BARODA BRANCH OF WIRC OF ICAI December 13, 2013

Service as an Activity Anirudh Sonpal

‘Service’[65B(44)] means any activity carried out by a person for another for consideration, and includes declared services, but does not include: (a) An activity which constitutes merely:  A transfer of title in goods or immovable property, by way of sale, gift or in any other manner,  Such transfer, delivery or supply of any goods which is deemed to be sale within the meaning of clause(29A) of Article 366 of the Constitution, or  A transaction in money or actionable claim

Declared Service – Section 66E (B) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion certificate by the competent authority. Explanation.- For the purposes of this clause,- (I) the expression "competent authority" means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:- Anirudh Sonpal

Declared Service – Section 66E A.architect registered with the Council of Architecture constituted under the Architects Act, 1972; or (20 of 1972.) B.chartered engineer registered with the Institution of Engineers (India); or C.licensed surveyor of the respective local body of the city or town or village or development or planning authority; (II) the expression "construction" includes additions, alterations, replacements or remodelling of any existing civil structure; Anirudh Sonpal

Declared Service – Section 66E (H) service portion in the execution of a works contract Anirudh Sonpal

Valuation Anirudh Sonpal  Section 67 of the Finance Act,1994  Service Tax (Determination of Value) Rules, 2006  Service Tax Rules,1994

Anirudh Sonpal Charged

Inclusions and Exclusion from the Value of Taxable Service Rules 5&6 Reimbursement of expenses will form part of taxable value Where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for the purpose of charging service tax on the said service. Anirudh Sonpal

Will be excluded if costs incurred by service provider as a Pure Agent – is a person who: (a)enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service; (b)neither intends to hold nor holds any title to the goods or services so procured or provided as pure agent of the recipient of service; (c)does not use such goods or services so procured; and (d)receives only the actual amount incurred to procure such goods or services. Inclusions and Exclusion from the Value of Taxable Service Rules 5&6 Anirudh Sonpal

Inclusions and Exclusion from the Value of Taxable Service Rules 5&6 Cost of Pure Agent excluded subject to; I. the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured; II.the recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service; III.the recipient of service is liable to make payment to the third party; IV.the recipient of service authorizes the service provider to make payment on his behalf; V.the recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party; Anirudh Sonpal

Inclusions and Exclusion from the Value of Taxable Service Rules 5&6 VI.the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service; VII.the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and VIII.the goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account. Anirudh Sonpal

Abatement Anirudh Sonpal

ABATEMENTS Anirudh Sonpal “12. Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly, except where entire consideration is received after issuance of completion certificate by the competent authority,- (i) CENVAT credit on inputs used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules,2004; (ii) The value of land is included in the amount charged from the service receiver.”. (a)for a residential unit satisfying both the following conditions, namely :- 25 (i)the carpet area of the unit is less than 2000 square feet; and (ii)the amount charged for the unit is less than rupees one crore; (b)for other than the (a) above.30 Amount charged includes FMV of goods and services supplied by recipient

ISSUES ▪ NOTIFICATION 12/2003 RESCINDED ▪ Composite Contracts – VAT vs Service Tax ▪ One time Maintenance Charges collected by Builders ▪ Sale of Developed Plots ▪ Abatement in case of Separate Agreement for Sale of Land and Construction Anirudh Sonpal

VALUATION - ISSUES Free Issue of Materials Anirudh Sonpal 2013 (32) S.T.R. 49 (Tri. - LB) BHAYANA BUILDERS (P) LTD. Versus COMMISSIONER OF SERVICE TAX, DELHI 16. In conclusion we answer the reference as follows : (a) The value of goods and materials supplied free of cost by a service recipient to the provider of the taxable construction service, being neither monetary or non-monetary consideration paid by or flowing from the service recipient, accruing to the benefit of service provider, would be outside the taxable value or the gross amount charged, within the meaning of the later expression in Section 67 of the Finance Act, 1994; and (b) Value of free supplies by service recipient do not comprise the gross amount charged under Notification No. 15/2004-S.T., including the Explanation thereto as introduced by Notification No. 4/2005-S.T.

2013 (31) S.T.R. 192 (Tri. - Del.) Member (J) and Manmohan Singh, Member (T) BHARTI AIRTEL LTD. Versus COMMISSIONER OF SERVICE TAX, NEW DELHI Anirudh Sonpal 8.6 Bare perusal of respective clauses of telecom policy prima facie throws light that service recipients of free telecom service provided by appellant were employees of the appellant, their relatives and Bharti Group companies who otherwise would have paid Service Tax for the telecom service availed had there been no exercise of option by them under the Policy of Appellant or availed such service from other telecom service providers. The value of charges indicated in the policy was found by the learned Adjudicating Authority as far below the market charges. The manner of providing free telecom service by appellant was made apparently shows that perquisite was given to the employees in the garb of free calls at reduced rate beyond certain call limit without payment of service tax and the appellant was enriched at the cost of Revenue. There was no nexus brought out to demonstrate that how the free calls were used by above persons and for what purpose. The telecom service provided had value in monetary terms under law being taxable under a taxing entry under Section 65(105) of the Act. But suppression of such value was made to serve mutual interest of service provider and service recipient. Free Services VALUATION - ISSUES

