Taxation - Service Tax

The Delhi High Court had granted a stay in April 2010 in favour of Home Solutions Retail India Ltd on recovery of service tax under the newly amended Section 65 (105) (zzzz) under "Renting of Immovable Property Service", of which the amendment was made retrospective with effect from 1 June 2006 by the Finance Act, 2010.

This ruling has encouraged other retailers also to follow the same procedure to relax the service tax on commercial rentals.

The "activity of renting itself is a taxable service," Mr Mukherjee had said while announcing the 10% tax, the second attempt to impose the levy. It had first been introduced by then finance minister P Chidambaram in his 2007-08 budget proposal when he imposed a 12% service tax on commercial rentals.

"We haven't approach a High Court as yet but we are contemplating it. In the next few weeks we will be approaching a High Court where our operations are impacted the most," said Thomas Varghese, chief executive officer, Aditya Birla Retail Ltd.

While granting a stay on service tax for Home Solutions Retail India, the Delhi HC said that service tax is a tax on value addition provided by a service provider. If there is no value addition, there is no service. Renting of immovable property, by itself, does not entail any value addition and therefore cannot be regarded as a service. If there is some other service provided along with renting of immovable property, then any such other service would be covered under Section 65 (105) (zzzz).

The Retailers Association of India (RAI) will help these retailers to file the litigation. "RAI is helping its members to take the cases to court. The service tax impacts retail more than anyone else. Currently retailers pay 10%-12% of the turnover as rentals and the service tax is affecting them by 10.2%. On total turnover, the retailers might pay 1%-1.2% as service tax. Most retailers make a profit between 2%-4%. The government will take away half of the profit," said Kumar Rajagopalan, chief executive officer, RAI.

He further added, "It was fine if goods and services tax (GST) was implemented in the country--then the service tax can be set off against sales tax. Retailers are already paying value-added tax (VAT). Most retail outlets are on leased spaces, they have to pay service tax. It is difficult for retailers to survive. Retailers are affected by VAT and service tax because the government is still not able to implement GST and retailers are landing in trouble."

Delhi High Court  has again granted stay to Home Solution Retail (I) Ltd. in W.P. (C) No. 3398 of 2010 on 18.05.2010 from payment of service tax on renting of immovable property.

The stay is not on services in relation to renting but on renting per se.

If anybody is having the copy thereof, same may please be shared with all.

In the Hindustan Zinc case - 2008-TIOL-1149-CESTAT-DEL-LB, a Larger Bench of the Tribunal headed by the President held that, "the taxable service provided by a non-resident or from outside India, who does not have any office in India, having been specified as 'taxable service' with effect from 1.1.2005, under notification No.36 /2004, recipient of such service could not be held liable for paying service tax prior to 1.1.2005 notwithstanding the amendment in rule 2(1)(d) of the Service Tax Rules under notification no. 12/2004."

The Department had challenged this in the Supreme Court and the Supreme Court had dismissed the Government's appeal - 2009-TIOL-87-SC-ST.

This, many in the Government, take as a reason to state that the Supreme Court had confirmed that Service Tax on import of services is payable from 1.1.2005 and not 18.4.2006 as held by the Bombay High Court in Indian National Shipowners Association - 2008-TIOL-633-HC-MUM-ST

The Supreme Court had not held that the tax is payable from 1.1.2005, but only dismissed the Revenue appeal against the CESTAT order holding that it was not payable before 1.1.2005. And there is a lot of difference in the two concepts.

Anyway not satisfied with the dismissal of its appeal by the Supreme Court, the Government filed a review petition in the Supreme Court in the Hindustan Zinc case. The Supreme Court found no merit in the prayer for Review and dismissed the Review Petition. - 2009-TIOL-117-SC-ST

You will remember that in Indian National Shipowners Association - 2008-TIOL-633-HC-MUM-ST the Bombay High Court held that the tax is payable only from 18.04.2006 and this decision had been widely followed.

