Goods and Service Tax

The Empowered Committee of State Finance Ministers has released the first discussion paper on Goods and Service Tax (“GST”). The mechanics of the provisions and even the macro level parameters are still under discussion. GST is set to replace the various State and Union indirect taxes. The discussion paper provides for dual GST, State level and Union level. Though instead of compliances under plethora of taxes at present, the compliances would be restricted to GST, but the issues of interplay of State and Union taxation, rivalry amongst States to garner more revenue, would continue to haunt the taxpayers. The earlier deadline of April 01, 2010 for implementation of GST is likely to be missed.

Certain important and recent legal developments and case laws in this area are set out below:

 

Goods and Service Tax

 

The Empowered Committee of State Finance Ministers has released the first discussion paper on Goods and Service Tax (“GST”). The mechanics of the provisions and even the macro level parameters are still under discussion. GST is set to replace the various State and Union indirect taxes. The discussion paper provides for dual GST, State level and Union level. Though instead of compliances under plethora of taxes at present, the compliances would be restricted to GST, but the issues of interplay of State and Union taxation, rivalry amongst States to garner more revenue, would continue to haunt the taxpayers. The earlier deadline of April 01, 2010 for implementation of GST is likely to be missed.

 

Delhi Entertainments and Betting Tax Act, 2009 amended

 

 It was observed by the Delhi Government that subscribers base of Direct to Home (“DTH”) has rapidly increased during the recent past and is further expanding, thereby provide good resource generation opportunity. However, DTH services were not covered under the existing provisions of the Delhi entertainments and Betting Tax Act, 2009. Hence, the amendment is made in the said Act to bring DTH under the tax net.

 

Applicability of Indirect Taxes on Packaged Software

 

Due to differences over the nature of software (whether software is considered as goods or services) and differences among authorities levying tax on import/manufacture/sale of goods and provision of services, the taxability of software is marred by confusion leading to double taxation in some cases.

 

In this regard, Central Board of Excise and Customs (“CBEC”) has instructed as below:

 

 (a)   ‘Packaged Software’ is a type of Information Technology (“IT”) software which caters to the needs of a variety of users and is capable of being used for variety of hardwares;

 

(b)   ‘Shrink Wrap Software’ is a type of packaged software which consists of a box containing software or software upgrade on media (i.e. CD/DVD), users manual and end-user licence agreements, which is shrink wrapped in plastic cover and is always sold as a set (without removing the plastic cover);

 

(c)   IT software is fully exempt from basic customs duty being covered under Information Technology Agreement. So far as excise duty/ Countervailing Duty (“CVD”) is concerned, while customised software is fully exempt, the packaged software attracts duty at the rate of 8 per cent;

 

(d)   Normally, cost of a software supplied in a media consists of two cost components, namely-

 

                        i.    the cost of the actual software, i.e. set of information which is placed on a media; and

                       ii.    the cost of the Intellectual Property Right (“IPR”) relating thereto.

 

(e)   The IPR portion of the cost of software is covered under taxable service ‘IT Software Service’ (“ITSS”). As per the definition, a service provided in relation to IT software for use in the course, or furtherance of business or commerce was covered under this taxable service. In specifics, the taxable service include,-

 

                                       i.        providing the right to use information technology software for commercial exploitation including right to reproduce, distribute and sell information technology software and right to use software components for the creation of and inclusion in other information technology software products;

                                     ii.        providing the right to use information technology software supplied electronically and the term ‘service provider’ shall be construed accordingly.

 

(f)    Vide CBEC Notification no.22/2009-CE dated July 07, 2009, partial exemption from excise duty was provided to packaged or canned software on that portion of the value which represents the consideration for the transfer of the right to use for commercial exploitation, as on this portion, service tax would be leviable under the ITSS. Similar exemption from CVD was provided vide Notification No. 80/2009-Customs dated July 07, 2009 on such software. These exemptions were notified to ensure that while importing or manufacturing packaged software, the importer/manufacturer is spared from paying customs duty/excise duty on the value attributable to transfer of ‘right to use’.