2013 (31) S.T.R. 192 (Tri. - Del.) Member (J) and Manmohan Singh, Member (T) BHARTI AIRTEL LTD. Versus COMMISSIONER OF SERVICE TAX, NEW DELHI Anirudh Sonpal Revenue was thereby prejudiced seriously. Had the service been proved to be used to provide taxable output service by the appellant Revenue would not have been prejudiced. But that was not the case of the appellant. Revenue neutrality was baseless plea. When there was no consideration disclosed by appellant the rule of valuation prescribed under Section 67 of the Act was invocable and value was rightly determined by ld. Adjudicating Authority in Para 38 of his order. Appellant is unable to avail benefit of the citation made for the reasons of no nexus with output service established by appellant.

2013 (31) S.T.R. 192 (Tri. - Del.) Member (J) and Manmohan Singh, Member (T) BHARTI AIRTEL LTD. Versus COMMISSIONER OF SERVICE TAX, NEW DELHI Anirudh Sonpal 8.7 Further reading of the policy throws light that the employees were encouraged to avail telecom service provided by the appellant granting an option to avail so at a lesser tariff rate, instead of switching over to avail such service provided by other telecom service providers. Varied choice and options granted by Appellant, prima facie, demonstrate that the value of calls provided to employees and relatives were less than the market value and unaccounted. Such service provided was at the cost of Revenue. Had the call charges been valued and as per market value and disclosed in the accounts, Revenue would not have been affected. But that was not done by the appellant.

2013 (29) S.T.R. 9 (Del.) INTERCONTINENTAL CONSULTANTS & TECHNOCRATS PVT. LTD. Versus UNION OF INDIA Anirudh Sonpal Service Tax (Determination of Value) Rules, Rule 5(1) - Expenditure/costs, such as travel, hotel stay, transportation, etc., incurred by service provider in course of providing taxable service - Stipulation that it has to be treated as consideration for taxable service and included in value for charging Service Tax - HELD : It purports to tax not what is due from service provider under charging Section 66 of Finance Act, It is ultra vires Section 67 ibid, which quantifies the charge of Service Tax, both before and after its amendment of In these Sections phrase ‘for such service’ is important - Such expenditure/costs cannot be considered as amount charged by Service provider ‘for such service’ provided by him - Power to make rules could not exceed or go beyond Section which provides for charge or collection of Service Tax - Apart from being ultra vires, Rule ibid may also result in double taxation, if VALUATION - ISSUES Reimbursement of Expenses

2013 (29) S.T.R. 9 (Del.) INTERCONTINENTAL CONSULTANTS & TECHNOCRATS PVT. LTD. Versus UNION OF INDIA Anirudh Sonpal expenses like air travel tickets, had already been subjected to Service Tax - Also, ‘consideration in money’ or ‘gross amount charged’ used in Section 67 ibid did not have widest sense of including such expenditure/costs; in their definition in Explanation to the section, these expenditure/costs have not been included - Even if Rule ibid is considered to have been made under Section 94 ibid, which provides for delegated legislation, it could only be for carrying out provisions of Chapter V of Finance Act, 1994 which provides for the levy, quantification and collection of the Service Tax - It was no answer to say that under Section 94(4) ibid, every rule framed by Central Government had to be laid before each House of Parliament, which have power to modify them.

2013 (29) S.T.R. 9 (Del.) INTERCONTINENTAL CONSULTANTS & TECHNOCRATS PVT. LTD. Versus UNION OF INDIA Anirudh Sonpal Valuation (Service Tax) - Scope of - Section 67(1) of Finance Act, 1994 is subject to provisions of Chapter V, which includes Section 66 ibid - This means value of taxable services has to be in consonance with Section 66 ibid which levies tax only on taxable service and nothing else - It is inbuilt mechanism to ensure that only taxable service shall be evaluated under Section 67 ibid, whereunder value of taxable service is gross amount charged by service provider ‘for such service’ - Harmonious reading of Sections 66 and 67(1)(i) ibid indicates that valuation of taxable service is only a consideration paid as quid pro quo for service can be brought to charge. [para 18]

2013 (29) S.T.R. 9 (Del.) INTERCONTINENTAL CONSULTANTS & TECHNOCRATS PVT. LTD. Versus UNION OF INDIA Anirudh Sonpal Valuation (Service Tax) - Consulting engineer - Expenditure/costs such as air travel, hotel stay, etc., incurred for service - They are not includible gross taxable value of service - Only value of service rendered as consulting engineer could be brought to charge - Sections 65(31), 66 and 67(1)(i) of Finance Act, [para 10]