But the litigation loving government does not keep quiet. It has filed a Special Leave Petition in the Supreme Court against the Bombay High Court judgement.

In its discussion paper released today, the group said cross-utilisation of input tax credit between the central GST and state GST would not be allowed, except in the case of inter-state supply of goods and services under the IGST model.

An inter-state seller will pay IGST on value addition after adjusting available credit of IGST, central GST and state GST on his purchases. The exporting state will transfer to the Centre the credit of state GST used in payment of IGST. The importing dealer will claim credit of IGST while discharging his output tax liability and the Centre will transfer to the importing state the credit of IGST used in payment of state GST.

The relevant information will also be sent to the central agency, which will act as a clearing house, verify the claims and inform the respective governments to transfer the funds.

Source: Business-standard Inter-state transactions may come under tax ambit

Letter F.No. 137/167/2006-CX.4, dated 3-10-2007

Section 73(1A) of the Finance Act, 1994 provides for conclusion of adjudication proceeding in the cases of wilful suppression/fraud/collusion if the taxpayer pays service tax liability along with interest and a penalty equal to 25% of service tax amount, within a period of one month from the date of issue of SCNs. Similarly, section 73(3) provides conclusion of adjudication proceedings in other cases on payment of service tax and interest.

2. A question has been raised as to whether the conclusion of proceedings in such cases is limited to the action taken under section 73 of the Act or all proceedings under the Finance Act, 1994, including those under sections 76,77 and 78, get concluded.

3. The issue has been examined. The intention of section 73(1A) has already been explained vide para 8(g) of the post budget instructions issued by TRU vide D.O.F. No. 334/4/2006-TRU, dated 28-2-2006, wherein it has been clarified that this sub-section provides for conclusion of adjudication proceedings in respect of person who has voluntarily deposited the service tax.

"Provided further that where such person has paid service tax in full together with interest and penalty under sub-section (1A), the proceeding in respect of such person and other person to whom notices are served under sub'-section (1) shall be deemed to be concluded."

THE Centre is examining a proposal to redefine exports of services in the service tax rules in the forthcoming Budget. The move is aimed at clearing confusion over the treatment of services exports in the tax structure, which has resulted in disputed tax claims of hundreds of crores of rupees.

    The finance ministry is considering an amendment to service tax rules --the third such if it happens--in the expectation that the problem will be solved for good, a government official said.

    The last attempt to solve the problem was in February, when the agency that administers all indirect taxes issued a `circular' to try and better explain a few words which had caused confusion about what actually constituted export of a service. The Central Board of Excise and Customs

(CBEC) had tried to make it clear that if the benefit of a service is accrued outside India, it becomes an export and so, no service tax has to been paid. Also, exporters of services can claim refund of duties that they may have paid on inputs. The aim now, the official said, is to enshrine the intent of the circular in service tax rules to put them on a sound legal footing.

    The rules governing the export of services were introduced in 2005 and

have been amended twice. The rules notified in 2007 defined the export of a service as "service provided from India and used outside India".

    The phrase `used outside India' had become a bone of contention, with service tax officials asking companies to provide proof that the service is being used overseas. This prompted CBEC to

come up with the circular in February.

Among those slapped with notices by the tax authorities, who claim the service was actually being used in India, are buying agents carrying out procurement for foreign retailers and liaison offices of foreign companies.

    Similarly, the Indian units of leading foreign IT firms have been issued notices for carrying out marketing activities for products sold directly by the parent. BPO firms catering to overseas clients have also been affected. Many had received recovery notices claiming tax on the basis of a definition, which existed prior to 2007. Those rules defined the export of service as that which was "delivered outside India and used outside India". TAX CONUNDRUM

What is the big issue?

Confusion over tax treatment of services exports, which has resulted in mammoth disputed tax claims

What is the sore point?

