Decisions in Coca Cola and ABB clears

mist over definition of ‘input service’

Definition of ‘input service’ is very wide. Any service in relation to business is input

service. Any relation to ‘manufacture’ or ‘provision of service’ is really of required.

However, department was taking a restricted view and even n case of many

decisions of Tribunal, restricted view was taken.

Recent decisions of division bench of Mumbai high Court in case of Coca Cola and of 3 member large bench of Tribunal in case of ABB has cleared the mist and has brought out true interpretation of the term ‘input service’.

In Coca Cola India v. CCE (2009) 22 STT 130 (Bom HC DB) and ABB Ltd. v. CCE (2009) 21 STT 77 = 15 STR 23 (CESTAT 3 member bench), various aspects of definition of ‘input service’ have been clarified’.

1 Definition of input service

Rule 2(l) of Cenvat Credit Rules reads as follows –

“Input service” means any service –

1. used by a provider of taxable service for providing an output service; or

2. used by the 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;

(The words ‘from the place of removal’ have been replaced by ‘, upto the place of

removal’ w.e.f. 1-4-2008).

and includes services used in relation to setting up, modernization, 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, activities relating to business, such as accounting, auditing, financing,

recruitment and quality control, coaching and training, computer networking, credit rating, share

registry and security, inward transportation of inputs or capital goods and outward transportation

upto the place of removal.

1-1 Analysis of the definition

The definition of ‘input service’ is broadly in two parts – first i.e. main part and second i.e.

inclusive part. First part of the definition is restrictive in scope as it covers input services directly

or indirectly used for providing output service or used in relation to manufacture or clearance of

final product. However, second i.e. inclusive part of the definition expands the scope much

beyond the coverage of first part.

The inclusive part itself is of two sub-parts. The first sub-part gives some illustrations of input

services while second part covers all services used in relation to ‘activities relating to business,

such as - -‘. Some illustrations are given in second sub-part of the definition, but these are

preceded by the term ‘such as’. It means these are only illustrations. Any service in relation to

business would be ‘input service’.

Meaning of ‘includes’ and ‘in relation to’ - It is well settled that inclusive part expands the

scope of main definition. The inclusive part can cover items which are not getting covered in main

part of definition. It is also well settled that ‘in relation to’ widens the scope of definition. It is not

restrictive [The case law is well settled and I am not burdening this article with that case law].

Any service in relation to business is input service - Thus, input services which have only

remote or no nexus with output services or manufacture of goods will get covered so long as

these are related to activities of business. This is also clear from the fact that service tax paid at

Head Office and branches/depots can be utilised as Cenvat credit through the mechanism of

‘input service distributor’.

2. Decision of Bombay HC in case of Coca Cola and large

bench of Tribunal in case of ABB

Definition of ‘input service’ is very wide. Any service in relation to business is input service. Any relation to ‘manufacture’ or ‘provision of service’ is really of required. However, department was taking a restricted view and even n case of many decisions of Tribunal, restricted view was taken.

Recent decisions of division bench of Mumbai high Court in case of Coca Cola  and of 3 member large bench of Tribunal in case of ABB has cleared the mist and has brought out true interpretation of the term ‘input service’.

In Coca Cola India v. CCE (2009) 22 STT 130 (Bom HC DB) and ABB Ltd. v. CCE (2009) 21 STT 77 = 15 STR 23 (CESTAT 3 member bench), various aspects of definition of ‘input service’ have been clarified’. These are summarised below.

Just when we thought the issue relating to ‘input service’ has been settled, Karnataka High Court has granted stay against operation of CESTAT large bench decision in case of ABB on 10-12-2009 (244 ELT A91). In India Cement Ltd. v. CCE (2010) 249 ELT 530 (CESTAT), the bench did not agree with decision in case of ABB and the matter regarding Cenvat credit of service tax on outward freight was adjourned awaiting decision of Karnataka High Court on stay petition filed by department.

Luckily, decision of Bombay High Court is also on same lines as that of ABB decision and that decision continues to be valid.

