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Indirect Taxes

Professional Touch (Central Excise Valuation Rules)

Discuss, how 'value' is to be determined for purposes of Section 4 of the Central Excise Act, 1944 and the Central Excise Valuation Rules, 2000 in each of the following situations:

i) The assessee manufactures certain excisable goods, which are not sold but used for captive consumption in the manufacture and sale of other final excisable products.
The value shall be 110 per cent of the cost of production or manufacture as per Section 4(1)(b) read with Rule 8 of the CE Valuation Rules, 2000.

ii) Excisable goods manufactured and cleared as free samples.
Under Section 4(1)(b), the value will be the one on the day of clearance. If ex-factory price is not available, it will be the price in the nearest past or future.

iii) Assessee effects F.O.R. sales of excisable goods, where freight and insurance are charged on actual basis through debit notes. The assessee and buyer are not related and price is the sole consideration for the sale.
Under Section 4(1)(a), the value will be the price charged by manufacturer in the invoice. However, excise duty is to be paid on the amount of freight and insurance subsequently raised as per debit note.

iv) Sales of excisable goods are made ex-factory, where freight and insurance are charged on actual basis through invoice. The assessee and the buyer are not related and price is the sole consideration for the sale.
As the freight and insurance are separately shown in the invoice as required under Section12A of the CE Act, the price will be what is charged to each buyer. In this case, they are shown separately and, hence, not chargeable to duty.

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TDS on Service Tax on Rent Paid : The Dilemma resolved

The Central Board of Direct Taxes (CBDT) has clarified that taxpayers need not deduct tax at source on service tax component on rental income. The move is expected to reduce the tax liability of a large number of taxpayers. The CBDT clarification states that TDS would be required to be deducted from the amount of rent payable without including the service tax.

The CBDT had been receiving representations from the industry seeking to know if TDS provisions u/s 194-I were applicable on the gross rental amount payable (inclusive of service tax) or net rental amount payable (exclusive of service tax). The Circular clarifies that “Service tax paid by the tenant does not partake the nature of income of the landlord. The landlord only acts as the collecting agency for government for collection of service tax. Therefore, it has been decided that tax deduction at source (TDS) under section 194-I of the I-T Act would be required to be deducted only on the amount of rent paid / payable without including the service tax.”

Read it in details in Eure CAtalyst : May '08.

What is meant by 'Current Repairs' ?

In a recent textile mills case, the apex court ruled that the criterion for tax deductibility was not whether the expenditure was revenue or capital in nature, but whether the expenditure was for “current repairs”. For instance, the Madras High Court, in CIT vs Janakiram Mills Ltd (275 ITR 403), had ruled that the concepts of “current repairs”, “modernisation” and “expenditure laid out wholly and exclusively for business” should all be interpreted in changing modern contexts e allowed either as current repairs or revenue expenditure in computing business income of the textile mill. It was an exhaustive judgment based on, among other things, the report of the South India Textile Research Association (SITRA).

The Revenue took up the matter in appeal before the Supreme Court. The company argued that the whole textile mill should be considered a “plant” and ring frames were only one of the 25 machines which constituted one single process and, therefore, replacement of the frames had to be treated only as a replacement of old parts which had become derelict and not as replacement of a machine.

On appeal, the three appellate authorities, namely, the CIT (Appeals), the Appellate Tribunal and the High Court, held that the process of converting fiber to yarn was one continuous interlinked process and that the ring frames could not work independently and could work only as a part of the spinning unit with the result that the expenditure was deductible under Section 31(i). Reversing the Madras High Court decision, the Supreme Court (in 293 ITR 201) ruled that the manufacturing process in the textile mill was not one continuous integrated process. In cases involving the applicability of Section 31(i) of the Act, the test was not whether the expenditure was revenue or capital in nature, but whether the expenditure was “current repairs”.

The basic test was to find whether the expenditure was incurred to preserve and maintain an already existing asset. It should not bring a new asset into existence. There should be no enduring advantage. Deduction was admissible only for current repairs. The question whether the expenditure was revenue or capital in nature was not quite relevant. Even if the expenditure is revenue in nature, it may not fall in the connation of “current repairs”. All the authorities — the CIT (Appeals), the Tribunal and the High Court — had proceeded on the footing that since the expenditure was revenue, it constituted “current repairs”. This, said the Supreme Court, is an erroneous view. The court explained the concept of “current repairs” and decided the matter in favour of the Revenue.