 

(g)   The first proviso of the said notification states that the exemption would be limited to that much of value which is towards right to use such software for commercial exploitation including the right to reproduce, distribute and sell such software and the right to use software components for creation of and inclusion in other information technology software products. A view has been taken by departmental officers that the benefit of the notification is available only if all the activities, viz., right to reproduce, right to distribute, right to sell and right to use the software component for creation of and inclusion in other IT software products are fulfilled. Thus, a conjunctive meaning of the term ‘and’ has been taken and it has been held that since the importer did not fulfill all the conditions, they should be denied the benefit of the notification. The view taken by departmental officers is legally untenable because the phrase used in notification No.80/2009-Cus is inclusive in nature and it is a well-known principle that in an inclusive expression, the word ‘and’ is to be understood as ‘or’ and that even if one of the activities (such as right to reproduce, right to distribute, right to sell etc.) mentioned in the said inclusive portion is carried out, it would satisfy the condition of commercial exploitation, thus making the import eligible for notification No.80/2009-Customs.

 

(h)   In case fully packed product was imported by a company which produced split value (i.e., one value for media CVD and other for right to use software) in a single invoice shown separately, the jurisdictional authorities have refused to accept such split value for the purpose of claiming notification No.80/2009-Customs and taken the view that CVD should be charged on entire amount. The notification No.80/2009-Cus itself envisages splitting of the value of the imported goods into that pertaining to software on media and the one pertaining to right to use. In such cases, there is no rationale for the department to deny splitting of value unless there are reasons to believe that such a splitting has been done in order to evade payment of duty.

 

The assessment of the shrink wrapped packaged software may be done keeping in view the above directions.

 

Job Work- Valuation under Rule 10A of Central Excise Act

 

Some manufacturers of the motor vehicles were getting complete motor vehicles manufactured by sending the Chassis to independent body builders for building the body as per the design/specification. The Chassis is transferred to the body builders on payment of appropriate central excise duty on stock transfer basis and is not sold to them. The body builder then avails cenvat credit of the duty paid on the Chassis and clears the same on the payment of duty to the Depots/Sales office distributor of the motor vehicle manufacturer. The duty is discharged by the body builder on the assessable value comprising the value of Chassis and the job charges. The Depot/Sales office of the motor vehicles manufacturer sells the vehicles at a higher price than the price on which duty has been paid.

 

After the examination of the practice, Department clarified that Rule 10A (ii) of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 (“Valuation Rules”) stipulates that where the excisable goods are produced or manufactured by a job-worker, on behalf of a principal manufacturer, then in a case where the goods are not sold by the principal manufacturer at the time of removal of goods from the factory of the job-worker, but are transferred to some other place from where the said goods are to be sold after their clearance from the factory of job-worker, and where the principal manufacturer and buyer of the goods are not related and the price is the sole consideration for the sale, the value of the excisable goods shall be the normal transaction value of such goods sold from such other place at or about the same time.

 

 The assessable value for the purpose of charging Central Excise duty, in the cases where the Job-worker transfer the excisable goods to the Depot/Sale office/Distributer and/or any other sale point of the principal manufacturer, shall be the transaction value on which goods are sold by the principal manufacturer from such a place. Therefore, where goods are manufactured by a person on job work basis on behalf of a principal, then value for the purpose of payment of excise duty may be determined in terms of the provisions of Rule 10 A of the Valuation Rules subject to fulfillment of the requirements of the said rule.

 

Exemption to Mega Power Projects

 

GOI has exempted the ‘Goods required for the expansion of any existing Mega Power project’ from special additional custom duty in lieu of local taxes under Section 3(5) of Customs Tariff Act, education cess and higher secondary education cess. The standard rate of duty on the same is now brought down to 2.5 per cent.