There is no doubt that soon the issue is going to land in Supreme Court.

Inclusive part expands scope of definition – The word ‘includes’ is generally used to enlarge the meaning of the preceding words and it is by way of extension, and not restriction [para 23 of decision of Bombay High Court and para 16 of decision of Tribunal in ABB]

Five parts of definition of ‘input service’ are independent of each other - The definition of ‘input service’ can be conveniently divided into following five categories, so far as the manufacturers are concerned -

(a) Any service used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products.

(b) Any service used by the manufacturer, whether directly or indirectly, in or in relation to clearance of final products, from the place of removal (now it is ‘upto the place of removal’ but that does not change the conclusion of decisions of Bombay HC and Tribunal).

(c) Services used in relation to setting up, modernization, renovation or repairs of a factory, or an office relating to such factory (or premises in case of service provider).

(d) Services used in relation to advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs.

(e) Services used in relation to activities relating to business and outward transportation upto the place of removal.

Both Bombay High Court (in case of Coca Cola) and Large bench of Tribunal (in ABB) have held that each of the limb of above definition is an independent benefit/concession. If an assessee can satisfy anyone of above, the credit of input service would be admissible even if the assessee does not satisfy the other limbs

[Note - In case of service provider, clauses (a) and (b) above change but there is no change in clauses (c), (d) and (e) above and in any case, the basic principle is same].

Any activity relating to business is ‘input service’ - There is no qualification to the word ‘activities’. There is no restriction that activities relating to business should be relating to only main activities or essential activities or essential activities [para 27 of Coca cola and para 13 ABB decision]. All activity relating to business fall within the definition of ‘input service’.

Meaning of ‘such as’ - The expression ‘such as’ is purely illustrative. ‘Such as’ means ‘for example’ or ‘of a kind that’ (Concise Oxford Dictionary). ‘for example’ (Chambers Dictionary) [para 14 of the decision in ABB and para 24 of decision in Coca Cola]

‘Valuation’ and ‘Cenvat Credit’ are independent of each other – Hon. Tribunal held that the two issues namely valuation and Cenvat credit are independent of each other and have no relevance to each other. The submission of revenue that Cenvat credit cannot be allowed for services if value thereof does not form part of value subjected to excise duty is clearly against the fundamental concept laid down by Supreme Court in All India Federation of Tax Practitioners and the OECD guidelines [para 21 of decision of Tribunal in case of ABB].

There is additional reason for holding that Cenvat credit is admissible on services even if the value thereof is not part of value subjected to duty. This is because the interpretation of the expression ‘input services’ cannot fluctuate with the change in definition of value in section 4 of Central Excise Act and cannot vary depending on whether goods are levied to duty under section 4A of Central Excise Act or tariff value under section 3(2) of Central Excise Act or the product attracts specific rate of duty [para 22 of decision of Tribunal in case of ABB].

If cost included in assessable value, Cenvat credit is available - It was observed by Hon. Tribunal that ‘question of denial of Cenvat credit does not arise if cost of (outward) freight is included in the transaction value’.

Thus, if a cost is included in assessable value, its Cenvat credit will be certainly eligible. However, even if it is not included, it will still be eligible if it is in relation to business of assessee.

Definition of input service’ is not confined to ‘manufacture’ but has to be interpreted on basis of requirements of business - The definition of ‘input service’ has to be interpreted in the light of the requirements of business and cannot be read restrictively so as to confine only upto the factory or only upto depot of manufacturers [para

Outward freight eligible for Cenvat credit – Tribunal, in case of ABB concluded that outward freight is ‘input service’ even if its cost is not included in assessable value of goods [In my view, if outward freight is not included in assessable value, assessee should be very careful while taking Cenvat credit since dispute regarding assessable value may arise].

However, the decision of three member bench of Tribunal goes much beyond the issue of ‘outward freight’ and in effect, it has been held that any service in relation to business of assessee is its input service.

