ 2001(135) ELT 1392 (Tri-Mumbai)holding was contradictory to the decision in SPIC (HCD) (supra), and held that where there are contradictory decisions of coordinate benches, the later one would prevail and therefore the view taken by the Division Bench in the case of SPIC (HCD) would be the appropriate precedent.

Recent case laws

2010-01-01T23:07:00.000-08:00

 Chennai High Court has held that where the original buyer fails to clear the imported goods on payment of duty/fine and penalty after same has been seized/confiscated by the customs, the subsequent buyer (who retires the shipping documents after same has been recalled and reissued by the overseas supplier) cannot claim the title to goods unless the original buyer has relinquished the title of imported goods. The Court also observed that the original buyer can never relinquish the title to the goods already seized by the customs authority. [Ref: CC vs Ishwar Impex]

 Related party cross-boarder transactions are subject to SVB investigation. Circular No.11/01-Cus dated 23 February 2001 issued by CBEC provides that where the value cannot be determined within 4 months from the date of reply, the extra duty deposit (EDD) should be discontinued. In the instant case, as original SVB order was pending before CESTAT, SVB periodical renewal order could not be issued within the stipulated period of four months. In such circumstances, the Bombay High Court has held that provisional assessment has to be allowed without any EDD and the proper officer should not deviate from the CBEC circular. [Ref: SKODA Auto India Pvt. Ltd. vs CC]

 Delhi High Court has upheld the view of Tribunal about ‘lex non cogit ad impossibilia’ which means that the law cannot ask a person to do the impossible. As per the present Import Policy, individuals can import car on production of Type Approval Certificate/ COP from the specified accredited agency of the country of origin confirming to all ECE Regulations. In the instant case, the agency informed the individual that such certificate cannot be issued, as only a part of the Japanese technical regulations are harmonized with the ECE regulations. In view of the above, confiscation of imported car was set aside. [Ref: CC vs J.S. Gujaral]

 Tribunal has held that once export obligation is discharged, replenished inputs imported under advance authorisation scheme can be used in manufacture of other products and disposed off without any restriction. [Ref: Aditya Birla Nuvo Ltd formerly vs CC]

 Tribunal has held that the principle of unjust enrichment is not applicable to a claim for refund of redemption fine. [Ref: Rashtriya Metal Industries Ltd vs CC]

 Tribunal has held that steel pipes used for drilling are spares and not capital goods, and therefore, import of used steel pipes, other than reconditioned/refurbished, is restricted under the prevailing Foreign Trade Policy. [Ref: Zenath Engineering Pvt. Ltd vs CC]

 Tribunal has held that DGPS, Electronic Theodolite and Radio Telephone Equipment used in the manufacture of launches are eligible for exemption under Notification No.23/98-Cus dated 2 June 1998 (equivalent to present exemption under serial 356 of Notification No. 21/2002 dated 1 March 2002). [Ref: Goodwill Engineering Works vs CC]

 The Apex Court has held that ‘game’ and ‘puzzle’ are different by three distinct features, viz., outcome, clue-chance and skill. In a puzzle, for example crossword or jigsaw puzzle, outcome is pre-determined and fixed; and winning or losing can only come by way of time taken in solving the puzzle. On the other hand, in game, the outcome is not predetermined but depends on chance and skill of the player. Applying the above test, the Apex court held that Scrabble and ‘Junior Scrabble’, ‘Snake and Ladder’, Monopoly are board game and not puzzle. [Ref: Pleasantime Products vs CCE & CCE vs Funskool (India) Ltd]

 In terms of Section 11AA of the Central Excise Act, interest was payable on the duty not paid within three months from the date of determination. However, in terms of Section 11AA(2) thereof, no interest was payable if duty becomes payable after 11 May, 2001. The show cause notice was issued in 1992 for 1987-91 and was adjudicated in 1993. On being set aside by the CESTAT by way of remand, the notice was adjudicated de-novo on 22 March, 2002. In such circumstances, the Bombay High Court has held that once the Original Order is set aside, there is no duty which was ascertained and which is payable and consequently no interest would be payable. The duty came to be ascertained on 22 March 2002 under de-novo proceedings and therefore, no interest could have been demanded in view of Section 11AA(2). [Ref: Blue Star Limited vs UOI]

 Karnataka High Court has held that cost analysis certificate issued by the chartered accountant showing that duty burden has been born by the manufacturer and the fact that manufacturer has suffered loss on sale of final products is not sufficient to repudiate the presumption of unjust enrichment. The High Court further held that it would be one of the relevant factor but the manufacturer has to establish with documentary evidence that burden of duty has not been passed to the customers. [Ref: CCE vs Toyota Kirloskar Motor Ltd.]

 Tribunal has held that a pre-existing software modified to suit the various parameters as required by the customer is not a customised software but merely a modified packaged software. Software has to be developed from the basic building blocks whereby a new software product should emerge as per the specific requirement of the client so as to qualify itself as custom designed software. [Ref: Steag Encotec India Pvt Ltd vs CC]

 Advance Ruling Authority has held that the activity of cutting of electric cables into desired lengths, testing and packaging thereof does not amount to manufacture as such activities does not result in emergence of a different commodity having its distinct character, use and name. [Ref: M/s Lapp India Pvt Ltd]

 Delhi High Court has declined to grant relief to the petitioner for waiver of pre-deposit of service tax on business auxiliary service provided to the overseas entity. In the instant case, Indian entity was providing, interalia, customer care service to the Indian customers on behalf of the overseas entity. The High court observed that the consumers are based in India, both destination and consumption is in India; Indian consumers pay for services which go out to the overseas entity and part of it comes back to India in the shape of commission; Economic and commercial activities also take place in India. The High court found the both sides have arguable case and therefore declined to interfere with the discretion of the Tribunal. [Ref: Microsoft Corp (India) Ltd. vs CST]

 The Apex court has confirmed the Bombay High Court decision that services provided from abroad were not taxable prior to 18 April 2006. In other words , before insertion of section 66A with effect from 18-4-2006, there was no authority to levy service tax on Import of service (Ref: Supreme Court in UOI vs M/s Indian National Ship Owners]

 Assessee was providing mining service under a composite contract, which, interalia, included services of site formation; and the Assessee was paying services tax thereon. Tribunal has held that demand of service tax on site formation service is not sustainable [Ref: Gurunanak Roadlines vs CCE]

 Tribunal has held that service tax paid on insurance premium for capital goods in transit is eligible for CENVAT credit as input service. [Ref: CCE vs Raipur Rotocast Ltd]

 Supreme Court has held that ‘ordinary earth’ used for filling or levelling purposes in the construction of embankments, roads, railways, buildings has validly been declared to be a `minor mineral' by the Central Government vide notification dated February 3, 2000 issued under Section 3(e) of Mines and Minerals (Development and Regulation) Act, 1957 and royalty is payable to the Government for lifting and using ‘ordinary earth’ from the privately held land. The Apex court concurred with the lower court that the liability to pay royalty is primarily of the person holding the mining lease or a mining permit but if a person does not hold any mining lease or a mining permit, the liability does not cease and the person excavating the mineral becomes liable to pay applicable royalty. [Ref: Som Datt Builders Ltd. vs UOI]

 Allahabad High Court has held that whenever a dispute arise pertaining to the classification of the export goods under DEPB scheme, the customs authorities have to refer the dispute for adjudication to DGFT. It is only if the DGFT as the licensing and also adjudicating authority decides against the licensee, that the customs authorities will get jurisdiction to confiscate and levy penalty on such goods. In the instant case, the exporter of ‘stainless steel hatch’ claimed a particular classification applicable for machined parts manufactured through Forging process and revenue was of the opinion that the goods were not manufactured out of forging process but by fabrication process. [Ref: PTC Industries Ltd. vs UOI]

Mandatory penalty under section 11AC

2009-12-09T22:28:00.001-08:00

In CCE vs M/s. Garden Silk Mills (Appeal E/1417/08), Tribunal held that in absence of clear findings about suppression of facts or mis-declaration in the Order, mandatory penalty under section 11AC cannot be imposed. In the instant case, the respondents had cleared polyester yarn to their own factory located else where and assessment was made on the basis of cost construction method. On pointing the mistake, differential duty was promptly paid.

The Commissioner (Appeals) found that the situation was revenue neutral and there was no intention to evade duty attracting the provisions of Section 11AC. The Tribunal relied on decision of the Hon'ble Supreme Court in the case of Cosmic Dye Chemical reported in 1995 (6) RLT 333 (Supreme Court), where in it was held by the Hon'ble Court that mis-statement and suppression of facts have to be willful to attract the Provision of is relevant and in this case, no evidence has been produced by the Revenue to show that appellants had made willful mis-statement or suppressed the facts.

BSNL Telephone Rental

2009-11-30T02:17:00.000-08:00

HIGH COURT OF JUDICATURE AT ALLAHABAD

Court No.37.
Civil Misc. Writ Petition No. 1023 of 2006.

Bharat Sanchar Nigam Limited and another ...Petitioners.

Versus
State of U.P. and others ..Respondents.

Hon'ble R.K. Agrawal, J.
Hon'ble S.K. Gupta, J.

By means of present writ petition filed under Article 226 of the Constitution of India , Bharat Sanchar Nigam Limited (hereinafter referred to as the 'petitioner') seeks a writ, order of direction in the nature of Certiorari, calling for record and to quash the order dated 31st March, 2006 passed by the Dy. Commissioner (Assessment) IV, Trade Tax, Noida-respondent no.3 for the assessment year 2003-04 filed as annexure-3 to the writ petition as also for quashing of the recovery citation dated 9th June, 2006 filed as annexure-6 to the writ petition. Further a writ of mandamus is sought commanding the respondents not to recover any amount in pursuance of the order dated 31st March, 2006.
Brief facts giving rise to the present petition are as follows:-
The petitioner came into existence vide office memorandum dated 30th September, 2000 issued by the Govt. of India, Ministry of Communication, Department of Telecommunication Service, New Delhi, wherein the business of providing telecoms services in the country previously run by the Telecommunication Department had been entrusted to the petitioner.
The petitioner is a company incorporated under the provisions of Companies Act, 1956 and has its registered office at New Delhi. The petitioner is engaged in providing telecommunication service to various persons throughout the country. The dispute arose between the Trade Tax Authorities of Uttar Pradesh and the petitioner regarding liability for payment of Trade Tax on the amount charged by it from its customers which is normally called rentals. The matter ultimately went up to the Supreme Court and the Apex Court in the case of State of U.P. V. Union of India reported in (2003) 3 SCC 739 had held that the Trade Tax Authorities were justified in demanding the tax on the amount charged by the petitioner for providing telecommunication service. However,in the case of Bharat Sanchar Nigam Ltd. Vs. Union of India reported in (2006) 3 SCC 1, the aforesaid decision in the case of State of U.P. V. Union of India had been over ruled. In the aforesaid case, the Apex Court had observed that had the learned Judges limited their observations to the telephone instruments, we could have had no quarrel with the opinion stated. The Apex Court in the aforesaid decision had formulated the following questions which arose for consideration:-

"(A) What are "goods" in telecommunication for the purposes of Article 366 (29-A) (d)?
(B) Is there any transfer of any right to use any goods by providing access or telephone connection by the telephone service provider to a subscriber ?
(C) Is the nature of the transaction involved in providing telephone connection a composite contract of service and sale ? If so, is it possible for the States to tax the sale element?
(D) If the providing of a telephone connection involves sale, is such sale an inter-State one?
(E) Would the "aspect theory" be applicable to the transaction enabling the States to levy sales tax on the same transaction in respect of which the Union Government levies service tax?"

The Apex Court after considering the matter in great detail answered the aforementioned question in the following manner:-

"(A) Goods do not include electromagnetic waves or radio frequencies for the purpose of Article 366 (29-A) (d). The goods in telecommunication are limited to the handsets supplied by the service provider. As far as the SIM cards are concerned, the issue is left for determination by the assessing authorities.
(B) There may be a transfer of right to use goods as defined in answer to the previous question by giving a telephone connection.
(C) The nature of the transaction involved in providing the telephone connection may be a composite contract of service and sale. It is possible for the State to tax the sale element provided there is a discernible sale and only to the extent relatable to such sale.
(D) The issue is left unanswered.
(E) The 'aspect theory' would not apply to enable the value of the services to be included in the sale of goods or the price of goods in the value of the service."

It appears that the assessment proceedings for the assessment year 2003-04 had been initiated by the Dy. Commissioner (Assessment) IV Trade Tax Noida, respondent no.3 and after taking into consideration the judgment of the Apex Court in the case of Bharat Sanchar Nigam Ltd. (Supra), imposed tax on the rentals charged by the petitioner treating it as the consideration for transfer of right to use the telephone sets. The order dated 31st March 2006 and the consequential recovery is under challenge in the present writ petition.
We have heard Sri Subodh Kumar, learned counsel for the petitioner and learned Standing Counsel appearing for the respondents.
Sri Subodh Kumar, learned counsel for the petitioner submitted that the rentals charge for giving the telephone connection from its customers does not amount to charging any price as a consideration for transfer of right to use telephone set as there is no transfer of right to use the telephone sets which is governed by the provisions of the Telegraph Act and the Rules framed thereunder. He further submitted that the authorities were not justified in levying tax treating the rental as consideration for transfer of right to use the telephone sets.
We may mention here that that the Apex Court in the case of Bharat Sanchar Nigam Ltd. in so many words has held that telephone instrument are goods and there may be a transfer of right to use goods when a telephone connection is given. Thus their can be no manner of doubt that when the petitioner provides a telephone set to its customers while giving a telephone connection there is a right of transfer to use goods. The liability for payment of tax under Section 3 F of the U.P. Trade Tax Act, 1948, (hereinafter referred to as the 'Act') on such transfer of right to use the telephone sets is upon the petitioner. However, the question as to what should be the amount of consideration is to be decided on the basis of the material and data by the authorities constituted under the Act. As in the present case the petitioner has straightway approached this Court by filing the writ petition without following the statutory alternative remedy of appeal as provided under Section 9 of the Act, we deem it fit and proper to direct the petitioner to avail the statutory remedy of appeal. Recently the Apex Court in the case of M/s Bharti Airtel Ltd. V. State of Karnataka and others Petition(s) for special leave to Appeal (Writ) (NIS) 4481/2009, decided on 02.03.2009 has held that the learned single Judge of the Karnataka High Court was right in directing the assessee to exhaust statutory alternative remedy in a case whether Broadband connectivity for Data transmission is exigible to tax under Karnataka Value Added Tax Act, 2003. The Court in the case of Sony India (P) Ltd. V. Commercial Tax Officer and another (2209) 23 VSTI and South India Tanners & Dealers Association V. Deputy Commissioner of Commercial Taxes and others (2209) 23 VST 8 has directed the appellants to prefer statutory appeals. We may observe that if the petitioner prefers an appeal within 30 days from today, the appeal be decided expeditiously by the Appellate Authority in accordance with law without raising any question of limitation.
With the aforesaid observations, the writ petition is, therefore, dismissed on the ground of alternative remedy.

Cable connection is not liable to VAT

2009-11-29T22:47:00.000-08:00

In the case of Kuldeep Chaurasia v State of U. P, the Allahabad High Court(Writ Petition No. 118 (Tax)/ 2008) held that a cable operator providing cable service through a cable television network is neither selling goods nor giving right to use goods and therefore not liable to VAT.