A circular said if service benefit is accrued outside India, it is tax-free. But the phrase `outside India' is in dispute

What will Budget do?

The aim is to enshrine the intent of the circular in service tax rules to put them on a sound legal footing

The Centre is weighing the option on account of spiralling government expenditure, a result of the government's attempts to boost the economy, and shrinking revenues during the slowdown in economic activity, according to a senior government functionary who did not want to be identified.

The final decision on the issue would be taken by finance minister Pranab Mukherjee in consultation with the Prime Minister's Office (PMO) and the Planning Commission, the source said. One view that has emerged is that the worst is over and the government should take steps to signal a gradual shift to fiscal discipline.

According to provisional estimates, service tax collections in 2008-09 were around Rs 60,000 crore (registering a growth of around 18%) even though indirect tax collections declined due to economic slowdown. This booming segment should not suffer due to concessions provided to India Inc, feel some sections within the government, including the revenue department.

Source: Economic Times Service tax may return to
12% rate

Form of Refund Claim is attached.

 ITEM NO.26                 COURT NO.2         SECTION III

       SUPREME COURT OF INDIA
           RECORD OF PROCEEDINGS

Petition(s) for Special Leave to Appeal (Civil) No(s).13850/ 2009

(From the judgement and order dated 18/04/2009 in WP No. 1659/2008
of The HIGH COURT OF DELHI AT N. DELHI)

UNION OF INDIA & ORS.                          Petitioner(s)

              VERSUS

HOME SOLUTION RETAIL INDIA LTD. & ORS.                     Respondent(s)

(With appln. for exemption from filing c/c of the impugned Judgment
and prayer for interim relief ))

Date: 02/06/2009 This Petition was called on for hearing today.

CORAM :
   HON'BLE MR. JUSTICE MARKANDEY KATJU
   HON'BLE MR. JUSTICE DEEPAK VERMA
           (Vacation Bench)

For Petitioner(s)      Mr.Biswajeet Bhattacharyya, Sr.Adv,
                       Mr.Debashish Mukherjee, Adv.
                       Mr. Ajay Singh, Adv.
                       Mr. Rupesh Kumar, Adv.
                       Mr. MPS Tomar, Adv.
                       Ms. Pamljiro Shrivastava, Adv.
                       Ms. Anil Katiyar, Adv.
             Mr. Arvind Kumar Sharma,Adv.. .

For Respondent(s)       Mr.Mukul Rohtagi, Sr.Adv.
                        Dr.A.M. Singhvi, Sr.Adv.
                        Mr. Ameet Naik, Adv.
                        Mr.Rishi Agrawala, Adv.
                        Mr.Gaurav Goel, Adv.
             Mr. E.C. Agrawala,Adv.

       UPON hearing counsel the Court made the following
                  ORDER

                    Issue notice.

        [ Usha Bhardwaj ]                        [ Indu Satija ]
Court Master   Court Master

Kind regards,

However, for services consumed outside the zones, companies (including the developer) operating within a SEZ will have to file for refund, a clarification issued by Central board of Excise and Customs (CBEC) this Wednesday said.

Essentially, the latest clarification restores a previous condition that exempted SEZs from paying service tax for services consumed inside the zones.

This exemption was changed into refund through a CBEC notification released on March 3 this year. The same notification also allowed refund of the indirect tax levied on services consumed outside the zones.

Both exemption and refund are related to activities that have been approved by the Board of Approval on SEZs. The commerce ministry and developers have been demanding blanket exemption of service tax.

Source: Business-standard Services consumed within SEZs get tax excemption

This will be done by revoking a finance ministry notification issued on March 3 that provided for refund of service tax on services consumed within the boundaries of the SEZ or outside in domestic tariff area (DTA), the report added.

Services tax directorate under the Central Board of Excise and Customs (CBEC) would issue a fresh notification shortly.