3 Other Tribunal decisions taking liberal view of ‘input service’

Any service whose cost included in assessable value eligible for Cenvat

credit - In CCE v. GTC Industries (2008) 17 STT 63 = 2008 TIOL 1634 (CESTAT 3

member bench), it has been held that, in principle, credit of service tax paid on those

taxable services would be allowed that go to form a part of the assessable value on

which excise is charged [Really, as stated in case of ABB Ltd., valuation and Cenvat

credit are independent issues. However, in ABB’s case, it was observed that ‘question

of denial of Cenvat credit does not arise if cost of (outward) freight is included in the

transaction value’. Thus, if a cost is included in assessable value, its Cenvat credit

will be certainly eligible].

Outward freight eligible even if its cost is not included in assessable value - Outward freight is ‘input service’ even if its cost is not included in assessable value of goods.- ABB Ltd. v. CCE (2009) 21 STT 77 = 15 STR 23 (CESTAT 3 member bench) – followed in  CCE v. Vasavadatta Cement (2009) 23 STT 284 (CESTAT) [However, in my view, if outward freight is not included in assessable value, assessee should be very careful while taking Cenvat credit since dispute regarding assessable value may arise] [In India Cements Ltd. v. CCE (2007) 10 STT 271 = 216 ELT 81 = 8 STR 43 (CESTAT), the issue relating to service tax on outward freight was referred to a large bench].

One doubt is whether decision of large bench of Tribunal will apply after 1-4-2008, when the words ‘from the place of removal’ in the definition of ‘input service’ were replaced by ‘upto the place of removal’. Really, the decision of Tribunal in case of ABB Ltd. is entirely based on basic analysis of definition of ‘input service’. The words ‘from the place of removal’ or ‘upto the place of removal’ have not even been considered while deciding issue relating to eligibility of Cenvat credit on outward freight. Hence, in my view, there is no change in legal position after 1-4-2008 and Cenvat credit on outward freight continues to be eligible.

However, in India Cement Ltd. v. CCE (2010) 249 ELT 530 (CESTAT), the bench did not agree with decision in case of ABB and the matter regarding Cenvat credit of service tax on outward freight was adjourned awaiting decision of Karnataka High Court on stay petition filed by department.

Outward freight eligible – Outward freight eligible for Cenvat credit -  Triveni Engg v. CST (2010) 24 STT 43 (CESTAT) * Southern Auto Castings v. CCE (2010) 24 STT 108 (CESTAT SMB) * Bharat Alloys v. CCE (2010) 24 STT 113 (CESTAT) (No specific mention in order whether or not it was included in assessable value) .

Outward freight eligible if its cost included in assessable value - In Ambuja Cements v. UOI (2009) 20 STT 182 = 236 ELT 431 (P&H HC DB), it has been held that if freight charges form part of assessable value, price is FOR destination, if ownership of goods remains with seller till delivery at customer’s doorstep, transit insurance is borne by assessee and property in goods is not transferred till delivery at doorsteps of customer, outward transportation is ‘input service’ and is eligible for Cenvat credit reversing decision in Gujarat Ambuja Cement Ltd. v. CCE (2007) 8 STT 122 = 212 ELT 410 = 6 STR 249 (CESTAT), where it was held that outward freight is not an input service. Service tax paid on the cost of transportation from the factory/depots to the buyers' premises, would not be available as credit].

In PSG & Sons v. CCE (2008) 17 STT 445 (CESTAT SMB), it was held that when ownership and property in goods remained with seller till delivery of goods to purchaser at his doorsteps, assessee can take credit of service tax paid on freight for transportation to such place of delivery – relying on CBE&C circular No. 97/8/2007 dated 23-8-2007.

In Vardhman Special Steels v. CCE (2007) 8 STR 374 = 223 ELT 220 (CESTAT), it was held that if outward freight is included in assessable value, service tax paid on outward freight would be available as credit – same view in Hindustan Coca Cola Beverages v. CCE (2009) 22 STT 504 (CESTAT) * CCE v. Modern Laminators (2009) 23 STT 49 (CESTAT) * CCE v. Endurance Systems (2009) 23 STT 422 (CESTAT SMB).