The court found that what is being transferred to the consumers by the petitioner is digital signals through the cable network. Digital signals cannot be included within the definition of "goods" as defined under Section 2 (d) of the U. P. Act, which means every kind or class of movable property, includes all material commodities and articles involved in the execution of works contract etc. Neither the digital signals which is being transferred by the petitioner to the subscribers are "goods" as defined under the U. P. Act nor there is transfer of right to use any "goods" for any purpose.

The Court further held that to constitute a transaction for the transfer of the right to use the goods the transaction must have the following attributes:

a. There must be goods available for delivery;

b. There must be a consensus ad idem as to the identity of the goods;

c. The transferee should have a legal right to use the goods-consequently all legal consequences of such use including any permissions or licenses required therefore should be available to the transferee;

d. For the period during which the transferee has such legal right, it has to be the exclusion to the transferor-this is the necessary concomitant of the plain language of the statue-viz. A "transfer of the right to use" and not merely a licence to use the goods;

e. Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.

6. In my opinion, none of these attributes are present in the relationship between a telecom service provider and a consumer of such services. On the contrary, the transaction is a transaction of rendition of service.

In the present matter, the petitioner provides the transmission of programme by cable and broadcast television signals to its subscribers for which he receives subscription from the viewers. The petitioner is already paying tax under Entertainment Tax Act, 1979. Since only digital signals are being transmitted to the subscribers by the petitioner through cable network, as such digital signal cannot be included within definition of goods. It has already been held in the case of Bharat Sanchar Nigam Ltd. Vs. Union of India (supra) that electromagnetic waves or radio frequencies are not "goods", therefore, it does not come under the purview of section 3-F of the Act. The proposition laid down in the said decision is fully applicable to the facts and circumstances of the present case. The learned Standing Counsel appearing for the respondents was unable to dispute the aforesaid legal position.

Commissioner (A) has no power to accept appeal beyond 90 days

2009-11-29T22:16:00.001-08:00

Allahabad High Court in the case of M/s Devender Security Services (P)
Ltd.,v The Joint Commissioner of Central Excise (WRIT PETITION NO.1767/2009)relying on Larger Bench decision of the Apex Court in the case of Commissioner of Customs And Central Excise Vs. Hongo India Private Limited and another, reported in (2009) 5 SCC, 791 held that appeal filed after 108 days from the date of the receipt of the order is barred by limitation.

Service tax on rent

2009-11-29T22:10:00.000-08:00

Allahabad High Court in the case of Devyani International ltd. Versus. Union of India (Writ Petition No.8649 (M/B)/ 2009)stayed realisation of service tax on the rent received from the immovable property under Notification No.24/2007 dated 22.5.2007, following the judgment of Delhi High Court in case of Home Solution Retail India Ltd. Vs. U.O.I.

BSNL to pay service tax

2009-11-29T22:05:00.001-08:00

High Court of Allahabad in the case of M/S Introspective Detective Private Limited v General Manager, B.S.N.L (WRIT TAX No. - 794 of 2006) directed BSNL to pay the service tax on taxable service by way of security guards to B.S.N.L., to the service provider so that petitioner can pay the service tax to the Revenue. So far as, penalty notice issued by the Central Excise Department is concerned, same was set aside as the petitioner was prevented by sufficient cause in not depositing the service tax in time.

IPR Enforecement Rules

2009-09-23T04:31:00.000-07:00

A presentation on the CROSS-BORDER INTELLECTUAL PROPERTY RIGHT PROTECTION.

Input tax credit on catering service

2009-09-23T02:59:00.000-07:00

In the case of Panasonic Home Appliances (I) Co.Ltd. and Indian Furniture Products Ltd., the CESTAT has reiterated that service tax credit is admissible in respect of "Canteen Services" as held by the Larger Bench in the case of Commissioner Vs GTC Industries Ltd., [2008 (13) STR 468].

Profit on sale of DEPB scrips

2009-09-15T04:40:00.000-07:00

The Apex court in the case of M/s Liberty India vs Commissioner of Income Tax [S.L.P.(C) No. 5827/07]held that profit from Duty Entitlement Passbook Scheme (DEPB) and Duty Drawback Scheme cannot the profit derived from the business of the Industrial Undertaking eligible for deduction under Section 80-IB of the Income-tax Act, 1961. The apex court held that duty drawback, DEPB benefits, rebates etc. cannot be credited against the cost of manufacture of goods debited in the Profit & Loss account for purposes of Sections 80-IA/80-IB as such remissions (credits) would constitute independent source of income beyond the first degree nexus between profits and the industrial undertaking.

Concurrent findings

2009-09-15T03:45:00.000-07:00

Concurrent findings by the lower authorities i.e adjudicating authority, appellate commissioner and CESTAT are interfered with by the apex Court in exercise of its jurisdiction under Section 35L of Central Excise and Salt Act, 1944 only when such findings are patently perverse or are based on manifest misreading of any legal provision.

Sidharath Pharmaceuticals Vs. Collector of Central Excise, Ahmedabad - 2003 (157) ELT 502 (SC)
Auto Control (P) Ltd. Vs. Collector 2006 (199) ELT A.127

Show cause notice

2009-09-15T03:24:00.000-07:00

The apex court has reiterated that:

"It is well settled that unless the foundation of the case is made out in the showcause notice, Revenue cannot in Court argue a case not made out in its show-cause notice. [Commissioner of Customs, Mumbai Vs. Toyo Engineering India Limited -2006) 7 SCC 592]. Similar view was expressed by this Court in the case of Commissioner of Central Excise, Nagpur Vs. Ballarpur Industries Ltd. - (2007) 8 SCC

Interpretation of statute

2009-09-15T03:15:00.000-07:00

In the case of CBI vs Parmeshwaran Subramani, the apex court also held that

"It is settled law that where there is no ambiguity and the intention of the legislature is clearly conveyed, there is no scope for the court to undertake any exercise to read something into the provisions which the legislature in its wisdom consciously omitted. Such an exercise if undertaken by the courts may amount to amending or altering the statutory provisions.

In a plethora of cases, it has been stated that where the language is clear, the intention of the legislature is to be gathered from the language used. It is not the duty of the court either to enlarge the scope of legislation or the intention of the legislature, when the language of the provision is plain. The court cannot rewrite the legislation for the reason that it had no power to legislate. The court cannot add words to a statute or read words into it which are not there. The court cannot, on an assumption that there is a defect or an omission in the words used by the legislature, correct or make up assumed deficiency, when the words are clear and unambiguous. Courts have to decide what the law is and not what it should be. The courts adopt a construction which will carry out the obvious intention of the legislature but cannot set at naught legislative judgment because such course would be subversive of constitutional harmony [See: Union of India & Anr. Vs.
Deokinandan Aggarwal [(1992) Supp. (1) SCC 323]

The apex court further observed that "two principles of construction one relating to casus omissus and the other in regard to reading the statute as a whole appear to be well settled. Under the first principle a casus omissus cannot be supplied by the Court except in the case of clear necessity and when reason for it is found in the four corners of the statute itself but at the same time a casus omissus should not be
readily inferred and for that purpose all the parts of a statute or section must be construed together and every clause of a section should be construed with reference to the context and other clauses thereof so that the construction to be put on a particular provision makes a consistent enactment of the whole statute. This would be more so if literal construction of a particular clause leads to manifestly absurd or anomalous results which could not have been intended by the Legislature."

Beware abettor of the offence

2009-09-15T02:57:00.000-07:00

The Supreme Court of India in the case of CBI v Parmeshwaran Subramani in criminal appeal 1758 OF 2009 has held that prior sanction under section 19 is not required or prosecution under Section 12 of the Prevention of Corruption Act, 1988.

Section 12 of the Act which provides for punishment for abetment of offences defined in Section 7 or 11 reads as under:

"Section 12 - Punishment for abetment of offences defined in section 7 or 11. Whoever abets any offence punishable under Section 7 or Section 11 whether or not that offence is committed in consequence of that abetment, shall be punishable with imprisonment for a term which shall be not less than six months but which may extend to five years and shall also be liable to fine."

The apex court found that abetment of any offence punishable under Section 7 or 11 is itself a distinct offence. The offence punishable under Section 7 or 11 whether actually committed by a public servant is of no consequence. It is precisely for the said reason Section 19 of the Act specifically omits Section 12 from its purview.

The apex court held that the language employed in Section 19 of the Act is couched in mandatory form directing the courts not to take cognizance of an offence punishable under Sections 7, 10, 11, 13 and 15 only, alleged to have been committed by a public servant, except with the previous sanction of the Government. The legislature consciously in its wisdom omitted the offence of abetment of any offence punishable under Section 7 or 11 of the Act thereby making its intention clear that no previous sanction as such would be required in cases of offence punishable under Section 12 of the Act.

Babus can be prosecuted for demanding bribes for seniors which is a abetment of an offence. In such cases prosecution can be launched wuthout payment of bribe and without prior sanction. There is no need for laying trap or catching red handed.

Beware of the changing interpretation of law.

DOING BUSINESS IN INDIA – BENEFITS UNDER SEZ

2009-07-29T21:56:00.000-07:00

DOING BUSINESS IN INDIA – BENEFITS UNDER SEZ

India is one of the first in Asia to recognize the effectiveness of the Export Processing Zone (“EPZ”) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965. Now, the Government has framed Special Economic Zone (“SEZ”) Policy and enacted the Special Economic Zone Act, 2005 (“SEZ Act”) to remove shortcomings of EPZ, create world-class infrastructure and provide a stable fiscal regime to attract larger foreign investments in India. The SEZ Act and SEZ Rules framed thereunder have come into effect on 10th February, 2006. The preset laws has simplified setting/operational/exit procedures and provided a single window clearance on matters relating to central as well as state governments. These SEZs have a definite notified area which is surrounded by a boundary wall and thus separated from the domestic area (“DTA”). SEZ is considered as deemed foreign territory for taxation purpose. Every SEZ is divided into a processing area where alone the SEZ units would come up and the non-processing area where the supporting infrastructure is to be created.

The SEZ Policy envisages establishment of sector specific SEZs for manufacture of Textiles & Apparels, Leather Footwear, Automobile components, Engineering etc., multi product SEZs, service SEZs like information technology and information technology enabled services (“IT/ITES”) and trading and warehousing SEZs. Units can be set up in notified SEZs for manufacture of goods or for providing services or for warehousing and trading. A large number of incentives and facilities have been offered to the units in SEZs for attracting investments into the SEZs. A well informed entrepreneur can appreciate incentives offered to the SEZ units. This article is an attempt to give an overview of the existing local taxes and levies, which a DTA unit suffers on goods and services in manufacturing of goods or providing services or on sale of goods in India. Levies and taxes add to the cost of goods and services, hence becomes relevant for cost analysis as well as evaluating benefits of setting up a unit in SEZ vis-à-vis DTA unit.

In India, various taxes and duties are imposed under the Central statutes by the Central Government of India and State statutes by the State Governments and local authorities. Various taxes can be grouped under indirect tax and direct tax. Indirect tax is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the customer). On the other hand, direct tax is collected directly by government from the persons (legal or natural) on which it is imposed.

Indirect Tax

Customs Duty

India is a founding member of the World Customs Organisation (“WCO”) and the World Trade Organisation (“WTO”). India follows 8 digit classifications of goods under the Harmonised Commodity Description and Coding System (“HSN”). India is also a signatory of Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 (“Customs Valuation Agreement”), thus classification and valuation system of imported goods are easy to understand for a foreigner. Under the Customs Act, 1962, customs duties are payable on import of goods in to India or export of goods outside India. The duty rates and duty exemptions are specified in the Customs Tariff Act, 1988. Customs duties are levied on the transaction value of imported goods. In case of import of goods from related parties, the value for the purposes of computation of customs duty is calculated on arms length basis. Customs duty consists of Basic Customs Duty (“BCD”), Additional Duty of Customs equal to central excise duty levied on similar goods manufactured in India (also called as countervailing duty) (“CVD”) and Special Additional Duty (“SAD”). In addition to above, Education Cess is also levied by the Indian Government as part of customs duty. At present, most of the industrial goods attract BCD @ 7.5% ad valorem and CVD @ 8% ad valorem. Total customs duty is computed as set out below:

Taxable value Tax Rate
A Assessed value

B BCD A 7.50%

C CVD A+B 8%

D Education Cess on CVD C 3%

E Education Cess on customs duty B+C+D 3%

F SAD A+B+C+D+E 4%

G Total import duty B+C+D+E+F

In some cases, industry specific cess is also collected as part of CVD. Indian Government is empowered to exempt, partially or fully, a class of goods or importers from the levy of customs duty. There are several product specific or thematic exemption notifications which partially or fully exempt certain goods. Therefore, the duty rates set out above are indicative. The applicable rate of customs duty may vary (which may be higher or lower) depending on type of goods under import and ‘end use’.

Goods imported by a unit in SEZ for development, authorised operation and maintenance of the SEZ units is exempt from customs duty whereas a DTA unit is liable to appropriate customs duty thereon.

Central Excise Duty

The Central Government levies excise duty on manufacture of goods in India under the Central Excise Act, 1944. The duty rates are specified in the Central Excise Tariff Act, 1985. Excise Tariff follows 8 digit classifications of goods and aligned with HSN. Excise duty is levied on the transaction value of manufactured goods at the point of sale. At present median rate of excise duty is 8%. In addition to above, Education Cess is also levied by the Indian Government.

In some cases, industry specific cess is also collected as part of excise duty. Indian Government is empowered to exempt, partially or fully, a class of goods or importers from the levy of excise duty. There are several product specific or thematic exemption notifications which partially or fully exempt certain goods. The applicable rate of excise duty may vary (which may be higher or lower) depending on type of goods manufactured and ‘end use’.

A unit in SEZ is not liable to pay Excise Duty on manufacture of goods. Further, SEZ unit may also procure indigenous goods for development, authorised operation and maintenance of the SEZ units from the DTA market without suffering Excise Duty as supply to SEZ unit is considered as equivalent to export (deemed export).

Service Tax

The Central Government levies service tax on certain specified services under the Finance Act, 1994 as amended from time to time. Presently 114 services attract service tax which inter alia includes consulting engineers’ services, scientific and technical consultancy services, design services, intellectual property services, and information technology (IT) software services. Ordinarily, the provider of specified services is liable to pay Service Tax. However, in case of taxable services received from outside India, the recipient of services is liable to pay service tax thereon. In some other specified cases also, the service tax is collected from the recipient of service under the reverse charge system. At present, service tax rate is 10.30% inclusive of Education Cess @ 3%.

Taxable services imported and/or procured within India by a unit in SEZ for authorised operation is exempt from service tax. In the case of certain services procured from local service providers and entirely used within SEZ are exempt from service tax whereas in the case of other services, exemption is provided by way of refund.

R&D Cess

Import of technical or special knowledge or special services required by an industrial concerns under any foreign collaboration including designs, drawings, publications and technical personnel attracts R&D Cess @ 5% under the Research And Development Cess Act, 1986 (“R&D Cess Act”).

A unit in SEZ is not liable to pay R&D Cess on import of technology.