Works Contract Anirudh Sonpal Works contract means : a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and

Valuation of Service portion in execution of Works Contract – Rule 2A such contract is for the purpose of carrying out:  construction,  erection,  commissioning,  installation,  completion,  fitting out,  repair,  maintenance,  renovation,  alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property Anirudh Sonpal

Valuation of Service portion in execution of Works Contract – Rule 2A Works Contract Composition Scheme rescinded Two Options – Valuation Rules  OPTION (1) Value of service portion in the execution of a works contract shall be equivalent to gross amount charged for works contract less value of transfer of property in goods involved in execution of said works contract and VAT/Sales Tax. In case VAT or Sales Tax is paid on actual value of transfer of property in goods involved in execution of works contract, then such value adopted for payment of VAT to be taken as value of transfer of property for determining the value of works contract service as referred above. Anirudh Sonpal

Valuation of Service portion in execution of Works Contract – Rule 2A  Value of works contract service shall include - (i) labour charges for execution of the works; (ii) amount paid to a sub-contractor for labour and services; (iii) charges for planning, designing and architect’s fees; (iv)charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract; Anirudh Sonpal

Valuation of Service portion in execution of Works Contract – Rule 2A  Value of works contract service shall include - (v) cost of consumables such as water, electricity, fuel used in the execution of the works contract; (vi) cost of establishment of the contractor relatable to supply of labour and services; (vii) other similar expenses relatable to supply of labour and services; and (viii)profit earned by the service provider relatable to supply of labour and services Anirudh Sonpal

Valuation of Service portion in execution of Works Contract – Rule 2A OPTION (2) If the value of service portion in the execution of a work contract has not been determined as above, then the person liable to pay service tax shall determine the service tax payable as under: Works ContractService tax payable on Execution of original works 40% of the total amount charged for the works contract Maintenance or repair or reconditioning or restoration or servicing of any goods 70% of the total amount charged for the works contract Works contract, not covered above, including maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property 60% of the total amount charged for the works contract

Valuation of Service portion in execution of Works Contract – Rule 2A “original works” means I.all new constructions; II.all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable; III.erection, commissioning or installation of plant, machinery or equipment Anirudh Sonpal

Valuation of Service portion in execution of Works Contract – Rule 2A “total amount” means the sum total of the gross amount charged for the works contract and the fair market value of all goods and services supplied in or in relation to the execution of the works contract, whether or not supplied under the same contract or any other contract, after deducting- I.the amount charged for such goods or services, if any; and II.the value added tax or sales tax, if any, levied thereon:  CENVAT credit of duties or cess paid on any inputs shall not be taken, which are used in or in relation to the said works contract. Anirudh Sonpal

Sr. No.ParticularsAmount in Rs. 1Gross amount received for Works Contract excl taxes1,00,00,000 2 Fair market value of goods supplied by the service provider excluding taxes 25,00,000 3Amount charged by service provider for 215,00,000 4Total amount charged (1+2-3)1,10,00,000 5Value of service portion (40% of 4 in case of original works) 44,00,000 As seen in the above example, the service provider has to discharge service tax liability on fair market value for the works contract. What is Fair Market Value? - Generally Accepted Accounting Principles Is there a standard/guidance by ICAI on determining Fair Market Value? Valuation of Service portion in execution of Works Contract – Rule 2A Anirudh Sonpal

Point of Taxation  Earlier of :  Invoice – 30 Days  Advance Received  Continuous Supply :  Continuously Provided – more than 3 months with periodically payment  Notified – Telecommunication and Works Contracts  POT – Completion of an event that requires payment Anirudh Sonpal

Reverse Charge Mechanism Anirudh Sonpal

Reverse Charge Mechanism  Section 68(2) of the Finance Act,1994 & Rule 2(1)(d) of the Service Tax Rules,1994  Applicability will depend on:  Nature and description of Service  Status of Service Provider  Status of Service Recipient Partial Reverse Charge – discharge of liability by both - Provider and Receiver- due precautions to be exercised by Receiver? Anirudh Sonpal

REVERSE CHARGE S.No.Description of a service % of service tax payable by the provider % of service tax payable by the receiver 9 Service portion in execution of works contract - non-corporate entity to corporate business entity (In works contract services, where both service provider and service recipient is the persons liable to pay tax, the service recipient has the option of choosing the valuation method as per choice, independent of valuation method adopted by the provider of service) “Business Entity” means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession ; 50% Anirudh Sonpal