In Datafield India v. CCE (2008) 17 STT 295 (CESTAT SMB), assessee had uniform CIF price all over India. The ownership of goods was transferred to buyer only at buyer’s premises. It was held that if excisable goods after removal from factory remain property of manufacturer and are transported on own risk upto premises of buyer, outward freight is ‘input service’ and is eligible for Cenvat credit (In other words, customer’s place is the ‘place of removal’ in such case).

In Maihar Cement Unit No. 1 v.  CCE (2007) 8 STR 391 (CESTAT), freight was paid for transport of final products from manufacturing factory to godown of C&F Agent, from where goods were sold. Removal was for ‘self’. It was held that Cenvat credit is available of service tax paid on such freight.

Outward freight upto place of consignment agent - Place of consignment agent is ‘place of

removal’ and hence service tax paid on GTA service availed upto place of consignment agent will

be eligible for Cenvat credit – CCE v. Rajhans Metals (2009) 19 STT 246 (CESTAT SMB).

Air travel by executives – Air ticket service charges for company officers is eligible for Cenvat credit - CCE v. Fine Care Biosystems (2009) 244 ELT 372 (CESTAT SMB).

Overhaul of DG set – Overhaul of DG set is input service – Sanghi Industries v. CCE (2009) 236 ELT 617 (CESTAT SMB).

Input service not related to output service - In CCE v. Shariff Motors (2009) 22 STT 419 (CESTAT), assessee was dealer in two wheelers and also was providing service to old vehicles as authorised service station. He paid service tax on GTA service in respect of inward transport of new vehicles. He availed Cenvat credit on the GTA service. The credit was utilised for payment of

service tax on servicing of vehicles which included even old vehicles. It was held that definition of input service is wide enough to cover input service availed by assessee.

Insurance charges – Insurance charges are eligible for Cenvat credit – CCE v. CCL Products (2009) 22 STT 36 (CESTAT). Insurance of plant and machinery is eligible for Cenvat credit - Finolex Cables v. CCE (2009) 22 STT 87 (CESTAT SMB). Transit insurance is eligible as input service - CCE v. Raipur Rotocast (2010) 24 STT 58 (CESTAT SMB).

Group insurance health policy – Service tax paid on group insurance health policy of workmen/employees is eligible for Cenvat credit - Stanzen Toyotetsu India v. CCE (2009) 21 STT 321 (CESTAT) * CCE v. Endurance Systems (2009) 237 ELT 204 (CESTAT SMB) * Stanzen Toyotetsu India v. CCE (2009) 23 STT 40 (CESTAT) * HEG Ltd. v. CCE (2009) 23 STT 157 (CESTAT SMB) * CCE v. Raipur Rotocast (2010) 24 STT 58 (CESTAT SMB).

Banking charges – Banking service is ‘input service’ – prima facie view in Rohit Surfactants v. CCE (2009) 240 ELT 472 (CESTAT SMB).

Outward freight upto place of consignment agent - Place of consignment agent is ‘place of removal’ and hence service tax paid on GTA service availed upto place of consignment agent will be eligible for Cenvat credit – CCE v. Rajhans Metals (2009) 19 STT 246 (CESTAT SMB).

Canteen, subsidized foods, personal insurance eligible - In Millipore India v. CCE (2009) 22 STT 536 = 236 ELT 145 (CESTAT SMB), it was held that expenses like medical benefit, subsidized food, canteen bill etc. which form part of cost of final product as per CAS-4 will be eligible as input service. Medical and personal accident insurance, catering bills, personal accident policy is ‘input service’. Landscaping of factory garden is also ‘input service’, as definition of input service is very wide.