This will provide a lot of relief to those paying service tax within and outside SEZs. Currently, units and developers had to claim refunds after having paid service tax. Earlier, developers and units were exempted from service tax on services availed within an SEZ, but they had to pay the tax on services from DTA. "The notification made service tax available as refund for both, which has created a lot of confusion. Hence, it will be revoked soon once the new government takes charge of the respective ministries," quoted a senior commerce ministry official in the report.

The official also added that the new notification would seek to reinstate the benefit of exemption from paying service tax to developers and units while it will be available as a refund for services rendered from DTA to SEZs such as banking, port and courier services.

"The notification needs to be reviewed immediately and exemption from the tax should be restored as it was before March 31 and the same should be done subsequently for services consumed from DTA to SEZs," said L B Singhal, director general, Export Promotion Council for EOUs and SEZs (EPCES).

Meanwhile, the factual matrix has given rise to interesting discussions on issues inter alia territorial applicability of the DHC judgment; finality; past, present and future tax liabilities; responsibility of landlords and refund of service tax paid.

I. Territorial applicability
The judgment does not restrict itself in terms of territorial scope. Notably, the DHC while granting interim stay orders in many petitions, recorded that the stay would operate only within the territory of Delhi. However, no such qualification is placed in the final judgment.

In any event, the judgment is on the point of legality, rather illegality, of the Notification No 24/2007 dated 22nd May 2007 (Notification) and Circular No 98/1/2008-ST dated 4th May 2008 (Circular) that sought to levy service tax on commercial rentals of immovable property, the situation would in all likelihood remain the same across India. To dispute applicability of the judgment in any other Indian state, the Service Tax Department would have to perform the herculean task of demonstrating as to how the judgment based on same points of law would not be equally applicable in other states.

It is noteworthy that Article 226A barred the High Courts from deciding the constitutional validity of any central law, and vice versa Article 32A barred the SC from considering the constitutional validity of any state law unless the constitutionality of any central law was also in question in the proceedings. These Articles, among others with similar objectives, were introduced by the Forty Second Amendment to the Constitution of India. By Forty Third Amendment to the Constitution, these Articles, conferring exclusive jurisdictions, were repealed.

II. Finality
The judgment is final in itself, unless stayed or set aside by the SC which is true for every HC judgment. The benefit of the judgment would therefore be available until it is so stayed or set aside. It is for the Government to prefer the appeal. An appeal does not warrant that the DHC judgment will be stayed initially, or set aside finally.

• III. Past, present and future liabilities

• IV. Concerns of landlords

• V. Composite agreements

• VI. Other similar arrangements

• VII. Possibility of refund

• VIII. Other petitions

• IX. Transfer petition

Source: Realty Plus By Alishan Naqvee Service tax on commercial rent - matrix of possibilities

1. It has ' reference to a service provided or to be provided to any person, by any other person in relation to "renting of immovable property for use in the course or furtherance of business or commerce".
   
2. The wordings of the provision are so structured as to entail - a service provided or to be provided to 'A' by 'B' in relation to 'C'. Here, 'A' is the recipient of the service, 'B' is the service provider and 'C' is the subject matter.
   
3. The expression "in relation to" may be of widest amplitude, but it has been used in the said Act as per its context. Sometimes, "in relation to" would include the subject matter following it and on other occasions it would not. As in the case of the service of dry cleaning, the expression "in relation to dry cleaning" also has reference to the very service of dry cleaning. On the other hand, the service referred to in Section 65(105)(v), which refers to a service provided by a real estate agent "in relation to real estate", does not, obviously, include the subject matter as a service. This is so because real estate by itself cannot by any stretch of imagination be regarded as a service.
   
