Before the Customs, Excise and Service Tax Appellate Tribunal

Before the Customs, Excise and Service Tax Appellate Tribunal

1

K.S.RAVI SHANKAR

Ravi Shankar (47), practices as a lawyer at Bangalore and leads a chamber of nine lawyers. He had his education at St. Joseph’s IndianHigh School and St. Joseph’s College of Commerce, Bangalore. He is a Graduate in law, Master of Commerce, Fellow of the Institute of Chartered Accountants of India and Fellow of the Institute of Company Secretaries of India. After qualifying as a C.A during 1982-1983 he studied law in the chamber of a senior advocate for a couple of years and practiced as a C.A. for about sixteen years before enrolling at the Bar.

He lectured for over nine years at IIM-Bangalore and IIM Calicut and is associated with the NationalLawSchool, Bangalore as a visiting faculty. He has lectured at the Institutes of Chartered Accountants and Company Secretaries for more than nineteen years. He has also lectured to officers of Indian Revenue Service and Police Service on the subjects of taxation and white collar crime.

His practice domain is Central Excise, Customs, Service-tax, foreign exchange, foreign trade and immigration law. He has authored topical books on foreign exchange law, and is the author of the largest book on Central Excise Valuation which has run three editions. He has also authored a book on Central Excise Audit. He has represented several industrial giants in the public and private sectors, charitable, religious and educational institutions before Courts and Tribunals. Scores of cases argued by him have been reported in leading law journals.

He had the distinction during 2000-2001, of serving on the Mitra Committee on Bank Frauds constituted by the RBI, and in 2002 as member of the Kelkar Committee on Indirect Taxes constituted by the Govt. of India.

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Service tax -Construction, Infrastructure and Support services

K.S.Ravi Shankar, LL.B.,FCA, Advocate, Bangalore

A. Introduction:

This paper is a brief sketch of major aspects relating to the above subject and is not intended to be exhaustive. Readers may refer to the official text of the statute and the government notifications and circulars for authentic information. The discussion is tersely condensed topic-wise and no attempt is made to dwell on matters which require exhaustive discussion and debate.

B. Nature of service tax:

  1. Service tax is levied under the Finance Act, 1994, i.e. the Act for short.
  1. There is as yet, no separate enactment for service tax, but the levy is a part of Chapter VAA of the Finance Act, 1994. The Union Finance Minister in his speech during the Budget of 2006 stated in Parliament, that by April 2010, there would be a new tax law for Goods and Services, viz. GST.
  1. Initially the levy was at 5% on three services, but has been extended over a period of time to cover ninety six services and now stands at 12.24%. The tax is at 12% and education cess at 2% on tax.
  1. Service tax is sanctioned after 2003 by a Constitutional amendment to the seventh schedule- Entry 92C, and introduction of a new Article 268A.
  1. Service tax is on service provided or rendered and is not on sale or manufacture.
  1. Service tax levy is administered by the Central Excise and Customs department. In large cities separate commissionerates have been established for the purpose.
  1. Service tax is generally payable by the service provider, but the law also permits collection from the service receiver in certain cases, as for example services received from non-resident service providers, goods transport agents etc.
  1. The Central Excise Act, 1944 (to the extent mentioned in section 83 of the Act), Service tax Rules, 1994 and Cenvat Credit Rules, 2004 form an integral part of the law pertaining to this levy. Therefore judicial decisions under Central Excise law are highly relevant in interpretation of this Act.
  1. The Constitutional validity of service tax on different services has been challenged, but all courts including the apex court have upheld the same.
  1. Service tax is an indirect tax as per the Central Boards of Revenue Act, 1963. It is intended to be borne by and passed on to the ultimate end-user or consumer of services. It is not a tax on income, not a tax on sale, not on profit, but on services.