Outdoor catering/canteen service – Catering service is input service and is eligible – CCE v. GTC Industries (2008) 17 STT 63 = 12 STR 468 = 89 RLT 197 = 2008 TIOL 1634 (CESTAT 3 member bench) – followed in Finolex Cables v. CCE (2009) 22 STT 87 (CESTAT SMB) * CCE v. Haldyn Glass Gujarat (2009) 240 ELT 729 (CESTAT SMB) * Thiru Arooran Sugars v. CCE (2009) 23 STT (CESTAT) 18 (CESTAT SMB) * CCE v. Relpol Plastic (2009) 23 STT 32 (CESTAT) * Kirloskar Oil Engines v. CCE (2009) 23 STT 39 (CESTAT) * Cummins Generator Technologies v. CCE (2009) 23 STT 42 (CESTAT) * GKN Sinter Metals v. CCE (2009) 23 STT 71 (CESTAT SMB) * Hindustan Coca-Cola Beverages v. CCE (2009) 23 STT 460 (CESTAT SMB) * Ferromatik Milacron v. CCE (2009) 23 STT 200 (CESTAT SMB) * CCE v. Visteon Powertrain Control Systems (2009) 23 STT 301 (CESTAT SMB) * Dr Reddy’s Lab v. CCE (2010) 24 STT 90 (CESTAT) * CCE v. Panasonic Home Appliances (2010) 24 STT 116 (CESTAT SMB).

Hire charges, courier, training, security eligible - In CCE v. Deloitte Tax Services (2008) 16 STT 449 (CESTAT), it was observed that definition of ‘input service’ is very wide. Services like equipment hiring, professional consultation, recruitment, security, telephone, transport, training, facility operation, courier, cafeteria, advertisement are all ‘input services’ (for providing Business Auxiliary Service).

Courier charges – Courier charges is ‘input service’ and is eligible – CCE v. CCL Products (2009) 22 STT 36 (CESTAT).

Manpower for generating electricity for factory as well as residential colony - In Sanghi Industries v. CCE (2009) 234 ELT 367 (CESTAT SMB), power plant was generating electricity which was supplied to residential colony, clinker unit, jetty and cement plant. It was held that Cenvat credit of service tax paid on manpower supply

service supplied to power plant and operation and maintenance of power plant is eligible.

Service tax on manpower supplied for operation of power plant - In Sanghi Industries v. CCE (2009) 19 STT 308 = 234 ELT 367 (CESTAT SMB), power plant was generating electricity which was supplied to residential colony, clinker unit, jetty and cement plant. It was held that Cenvat credit of service tax paid on manpower supply service supplied to power plant and operation and maintenance of power plant is eligible [The Cenvat credit was denied by department on the ground that electricity is not excisable goods].

All expenses upto port eligible in case of export - In CCE v. Rolex Rings (2008) 16 STT 193 = 230 ELT 569 (CESTAT SMB), it has been held that in case of exports, port is the ‘place of removal’ as exporter continues to be owner of goods till the same are exported. Hence, CHA and surveyor services which are relating to export business are eligible for Cenvat credit - followed in CCE v. Adani Pharmachem (2009) 19 STT 239 = 232 ELT 804 (CESTAT SMB), where it was held that CHA service in respect of export goods  is ‘input service’ and is eligible for Cenvat credit – also followed in Rawmin Mining v. CCE (2009) 18 STT 329 (CESTAT).

Port is place of removal and GTA service upto port is eligible – CCE v. Colour Synth Industries (2009) 22 STT 88 (CESTAT SMB) * CCE v. Fine Care Biosystems (2009) 244 ELT 372 (CESTAT SMB).

Port is place of removal for exports and hence C&F service is eligible as input service – Adani Pharmachem v. CCE (2009) 238 ELT 179 (CESTAT SMB).

Port/airport is place of removal in case of export - In case of exports, the place of removal is port where export documents are presented to customs office – Kuntal Granites v. CCE (2007) 215 ELT 515 = 2007 TIOL 930 (CESTAT) – quoted and followed in Rajasthan Spinning & Weaving Mills v. CCE (2007) 8 STR 575 (CESTAT). Hence, all expenses upto that place should be considered as ‘input service’.