4. Going back to the structured sentence, i.e.- service provided or to be provided to 'A' by 'B' in relation to 'C', it is obvious that 'C' can either be a service (such as dry cleaning, hair dressing, etc.) or not a service by itself, such as real estate. The expression "in relation to" would, therefore, have different meanings depending on whether 'C' is a service or is not a service. If 'C' is a service, then the expression "in relation to" means the service 'C' as well as any other service having connection with the service 'C'. Where 'C' is not a service, the expression "in relation to" would have reference only to some service which has a connection with 'C'. But, this would not imply that 'C' itself is a service.
   

The Centre will challenge the order in the Supreme Court, said a government official who did not wish to be identified.

Renting of immovable property for use in the course or furtherance of business cannot be regarded a service, and, therefore, can't be taxed, the court ruled while disposing of petitions by retailers such as Lifestyle, Shopper's Stop Home Solution and Barista Coffee.

The order comes as a major relief to realtors and all companies operating from rented space, particularly retailers and call centres. "The high court order is a welcome one for the business and shall reduce the input costs in these tough times," Ernst & Young associate director Bipin Sapra said.

It also means a major revenue loss for the government, which collects over Rs 8,000 crore annually as tax on renting services, or more than one-tenth of its service tax net.

Source: Economic Times Service tax relief on rentals

Service tax may fetch Rs 68,900cr in FY10

Alishan Naqvee, advocate, LexCounsel Law Offices, who represented his clients in two of the petitions, which was disposed of on Saturday, said, "The category of "renting of immovable property service" was introduced by the Finance Act of 2007. This, in effect brought renting, letting, leasing, licensing or other similar arrangements of immovable property for use in the course of furtherance of business and commerce, within the service tax net with effect from June 1, 2007. This new levy severely impacted business models across India as most of the rent arrangements did not even stipulate it beforehand."

The division bench of the Delhi High Court, which comprised Justice B D Ahmed and Justice Rajiv Shakdher, observed that service tax shall not be levied on renting of immovable property. "We hold that law does not in terms entail that renting out of immovable property for use in the course of furtherance of business or commerce would by itself constitute a taxable service and be eligible to service tax," said Ahmed.

Naqvee further added, "The businesses across India opted to en masse challenge the constitutionality of levy of service tax on rent, on the primary grounds that renting does not involve any service, and the Central Government is not empowered to tax consideration for transfer of rights in immovable property, being a state subject as per the Constitution of India." Meanwhile, few High Courts, including the High Court of Mumbai, Delhi, Gujarat, Andhra Pradesh, Kolkata and Chennai reportedly granted interim reliefs to the petitioners from payment of service tax until final disposal of their matters. The stays were however granted subject to undertakings by the petitioners, mainly tenants, to deposit the service tax amount with the Government if the tax was ultimately held constitutional. The Delhi High Court, however, is the first High Court to deliver the final order in the matter that would have persuasive value for the other High Courts, said Naqvee.

Source: Realty Plus No service tax on renting premises for business: Delhi HC

The Central Board of Excise and Customs (CBEC), the apex body for indirect taxes, has proposed to end double taxation on software sales and is likely to come up with a clarification soon, said a senior government official. A final decision would be taken shortly, he said requesting anonymity.

The domestic market for software in the country is estimated at around Rs 10,000 crore, but the margins are in the range of 4-5%.

When a packaged software is downloaded, it attracts service tax at the rate of 10%, as the downloading is treated as a service. It again faces a countervailing duty of 8% when a hard copy is taken or the licence is taken. The countervailing duty is levied on imported goods to provide a levelplaying field to Indian companies that pay an excise duty.

The government is examining both the options -- exemption from service tax and from countervailing duty. This comes after an appeal from the software industry to CBEC, following a 40% decline in sales.

The problem arose after the Union Budget 2008-09 brought customised software under the service tax net. But, the Finance Act did not mention the word `customised', giving room to tax officials to interpret the law.

The definition prescribed for software makes acquisition of right to use packaged software also taxable, thereby leading to double taxation.

This is because sale of licences, which are acquisition of a right to use the software, would be treated as a sale of good and thereby attract CVD and value-added tax.