Value Added Tax

India is divided into 29 states which also have power to levy certain taxes including taxes on sale of goods. State Governments levy VAT on the sale of goods within the state. CST is levied in case of inter-state sale of goods under the Central Sales Tax Act, 1956. Most of the specified industrial products are subject to VAT @ 4% whereas other goods ordinarily attract VAT @ 12.5% on the transaction value. At present the CST rate is 2% when the goods are sold inter state by one registered business entity to another registered business entity subject to fulfillment of certain procedural requirements.

VAT/CST is not levied on sale of goods in the course of import or export out of the territory of India. Purchase of goods in the local market for fulfillment of export order is considered as ‘last sale’ or ‘penultimate sale. Such, ‘last sale’ immediately preceding the export is also exempt from VAT/CST subject to fulfillment of specified conditions.

Purchase of goods by a unit in SEZ to carry on the authorised operations is exempt from CST.

Most of the State Governments have exempted sale and purchase of goods within SEZ from levy of VAT. Some State Governments have also exempted sale of goods to SEZ units for authorised operations from levy of VAT.

Local levies

Local bodies like municipal corporations, municipalities levy octroi on entry of goods in the local area administered by such local bodies. Most of the states in India has abolished octroi levy. However, many of the Municipal Corporation in the state of Maharashtra like Mumbai, Thane, Pune etc. still levies octroi. These levies add to the procurement cost of goods and services.

At present, there is no exemption from levy of octroi for the SEZ units. If the SEZ units are located inside the area administered by local bodies levying octroi, the SEZ units has to suffer the same.

Tax Set-off and credit mechanism

A discussion on indirect tax can not be complete without discussion about credit of input tax and set-off mechanism which removes cascading effect of duty/tax and ‘zero rating’ of export of goods and services. Levies eligible for credit and set-off are not considered as cost of the inventories.

The CENVAT Credit Rules, 2004 (“CCR”) prescribe the entitlement and utilisation of tax credit of the CVD, SAD and excise duties paid on inputs and capital goods and Service Tax paid on input services used in manufacture of excisable goods or provision of taxable services. The credit of such duties/taxes is permissible only if the said input goods or input services have been used in the manufacture of excisable goods or for provision of taxable services. In the case of imported inputs such as raw material, duties & cess paid under C, D and F (in the table set out above) are eligible for cenvat credit. Such cenvat credit can be used in payment of excise duty on manufactured goods or service tax on taxable output services.

SEZ units engaged in manufacturing of gods are not eligible to avail credit of levies under the CCR as SEZ units are not required to pay excise duty. Delivery of goods by the SEZ unit to DTA area attracts duty equivalent to customs duty leviable on import of such goods. It appears that Service SEZ units will be eligible to avail credit of inputs/input services used in provision of taxable services in DTA as the SEZ units will be liable to pay Service Tax on service provided in DTA.

VAT paid on input materials is allowed as input tax credit and can be adjusted against output tax payable on sale of goods. In the case of inter-state sales, certain States retain a part of credit availed on input, generally in the range of 2 to 4%. The balance credit is allowed to be availed as input tax credit.

SEZ units are permitted to avail credit of VAT which can be subsequently setoff against output tax.

Duty drawback, rebate and refund

Primary purpose of the SEZ Policy is promotion of exports of goods and services so that additional economic activity can be generated in India which in turn will create employment opportunities to the Indians. Every nation strives to promote exports and it is cardinal principle of export that nations export goods and services not taxes. Therefore, most of the countries eliminates incidence of tax suffered on export goods and services by giving various incentives. Hereunder, basic discussions on some of the available incentives on exports have been which may properly evaluate SEZ benefits vis-à-vis DTA units.

An exporter can seek duty drawback of customs duty and excise duty paid on inputs used in the goods exported out of the territory of India. The Central Government has prescribed duty draw back rates in the case of most of the goods exported out of the territory of India. These rates are based on periodical review of input tax incidence suffered on raw materials by the relevant industry. An exporter can lodge duty drawback claim at such all industry rate prescribed by the Central Government under the drawback schedule. In case of a product where all industry rate is not prescribed, or when an exporter is of the view that all industry rate is insufficient compared to the actual incidence of such input tax, the exporter has option to apply for special ‘brand rate’ for duty drawback which will be determined by the authorities on a case by case basis having regard to factual aspects and actual incidence of duty.

A manufacturer can also export goods without payment of excise duty by following a prescribed statutory procedure and maintaining certain documentation. The manufacturer is required to furnish a bond/undertaking to export the goods and submit proof of export. If the exporter fail to export such goods, he will be liable to pay excise duty thereon. In such cases, the input tax credit of duty on goods used in export production is permitted to be used against excise duty payable on other domestic clearances of goods. Alternatively, the manufacturer may pay the applicable excise duty on goods by utilising credit of duty on inputs and seek a refund of such excise duty on export as per the prescribed procedure. Such refund of excise duty is known as rebate. Such rebate is granted on submission of proof of export.

A service provider is also eligible to avail credit of tax on inputs and input services used in provision of output services. The output services can be exported without payment of service tax. In such circumstances, CCR permits refund of accumulated input tax credit.

Apart from aforesaid “zero rating” of export, the Government has also given some other incentives to DTA units which are engaged in export of goods and services. These incentives include duty free import of goods against Advance Authorisation Scheme (“DEEC”), import of capital goods for manufacture of export goods and services (“EPCG”), refund of customs duty incidence on export goods (“DEPB”) and (“DFIA”).

A SEZ unit will not be eligible for aforesaid benefits on export of goods and services.

Direct Tax

Entrepreneurs are eligible for 100% Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years. Income Tax benefit for the unit will be computed as follows:

“Profits of the business of the undertaking X Export turnover of the undertaking)/Total turnover of the business of the undertaking”

Entrepreneurs are eligible for exemption from minimum alternate tax under section 115JB of the Income Tax Act.

Stamp Duty

Sale and purchase of immovable property including land and building is subject to levy of stamp duty.

The Government has exempted SEZ developers and SEZ units from levy of stamp duty.

Repatriation of FOREX

The freely convertible foreign exchange (“FOREX”) receivable against the export of goods or services from India is required to be repatriated to India within a period of 12 month under the present exchange control regulations in India. In exceptional circumstances, on case to case basis, Reserve Bank of India is empowered to extend the time limit.

In the case of units set up in SEZ, this period of 12 months is relaxed for repatriation of export proceeds.

External commercial borrowing

SEZ units are permitted for external commercial borrowing upto US $ 500 million in a year without any maturity restriction through recognized banking channels.

Incentives, exemptions and benefits granted to the SEZ units and developers have led to massive investment in SEZs amounting to Rs 1000 billion. However, the Government has to ensure that such incentives, exemptions and benefits are not misused and should result in increase of export of goods and services. SEZ units have certain obligations, which includes FOREX earning as explained below:

Net Foreign Exchange Earning

The SEZ Policy has granted many incentives, exemptions and benefits to the SEZ units for the promotion of export of goods and services from India. Therefore, the SEZ units are required to meet net foreign exchange earning (“NFEE”) criteria in the block of 5 years, i.e. that the unit in the SEZ would be required to have greater income from exports of goods and services than the expenditure incurred in foreign exchange by it in importing the goods or services.

The SEZ units are required to execute a “Bond-Cum-Legal Undertaking”, inter alia, with regard to achievement of positive NFFE. The performance of the SEZ units will be continuously monitored by the authorities. If a unit in SEZ continues to be NFEE negative by the end of 3rd year, a show cause notice will be issued by the competent authorities and if the negative performance continues till the 5th year, the competent authorities will initiate penal action. If a SEZ unit is unable to meet the NFEE criteria, such SEZ unit will be liable for payment of penalty as may be imposed by the adjudicating authority in accordance with the provisions of the Foreign Trade (Development and Regulation) Act, 1992.

Export Performance of SEZ

In recent past, exports from SEZ units have seen significant growth as given below:

Year Value in Million Rupees Yearly Growth Rate

2004-2005 18,314 32%

2005-2006 22,840 25%

2006-2007 34,615 52%

2007-2008 66,638 92%

The overwhelming response to the SEZ scheme is evident from the flow of investment and creation of additional employment in the country. The SEZ scheme has generated tremendous response amongst the investors, both in India and abroad. A large number of multi-national companies have set up SEZ/SEZ units in India which includes Nokia, Flextronics (Tamil Nadu), Adidas (Andhra Pradesh).

The SEZ Policy provides an excellent opportunity for the entrepreneurs and enterprises to expand business activity in India without hassles. Prosperity to entrepreneurs and enterprises also bring prosperity to the nation.

Budget 2009-10-- Analysis of Customs proposal

2009-07-08T23:18:00.000-07:00

CUSTOMS

A Rate Structure:

Peak rate of customs duty (BCD) for most of the goods remains at 10% ad valorem. Economic survey 2009-10 had proposed to review customs duty exemptions and move towards a uniform duty structure to eliminated inverted duties. However, the FM has not found favour in withdrawing a large number of exemptions.

The FM has made some changes which are detailed below. All changes are effective from 7 July 2009.

A1 Bullion:

In recent years, there has been steep rise in the prices of gold and silver whereas the customs duty thereon has remained unchanged since 2004. Now the customs duty has been doubled as below:
Product: Old duty: New duty

Gold bars, other than tola bars, bearing manufacturer’s engraved serial number and weight expressed in metric units, and gold coins: Rs. 100 /10g: Rs. 200 /10g

Gold in any form (other than those specified, against S. No. 1), including liquid gold and tola bars: Rs. 250 /10g :Rs. 500 /10g

Silver in any form :Rs. 500 /Kg :Rs. 1000 /Kg

(Refer Notification No. 78/2009-Customs)

A2 Television:

BCD exemption to integrated decoder receiver also known as set-top boxes used for television has been withdrawn by deleting serial No. 538 from the Notification No. 21/2002. They will now attract BCD of 5%. Set top box are required to receive the digital signal for television viewing. This will increase the cost of imported set-top boxes and expansion of Conditional Access System. However, BCD on LCD panels for manufacture of LCD televisions has been reduced from 10% to 5% by inserting serial No. 319A in Notification No. 21/2002. (Refer Notification No. 77/2009-Cus)

Impact: Level playing field for domestic manufacturers of set-top box. Increase in the cost of imported set-top box and decrease in the prices of LCD televisions.

A3 Mobile handset:

Parts, components and accessories of mobile handsets including cellular phones has been exempted from the special additional duty of customs (SAD) subject to the condition that the importer follows the procedure set out in the Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996. Similar exemption has lapsed on 30 June 2009 is now restored. (Refer Notification No. 79/2009-Cus)

A4 Capital Goods for plantation:

Specified machinery for coffee, tea and rubber plantation were eligible for concessional BCD of 5% till 30 April 2009. This concession has now been restored for one more year upto 6 July 2010. (Refer Notification No. 77/2009-Cus)

BCD on 'mechanical harvester' for coffee plantation has been reduced from 7.5% to 5%. Such harvesters have also been exempted from excise duty. (Refer Notification No. 77/2009-Cus)

A5 Renewal energy:

Parts like special bearings, gear box, yaw components, wind turbine controllers and blades for rotor of wind operated electricity generators, for the manufacture or the maintenance of wind operated electricity generators upto 30 KW are eligible for concessional BCD of 5%. Now, concessional BCD of 5% has been extended to permanent magnets for manufacture of PM synchronous generators above 500KW for use in wind operated electricity generators by inserting serial No. 224A in Notification No. 21/2002. It may be noted that benefit is not available if permanent magnets is imported for wind operated electricity generators upto 30 KW. (Refer Notification No. 77/2009-Cus)

A6 Drugs and Medical Devices:

Life saving drugs, medicines, diagnostic kits or equipment specified in List 3 of the Notification No. 21/2002 and bulk drugs thereof are eligible for concessional BCD of 5% and full exemption from CVD. Now, list has been expanded to include following drugs/ vaccine:

 Abatacept – Rheumatoid Arthritis
 Daptomycin - Antibacteria
 Entacevir - Hepatitis B
 Fondaparinux sodium - Anticoagulant
 Influenza vaccine - Influenza
 Ixabepilone - Anticoagulant
 Lapatinib - Breast Cancer
 Pegaptanib sodium injection- Neovascular AMD
 Suntinib malate - Cancer
 Tocilizumab - Rheumatoid Arthritis

These drugs as well as bulk drugs to manufacture these drugs will be eligible to concessional BCD of 5%. These drugs/ bulk drugs have also been exempted from excise duty. (Refer Notification No. 77/2009-Cus)

BCD on Patent Ductus Arteriosus / Atrial Septal Defect occlusion devices has been reduced from 7.5% to 5%. These devices have also been exempted from excise duty. (Refer Notification No. 77/2009-Cus)

BCD on Artificial Heart (left ventricular assist device) has been reduced from 7.5% to 5%. This device attracts nil excise duty. (Refer Notification No. 77/2009-Cus)

A7 Road construction

Concrete batching plants of capacity 50 cum per hour or more for road construction were exempt from BCD vide serial No. 230 in Notification No. 21/2002. This exemption has been withdrawn and will now attract BCD of 7.5%. (Refer Notification No. 77/2009-Cus)

A8 Aerial Passenger Ropeway Projects

Aerial Passenger Ropeway Projects were eligible for concessional BCD of 5% and full exemptions from CVD vide serial No. 433 in Notification No. 21/2002. Exemption from CVD has been withdrawn. Now, such projects will be eligible for such projects will be eligible for concessional BCD of 5% and will applicable CVD. (Refer Notification No. 77/2009-Cus)

A9 Textiles:

BCD on cotton waste and wool waste has been reduced from 15% to 10%. (Refer Notification No. 77/2009-Cus)

A10 Fertilizer:

BCD on rock phosphate has been reduced from 5% to 2%.(Refer Notification No. 77/2009-Cus)

A11 Sports:

BCD on inflatable rafts, snow-skis, water skis, surf-boats, sail-boards and other water sports equipment has been fully exempted. (Refer Notification No. 77/2009-Cus)

A12 Environment friendly fuel:

BCD on bio-diesel has been reduced from 7.5% to 2.5%. (Refer Notification No. 77/2009-Cus)

A13 Unworked corals:

BCD on unworked corals has been reduced from 5% to Nil. (Refer Notification No. 77/2009-Cus)

A14 Information Technology Software:

Packaged or canned software attracts excise duty @ 8% and correspondingly attracts CVD @ 8% on import. Value of the software may include consideration for right to use such software. Transfer of right to use IT software is subject to service under the IT Software service. To avoid double taxation, now, exemption has been provided on the portion of the value which represents the consideration for transfer of the right to use such software. Exemption is available subject to the following conditions:

 transfer of the right to use IT software is for commercial exploitation including the right to reproduce, distribute and sell such software and right to use the software components for the creation of and inclusion in other information technology software products
 the importer makes a declaration to the Assistant Commissioner of Customs or the Deputy Commissioner of Customs, as the case may be, in respect of such transfer of the right to use for commercial exploitation
 the importer is registered under section 69 of the Finance Act, 1994 read with rule 4 of the Service Tax Rules, 1994
(Refer Notification No. 80/2009-Cus)

Impact: Packaged or canned software attracts CVD @ 8% whereas ITSS attract service tax @ 10%. Import of taxable service from outside India is taxable in the hands of recipient of service. Hence, there will be increased tax liability on import of IT software. Further, where the price is a composite price involving value of software and right to use, there will be difficulties in determining the value for the purpose of CVD and service tax. However, the importer will be spared from the double taxation.