 

The Mega power plant as per the said notification means a thermal power plant of a capacity of 700MW or more, located in the States of Jammu and Kashmir, Sikkim, Arunachal Pradesh, Assam, Meghalaya, Manipur, Mizoram, Nagaland and Tripura; or a thermal power plant of a capacity of 1000MW or more, located in States other than those specified hereiabove; or a hydel power plant of a capacity of 350MW or more, located in the States specified hereinabove; or a hydel power plant of a capacity of 500MW or more, located in States other than those specified hereinabove.

 

 The Goods required for setting up of any Mega Power Project is to be certified by an officer not below the rank of Joint Secretary to the GOI in the Ministry of Power. 

 

India Lowers Customs Duties under Trade Agreements

 

 GOI has slashed Customs duties on import from Singapore, Thailand, Malaysia, Korea and South Asian Free Trade Area countries with effective from January 1, 2010 to implement the Trade Agreements on various goods as mentioned in the respective custom notifications.

 

Case Laws

Larsen & Toubro limited v. Union of India

 

The petitioner was engaged in the business of fabrication and erection of structures of various types on contract basis. The petitioner entered into a contract with Bharat Petroleum Corporation Ltd. (“BPCL”) for fabrication, assembly and erection of waste water treatment plant.

 

The Department issued a notice to the petitioner alleging that waste water treatment plant came into existence in unassembled form as per the drawings and designs approved by the BPCL before the same was installed and assembled to the ground with civil work. Thus, the excise duty was payable on the value of the plant excluding the value of the civil work.

 

The petitioner submitted the procedure for erection and commissioning of the said plant before the Bombay HC which was not denied by the Department.

 

Petitioner contended that the plant when erected by embedding in the civil work becomes an immovable property and would not therefore attract any excise duty.

 

 Bombay HC observed that mere bringing of the duty paid parts in an unassembled form at the site does not amount to manufacture of a plant. Simply collecting together at a site, the various parts would not amount to manufacture unless an excisable movable product (say a plant) comes into existence by assembly of such parts. In the present case, as the petitioner has stated, the waste water treatment plant does not come into existence unless all the parts are put together and embedded in the civil work. Waste water treatment plant does not become a plant until the process which includes the civil work, is completed. Therefore, no commercial movable property came into existence until the assembling was completed by embedding different parts in the civil works. Hence no excise duty was payable on the Waste water treatment plant as no moveable goods are manufactured in such case.

 

M/s Lapp India Pvt. Ltd., Bangalore

 

The applicant has proposed some activities like (a) procuring from other manufacturers electrical cables in running length packed in large spools, (b) rewinding such cables and cut them into cables of standard length, as per requirements of the customers, (c) testing thereof to check whether the cable meets the standards / specifications, and (d) packaging thereof in small cartons/packages for delivery to customers.

 

The issue before AAR was whether the aforesaid activities amounts to manufacture in terms of clause (f) of section 2 of the Central Excise Act, 1944 (“Excise Act”) read with note 6 of Section XVI of the First Schedule to the Tariff Act (“Relevant Note”)?

 

In the context of clause (f) of Section 2, it is a well settled law that manufacture can said to have taken place only if the processing to which an item is subjected to results in the emergence of a different commodity having its distinct character, use and name and it should be commercially known as such. The question whether a particular process is a process of manufacture or not, has to be determined naturally having regard to the facts and circumstances of each case.

 

As may be observed Relevant Note read with definition of manufacture as given in clause (f) of Section 2 of Excise Act provided for a ‘deeming’ definition of “manufacture” for the purposes of levy of Central Excise duty. In other words Relevant Note is intended to cover such situations wherein the processing/transformation may not naturally amount to manufacture by bringing into existence a new product having a different character, name and usage. An essential requirement for applicability of Relevant Note that needs to be satisfied is that the article, which is sought to be “converted”, should be ‘incomplete or unfinished’. Length of the cable especially when the minimum unit is in hundreds of meters, therefore, is not a relevant criterion to render the cable as an incomplete or unfinished article. In this view of the matter the cables in running length obtained by the applicant for cutting cannot be identified as incomplete or unfinished articles. Therefore, the Relevant Note is not applicable.