What are the exemptions available to an exporter in respect of payment of Service Tax?

The service tax paid by the exporters on general insurance, technical testing/analysis and inspection and certification charges in respect of export of goods will be refunded vide notification no. 41/2007 dated 6th October, 2007. However certain conditions would have to be fulfilled to claim exemption namely:

(a)  The exemption by way of refund of service tax paid on specified services used for export of goods shall be provided only when the exporter has actually paid the service tax on the specified services.

(b)  Moreover no CENVAT credit of service tax paid on the specified services used for export of said goods has been taken under the CENVAT Credit Rules, 2004.

(c)  The said goods have been exported without availing drawback of service tax paid on the specified services under the Customs, Central Excise Duties and Service Tax Drawback Rules, 1995

No input credit on construction services used in immovable property

The Finance Ministry has taken a stand that service tax paid on construction services used in an immovable property cannot be adjusted against the service tax payable on the renting of such a property for commercial purposes.Renting of immovable property for commercial purposes was brought under the service tax net in Budget 2007-08.

Official sources said that the industry had approached the Finance Ministry seeking clarification on whether construction service or works contract service used for construction of an immovable property could be treated as input service for the output service of renting of an immovable property under the Cenvat Credit Rules 2004.

“We have taken the position that input credit cannot be taken. Construction service is an input service for the output service namely ‘immovable property’. Immovable property is neither subjected to service tax nor excise duty. Input credit of service tax can be taken only if the output is a ‘service’ liable to service tax or ‘goods’ liable to excise duty,” said a senior Finance Ministry official.

Meanwhile, the Finance Ministry has also clarified that a works contract service provider was not eligible to take credit of excise duty paid on goods involved in the execution of works contract. Currently, VAT/sales tax is payable on the transfer of property in goods involved in the execution of a works contract. Service tax on the works contract is levied on gross amount charged for the contract less the value of the transfer of property in goods involved in the execution of works contract.

Supreme Court Defines Manufacture.

Excise Duty is levied when the goods are manufactured or produced in India and is marketable and movable. The event for the levy of excise duty is manufacture or production of excisable goods. Also the manufacture of goods must result in new identity/ characteristics distinct from the inputs used in the manufacture.

The question whether plants and machinery assembled at site amounted to manufacture and therefore attracted excise duty arose in one appeal before the Supreme Court in the case, Commissioner of Central Excise vs. Cethar Vessels Ltd.
In the case, the firm erected a boiler by assembling various components and parts. The revenue authorities maintained that fabrication of such plants out of duty-paid, bought-out items amounted to manufacture of a new marketable commodity and therefore excise duty was payable.

Attention is invited to Section 37B Order No.53/2/98 dated 2.4.98 regarding the excisability of plant and machinery assembled at site. Where change of identity takes place in the course of construction or erection of a structure which is an immovable property, then there would be no manufacture of "goods" involved and no levy of excise duty.

The Appellate Tribunal accepted the stand of the appellants that these plants are basically systems comprising of various components and are thus in the nature of systems and are not machines as a whole. Accordingly, such systems as a whole cannot be considered to be excisable goods. The Supreme Court stated that the law on this point has been laid down by it in the Virdi Brothers case in 2006 and it should be followed.

Consumer of capital goods cannot get the excise heading changed to claim Modvat credit.

The Supreme Court observed last week that a consumer of capital goods could not get the excise heading changed to claim Modvat credit after the manufacturer and the excise authorities classified the goods in a different category for tariff.

The court, thus, dismissed the appeal of Sarvesh Refractories Ltd against the ruling of the Excise and Service Tax Appellate Tribunal. The firm bought 'loadall', a material handling equipment like a forklift truck or crane, from Escorts JCB Ltd. The cost included the excise duty.

The firm then claimed Modvat credit, which was rejected by the authorities. After several appeals, the Supreme Court held that tax authorities were right.

CA Tutions in Kolkata

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When service tax is not collected separately, whether the amount received should be treated as inclusive of service tax?