A15 Leather industry:

Machinery specified in List 34 for use in leather industry or footwear industry are eligible for concessional BCD of 5% vide serial No.257 of Notification No. 21/2002. Now, the scope of eligible machinery has been broadened by changing the descriptions as below:

(Serial Number) Old description:New description
(33) Clicking Board levelling machine : Clicking Board levelling/ Planing Machine
(34) Clicking machine : Clicking machine/cutting press
(40) Conveyor system : Conveyor System including conveyors for heat setting, cold setting, with or without vacuum
(77) Halogen and Adhesive Application machine : Halogen and adhesive/film application machine
(110) Injection Moulding of PVC/TPR Soles, Inserts and Half Soles : Injection moulding of PVC / TPR/ EVA soles, inserts and half soles
(117) Ironing and Conditioning machine : Ironing and conditioning machine including chill setter machine
(136) Moccasin Performing machine : Moccasin performing machine
(151) Piping machine for trimming and embelishment fixing machine : Piping making machine with trimming and embellishment fixing machines
(158) Polyurethane / PVC / TPR Sole, Insole, Heel, Heel Tip Injection Moulding machine (single or multiple station) : Polyurethane/PVC/TPR and EVA sole, insole, midsole, heel, heel tip injection moulding machine (single or multiple station)
(159) Pore part lasting machine : Fore part lasting machine
(171) PVC / PU direct injection soling machine (DIP construction) : PVC/PU/EVA direct injection soling machine (DIP construction)
(185) Scissors Cutting machine for plate : Scissors type and nibbling type machines for plates
(223) Tapping and seam rubbing machine : Taping and seam rubbing machine
(253) Stapling machine for lows to upper on leather shoes : Stapling machine for bows to uppers of leather shoes
(256) Bistep cutting machine : Bias tape cutting machine
(262) Dust collector systems : Dust collector and exhaust systems
(Refer Notification No. 77/2009-Cus)

B Export Promotion:

B1 Sport Goods

Nylon gut, PU or nylon grip sheets for hockey sticks, butyl bladders for inflatable balls, willow clefts, ashwood or beechwood and cork bottoms imported for manufacture of sport goods for export are exempt from BCD vide serial No. 583 in Notification No. 21/2002. Now the list has been expanded to include following items:

 Synthetic rubber bladder,
 Macau cane
 Table tennis rubber
 Table tennis bat handles
 Table tennis blade

However, overall ceiling for imported goods of 3% of FOB value of sport goods remains unchanged. (Refer Notification No. 77/2009-Cus)

B2 Garments

Specified 26 items like fasteners, inlay cards, Velcro tape are fully exempt vide serial No. 167 in Notification No. 21/2002 from customs duty including CVD if imported by textile garment or leather garment exporter. Now, the list has been expanded to include “Knitted ribs”. However, overall ceiling for imported goods of 3% of FOB value for textile and leather garments and 5% of FOB value of handloom garments remains unchanged. (Refer Notification No. 77/2009-Cus)

B3 Footwear and other leather products

Specified 24 items like buckles, fasteners, Velcro tape are fully exempt vide serial No. 167A in Notification No. 21/2002 from customs duty including CVD if imported by leather or synthetic footwear and other leather product exporter. Now, the list has been expanded to include following items:

 Fittings, snaps of metals or alloys;
 Metal fittings / embellishments, webbing of any material for making harness and saddlery items;
 Stirrup of any material and stirrup bars used for making Saddle Tree;
 Nylon polyester/PVE mesh and fabrics for making non-leather harness and saddlery items;
 Beading material - synthetic / leather / fabric;
 Chatons / stones / beads / crystals as decorative items;
 Shoe laces;
 Stretch fabric for shoe uppers;
 Cork sheets for soles covering soles and insoles;
 Artificial fur and alarm tag

However, overall ceiling for imported goods of 3% of FOB value of leather or synthetic footwear and other leather product remains unchanged. (Refer Notification No. 77/2009-Cus)

B4 Duty Free Import Authorisation Scheme:

Notification No. 40/2006-Cus dated 01.05.2006 is proposed to be amended retrospectively from its date of issue so as to allow, inter alia, the facility of rebate in respect of locally procured materials used in the manufacture of goods exported under the Duty Free Import Authorisation Scheme (DFIA).

Goods imported or procured locally under DFIA scheme is sought to under actual user condition for manufacture of dutiable goods in the factory of exporter. Materials imported under DFIA against licenses issued after 31 March 2007 transferred with the permission of the licensing authority or imported against transferrable licenses issued after 31 March 2007 will be liable for payment of CVD along with interest @ 15% per annum from the date of clearance of such materials.

Notification No. 17/2009-Cus Dated 19 February 2009 has incorporated aforesaid provisions prospectively in the Notification No. 40/2006.

C Legislative amendments:

The Customs Act, 1962 and the Customs Tariff Act, 1975, inter alia, are proposed to be amended to facilitate easy refund of customs duty on defective goods, merger of Authority for Advance Ruling (AAR), restricting compounding of offence and certain validation of acts. These changes will be effective from the date of enactment of Finance Bill, 2009.

C1 Refund of customs duty

Section 26A proposed to be inserted in the Customs Act to provide for refund of import duty paid on imported goods if they are found to be defective or not conforming to the specifications agreed upon between the importer and the seller. Refund is not permissible in respect of perishable goods and goods which have exceeded their shelf life or their recommended storage-before-use period. Refund of duty is subject to the following conditions:

 imported goods have not been worked, repaired or used after importation except where such use was indispensable to discover the defects or non-conformity with the specifications;
 the goods are identified to the satisfaction of the Assistant Commissioner of Customs or Deputy Commissioner of Customs as the goods which were imported;
 the importer does not claim drawback; and
 Within a period of thirty days from the date of order or as extended, either
(i) the goods are exported; or
(ii) the importer relinquishes his title to the goods and abandons them to customs; or
(iii) such goods are destroyed or rendered commercially valueless in the presence of the proper officer,
An application for refund of duty is to be made before the expiry of six months from the relevant date in the prescribed manner.
An importer under Section 23 of the Customs Act has an option to relinquish title to the imported goods at any time before an order for clearance of goods for home consumption or an order for permitting the deposit of goods in a warehouse has been made. On relinquishment of title, importer is not liable to pay the duty. However, this provision does not permit refund of duty after clearance of goods for home consumption or warehousing. Drawback on re-export of defective goods under section 74 is a contentious issue as market value becomes unascertainable.

C2 Merger of Authority for Advance Ruling (AAR)

Section 28F of the Customs Act proposed to be amended to provide that the AAR constituted under Section 245-O of the Income Tax Act to act as an Authority for the purposes of customs, central excise and service tax.

It is further proposed to transfer all application and proceeding pending before AAR (customs, central excise and service tax) will stand transferred to the AAR (Income Tax).

C3 Condonation of delay

Sections 130 and 130A of the Customs Act proposed to be amended to empower the High Court to condone the delay in filing of appeals/applications/memorandum of cross objections where it is satisfied that there is sufficient cause for delay.

A Tribunal order can be appealed within 180 days before the High Court under Section 130 and 130A of the Customs Act, on a substantial question of law. The said provision does not empower the High Courts to condone delay, if any. Recently, in the case of Commissioner of Customs & Central Excise Vs. Hongo India Pvt. Ltd. [2009 (236) E.L.T 417 (S.C)], larger Bench of the Supreme Court’s held that the High Court has no power to condone the delay in filing the appeals/applications/memorandum beyond the prescribed period of 180 days.

C4 Compounding of offences

Section 137 of the Customs Act proposed to be amended to exclude certain types of offences and circumstances from the purview of compounding provisions. Customs offence which is also an offence under any of the following Acts are excluded from the compounding:

 the Narcotic Drugs and Psychotropic Substances Act, 1985;
 the Chemical Weapons Convention Act, 2000;
 the Arms Act, 1959;
 the Wild Life (Protection) Act, 1972;
 Smuggling of goods specified in the SCOMET list
 Smuggling of prohibited items for import and export in the ITC (HS) Classification
 Smuggling of any other goods or documents, which are likely to affect friendly relations with a foreign State or are derogatory to national honour;

A person who has been allowed to compound once in respect of any offence for goods of value exceeding rupees one crore and a person convicted under the Customs Act on or after the 30th day of December, 2005 will not be eligible for the compounding.

C5 Tariff Valuation for CVD

Section 3(2) of the Customs Tariff Act proposed to be amended to provide that in the case of an article imported into India, where the Central Government has fixed a tariff value for the like article produced or manufactured in India under sub-section (2) of section 3 of the Central Excise Act, 1944, the value of the imported article shall be deemed to be such tariff value.

Presently, CVD is levied on assessable value arrived under section 14 of the Customs Act plus BCD levied thereon. There is no provision to levy CVD on the tariff value fixed under the Central Excise Act. Presently on following goods tariff value under excise has been fixed:

 Pan Masala [Notification No. 12/2008-CE (NT) Dated 1/3/2008]
 articles of apparel classifiable under sub-heading No. 6201.00 [Notification No. 20/2001-CE (NT) Dated 30-04-2001]

C6 Demand and penal provisions for certain duties

Sections 8B, 8C and 9 of the Customs Tariff Act, 1975 proposed to be amended retrospectively so as to extend the machinery provisions of the Customs Act, inter alia, relating to the date for determination of rate of duty, assessment, non-levy, short levy, refunds, interest, appeals, offences and penalties for safeguard duties, specific safeguard duties and countervailing duties also.

In absence of specific provisions in the Customs Tariff Act, relevant provisions under the Customs Act could not be invoked. Section 9A pertaining to anti-dumping duty was amended way back in the year 2000 on the above lines.

C7 Procedure for determination of Anti-dumping duty

Sub-section (6A) proposed to be inserted in section 9A of the Customs Tariff Act so as to provide that the margin of dumping in relation to an article exported by an exporter or producer shall be determined on the basis of records maintained by such exporter or producer and on the basis of information available in the case of non-cooperating exporter or producer.

C8 Classification of Textile goods

Para (A) in Note 2 of Section XI of the Customs Tariff Act has been amended so as to align it with the parallel provision in the Central Excise Tariff Act.

Now, in case of textile goods consisting of a mixture of two or more textile materials will be classified on the basis of predominance of weight failing which classification will be decided based on occurring last in the numerical order.

C9 Appointment of DGCEI officers

Notification No.27/2009-Customs (N.T.) dated 17 March 2009 notifies DGCEI officers as officers of Customs under Customs Act, 1962 with an all-India jurisdiction. Prior to 17 March 2009, DGCEI officers were not competent to initiate action for violation of the Customs Act but were issuing show cause notices under the Customs Act.

Clause 91 seeks to validate such blatant illegal actions of DGCEI officers retrospectively from 9th May, 2000 as if their area of jurisdiction as specified in the said notification was in force at all material times.

Refund of customs duty

2009-05-19T02:23:00.000-07:00

There was no increse in the sale price agreed between the importer and buyer before the importation of goods and a particular classification demanded by the importer was denied resulting in excess payment.

Delhi High Court held that as there was no increase in the contract price, burden of duty not passed and refund claim is not hit by unjustment enrichment.

GTA

2009-04-13T05:44:00.001-07:00

Non endorsement of consignment notes regarding non availment of cenvat credit by the GTA for availing benefit of Notification No.32/04-ST is not fatal if same can be verified on documnetary evidence.

Fatal mistakes in the SCN/Order

2009-04-13T05:31:00.000-07:00

Show Cause Notice demanding service tax was issued invoking Section 11 of the Central Excise Act and confirmed under Section 66(1) of the Service Tax Act, 1994.

There is no Act called Service Tax Act, 1994; Section 66(1) of the Finance Act, 1994 is the charging section and not machinery for recovering tax not paid.

Deficiencies in the proceedings are fatal therefore order is not sustainable.

Limitation

2009-04-13T05:19:00.000-07:00

Extended period demand cannot be sustained when the adjudicating/appellate authority finds that penalty is not imposable as there isno suppression.

Import of service

2009-04-13T05:10:00.000-07:00

Business Auxiliary Service (BAS) provided by persons resident abroad on canvassing purchase orders is not liable to service tax in the hand of recepient prior to the date of insertion of section 66A i.e. 18.4.2006.

Tribunal follow High Court of Bombay judgment in Indian National Shipowners Association Vs. Union of India [2008-TIOL-633-HC-MUM-ST]

Penalty & bonafide belief

2009-04-07T23:58:00.000-07:00

if the service tax is escapped on the genuine belief and subsequently paid along with interest, penalty under Section 78 cannot be imposed on the plea that ignorance of law is no excuse.

Subject service not a taxable service in the ordinary sense of the term, as is understood by the common people.

Payment of tax by the service provider is available as input credit and reimbursable, hence there could be no intention on the part of the assessee not to deposit the tax.

A fit case to invoke the provisions of Section 80 of the Finance Act, and penalty is not imposable under Section 78.

Condonation of delay

2009-04-07T23:48:00.001-07:00

Commissioner(Appeals) does not have power to condone the delay of more than 30 days.

Ref:

Raja Mechanical Company Pvt. Ltd. Vs. CCE [2002(144)ELT 36(Del)]
M.R. Tobacco Pvt. Ltd. Vs. UOI [2004(178)ELT137(Del)
Maithan Ceramic Ltd. Vs. CCE Jamshedpur [2002(51)RLT.583(CEGAT-LB)]
Singh Enterprises Vs. CCE, Jamshedpur [2008(221)ELT.163(S.C.)

Denial of credit

2009-04-07T23:43:00.000-07:00

Modvat credit cannot be denied for the inputs received on the invoices issued prior to 04.07.94 even if the dealers were not registered with the Central Excise Department as during the relevant period registration under Rule 173 was not necessary.
Ref: Bengal Safety Industries Vs. CCE Kolkata reported in 1997 (92) ELT 81 (Tribunal).

Setting up of a STP unit

2009-04-04T04:23:00.000-07:00

Presentation on STP registration

Reversal of cenvat-fire accident

2009-03-30T03:23:00.001-07:00

Cenvt Credit of involved in the finished goods/semi-finished goods destroyed in fire accident need not be reversed [refer M/s Grasim Industries 2007 (208) ELT 336 (T-LB)].

Cenvt Credit of involved in the inputs destroyed in fire accident as such need to be reversed.

Articles on taxindiaonline.com

2009-03-30T03:14:00.000-07:00

My articles on taxindiaonline.com

1. SERVICE TAX ON RENTING - MIXED USE OF PROPERTY

2. COMBATTING PARALLEL IMPORT

3. AMBIT OF BAS ENLARGED BUT SCOPE OF AUXILIARY AND INCIDENTAL SERVICES RESTRICTED WITHIN BAS

4. MULTIPLICITY OF EXCISE DUTY RATES HURTING CEMENT INDUSTRY

5. COMPOUNDED LEVY MAY YIELD MORE REVENUE BUT NOT DESIRABLE

6. BANNING OF CHINESE TOYS: KID'S STORY

7. CLASSIFICATION DISPUTE OF OPTICAL FIBER CABLES

Reversal of unutilised credit

2009-03-30T02:52:00.000-07:00

Revesal of the irregular Cenvat credit availed by the assessee but not utlised for payment of duty does not amount to offence as held in the case of M/s Maruti Udyog Ltd. 2006 (196) ELT 322 (Tri-Delhi),

Revenue can impose penalty under Rule 15 of the Cenvat Credit Rules for wrongful credit eventhough not utilised.