 

Thus, AAR held that the processing that has been carried out on cables did not result into any change in the character, use or name of the item. Thus mere cutting or slitting (of paper, graphic art films, metallic sheets, coil etc.) does not amount to manufacture for the purpose of Section 2 (f) of the Excise Act.

 

Ernakulam District Rolling Shutter Fabricators Association and Others v. Commissioners, Department of commercial Taxes, Trivandrum and another

 

The petitioner was an association whose members were engaged in fabrication, supply and installation of rolling shutters. The issue involved in this case was whether the work involved, viz., fabrication and installation of rolling shutters for the customers, was works contract which entitled them for payment of tax at compounded rate under the works contract scheme.

 

 The Kerala High Court (“Kerala HC”) observed that the second proviso to section 8(a)(ii) of the Kerala Value Added Tax Act, 2003 (“KVAT Act”) makes an exception to the compounding provisions with regard to works contract involving transfer of materials in the form of goods. The effect of the second proviso is that Section 8(a) of the KVAT Act providing for compounding is not applicable to works contract involving transfer of materials in the form of goods. In the present case, since the contract providing for fabrication and installation of rolling shutter involves transfer of rolling shutter which was goods, dealers engage in such contracts are not entitled to pay tax under the compounding scheme under Section 8(a) of the KVAT Act. The rolling shutter was fabricated in the factory of the contractor and its installation was only a simple job of fixing it in the customer’s premises. The dimensions of the space where rolling shutter was to be installed were taken in advance and the rolling shutter was fabricated with the length and width required for the customer. The item supplied was in the form in which it was fabricated, i.e., as rolling shutter and the contract for installation which was only fixation thereof was only an incidental work, the cost of which was insignificant when compared to the value of the rolling shutter. Accordingly, the petition was dismissed.

 

Dish T.V. India Limited and Another v. State of Uttarakhand

 

In this case, a writ petition was filed by the petitioners challenging the levy of entertainment tax under the U.P Entertainments and Betting Tax Act, 1979 (applicable to the State of Uttarakhand) on DTH service provided by the petitioners mainly on two grounds (1) they were not cable operators, and (2) since, DTH service is covered under service tax which is a subject matter of tax by the Central Government, under entry 92C of List I of the Seventh Schedule to the Constitution, the State authorities have no power to levy tax on the same subject matter.

 

It was held that a harmonious construction needs to adopted in interpreting the field of legislation mentioned in entry 62 of List II pertaining to powers of State and entry 92C of List I pertaining to powers of Central Government, under the Constitution of India. Merely because a service tax is payable by certain broadcasting service operators, it cannot be said that no entertainment tax can be levied by the State. So, State legislature is competent to levy entertainment tax on DTH service.

 

According to Section 4C of the U.P. Entertainments and Betting tax Act, 1979 (applicable to the Sate of Uttarakhand) under which entertainment tax is payable by cable operators, read with the definition of “cable service” in Section 2(ee) makes it clear that DTH service which uses the technology of transmission of electromagnetic waves through beams, and not through cables, is not covered thereunder. The liability to pay tax must be unambiguous and the legislature must have in clear words specifically expressed its intention. No person, by inference can be said to be liable to pay tax in respect of which there is no liability imposed by the statute. However, the statute may be amended to make appropriate provisions.

 

 A perusal of the definition of expressions “admission to an entertainment” given in section 2(a) of the said Act and that of “cable service” and “cable television network” and the definitions of expressions “broadcasting” and “broadcasting agency and organization” given in the Finance Act,1994 (as amended), makes it clear that levy of entertainment tax on the DTH service for the entertainment provided by broadcasting agencies (without cable) to their subscribers, cannot be said to be leviable under Section 4C of the U.P. Entertainments and Betting tax Act, 1979, in its present form. Accordingly, the notices issued by State Government for recovery of entertainment tax from the petitioner, being without authority of law, were liable to be quashed.

 

CCE v. Cochin International Airport Ltd.