Reverse Charge Mechanism – Some Issues  Where Service provider is not liable to Service tax, whether Service receiver is liable to discharge the tax obligation? If yes, whether full tax or part of tax is to be paid by him?  Where one of the parties do not discharge its obligation, whether full tax can be recovered from other party?  Whether service receiver liable even if provider has charged full tax in invoice and the receiver has paid the full tax which has been deposited by provider – Revenue Neutrality? Anirudh Sonpal

Reverse Charge Mechanism – Some Issues  Whether Service recipient can choose valuation method (especially in case of works contract service) different than that of Service provider?  Whether Service provider (discharging partial liability) entitled to claim cenvat credit?  Whether Service recipient can discharge Service tax liability under Reverse charge mechanism from accumulated Cenvat balance? Anirudh Sonpal

Reverse Charge Mechanism – Some Issues  Whether Service provider and Service recipient have to discharge their respective service tax liability on the same point of time?  Reverse Charge when Construction Abatement claimed  Whether Service recipient can avail threshold exemption in respect of services on which tax to be paid under Reverse Charge mechanism?  Whether Service recipient (who is not liable to Excise or Service tax) is obliged to:  Obtain Service tax registration  File the Service tax returns Anirudh Sonpal

Mega Exemption Anirudh Sonpal

Mega Exemption Anirudh Sonpal 12. Services provided to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of - (a) a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession; (b) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958); (c) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment;

Mega Exemption Anirudh Sonpal (d) canal, dam or other irrigation works; (e) pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal; or (f) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Act;

Mega Exemption Anirudh Sonpal 13.Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,- (a)a road, bridge, tunnel, or terminal for road transportation for use by general public; (b) a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana; (c)a building owned by an entity registered under section 12 AA of the Income tax Act, 1961(43 of 1961) and meant predominantly for religious use by general public; (d)a pollution control or effluent treatment plant, except located as a part of a factory; or a structure meant for funeral, burial or cremation of deceased;

Mega Exemption Anirudh Sonpal 14. Services by way of construction, erection, commissioning, or installation of original works pertaining to,- (a)an airport, port or railways, including monorail or metro; (b)a single residential unit otherwise than as a part of a residential complex; (c) low- cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;

Mega Exemption Anirudh Sonpal (d)post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or (e) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages;

Mega Exemption Anirudh Sonpal 25. Services provided to Government, a local authority or a governmental authority by way of – (a) carrying out any activity in relation to any function ordinarily entrusted to a municipality in relation to water supply, public health, sanitation conservancy, solid waste management or slum improvement and upgradation; or (b)repair or maintenance of a vessel; 29(h) Sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempt;

Mega Exemption Anirudh Sonpal “governmental authority’’ means a board, or an authority or any other body established with 90% or more participation by way of equity or control by Government and set up by an Act of the Parliament or a State Legislature to carry out any function entrusted to a municipality under article 243W of the Constitution; “residential complex” means any complex comprising of a building or buildings, having more than one single residential unit; “single residential unit” means a self-contained residential unit which is designed for use, wholly or principally, for residential purposes for one family;

Definition Anirudh Sonpal Local authority” means - A Panchayat as referred to in clause (d) of article 243 of the Constitution A Municipality as referred to in clause (e) of article 243P of the Constitution A Municipal Committee and a District Board, legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund A Cantonment Board as defined in section 3 of the Cantonments Act, 2006 A regional council or a district council constituted under the Sixth Schedule to the Constitution A development board constituted under article 371 of the Constitution, or A regional council constituted under article 371A of the Constitution.

ISSUES  Service Tax on Sub-Contractors  Whether option available for Valuation other than provided in Valuation Rules  Exemption to Services for Infrastructure Projects – in relation to water supply  Valuation below Cost – Fiat India Pvt. Ltd. – SC Valuation (Central Excise) - Selling goods below cost - Loss making price in wholesale trade - For penetration of market and competing with other manufacturers of similar goods - Not based on manufacturing cost and profit - Spread over five years - HELD : It was extra commercial consideration in fixing of price, and artificially depressed it - Full commercial cost of manufacturing and selling was not reflected in it - It was not ‘normal price Anirudh Sonpal

Cenvat Credit - Input Service “Input Service” means any service, - I.used by a provider of output service for providing an output service; or II.used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal, and includes services used in relation to modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, Anirudh Sonpal

accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal; but excludes services,- Service portion in the execution of a works contract and construction service including service listed under clause (b) of Section 66E of the Finance Act (hereinafter referred as specified service) in so far as they are used for - Anirudh Sonpal Cenvat Credit - Input Service

(a)construction or execution of work contract of a building or a civil structure or a part thereof; or (b)laying of foundation or making of structures for support of capital goods, except for the provision of one or more of the specified services; Anirudh Sonpal Cenvat Credit - Input Service

Issues wrt disclosure: 1.Reverse Charge 2.Gross Amount 3.Rate – Abatement Anirudh Sonpal Service Tax Return

PRESENTED BY : CA ANIRUDH SONPAL