Wrong respondents

2009-03-30T02:15:00.000-07:00

Tribunal has thrown away a revenue appeal wherein respondents were wrongly mentioned.

Commissioner confirmed a demand against the noticee but did not impose any penalty on the ground that the entire duty was deposited before issuance of show cause notice. However, a penalty was imposed on co-noticee. On appeal by the co-noticee, Tribunal set aside penalty on co-noticee.

Revenue challenged the Commissioner's order for non-imposition of penalty on the noticee. The department, by mistake filed the appeal under the cause title of the co-noticee as pespondents.

As noticce were not shown as one of the respondent, Tribunal rejects the appeal as not maintanable.

Cenvat credit on air ticket

2009-03-30T02:09:00.000-07:00

The credit of service tax paid on air-tickets for the company officials is admissible as imput service under Rule 2(1)(ii) of the Cenvat Credit Rules, 2004 if the services availed are in respect of the activities relating to the business and the cost of the same stand reflected in their books of accounts and has been taken as part of the cost of their final product.

Second portion of the definition of input services include the services used in relation to the activities relating to the business as held in M/s GTC Industries Ltd. [2008(12) STR 468 (Tri-LB)].

Interest liability

2009-03-30T02:08:00.000-07:00

The Government amended Chapter 15 of the Central Excise Tariff Act with restospective effect to bring one or more of the processes of treatment of crude oil with an alkali, bleaching and deodorisation amounting to ‘manufacture’ to nullify the impact of the Supreme Court judgment in the case of Shyam Oil Cake Ltd. vs. CCE [2004 (174) ELT 148 (SC)]. The restrospective amendment came in force from the 1 March, 1986 till 28 February, 2005.

Whether the processors are liable to pay interest on the duty on deemed manufacture of the refined oil?

The amendment of Chapter 15 came on 13.5.2005 with retrospective effect. In terms of Section 11AB(1) of the Central Excise Act, where any duty of excise has not been levied or paid or has been short-levied or short-paid or erroneously refunded, the person who is liable to pay duty, is liable to pay interest. In the present case, there is no short levy or short payment of duty prior to 13.5.2005 as the duty was levied with retrospective effect consequent upon amendment by Finance Bill, 2005 as enacted on 13.5.2005.

Therefore, there is no liability to pay interest under Section 11AB(1) of the Excise Act.

Lay Flat Tubes

2009-03-25T00:31:00.000-07:00

Flexible Ducting and Parts thereof are entitled to exemption under Notification No. 6/2000 dated 1.3.2000 as Lay Flat Tubes classifiable under sub-heading 3917.00 of the Central Excise Tariff.

Equalised Freight is not includible in the value

2009-03-18T05:13:00.000-07:00

Supreme Court in the case of M/s ACCURATE METERS LTD, recently held that equalised freight and insurance charges don't constitute value of the goods for the purpose of computation of Excise Duty in terms of Central Excise Act, 1944

Prosecution

2009-03-17T04:17:00.000-07:00

In case where the order confirming demand of duty and penalty do not survive, the criminal proceeding of prosecution cannot be continued as very basis of compliant ceases to exist.

Service Tax on Beauty Parlour

2009-03-17T03:13:00.000-07:00

Electro Homeopathy Consultant undertaking activities of hair bonding/wig weaving and sale of wigs and clip is not providing a taxable under under the category of "Beauty Treatment"

Clearing & Forwarding Service

2009-03-16T05:30:00.000-07:00

“ Whether a person (agent) who has entered into an agreement with principal (owner) for handling and distribution of the products of the principal and entrusted with the job of receiving, storing and distributing the products of the principal to his authorised stockists and distributing centers is liable to pay Service Tax under the category of 'Clearing and forwarding Agent” when no clearing activity from the manufacturer's (Principal) premises is directly undertaken by the agent or
Service Tax is leviable under the category “Clearing and forwarding” only if an agent renders both clearing forwarding services"

P&H High court has held that it is the context in which the word “and” is positioned, being sandwiched between the words “clearing” and “forwarding” has to be looked into while interpreting the meaning. Like the legendary Trishanku, the word “and” is dangling between “clearing” and “forwarding”- neither divorcing from the Heavens, nor from the Earth. In such a positioning, it is not possible to segregate the holistic concept of 'clearing and forwarding” into divisible activities, either or both of which can be provided for answering the customers'
needs.”

Hence person not engaged in clearing activity is not a C&F Agent.

Penalty under section 11AC

2009-03-16T05:18:00.000-07:00

The basic requirement for attracting the provisions of Section 11AC of the Act is that there has to be intention to evade the payment of Excise duty.

Such an intention cannot be presumed because the shortage which was detected during stock verification stood explained as occurred due to clerical mistake, and duty was paid without any protest.No question of law warranting admission of the appeal would arise.

Amendment in the import manifest

2009-03-13T03:14:00.001-07:00

Mumbai High Court direct customs authorities to pass appropriate order on application for amendment in the manifest.

Amendment in the import manifest

2009-03-13T03:14:00.000-07:00

Mumbai High Court direct customs authorities to pass appropriate order on application for amendment in the manifest.

seizure of documents by customs authorities

2009-03-13T03:12:00.001-07:00

In terms of Section 110(4) of the Customs Act 1950, person from whose custody any
documents are seized shall be entitled to make copies thereof or take extract therefrom in the presence of a officer of Customs.

It is not uncommon that investigating authorities deny access to the seized documents during investigation of the case. Bombay High Court held that:

“From the language of the sub-section, it is clear that it is mandatory on the officer of Customs to make available the copies asked for. The choice of either asking for the document or seeking extract is of the party concerned and not that of the officer. In other words, if any document is seized during the course of any action by an officer and relatable to the provisions of the Customs Act, that officer is bound to make available those documents. The action, therefore, of the respondents in communicating to the petitioner that documents would not be available, is clearly an act without jurisdiction. We fail to understand as to why statutory authority failed to discharge the duties according to law and driving the party to this Court for seeking relief.”

seizure of documents by customs authorities

2009-03-13T03:12:00.000-07:00

Re-test of samples

2009-03-09T04:52:00.000-07:00

Denial of opportunity of rebuttal of the Chemical Laboratory report, which is the basis of SCN and assessee doubts the varacity of the report of chemical laboratory, Revenue should retest the samples to do justice and protect interest of Revenue.

Recall of order

2009-03-09T03:18:00.000-07:00

Ex-parte orders passed by the Tribunal due to negligence and inaction on the part of the Counsel can be recalled and restored. Refer J.K. Synthetics Ltd. vs. C.C.E. 1996 (86) ELT 472 (SC)

Penalty

2009-03-09T02:52:00.000-07:00

Penalty under Section 76 is not imposable when the service tax liability, not paid on the bonafide believe that reimbursement expenses are not includible, is subsequently paid.

manufacturer cum trader of goods

2009-03-09T02:10:00.000-07:00

A manufacturer cum trader of goods need not to register the premises for storage of traded goods.

Branded and un-branded goods

2009-03-09T01:59:00.000-07:00

Whether a manufacturer engaged in the manufacture of "branded" parts and components of motor vehicles as OEM paying appropriate duty is eligible for concessional rate of duty under notification No. 9/2001 dated 1.3.2001 on parts and components without any brand name?

Matter remanded to the original authority.

Penalty

2009-03-09T01:49:00.000-07:00

In absence of any material that the goods were clandestinely removed, imposition of penalty under Section 11AC of the Act is not warranted.

For imposition of penalty under Section 11AC of the Act, mens rea are to be satisfied. Refer CCE, Ludhiana vs. Omkar Steel Tubes (P) Ltd., reported in 2008(221)ELT200(P&H).

Consumables used in capital goods

2009-03-09T01:38:00.000-07:00

Consumables used in capital goods for manufacture of excisable goods are input eligible for CENVAT credit

Board Circular

2009-03-08T23:39:00.000-07:00

Where Board issues a circular/clarification clarifying certain doubts regarding leviability of central excise duty, extended period of demand is not invokable.

Intermediate products cleared for Captive consumption

2009-03-08T22:59:00.000-07:00

Concessional rate of excise duty on final products is available on the condition that no credit of duty paid on inputs used in the manufacture of goods was taken under the CENVAT Credit Rules. Manufacturer availed CENVAT credit on inputs used in the intermediate products, cleared captively for use in the manufacture of final products. As intermediate product consumed captively were exempted, the assessee paid 8% of the value of intermediate products in as much as they have taken Cenvat credit on common inputs but have not maintained separate accounts.

It cannot be held that the intermediate products are not excisable goods and that they are not exempted. As the manufactuere have not taken credit on other inputs used in the final products, the condition of notification has been fulfilled.

Discount

2009-03-08T22:26:00.000-07:00

Documentary evidence for discount prevailing at the time of removal of goods can be produced even before Commissioner (Appeal)

Commissioner (Appeals) has inherent powers to remand the case in appeal to the original authority. Refer MIL India Ltd. vs. CCE, Noida [2007 (210) ELT 188 (SC)].

Blending of MS & HSD with additives

2009-03-07T02:44:00.000-08:00

whether blending of duty paid branded motor spirit (MS) and duty paid branded HSD with multifunctional additives would amount to manufacture under the Central Excise Act, 1944.

The process of treatment to enhance the marketability of a product or to improve the value addition does not amount to manufacture. Hon ble Supreme Court in the case of CCE v. Sudarshan Chemical Industries (Supra) and Tribunal in the case of Lakme Lever Ltd. vs. CCE and CCE v. Mysore Ammonia Pvt. Ltd., and Hindustan Petroleum Corporation Ltd. vs. CCE, [2009 (162) ECR 0016 (Tri-New Delhi) held, that a process or treatment to enhance the marketability of a product or improve the value addition does not amount to manufacture.

The MS and HSD after being blended with small quantity of MFAs remain MS and HSD only, conforming to ISI specifications IS:2796 -2000 and IS: 1460 -2000 respectively. Hence, just because blending improves their quality and after blending they are sold under different brandnames, they do not become products different from unblended MS/ HSD, with different characteristics and usages.

The Tribunal held that blending of duty paid branded motor spirit (MS) and duty paid branded HSD with multifunctional additives does not amount to manufacture under the Central Excise Act, 1944

Buyer paying duty under protest

2009-03-07T01:51:00.000-08:00

Buyer, a manufacture of Fertilizers i.e. Ammonia & Urea of naptha applied for registration under Rule 192 of the erstwhile Central Excise Rules, 1944 to procure Naptha for use in the manufacture of Fertilizers without payment of duty under notification No. 75/84-CE dated 1.3.84. The Asst. Commissioner of Central Excise rejected the application to issue CT-2 certificate for procuring duty free Raw Naptha. Buyer procured naptha on payment of duty under protest and filed appeal before the Commissioner (Appeals.) who held that the buyer are eligible to avail the benefit of exemption notification and to procure duty free Raw Naptha under CT-2 certificate under Chapter 10 procedure of the erstwhile Rules.

Refund claim of duty paid on naptha filed by the buyer was rejected on the grond that that refund is barred by limitation as refund claim is to be filed as provided under clause (B)(e) of Explanation to Section 11B of Central Excise Act, 1944 and as the buyer has not paid duty, notion of the payment of duty under protest is misplaced.

The Tribunal held that filing of appeal by the appellant has to be treated as protest, especially when there is no separate provision in the law to file protest by the buyer of the good.

The tribunal further held that the claim of the appellant for refund of excess duty paid is as a consequence of passing of the appellate order in their favour and is basically implementation of the order of the Commissioner (Appeals). The success of their appeal is not an empty formality and the appellate order is required to be implemented, as a result of which CT-2 certificate is required to be issued right from the date of their first claim and the benefit of concessional rate has to be extended from that date onwards.

The Tribunal also held that the buyer cannot be treated as purchaser as mentioned in clause (e) of Explanation (B) of Section 11B(5) of the Act but would come within the purview of Second proviso to Section 11B(1) of the Act.

Natural Justice

2009-03-07T01:48:00.000-08:00

Failure to grant extension of the personal hearing with sufficient time, even though the law provides three adjournments during the proceeding, is clear cut violation of the principles of natural justice.

Undervaluation of goods

2009-03-07T01:41:00.001-08:00

The importer has imported 18 consignments of plastic sheets over a period of three yeras. On investigation, documents evidencing gross undervaluation of sheets in respect of 8 consignments were found. Based on the gathered evidence, undervaluation in the case of other imports were also alleged and confimed.

The Tribunal held that as regards to balance 10 consignments, case has been made on the basis of conjectures on the ground that once under valuation was resorted to in respect of the 8 consignments the same must have been resorted to in respect of earlier consignments also. This was not acceptable as the two periods were different. There was not a single iota of evidence in respect of these consignments. The entire enquiry was limited to 8 consignments only. There was no reference to any contemporaneous imports during the relevant period nor any assertion that the international price remained the same during both the periods.

The Tribunal held that duty cannot be demanded on the basis of the presumptions and conjectures in the absence of any evidence of any nature.

Undervaluation of goods

2009-03-07T01:41:00.000-08:00

Proof of export

2009-03-07T01:14:00.000-08:00

Duty is not payable on the P.P. bags cleared by the manufacturer to rice exporters who used the same for packing rice which was exported without following the procedure prescribed under Chapter X of CER, 1944 provided that ample evidence is produced before the authorities such as copies of AR4, duly certified by the Customs officer in charge of Port certifying the shipment of consignment, Shipping Bills, copies of letters to prove the export of their goods i.e. P.P. bags/sacks.

Proof of export in respect of P.P. Bags not exported directly but used for packing of rice, was held to be inadmissible in the case of M/s Chittor Polyfab (P) Ltd. Vs. CCE Jaipur [2003 (151) ELT 473 (Tri-Del.)] on the ground that in the relevant invoices issued at the time of clearance for P.P. bags, addresses of the consignees and addresses where the goods were to be delivered were different.

freight and insurance charges

2009-03-07T01:13:00.000-08:00

Excess freight and insurance charges are not includible in the assessable value of the excisable goods for levy of excise duty as held in M/s Baroda Electric Motors Ltd. Vs. CCE [1997 (94) ELT 13 (SC)] and CCE Meerut Vs. M/s Majestic Auto Ltd. [2005 (184) ELT 130 (SC)].

Cutting/slitting of jumbo rolls

2009-03-07T01:10:00.000-08:00

The activity of slitting up of thermal paper roll for use in fax machine from jumbo roll would not amount to manufacture. The issue is no more res integra and stand decided by Larger Bench of the Tribunal in case of:
i)M/s Anil Dang Vs. CCE, Vapi [2007 (213) ELT 29 (Tri-LB)],
ii)CCE Vapi Vs. M/s Garware Polyesters Ltd.