C. Service tax on infrastructure, construction and real estate sector:

  1. Earlier, interior decorators and real estate agency service were taxed from 16.10.1998. Some of the services enumerated in the real estate agency category overlap with specific services brought under tax from 10.9.2004. But the specific services latter mentioned would be taxable prospectively and not otherwise.
  1. Construction services include industrial and commercial construction services, and also construction of residential complexes. These are taxable from 10.9.2004 and 16.6.2005 and include a host of services. Finishing services relating to buildings also fall under this activity. Survey and mapping services apart from mineral, oil and gas exploration services are taxable from 10.9.2004.
  1. Site formation services are separately taxed from 16.6.2005 which includes earth moving, excavation, clearance and demolition activity.
  1. Engineering consultancy services are under tax net from 7.7.1997 and services of architects are taxable from 16.10.1998. Technical inspection and certification and technical testing and analysis services are taxable from 1.7.03.
  1. Certain types of construction activity e.g. roads, culverts, bridges, tunnels, etc., are excluded from the purview of service tax.
  1. Erection, installation, commissioning services of plant, machinery, equipment, including lifts, elevators, escalators, electronic devices, fittings, plumbing, drain laying, fluid transport systems, heating, ventilation, air-conditioning, pipe work and ducting work, water proofing, sheet metal working, thermal insulation, sound insulation, fire-proofing, fire-escape staircases and allied or similar services fall under service tax. Initially it was restricted to installation and commissioning of equipment, but has been enlarged considerably after 10.9.04.
  1. Business support services, business auxiliary services as enumerated in the Act have been made taxable. The first category from 18.4.2005 and the second from 2003 in amended versions.
  1. Internet telephony, on-line information and data base access and retrieval services are taxable, apart from internet access and leased circuit services.
  1. Airport services provided by Airport Authority or a person authorized by them in an airport or civil enclave are taxable from 10.9.2004.
  1. Cargo handling services in relation to movement of goods, other than export cargo and passenger baggage are taxable from 10.9.04. Goods transport booking agents services are taxable from that date as well. Service of air transport of goods is taxable from 10.9.2004. Customs HouseAgency services are taxable from 15.6.97 and dredging services from 16.6.05. Steamer agent’s services provided to a shipping line are taxable from 15.6.1997.
  1. Storage and warehousing services except storage of agricultural produce and cold storage services are taxable from 16.8.2002.
  1. Port services are taxable, and so are security service agency services.
  1. Manpower recruitment and manpower supply services are also taxable. Market research is taxable.
  1. Letting of immovable property for official, social and business functions is made taxable under the head of Mandap keeper services.
  1. Packaging services, which does not amount to manufacture under central excise law is made taxable from 16.6.05. What is known as deemed manufacture is under central excise law, and hence outside the scope of this service.

D. Works contract tax,Service tax and Cenvat:

  1. Both the above levies are currently in force, but there have been controversies still raging, and the Honorable Supreme Court decided a case titled BSNL v. UOI, 2006 (2) STR 161 (SC), where the Court held that the decision in State of Madras v. Ganon Dunkerly & Co, [1958] 9 STC 353 (SC) would still hold good in those cases, where the 46th amendment to the Constitution has not expressly enlarged the definition of sale in Article 366.
  1. For the purpose of reckoning the value of taxable services, the value of goods sold or transferred while rendering services can be excluded from the gross amount charged.
  1. Only the gross amount charged for rendering services would be liable for tax under service tax law and nothing more, i.e. the value of goods sold, or deemed to be sold / consumed in the course of service should not be taxed.
  1. Works contract tax is a state subject and service-tax a Union / Central subject. One has no jurisdiction to levy a tax on an activity, which the other can subject to the levy, vide BSNL decision supra.
  1. The segment relating to “sale” of goods which is reckoned for works contract purposes under state law, can be employed as the yardstick to measure the value of goods sold for reckoning the service element, where there is a composite contract.
  1. The Service Tax Valuation Rules, 2006 have been framed under the Act, but these rules cannot override the charging section 66 or the valuation section 67 of the Act (Finance Act, 1994).
  1. Cenvat credit representing duty of excise and CVD paid on the inputs and capital goods used for rendering a service is available for set off against service tax liability, apart from service tax paid on input services used to render a given service. However the benefit of certain notifications is not available in such cases.
  1. A person who renders multiple services can have a single registration certificate endorsing all the services therein.
  1. A multi-unit company with centralized accounting system/ billing system can have a composite registration certificate.
  1. A person can have a single contract for rendering construction, development and other services, and the consideration for each service may be bifurcated and enumerated in the contract. It is also possible for a person to have different contracts for different services, sale of goods, work unconnected with service tax and pay service tax on the pure service element discernible from the contract.
  1. The substance of the contract would prevail over the form of the contract.
  1. Nomenclature given to a transaction is not determinative of the nature of a transaction. In other words, one would have to give due regard to the intent of parties, the conduct of parties and the nature of activity encompassed in a given contract carried out.

E. Cases decided by the SupremeCourt relevant to the subject:

  1. State of Madras v. Gannon Dunkerly & Co Ltd, [1958] 9 STC 353 (SC) wherein the Honorable Supreme Court held that the classical concept of “sale” would apply to the entry in Entry 48 of List II of 7th Schedule. A contract under which a contractor agreed to set up a building would not be a contract for sale and the said contract was ‘entire and indivisible’ and there was no separate agreement for sale of goods justifying the levy of sales tax by the State legislatures. Further it was observed that the expression “sale of goods” in Entry 48 is a nomen juris its essential ingredients being an agreement to sell movables for a price and property passing therein pursuant to that agreement. In a building contract which is one, entire and indivisible, there is no sale of goods and it is not within the competence of the State legislature to impose a tax on the supply of the materials used in such a contract treating it as a sale.

Note:It may be appreciated that the above decision of the Supreme Court among other things, ultimately led to 46th Amendment amending the definition of the expression “tax on the sale or purchase of goods” in Article 366(29A) of the Constitution. This amendment was in accordance with the Finance Commission’s recommendations.