 

The issue in this case before the Kerala HC was whether the respondent is liable to pay service tax on user fee collected from every outgoing international passenger.

 

The taxpayer was owning and managing the airport at Cochin and answers the description of Airports Authority under the service tax provisions. The Kerala HC noted that no user fee is collected from any domestic passenger or any international passenger landing at the airport from a foreign destination. The amount was charged from every outgoing international passenger at the flat rate of INR 500. The amount collected was not for any service rendered because services rendered to passengers are almost similar in nature and there is no reason why domestic passengers and international passengers arriving from foreign destination are exonerated. The Kerala HC referred to the decision of the Board of the respondent company and noted that the purpose of collecting user fee was to augment revenue for the Airport and not towards consideration for any service rendered to the outgoing international passenger. Further, ground handling services in the Airport were rendered by Air India and the traffic and other operational matters were handled by the Airport Authority. For these specific services rendered by these agencies, service tax was collected and remitted by them. Even though Airport was also rendering services to the passengers like restaurants, air conditioning, facility for foreign exchange transactions etc., service tax can be demanded for such services only when Airport collects charge for any of the services rendered by them. The facts and circumstances of the case and the evidence clearly proved that since collection of user fee was not for any specific services rendered by the taxpayer, it cannot be said that the amount so collected was by way of service charge.

 

 Hence, it was held that no service tax is payable for the user fee collected by the respondent.

 

American Quality Assessors (I) P. Ltd. v. Asstt. Commr. (S.T.), Hyd.-II

 

 The appellant was operating as a licensed registrar under the office of American Quality Assessors (“AQA”), USA. In terms of the understanding between the appellant and the AQA, the appellant is to represent the AQA for the purpose of assigning clients in achievement of certification for various quality standards. It undertakes the activities in relation to technical inspection and certification. The appellant has carried out the audit of quality of various organizations. The activities rendered by the Appellant are a pre-requisite for any client in India to obtain ISO certification. It receives money directly from the customers seeking certification for the services rendered by it. AQA gets its due separately. However, the certification relates only to management system or management process. 

 

The issue to be decided was whether the activity carried out by the appellant would fall within the category of taxable service namely ‘Technical Inspection and Certification Agency’ in terms of Section 65(108) of the Finance Act, 1994.

 

Tax tribunal observed that the principles of ejusdem generis is clearly applicable in the interpretation of the word ‘process’ used in the definition of ‘Technical Inspection and Certification Service’. The word ‘process’ could relate only to physical and chemical processes. They cannot be transported to the province of management relating to human beings. The activities of the appellant in any way would not be covered under inspection or examination of goods, materials, immovable property.

 

 It was held that the activities carried out by the appellant for certification of quality management system practiced by clients would not come within the purview of ‘Technical Inspection and Certification Service’.

 

Intas Pharmaceuticals Limited v. Commissioner of Service Tax, Ahmedabad

 

The appellant were engaged in the manufacture of pharmaceutical products. They claimed they were not liable to pay service tax as a receiver of taxable service on technical testing and analysis service availed by them in view of the fact that the service was fully performed outside India.

 

 The issue involved in this case is whether service tax is payable by the recipient when the service is fully performed outside India.

 

Tax tribunal observed that in case of technical and testing analysis service, the reverse charge mechanism is applicable. The reverse charge mechanism basically shifts the burden of service tax to the receiver if service provider has no place of business in India. The lower authorities have stated that even if the services are performed wholly outside India, then also reverse charge mechanism is applicable. The tax tribunal disagreed with the interpretation of the lower authorities.

 

 It was held that if the services are fully or partly performed in India, service tax is applicable on full value. However, if the services are fully performed outside India, the provisions pertaining to import of services are not applicable. Accordingly, there was no liability to pay service tax in the present case.

 

Authors:

 

Atul Dua (e-mail: atul.dua@sethdua.com) is a Senior Partner and Manish Gaurav (e mail: manish.gaurav@sethdua.com) is an Associate, with Seth Dua & Associates, Solicitors & Advocate, India .

 

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