The process of cutting and slitting of jumbo rolls of insulated tape does not amounts to manufacture as held in:
i) CCE Vs. Bakelite Hylam Ltd. 1997 (91) ELT 13 (SC)
ii) S.R.Foils Vs. CCE 2001 (138) ELT 719 upheld by SC,
iii) S.R. Tissues Vs. CCE 2001 (136) ELT 367 approved by SC,
iv) Computer Graphics Vs. UOI 1991 (52) ELT 491,
v) CCE Vs. Bloom Product 2002 (144) ELT 132,
vi) Premier Aryco Vs. CCE 2002 (142) ELT 595,
vii) Hindustan Photo Film Vs. CCE 2001 (136) ELT 619,
viii) Gurdian Controls Vs. CCE 2003 (157) ELT 39.

2009-03-07T01:09:00.000-08:00

Board’s Circular No.206/40/96-CX, dt.1.5.96, clarifying that the credit for inputs against an invoice received in piecemeal was required to be taken only when the entire inputs were received inside the factory and not relevant for imported inputs where credit of CVD is taken against a bill of entry.

Printed Plastic Sheets

2009-03-07T00:55:00.000-08:00

Printed plastic sheets, used in indoor and outdoor advertising, is classifiable under Heading 49.01 of the First Schedule to the Central Excise Tariff Act as products of printing industry and not under under Heading 94.05as parts of illuminated signs.

Tribunal followed earlier judgments in the case of Sri Kumar Agencies Vs. CCE, (2000 (116) ELT 483 (Tri-Chennai) and Tanzeem Screenarts Vs. CCE, Mumbai (2001 (131) ELT 656 (Tri-Mumbai.

Appeal filed by revenue in the above two case has been referred by Supreme Court to a Larger Bench vide Commissioner Vs. Sri Kumar Agencies (2007 (216) ELT A24 (SC).

Precedents were followed in absence of stay by the apex court.

Retraction of statement

2009-03-07T00:48:00.000-08:00

A retraction of the statement recorded under section 14 of the Centarl Excise Act in the form of reply to the show-cause notice is not legally sustainable.

रोयाल्त्य अस कन्डीशन ऑफ़ सेल ऑफ़ कोम्पोनेंट्स हेल्ड तो बे includible

2007-05-11T04:50:00.000-07:00

CASE NO.:Appeal (civil) 526 of 2002
PETITIONER:M/s. Matsushita Television & Audio (I) Ltd
RESPONDENT:Commissioner of Customs
DATE OF JUDGMENT: 12/04/2007
BENCH:S.H. KAPADIA & B. SUDERSHAN REDDY
JUDGMENT:J U D G M E N T

KAPADIA, J.
This civil appeal under Section 35L(B) of the Central Excise Act, 1944, is directed against the Order passed by the Central Excise & Customs & Gold Control Tribunal (for short, 'CEGAT') dated 24.8.01. By the said Order the CEGAT (Tribunal) has dismissed the assessee's appeal.
A short question which arises for determination in this civil appeal is: whether the royalty payment was connected with the imported components of Colour TV and if so whether such royalty payment was includible in the assessable value of such components.
Appellants-assessee is a joint venture of M/s. Matsushita Electric Industrial Co. Ltd., Japan, (for short, 'MEI'). The predecessor of the appellants was M/s. Salora International Ltd. (for short, 'SIL'). In 1993, M/s. SIL had entered into an agreement with M/s. MEI for obtaining technical assistance and know-how. The technical assistance and know-how was assigned by M/s. SIL to the appellants. This was in 1996. In terms of clause 6.01, appellants were required to pay royalty at 3% on net ex-factory sale price of the colour receiver manufactured by them towards technical assistance rendered by MEI. In addition to royalty the appellants were also required to pay U.S.$ 2 lakhs, as lump-sum payment to MEI for transfer of technical know-how. Under the agreement, MEI agreed to assist the appellants by selling the equipment at commercial prices. Under the agreement appellants' predecessor imported components of colour receiver from M/s. B.M. Nagaro & Co. who in turn had procured components (bought-out items) from different manufacturers including those in Singapore.
By Adjudication Order NO.6/99 dated 20.5.99, the Adjudicating Authority loaded the value of the said components by 2% and 1.58% for the years 1996-97 and 1997-98 respectively. This was in terms of Rule 4(2) and Rule 9(1)(c) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 [for short, 'Valuation Rules, 1988']. The said Order confirmed by the Commissioner (Appeals) vide his Order No.683/2000 dated 15.11.2000. The said concurrent findings were also confirmed by the impugned judgment of the Tribunal. According to the impugned judgment, the assessable value of the components were required to be loaded with the cost of royalty payment as under the Agreement the appellants had agreed to pay to MEI a royalty at 3% on the net ex-factory sale price of the colour receiver manufactured by the appellants for the technical assistance rendered by MEI. According to the Tribunal, on bare reading of the Agreement it was clear that the royalty payment was related to components in view of clause 7.02. According to the Tribunal, the technical assistance under the Agreement was related to the components since under clause 7.02 it was stipulated that not only MEI would assist SIL in selling the components but MEI would also assist the appellants in approving the components which were bought-out items. Under the Agreement, samples of bought-out items were to be sent by the appellants to MEI for inspection and quality certification. Under the agreement, the bought-out items (components) could be used in the T.V. only if it was approved by MEI. Under the Agreement, MEI had to approve in writing the quality and the specifications of such bought-out items (components). In the circumstances, the Tribunal took the view that technical assistance extended not only to the supply of components but also to the approval of the components (bought-out items). Further, according to the Tribunal, the amount of royalty had to be included in the price paid for bought-out items (components). For the above reasons, the Tribunal held that royalty payment constituted consideration for technical assistance rendered by MEI and, therefore, the Department was right in including the cost of royalty payment in the assessable value of the components (bought-out items), duly imported. For the above reasons, the Tribunal dismissed the appellants' appeal. Hence this civil appeal.
This matter has been decided by all the authorities below and CEGAT only on interpretation of the various clauses containing in the Agreement dated 20.8.1993. Therefore, we quote hereinbelow the relevant provisions of the Agreement which are as follows:"TECHNICAL ASSISTANCE AND KNOW-HOW AGREEMENT"
xxx xxx xxx
1. DEFINITIONS
1.02 The term "Products" shall mean one or more of such models of the Item designed by MEI, as MEI regularly manufactures at its own and/or its subsidiaries/affiliates' factories and as shall be selected from time to time during the term hereof by mutual agreement of the parties hereto in writing, provided that MEI reserves the right to finally decide in selecting such specific models as the products.
1.03 (a) The term "Net-factory Sales Prices" shall mean the sales prices billed by SIL of the Products to its customers in normal arm's length transaction exclusive of excise duties, custom duties, ocean freight and insurance, but including the cost of the standard brought out components (hereinafter defined) and the cost of the imported Components.
(b) In relation to the products sold other than in normal arm's length transaction, used, leased or otherwise disposed of by SIL, the prices equal to the arithmetic average of the Net Ex-factory Sales prices of the same products reported to MEI in the immediately preceding Calculation Period (hereinafter defined) shall be deemed to be the Net Ex-factory Sales Prices for such Products, but if there be no same Products so reported, then the Net Ex-factory Sales Prices for such Products shall be determined by mutual agreement of the Parties hereto.
1.04 The term "Technical Know-how" shall mean such technical information in written form as shall be specified in Section 3.01 hereof, embodying technical know-how and data required for the manufacture of the Products.
1.05 The term "components" shall mean component, parts, material and/or sub-assemblies comprising the Products.
2. RENDERING OF TECHNICAL ASSISTANCE
2.01 MEI agrees to render to SIL the technical assistance regarding the manufacturing of the Products in the manner provided in Clause 2 hereof. To the extent that both parties deem necessary, the technical assistance to be rendered by MEI as aforesaid shall comprise the training to effectuate the following items (hereinafter called "Technical Assistance"):
1. Advice and instruction for he manufacture of the Products;2. advice and instruction on installation, operation and maintenance of Production Equipment used for the manufacture of the Products;3. Advice and instruction on factory layout used for the manufacture of the Products; and 4. Other necessary advice and instruction.
2.02 The Technical Assistance for the manufacture of the Products shall be actually rendered in the manner hereinbelow specified.
(A) During the term of this Agreement upon request of SIL and by consent of MEI thereto, MEI will permit employees of SIL to visit the manufacturing department concerned of MEI and/or MEI's subsidiaries/affiliates which manufacture the Products, for a period MEI deems necessary, for training in the process of manufacturing the Products.(B) During the term of this Agreement, upon request of SIL and by consent of MEI thereto, MEI will send the engineers of MEI and/or MEI's subsidiaries/affiliates to SIL's factory manufacturing the Products hereunder for a period MEI deems necessary to give instructions to the employees of SIL engaged in the manufacture of the Products.(C) All costs and expenses incurred for the Technical Assistance as referred to in (A) and (B) of this Section 2.02 hereof (including those for accommodation, transportation, and both way air coaches and salaries and allowances payable for MEI (including MEI's subsidiaries/affiliates)'s engineers and SIL's Employees) shall be paid by SIL in United States Dollars. In case any costs and expenses payable by SIL to MEI for the Technical Assistance herein contained be prepaid by MEI, SIL shall reimburse to MEI in United States Dollars promptly after receipt by SIL of MEI's invoice therefore. Details of the terms and conditions for the Technical Assistance of MEI (including MEI's subsidiaries/affiliates)'s engineers visiting SIL's factory and SIL employees visiting MEI (including MEI's subsidiaries/affiliates)'s factory, as the case may be, shall be confirmed in writing between the parties hereto prior to such visit.
4. USE OF TECHNICAL ASSISTANCE AND TECHNICAL KNOW HOW
4.01 During the term of this Agreement MEI agrees to grant to SIL a non-exclusive and non-transferable licence to use the Technical Assistance and the Technical Know-how manufacture of the Products at SIL's factory in India and for sale of such Products throughout India. In the event this Agreement expired, however, MEI agrees to grant to SIL a non- exclusive and non-transferable licence to use the Technical Assistance and the Technical Know-how for manufacture of the Products at SIL's factory in India only for the orders booked from SIL's customer in India during the terms of this Agreement.4.02 The Technical Assistance and the Technical Know-how made available to SIL hereunder shall be used only for SIL's own manufacture of the Products at its own factory in India, and SIL undertakes that such Technical Assistance and Technical Know-how made available to SIL hereunder shall be neither directly or indirectly transferred nor be made available to any third party. The term "third party" used herein shall mean any party who shall not sign this Agreement.
6. REMUNERATION
6.01 Payment of the Technical Assistance:
A. In consideration of the Technical Assistance rendered by MEI under Clause 2 hereof and the license granted under Clause 4 hereof, SIL shall pay to MEI the royalty at the rate of three percent (3%) on the Net Ex-factory Sales Prices of the Products manufactured and sold, used, leased or otherwise disposed of by SIL herein.
B. SIL agrees to forward to MEI written royalty reports in a form attached hereto as EXHIBITS A and B, which shall be audited and certified by a certified public accountant retained by SIL, within ninety (90) days after the end of each Calculation Period, setting forth the number of all Products manufactured and sold, used, leased or otherwise disposed of by SIL during the immediately preceding Calculation Period, and also showing computation of the royalty payable pursuant to the provisions of this Clause 6 and deduction of the withholding tax as referred to in Section 6.01-E below.
C to G xxx xxx xxx
7 PRODUCTION EQUIPMENT AND COMPONENTS.
7.02 Components:
A. In addition to the technical assistance herein contained, MEI will assist SIL as much as practicably possible in manufacturing the Products by selling, at the reasonable request of SIL, the Components to SIL.B. SIL may, if it so desires, use in manufacturing the Products certain Components available from sources other than MEI, if SIL first sends reasonable quantities of samples of such components to MEI for inspection and if then MEI approves in writing the quality and the specifications of such Components.
7.03 Sale and purchase of the Production Equipment and the Components supplied by MEI pursuant hereto shall be made at commercial prices under payment and other terms to be agreed upon between MEI and SIL and subject to the necessary approval and the concerned authorities of the Japanese Government or Indian Government, as the case may be. Specifically payment of the purchase price of the Production Equipment and the components so supplied by MEI to SIL shall be made through the Japanese shippers designated by MEI under the terms and conditions to be agreed upon among the parties concerned.7.04 Supply of the Production Equipment and Components from MEI to SIL hereinabove set forth is for the sole purpose of SIL's own manufacturing of the Products hereunder for itself, and unless otherwise agreed in writing by MEI, any item of the Production Equipment and the Components supplied by MEI hereunder, unless otherwise agreed by MEI."
On reading the above agreement, the following features emerge. Under Clause 1.03 the term "Net-factory sale price" has been defined to mean the sale price billed by the appellants for its products to its customers in normal arm's length transaction exclusive of taxes, freight and insurance, but including the cost of the bought-out components and the cost of the imported components. Under Clause 1.04 the term "Technical Know-how" was defined to mean technical information required for the manufacture of colour T.V. as specified in Clause 3.01. The technical know-how which was agreed to be furnished to the appellants was to consist of quality control standard and specification of the components to be used in the manufacture of T.V. sets. Further, under Clause 2.01 it was agreed that MEI shall render to the appellants the technical assistance regarding the manufacture of the T.V. sets in the manner provided in the said clause. Under the said Clause 2.02(C), all costs, charges and expenses, incurred by the appellants for technical assistance, was to be paid by the appellants in U.S. Dollars. Further, under Clause 4.01, MEI agreed to grant to the appellants a licence to use the technical assistance and the technical know-how for the manufacture of the colour T.V. at the appellants' factory in India and also for sale of such products throughout India. Under Clause 6.01, in consideration of the technical assistance to be rendered by MEI and in consideration of the licence to be granted by MEI to the appellants it was agreed that the appellants shall pay to MEI the royalty at the rate of 3% on the net ex-factory sale price of the colour T.V. manufactured and sold. Further, it was agreed that in addition to the technical assistance, MEI would assist the appellants in the manufacturing of the colour T.V. by selling the components to the appellants. Under the Agreement, the parties further agreed that if the appellant desired to make use of bought-out components it can do so provided the said components are forwarded to MEI for inspection and if MEI approves the quality and the specifications of such bought-out components then alone the appellant would be free to use such components in the manufacture of colour T.V.
The question which arises for consideration in this civil appeal is: whether royalty payment was connected with the imported components. Under Rule 9(1)(c) of the Valuation Rules, 1988, only such royalty which is relatable to the imported goods and which is a condition of sale of such goods alone could be added to the declared price. However, in the present case, payment of continuing royalty was payable at the rate of 3% of the net ex-factory sale price of the colour T.V. exclusive of taxes, freight and insurance but including the cost of imported components. In other words, the royalty payment was to be computed not only on the domestic element of the net sale price of the colour T.V. but also on the cost of imported components. A bare reading of the agreement shows that payment under the said agreement related not only to the production of the goods in India but also to imports. In some of the decisions cited on behalf of the assessee, we find that the net ex-factory sale price of the finished products expressly excluded the cost of imported components. On the other hand, in the present case, the cost of imported components was expressly included in the net ex-factory sale price of the colour T.V. Further, when payment to MEI was at the rate of 3% of the sales turn over of the final product, including cost of imported component, it became a condition of sale of the finished goods. Hence, in this case both the conditions of Rule 9(1)(c) of the Valuation Rules, 1988, are satisfied.
For the above reasons, we find no merit in this civil appeal and the same accordingly stands dismissed with no order as to costs.