In the matter of Commissioner of C. Excise & Customs. Patna vs. Advantage Media Consultant, honorable tribunal (CESTAT) upheld the decision of commissioner (appeals) and dismissed the departmental appeal by observing that:
"Service tax is an indirect tax. As per this system of taxation, tax borne by the consumer of goods/services is collected by the assessee (manufacturer/service provider) and remitted to the Government. When the amount is collected for the provision of services, the total compensation received should be treated as inclusive of service tax due to be paid by the ultimate customer of the services unless service tax is also paid by the customer separately. So considered, when no tax is collected separately, the gross amount has to be adopted to quantify the tax liability treating it as value of taxable service plus service tax payable."

Vital amendments in service tax vide Finance Act 2008 :

1) The definition of ‘input service' has been amended to provide that ‘clearance of final products up to the place of removal' will alone be considered as input service. It has also substituted the words ‘from the place of removal', used earlier, by ‘up to the place of removal'.

2) The definition of ‘output service' has been amended to exclude the taxable service of goods transport agency (GTA) from its purview. Since GTA service is no longer an output service, a GTA service provider cannot utilise input CENVAT credit towards the service tax payable by him on such GTA services.

3) Another amendment about the duration of removal of capital goods to any place by the service provider for output services. Now, there is no time limit for return of such goods. Earlier, a limit of 180 days was stipulated.

Service Tax on Foreign Transactions :

Banks are expected to levy service tax on all foreign exchange transactions from Friday, even as there is lack of clarity on its applicability.According to the notification, all foreign exchange transactions done from May 16 will be subject to a service tax of 0.25 per cent on the gross amount of the currency exchanged.

Read the full story at: http://www.thehindubusinessline.com/2008/05/16/stories/2008051652340100.htm

Industry and Business Chambers under Service Tax net :

Industry and business chambers are liable to pay service tax.
The Central Board of Excise and Customs on Thursday clarified that the trade associations fall within the scope for “clubs and association services”. The board said that services provided by these associations are not of charitable, religious or political in nature. “They collect membership fees and other charges and work for the interest of trade and industries. Therefore, they do not have objectives that could be categorised as public service. Accordingly, they do not fall within the scope of the excluded categories,” it said.
Full Story at:
http://economictimes.indiatimes.com/News/Economy/Finance/Industry_business_chambers_come_under_service_tax_net/articleshow/3044703.cms

Is unutilized Modvat credit, advance payment of excise duty?

While allowing small benefits, the Tribunal rejected the plea of Maruti Udyog in all major issues. Regarding Modvat the Tribunal observed that, “it appears to us that Modvat credit is the notional amount which is allowed to be adjusted against the liability which is to be incurred by the assessee on the manufacture of the final products”. The Tribunal rejected the plea of the assessee that unutilized Modvat credit is nothing but advance payment of excise duty and therefore should not be allowed as deduction, as the Tribunal was of the view that advance payment without incurring the liability cannot be allowed as deduction.

The Tribunal was not prepared to accept that unutilized Modvat is advance payment. It understood the Modvat scheme with absolute clarity when it observed:

“Even otherwise, we are of the view that un-utilized modvat credit is not even payment of excise duty by way of any liability to pay such duty much less the advance payment. The liability to pay excise duty under the excise laws accrues only on the event of the manufacture of goods and not earlier as held by the Supreme Court in the case of Union of India Vs. Delhi Cloth & General Mills Ltd., AIR 1963 SC 791. As per the scheme of excise law discussed earlier, the assessee becomes entitled to set off the amount of modvat credit against the liability to pay excise duty which accrues on the date of manufacture. The amount of modvat credit is not refundable in any circumstance. Even assessee has no right to set off if ultimate goods manufactured is exempt from excise duty. In fact, in our opinion, the element of excise duty on the purchase of raw material is part of cost of raw material as also held by the Tribunal in the case of S.H. Kelkar & Co. 44 ITD 170 (Bom) and, therefore, cannot be considered as payment of excise duty. On the other hand, it is the vendor manufacturer who is entitled to deduction u/s 43-B in respect of excise duty charged by him from the customers like the assessee. Two persons cannot claim deduction u/s 43-B in respect of the same amount i.e. once by the manufacturer who manufactured the goods and again by the purchaser of raw material from such manufacturer on the basis of entries made in R.G. 23A. The entries in R.G./23A only entitles the assessee to set off the amount equal to the amount of excise duty forming part of cost of raw material. It assumes the character of payment only when it is adjusted against the liability on the manufacture of final product. Therefore, in our humble opinion, the assessee would be entitled to deduction in the year in which modvat credit is adjusted.”