  1. In Builders Association of India v. State of Karnataka, [1989] 73 STC 370 (SC), the Honorable Supreme Court held that the enlargement of the definition of “sale” in Article 366(29A) of the Constitution to include “tax on transfer of property in goods involved in the execution of works contract” is to enable the State Governments to tax transfer of property in the goods involved in the execution of a works contract. It does not enable the States to tax the entire works contract itself.
  1. Gannon Dunkerley & Co v. State of Rajasthan, [1993] 88 STC 204 (SC) and Builders Association of India v. State of Karnataka, [1993] 88 STC 248 (SC), (the second Builders Assn. case) the Honorable Supreme Court held that even after the amendment to Article 366 (29A) of the Constitution by 46th Amendment, the power of the State Governments to impose tax on sale of deemed sales as in Article 366(29A)(a) to (f) is subject to other Articles in the Constitution such as Article 286, etc and restrictions under CST Act, 1956 would still be applicable. As regards ‘measure’ for the levy of works contract tax as contemplated by Article 366(29A)(b), the same is restricted to the value of goods involved in the execution of a works contract. The measure for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in the works and not the cost of acquisition of the goods by the contractor. The value of the goods involved in the execution of a works contract will have to be determined by taking into account the value of the entire works contract and deducting there from the charges towards labour and services.
  1. K.Raheja Development Corporation v. State of Karnataka, 2006 (3) STR 337 (SC)- This decision of the Honorable Apex Court rendered in the context of ‘works contract’ in Karnataka Sales Tax Act, 1957 is extremely important and in para-18 of the decision, the Court held thus:

“..It must be clarified that if the agreement is entered into after the flat or unit is already constructed, then there would be no works contract. But so long as the agreement is entered into before the construction is complete it would be a works contract.”

Note:The above observation of the Honorable Court is of considerable significance in the context of Service Tax whereby in order to attract levy of service tax there must be relationship of “service provider” and “service receiver” which is quintessential. In a case where the “service provider” has constructed a commercial / industrial or residential complex without there being any customer/client and in a case where after the construction is completed, a person enters into contract for sale of apartment/flat/immovable property, then there can be no question of service tax being attracted applying the above ratio. In the above situation, the transaction would be that of immovable property and not for rendering or providing of any taxable service.

  1. Bharat Sanchar Nigam Ltd. v. UOI, 2006 (2) STR 161 (SC), wherein the Honorable Supreme Court held that out of six deemed sales in Article 366 (29A) as amended by the 46th Amendment, only works contract and catering contract involved a kind of service and sale at the same time. These are the only two deemed sales situations which are constitutionally amenable to splitting of the service and supply of goods. Further, it was held that the ‘aspect theory’ can be applied to a contract of service and sale and 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. However, ‘aspect theory’ cannot be applied to enable the value of the services to be included in the sale of goods or the price of goods in the value of service.

Note: Though the above decision was rendered in the context of ‘tax on transfer of right to use goods’ vis-à-vis service tax in the case of providing telephone connection, wherein the Court held that ‘goods’ do not include electromagnetic waves or radio frequencies and there was no ‘transfer of right to use’ in providing telephone connection since there was no ‘goods’ in a deliverable condition, the decision is important insofar as it relates to valuation of goods and/or taxable service applying the ‘aspect theory’.

Important notifications and circular references and gist:

  1. Notification No.1/2006-ST dated 1.3.2006 [Sl.Nos.7 & 10]: This is a notification granting exemption from the service tax payable, in relation to construction services in section 65(105)(zzq) and section 65(105)(zzzh) of the Act, on a value in excess of 33% of the gross amount charged. This notification is subject to the condition that the service provider opting to this notification is not entitled for Cenvat credit of duty paid on inputs or capital goods or the Cenvat Credit of service tax on input services used for providing the service.
  1. Notification No.12/2003-ST dated 20.6.2003: This is a general notification applicable to all taxable services under the Act. This notification grants exemption equal to the value of goods and materials sold by the service provider to the recipient of service. This notification is subject to the condition that there is documentary proof indicating the value of the goods and materials. There is also further condition that no Cenvat credit benefit should have been availed on goods and materials which were sold and in respect of which the exemption is claimed by the service provider.
  1. MF (DR) Letter F.No.332/35/2006-TRU dated 1.8.2006: The Ministry of Finance has clarified legal position in respect of certain issues relating to levy of service tax on “construction of complex” and “construction of commercial or industrial construction”. It is clarified that in a case where the builder, promoter or developer builds a residential complex by engaging a contractor for construction of residential complex, the contractor is liable to pay service tax on services provided to the builder/promoter/developer. However, if the builder/promoter/developer himself undertakes construction work on his own without engaging any contractor, then there would be no service tax leviable.
  1. DGST Letter F.No.V/DGST/22/Audit/Misc./1/2004 dated 16.2.2006: The DGST has clarified that estate builders would be liable for payment of service tax apart from hired contractor, they being independent service providers. The decision of the Apex Court in K.Raheja Development Corporation was relied on. This clarification is at variance to the clarification dated .8.2006 supra of the Ministry of Finance.

PS: The writer acknowledges the valuable assistance rendered by Mr. N.Anand, LL.B.FCA, Advocate,Bangalorein preparing this paper.