In view of the above, what I have stated earlier that splitting of contract pays hold good.

2007-05-11T01:02:00.000-07:00

Limitations

2007-03-06T21:35:00.000-08:00

Utilization of duty credit earned under SFISC is not be permitted for payment of duty in case of import of vehicles

The imported goods imported are nontransferable. However, transfer of imported goods is allowed within the Group Company

The duty credit entitlement certificate shall be valid for import for a period of 24 months. Revalidation of duty credit certificate is not allowed.

RCMC Certificate & IEC

2007-03-06T21:34:00.000-08:00

Service exporters is registered with the Federation of Indian Exporters Organisation (‘FIEO’)

Service provider has an Importer Exporter Code (IEC)

Eneligible services/remittances

2007-03-06T21:32:00.000-08:00

The following Foreign Exchange remittances are not eligible for entitlement.

I. Remittances related to Financial Services Sector

1. Raising of all types of foreign currency Loans
2. Export proceeds realisation of clients
3. Issuance of Foreign Equity through ADRs /GDRs or other similar instruments
4. Issuance of foreign currency Bonds
5. Sale of securities and other financial instruments
6. Other receivables not connected with the services rendered by the financial institutions

II. Other Remittances

1 Earnings through contract/regular employment abroad (e.g. labour remittances).
2 Payments received from Export Earners Foreign Currency (EEFC)
3 The foreign exchange turnover for Healthcare Institutions like equity participation, donations etc. (However remittances received on account of medical treatment, surgery, testing, consultancy and health care provided by the institution will be eligible.)
4 The foreign exchange turnover for Educational Institutions like equity participation, donations etc. (However remittances received on account of the course fees and consultancy provided by the institution will be eligible)
5 Export turnover of units operating under SEZ/EOU/EHTP/STPI/ BTP schemes or supplies made to such units or products manufactured by them and exported through DTA units. Moreover, the clubbing of turnover of services rendered from these units with DTA units is also not allowed.

Earnings in foreign exchange

2007-03-06T21:30:00.000-08:00

Payment for services is received in free foreign exchange or in Indian Rupees which are otherwise considered as having been paid for in free foreign exchange by RBI. The earning in the preceding financial year or current financial year should be al least Rs 10 Lakhs.

For individuals, earnings in foreign exchange is required to be at least Rs 5 Lakhs in the preceding financial year

Eligibility

2007-03-06T21:05:00.001-08:00

Services should be one of the 161 tradable services covered under the General Agreement on Trade in Services.

List of eligible services

2007-03-06T21:05:00.000-08:00

Following services are listed in the Appendix 10 of the Handbook of Procedure as eligible services under SFISC

LIST OF SERVICES

SECTORS AND SUB-SECTORS

1. BUSINESS SERVICES

A. Professional services

a. Legal services
b. Accounting , auditing and bookkeeping services
c. Taxation services
d. Architectural services
e. Engineering services
f. Integrated engineering services
g. Urban planning and landscape architectural services
h. Medical and dental services
i. Veterinary services
j. Services provided by midwives, nurses, physiotherapists and paramedical personnel
k. Others

B. Computer and related services

a. Consultancy services related to the installation of computer hardware
b. Software Implementation services
c. Data processing services
d. Database services
e. Others

C. Research and development services

a. R&D services on natural sciences
b. R&D services on social sciences and humanities
c. Interdisciplinary R&D services

D. Real estate services

a. Involving own or leased property
b. On a free or contract basis

E. Rental/Leasing services without operators

a. Relating to ships
b. Relating to aircraft
c. Relating to other transport equipment
d. Relating to other machinery and equipment
e. Others

F. Other business services

a. Advertising services
b. Market research and public opinion polling services
c. Management consulting service
d. Services related to management consulting
e. Technical testing and analysis services
f. Services incidental to agricultural, hunting and forestry
g. Services incidental to fishing
h. Services incidental to mining
i. Services incidental to manufacturing
j. Services incidental to energy distribution
k. Placement and supply services of personnel
l. Investigation and security
m. Related scientific and technical consulting services
n. Maintenance and repair of equipment (not including maritime vessels, aircraft or other Transport equipment)
o. Building- cleaning services
p. Photographic services
q. Packaging services
r. Printing, publishing
s. Convention services
t. Others

2. COMMUNICATION SERVICES

A. Postal services

B. Courier services

C. Telecommunication services

a. Voice telephone services
b. Packet-switched data transmission services
c. Circuit-switched data transmission services
d. Telex services
e. Telegraph services
f. Facsimile services
g. Private leased circuit services
h. Electronic mail
i. Voice mail
j. On-line information and data base retrieval
k. Electronic data interchange (EDI)
l. Enhanced/value-added facsimile services including store and forward, store and retrieve
m. Code and protocol conversion
n. On-line information and/or data processing (including transaction processing)
o. Others

D. Audiovisual services

a. Motion picture and video tape production and distribution service
b. Motion picture projection service
c. Radio and television services
d. Radio and television transmission services
e. Sound recording
f. Others

E. Others

3. CONSTRUCTION AND RELATED ENGINEERING SERVICES

A. General Construction work for building

B. General Construction work for Civil Engineering

C. Installation and assembly work

D. Building completion and finishing work

E. Others

4. DISTRIBUTION SERVICES

A. Commission agents’ services

B. Wholesale trade services

C. Retailing services

D. Franchising

E. Others

5. EDUCATIONAL SERVICES

A. Primary education services

B. Secondary education services

C. Higher education services

D. Adult education

E. Other educational services

6. ENVIRONMENTAL SERVICES

A. Sewage services

B. Refuse disposal services

C. Sanitation and similar services

D. Others

7. FINANCIAL SERVICES

A. All Insurance and Insurance-related services

a. Life, accident and health insurance services
b. Non-life insurance services
c. Reinsurance and retrocession
d. Services auxiliary to insurance (including brokering and agency services)

B. Banking and other Financial Services (excluding insurance)

a. Acceptance of deposits and other repayable funds from the public
b. Lending of all types, including consumer credit, mortgage credit, factoring and financing of commercial transaction
c. Financial leasing
d. All payment and money transmission services
e. Guarantees and commitments
f. Trading for own account or for account of consumer, whether on an exchange, in an over-the-counter market or otherwise, the following:
- money market instruments(cheques, bills, certificates of deposits, etc.)
- derivative products including, but not limited to, futures and options
- exchange rate and interest rate instruments, including products such as swaps, forward rate agreements, etc. transferable securities
- other negotiable instruments and financial assets, including bullion
g. Participation in issue of all kinds of securities, including under writing and placement as agent (whether publicly or privately) and provision of service related to such issues
h. Money binding
i. Asset management, such as cash or portfolio management, all forms of collective investment management, pension fund management, custodial depository and trust services
j. Settlement and clearing services for financial assets, including securities, derivative products and other negotiable instruments
k. Advisory and other auxiliary financial services on all the activities listed in article 1B of MTN.TNC/W/50, including credit reference and analysis, investment and portfolio research and advise, on acquisitions and own corporate restructuring and strategy
l. Provision and transfer of financial information and financial data processing and related software by providers of other financial services

C. Other

8. HEALTH-RELATED AND SOCIAL SERVICES (OTHER THAN THOSE LISTED UNDER 1.A.h-j.)

A. Hospital services

B. Other human health services

C. Social services

D. Other

9. TOURISM AND TRAVEL-RELATED SERVICES

A. Hotels and Restaurants (including catering)

B. Travel agencies and tour operators services

C. Tourist guides services

D. Others

10. RECREATIONAL, CULTURAL AND SPORTING SERVICES (Other than audiovisual services)

A. Entertainment services (including theatre, live bands and circus services)

B. New agency services

C. Libraries, archives, museums and other cultural services

D. Sporting and other recreational services

E. Others

11. TRANSPORT SERVICES

A. Maritime Transport Services

a. Passenger transportation
b. Freight transportation
c. Rental of vessels with crew
d. Maintenance and repair of vessels
e. Pushing and towing services
f. Supporting services for maritime transport

B. Internal waterways transport

a. Passenger transportation
b. Freight transportation
c. Rental of vessels with crew
d. Maintenance and towing services
e. Supporting services for internal waterways transport

C. Air transport services

a. Passenger transportation
b. Freight transportation
c. Rental of aircraft with crew
d. Maintenance and repair of aircraft
e. Supporting services for air transport

D. Space Transport

E. Rail Transport Services

a. Passenger transportation
b. Freight transportation
c. Pushing and towing services
d. Maintenance and repair of rail transport equipment
e. Supporting services for rail transport services

F. Road Transport Services

a. Passenger transportation
b. Freight transportation
c. Rental of Commercial vehicles with operator
d. Maintenance and repair of road transport equipment
e. Supporting services for road transport services

G. Pipeline Transport

a. Transportation of fuels
b. Transportation of other goods

H. Services Auxiliary To All Modes Of Transport

a. Cargo-handling services
b. Storage and warehouse services
c. Freight transport agency services
d. Others

12. OTHER SERVICES NOT INCLUDED ELSEWHERE

Entitlement

2007-03-06T21:03:00.000-08:00

10% of the earnings in foreign exchange from eligible service except for hotels (one star or above), entitlement is restricted to 5% of earnings in foreign exchange

Benefits

2007-03-06T20:58:00.000-08:00

Service provider can import capital goods, office equipment, professional equipment, office furniture and consumables required to provide service free of customs duty against Served from India Scheme Certificate (‘SFISC’). Goods can be procured from private/public bonded warehouse also. - Notification No. 92/2004 dated 10 Sep 2004

Served from India Scheme

2007-03-06T20:43:00.000-08:00

A scheme to promote export of service from India

Payments in currency held for numismatic value

2007-02-25T23:48:00.000-08:00

Wherever, payment is received in the form of currency which is held for its numismatic value, in that case, the face value (tenor) of the currency alone will not be the monetary consideration and it can not be said that service has been provided for monetary consideration alone, as the market value of such coin/currency will be different from the apparent value. If service provider receives 100 silver coins of Re 1 for the service, then the value of service is not Rs 100/= because silver coin has numismatic value and taxable value cannot be arrived based on face value of the coins. In such circumstances, value has to be determined under section 67(ii) of the Finance Act, as if money is not the sole consideration for the taxable service.

Post dated cheque/ letter of credit

2007-02-25T23:47:00.000-08:00

under posting

Cheque collection charges

2007-02-25T23:41:00.000-08:00

Payment for the service received in any one or more manner i.e. currency, cheque, promissory note, letter of credit, draft, pay order, travellers cheque, money order, postal remittance and other similar instruments form part of the taxable value of the service. Some time, encashment of cheque, letter of credit etc involve some banking charges which are deducted by the bankers while giving credit for the instrument. In that case, whether the full value of the instrument is the consideration or the discounted/net value of the instrument is the consideration for the service is required to be analysed.

Relevant date for receipts of payment towards service

2007-02-25T23:40:00.000-08:00

Encashment of cheque, letter of credit etc involve some banking charges which are levied by the bankers while giving credit for the instrument. In that case, whether the full value of the instrument is the consideration is required to be analysed. A cheque or letter of credit or any other instrument is issued by the service receiver to the service provider for the consideration of the service provided to him. Amount of the cheque represent the value of the service received by him. Therefore, cheque collection charges levied by the bankers can not be deducted from the value as charge of the service tax is on gross amount. Cheque collection charge will be an expenditure incurred by the service provider in the course of providing service and also an input service, if taxable, eligible for Cenvat credit.

When the payment is received in currency, date of the receipt of such currency is the relevant date to determine the payment of service tax. Similarly, when book adjustments are made or account is deducted for the service, date of such adjustment or deduction will be relevant date. Receipt of a cheque by service provider whether amounts to the receipt of payment is required to be analysed. Cheque is only a revocable authority issued to a bank by service receiver to pay to the service provider a sum of money. Accordingly, no payment can be considered to have been received by the service provider until the cheque is presented to the bank, honored by the payer and the proceeds of the cheque are credited to the supplier’s bank account. Further, receipts issued for cheque are subject to realization. In other words, if cheque is not realized, receipts are void. Therefore, date of the cheque or receipt thereof is not relevant date to determine tax liability. However, it is difficult in practice for the service provider to ascertain when the sum, as stipulated on the cheque, is credited to his bank account since he does not know when the bank has cleared the cheque. Furthermore, most banks only reflect the cheque presentation date instead of the cheque clearance date in their bank statement. Therefore, the question remains as to what is the relevant date. The question becomes difficult to answer in the case cheque is dishonored subsequently.

The Finance Act provides for adjustment in case of advance payments. However, there is no provision for adjustment in tax liability for any other count. Therefore, if assessee makes adjustment in the tax liability for the subsequent period for the dishonored cheque of the preceding period, it will be without authority of law and may attract penal provisions of non payment of service tax. Further, the Finance Act does not provide for any refund in such scenario. Therefore, the service provider may be loser on both counts.

In view of the complex situation as narrated above, it is desirable that the service provider opt for payment of service tax on the collection basis. As service tax is payable 5th of the subsequent month by which time, usually, one will know about dishonored cheque. However, on 31 March every year, one has to discharge his service tax liability on 31st March itself instead of 5th day of the subsequent month, therefore, it will pose difficulty in the above approach and one has to pay service tax on the cheque deposited in the bank for collection without knowing whether cheque has been collected or dishonored.

Payment received during Transit period

2007-02-25T23:38:00.000-08:00

There may be situations where a particular service becomes taxable during its performance. There are many service assignments which are performed over a period of time. In every budget, Central Government brings new services within the service tax net. It is a regular occurrence that during the initial period, the service is not taxable but before completion of the service it has become taxable. There may be two possible scenario regarding payment for the service, i.e. (i) Payment for the service is received after the subject service has become taxable, and (ii) payment has been received in advance for a service and during the performance of the service, it has become taxable wherein part of the service was provided to the client when it was not taxable. As per second proviso to Rule 6(1) of the Service Tax Rules, notwithstanding the time of receipt of payment towards the value of services, no service tax is payable for the part or whole of the value of services, which is attributable to services provided during the period when such services were not taxable. In other words, if the payment is for the service which became taxable during the performance of such service, tax is payable on pro-rata basis.

Therefore, in the first scenario, there is no ambiguity in law and a provision has been incorporated in the service Tax Rules that even if payment is received after service has become taxable, such service or part of such service cannot be taxed.

In the second scenario, position of law is not clear. As per Section 66 of the Finance Act, service tax is levied on the value of the taxable service at prescribed rate, whereas as per Section 68 thereof, service provider is required to pay service tax at the prescribed rate in prescribed manner. As per Rule 6 of the Service Tax Rules, payment of service tax is required to be made on the subsequent month on the basis of payment received during the month for the taxable service.

From the above, it appears service provider is required to pay service tax on the payments received for taxable services at the prescribed rate within stipulated time. Since the payment for service has been received in advance, no service tax has been paid thereon during the said period, as it was not a taxable service. As per Rule 4A of the Service Tax Rules, provider of a taxable service is required to issue Bill/Invoice/Challan within fourteen days from the date of completion of taxable service or receipt of any payment towards the value of taxable service, whichever is earlier.

In the present case, as payment has already been received, an event occurring earlier than completion of service, service provider is not required to issue any fresh Bill/Invoice/Challan for rendering service. Therefore, it appears that such advance receipts escape levy of service tax. However, that is not the case may be. The advance receipt for the services will be shown in the books of account as advance and will be adjusted in the books as and when the service is provided to the client. Such adjustments in the books of accounts have been considered as consideration for the service and therefore, it will be exigible to the service tax. Central Board of Excise and Customs (‘CBEC’) vide Circular No. 65/14/2003-S.T., dated 5 November 2003 has also clarified, although for a different logic, that where the value of taxable service has been received in advance for a service which became taxable subsequently, service tax has to be paid on the value of service attributable to the relevant month/quarter which may be worked out on pro rata basis. Relevant Para of the circular is reproduced below:

“As per the said circular, Rule 6 only prescribes the procedure of payment of tax. The liability to tax is created by Section 66 of the Finance Act, 1994. The liability to pay tax is fastened on the service provider by Section 68 of the said Act. These two sections read together imply that service tax is payable by the service provider on the value of taxable services. Thus if a service provided is taxable, tax has to be paid on its value. Section 67 also clarifies value of service as the amount charged for the taxable service by the service provider. In other words, an amount becomes value of taxable service only when it has a nexus with the service provided. That is the reason why the expression used in Rule 6 is “value of taxable services” and not amount. The implication is that the tax has to be paid on the value of taxable services attributable to the service provided in a month/quarter as and when it is received. Thus, Rule 6(1) cannot be read in isolation.”

In this context, it is interesting to note that maintenance and repair of goods and equipment service was brought within service tax in the year 2003 from 1 July 2003. Government vide Notification No. 11/2003 dated 20 June 2003 exempted service tax on maintenance and repair on the payment received prior to 1 July 2003 provided the bill or invoice for the said portion of taxable services was also raised prior to the 1 July 2003. CBEC vide circular No. 59/8/2003 dated 20 June 2003 clarified that similar will be the situation for payments made for continuing service. In other words, if the payment has been received in before 1 July 2003 but service is continuing even after 1 July 2003, after it has become taxable, no service tax is leviable.

If the similar logic is taken in respect of other service, it will appear that in case of continuing service where bill is raised and payment is received in advance, no tax is leviable on the services which subsequently become taxable. However, CBEC vide Circular No. 65/14/2003-S.T., dated 5 November 2003 has clarified that:

“Circular No. 59/8/2003, dated 20-6-2003 [2003 (155) E.L.T. T7] wherein it was clarified that in view of the Notification 11/2003-S.T., dated 20-6-2003, no service tax would be payable where maintenance contracts are entered into before 1-7-2003, provided the invoices are raised and paid prior to 1-7-2003. It was further mentioned in the circular that similar would be the situation in case of continuing services. By continuing services what was meant was continuing maintenance services where there is an ongoing contract under which regular periodical payments are made. That Para 2.3.1 was only in the context of maintenance and repair service is also quite clear from the heading, “MAINTENANCE AND REPAIR SERVICES” of Para 2.3 in that circular. No similar exemption has been granted to any other service in case of advance payments.”

It is an open question as to whether the Board can issue contrary clarifications with respect to assessment practice wherein different assessees are placed in similar situation but the liability is different.

Advance payments for the taxable service

2007-02-25T23:37:00.000-08:00

As per Rule 6 of the service Tax Rules, 1994 (‘the Service Tax Rules’), service tax is required to be paid to the Government by the 5th of the month immediately following the calendar month in which the payments are received towards the value of taxable services. The liability to pay service tax arises on receipt of the payment for the service already provided or to be provided to a client. Therefore, service provider is also required to pay service tax on the advance payment received for the services which are yet to be provided by him. However, in case, service is not provided either wholly or partly for any reason and service provider refunds the amount to the client, the service provider may adjust the excess service tax so paid by him (calculated on a pro rata basis) against his service tax liability for the subsequent period . Further, if the service provider has received payment attributable to a service provided by him during the period when such service was not taxable, he is not required to pay service tax to that extent.

Mode of Receipts for the service rendered

2007-02-25T23:36:00.000-08:00

Payment for the service can be in any one or more manner i.e. currency, cheque, promissory note, letter of credit, draft, pay order, travellers cheque, money order, postal remittance, credit cards and other similar instruments and book adjustments. It may be seen that issue of debit/credit notes and deductions from accounts or book adjustments has also been considered as monetary consideration for the purpose of valuation of service.

Statutory Provisions

2007-02-25T23:35:00.000-08:00

As per section 66 of the Finance Act, 1994 (‘the Finance Act’), Service tax is levied ad valorem @ 12% on the value of the taxable service.

Value of the taxable service is determined in accordance with the provisions of Section 67 of the Finance Act read with Service Tax (Determination of Value) Rules, 2006 (‘the Valuation Rules’).

As per Section 67(i) of the Finance Act, the value of taxable service is the gross amount charged by the service provider for such service provided or to be provided, where the provision of service is for a monetary consideration alone.
As per the explanation (a) to the section 67 of the Finance Act, consideration includes any amount which is paid or payable for the service provided or to be provided. Further as per explanation (b) thereto “money” includes any currency, cheque, promissory note, letter of credit, draft, pay order, travellers cheque, money order, postal remittance and other similar instruments but does not include currency that is held for its numismatic value and as per explanation (c) thereto “gross amount charged” includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment.

Latest Judgment of the Apex Court

2007-02-11T22:38:00.001-08:00

On 2 February 2007, the apex court in the case of J K Corporation Ltd in Appeal (Civil)4663 of 2006 held that:

"The basic principle of levy of customs duty, in view of the afore- mentioned provisions, is that the value of the imported goods has to be determined at the time and place of importation. The value to be determined for the imported goods would be the payment required to be made as a condition of sale. Assessment of customs duty must have a direct nexus with the value of goods which was payable at the time of importation. If any amount is to be paid after the importation of the goods is complete, inter alia by way of transfer of licence or technical knowhow for the purpose of setting up of a plant from the machinery imported or running thereof, the same would not be computed for the said purpose. Any amount paid for post-importation service or activity, would not, therefore, come within the purview of determination of assessable value of the imported goods so as to enable the authorities to levy customs duty or otherwise. The Rules have been framed for the purpose of carrying out the provisions of the Act. The wordings of Sections 14 and 14(1A) are clear and explicit. The Rules and the Act, therefore, must be construed, having regard to the basic principles of interpretation in mind.

Rule 12 of the Rules provides that the interpretative notes specified in the Schedule appended thereto would apply for construction thereof. They are statutory in nature being integral part of the Rules themselves. The relevant portion of Interpretative Note to Rule 4 reads as under:
"The value of imported goods shall not include the following charges or costs, provided that they are distinguished from the price actually paid or payable for the imported goods:
(a) Charges for construction, erection, assembly, maintenance or technical assistance, undertaken after importation on imported goods such as industrial plant, machinery or equipment;
(b) The cost of transport after importation;
(c) Duties and taxes in India."
What would, therefore, be excluded for computing the assessable value for the purpose of levy of custom duty, inter alia, has clearly been stated therein, namely, any amount paid for post-importation activities. The said provision, in particular, also apply to any amount paid for post- importation technical assistance. What is necessary, therefore, is a separate identifiable amount charged for the same. On the Revenue's own showing, the sum of US $ 14, 00, 000.00 was required to be paid by way of remuneration towards services to be offered by the companies in respect of matters specified in Part-A of the said Memorandum of Agreement. The said sum represents amount of licence or amount to be paid by the respondent for the licence for the manufacturing process for production of goods which were covered by the patents held by M/s. Samsung as also for technical knowhow.

No part of the knowhow fee was to be incurred by the respondent herein either for the purpose of fabrication of the plant and machinery or for any design in respect whereof M/s. Samsung held the patent right.

It may be noticed that the said Memorandum of Agreement specifically contemplates that the plant and machinery to be supplied thereunder may be procured from other independent manufacturers and suppliers who might not have anything to do with the knowhow or licence provided thereunder by Samsung.

The part of the Interpretative Note to Rule 4 relied on by the Tribunal has been couched in a negative form and is accompanied by a proviso. It means that the charges or costs described in clauses (a), (b) and (c) are not to be included in the value of imported goods subject to satisfying the requirement of the proviso that the charges were distinguishable from the price actually paid or payable for the imported goods. This part of the Interpretative Note cannot be so read as to mean that those charges which are not covered in clauses (a) to (c) are available to be included in the value of the imported goods."

Therefore, once again the apex court has upheld the GOLDEN RULE that if payment is not a condition of sale and pertains to post importation, it can not be added to the assessable value.

Latest Judgment of the Apex Court

2007-02-11T22:38:00.000-08:00

2007-01-17T23:34:00.001-08:00

View my other blogs on Service Tax

Airport Services

http://servicetax-airport.blogspot.com/

Intellectual Property Rights

http://servicetax-ipr.blogspot.com/

Consulting Engineers

http://servicetaxind.blogspot.com/

Blogs on Customs Duty and procedure

Import of Computer Software

http://customs-software.blogspot.com/

Import of capital goods/components where supplier is paid royalty

http://customs-royalty.blogspot.com/

How Bill of Entry is assessed in a Custom House

http://import-procedure.blogspot.com/

Blogs on Central Excise duty and procedure

Exemption to new industrial units in Himachal Pradesh and Uttaranchal

http://excise-uttaranchal.blogspot.com/

2007-01-17T23:34:00.000-08:00

View my other blogs on Service Tax

Airport Services

http://servicetax-airport.blogspot.com/

Intellectual Property Rights

http://servicetax-ipr.blogspot.com/

Consulting Engineers

http://servicetaxind.blogspot.com/

Blogs on Customs Duty and procedure

Import of Computer Software

http://customs-software.blogspot.com/

Import of capital goods/components where supplier is paid royalty

http://customs-royalty.blogspot.com/

How Bill of Entry is assessed in a Custom House

http://import-procedure.blogspot.com/

Blogs on Central Excise duty and procedure

Exemption to new industrial units in Himachal Pradesh and Uttaranchal

http://excise-uttaranchal.blogspot.com/

My Blogs

2007-01-17T23:29:00.000-08:00

Blogs on Service Tax

Airport Services
http://servicetax-airport.blogspot.com

Intellectual Property Rights
http://servicetax-ipr.blogspot.com

Consulting Engineers
http://servicetaxind.blogspot.com

Blogs on Customs Duty and procedure

Import of capital goods/components where supplier is paid royalty
http://customs-royalty.blogspot.com

Blogs on Central Excise duty and procedure

Exemption to new industrial units in Himachal Pradesh and Uttaranchal
http://excise-uttaranchal.blogspot.com/

Royalty Payment

2007-01-10T03:50:00.001-08:00

What is Royalty

Royalty is the sum of money paid to the proprietor or Licensor of Intellectual Property (IP) Rights for the benefits derived, or sought to be derived, by the user (the Licensee) through the exercise of such rights. Royalties may be paid for the use of copyright, patent, registered design, knowhow, trademark or a combination of them.

The express rights granted to the licensee, and the amounts to be paid to the Licensor for the exercise thereof, are set out in a documented License Agreement. The agreement specifies the method of calculating the royalties and the period over which the payments become applicable.

The royalty amount can be one time lump sum payment or may be based on a formula specified in the licence agreement which defines the royalty rate and the unit base on which it is to be applied. Unit base can be value or volume of production of the licensed products.

Generally, the Licensee will import capital goods in the form of plant and machinery to create manufacturing base of the licensed product. Sometimes proprietary products are also imported to be used in manufacture of licensed products.

CUSTOMS DUTY

On importation, customs duty is required to be paid on the capital goods as well as other products. Duty of customs may be specific or ad valorem. Specific rate of duty means that duty is fixed on the basis of quantity or volume of the imported goods and expressed in the form of Rs XXX per unit. On the other hand, most of the time, custom duty is levied ad valorem which means that duty is calculated on the basis of value of the imported goods and expressed in percentage.

Customs Act, 1962

Section 14 of the Customs Act, 1962 deals with valuation of the imported goods, as per which the value goods is the price at which such or like goods are ordinarily sold, or offered for sale, to unrelated parties for delivery at the time and place of importation in the course of international trade and the price is the sole consideration for the sale or offer for sale. Royalty is paid to the supplier or a third party consequent upon the import of goods or technology and therefore, it may be possible that price is not the sole consideration to the buyer and a part of the consideration may be paid by way of royalty.

Customs Valuation Rules

As per Rule 9(1)(c) of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988, (‘the Valuation Rules’) royalties and licence fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable is required to be added in the price of the goods.

Further, as per as per Interpretative Notes to the Valuation Rules, the royalties and licence fees may include among other things, payments in respect to patents, trademarks and copyrights. However, the charges for the right to reproduce the imported goods in the country of importation are not required to be added to the price for the imported goods. Further, payments made by the buyer for the right to distribute or resell the imported goods are not required to be added to the price of the imported goods if such payments are not a condition of the sale for export.

Conditions

In view of the above, following conditions are required to be fulfilled, if the payments for the royalty or licence fees are added in the price of the imported goods:

· Royalty payments are pursuant to the conditions of sale
· Such payments are not included in the price
· Royalty payments should have a direct nexus to the imported goods
· Payment does not pertain to right to produce goods in India
· Payment does not pertain to right to resell or distribute

To bring royalty payments within the dutiable event, all the above conditions are to be fulfilled. It is immaterial as to whether the payment for royalty or licence fee or technical know-how has been in lump-sum or on regular basis.

Once it is established that royalty is includible in the price, only to that extent payment towards royalty will be added in the price to which it directly relates to the imported goods. Such addition has to be made on the basis of quantifiable data and not on presumptions.

Royalty payments are pursuant to the conditions of sale

To bring within the mischief of the Rule 9(1)(c) of the Valuation Rules, it has to be established that one of the condition of the sale is payment of royalty. Generally, following conditions are required to be satisfied to allege that royalty payment is the condition of the sale:

· Goods under import is proprietary product
· Proprietary product has to be exclusively procured from the Licensee or his agent
· Proprietary product is essential for the manufacture of licensed product

Royalty payments should have a direct nexus to the imported goods

What is assessed to the customs duty is goods under import. Therefore, it is essential to establish that there is a nexus between royalty and imported goods. If nexus is not established, value can be loaded under Rule 9(1)(c) of the Valuation Rules.

Why it is difficult to establish that royalty payment is a condition of sale

Generally, the IPR holder and the Licensor enter in to a multiple but separate agreements for various activities. Following are the typical agreements:

Agreements for supply of know-how
Agreement for supply of capital goods from the IPR Holder
Agreement for supply of capital goods from the associate entities of the IPR Holder
Agreement for erection and commissioning of the plant
Agreement for supply of proprietary product from the IPR Holder
Agreement for supply of proprietary product from the associate entities of the IPR Holder
Agreement for supply of non-proprietary product from the IPR Holder
Agreement for supply of non-proprietary product from the associate entities of the IPR Holder
Agreement for supply of non-proprietary product from the other entities
Agreement for technical training of the staff

In plethora of these various contracts entered at different dates, the obligation for payment of royalty will be in only one agreement i.e. Agreements for supply of know-how. Therefore, it is always difficult to establish that royalty payment is one of the conditions of sale of capital goods/components/raw material.