Transport charges for bringing employees to factory - In CCE v. Cable Corporation of India (2009) 19 STT 158 (CESTAT SMB), it has been held that scope of definition of input service is much larger than being used directly or indirectly in relation to manufacture. In this case, it was held that rent-a-cab service used to bring employees to work in factory has to be considered as being used indirectly in relation to manufacture  or as part of business activity for promoting the business as any facility given to employees will result in greater efficiency and promotion of business – followed in  CCE v. J K Cement Works (2009) 20 STT 254 (CESTAT SMB) * CCE v. Hindustan Zinc (2009) 21 STT 285 (CESTAT SMB) * Stanzen Toyotetsu India v. CCE (2009) 21 STT 321 (CESTAT).

Bus service used for transporting employees to factory is input service - CCE v. Haldyn Glass Gujarat (2009) 240 ELT 729 (CESTAT SMB) * CCE v. HEG Ltd. (2010) 24 STT 9 (CESTAT SMB).

Rent-a-cab service – Rent-a-cab service is input service and eligible – Hindustan Coca-Cola Beverages v. CCE (2009) 23 STT 460 (CESTAT SMB) * Dr Reddy’s Lab v. CCE (2010) 24 STT 90 (CESTAT).

Expenses on which FBT paid are in relation to business - Fringe benefit tax (FBT) is paid on certain business expenses. If FBT is paid on some services, it means that those are related to business of assessee. Hence, such services are input service eligible for Cenvat Credit – Victor Gaskets v. CCE (2008) 14 STT 403 (CESTAT) [decision with reference to canteen services but applicable to all the input services].

Services of commission agent – Commission Agents do promote sale and hence commission paid to them is eligible as ‘input service’ – prima facie view held in Metro Shoes v. CCE (2007) 10 STT 462 = 8 STR 502 (CESTAT) - same view in Bhoruka Gases v. CCE (2008) 224 ELT 449 (CESTAT).

Services of commission agent is input service and is eligible for Cenvat credit – CCE v. Bhilai Auxiliary Industries (2009) 21 STT 474 (CESTAT) * Lanco Industries v. CCE (2009) 22 STT 380 (CESTAT) * CCE v. HEG Ltd. (2010) 24 STT 9 (CESTAT SMB).

C&F Agent – Services of C&F Agent is el;igible input service for Cenvat credit – Cadilla Healthcare v. CCE (2009) 23 STT 224 (CESTAT).

Services of residential colonies eligible – Scope of input service is very wide to cover many activities indirectly used in or in relation to manufacture. Hence, service tax paid in respect of security services provided in colony is eligible -  CCE v. Hindustan Zinc (2009) 21 STT 285 (CESTAT SMB) * GHCL Ltd. v. CCE (2009) 23 STT 89 = 242 ELT 468 (CESTAT SMB).

In ITC Ltd. v. CCE (2009) 22 STT 282 (CESTAT), assessee was under obligation to maintain colony for its employees (engaged in plantation of soft wood trees which was input for manufacture of paper) since there was prohibition in acquiring plot/flat in that area as it was a ‘Scheduled Area’. It was held that all services received in maintaining such colony would be ‘input service’ as it has nexus with manufacturing activity.

In a contrary view, in CCE v. Ultra Tech Cement (2009) 21 STT 470 (CESTAT SMB), it was held that security services in residential colonies of assessee is not an input service, as it is not in a place and for a purpose connected with business activities of manufacturer.

In another contrary view, in CCE v. Manikgarh Cement Works (2010) 24 STT 1 (CESTAT SMB), it was held that services of construction, repairs, cleaning etc. received in residential colony is not input service as it has no relation with manufacture of excisable goods.

Landline phones at residences of officers and directors eligible - Landline phones installed in residences of officers and directors of company is for business purpose and Cenvat credit is eligible – Keltech Energies v. CCE (2008) 14 STT  419 (CESTAT SMB) * ITC Ltd. v. CCE (2009) 20 STT 110 (CESTAT SMB) * CCE v. Greaves Cotton (2009) 239 ELT 137 (CESTAT SMB) * HEG Ltd. v. CCE (2009) 23 STT 157 (CESTAT SMB).

However, in International Testing Centre v. CCE (2009) 18 STT 153 (CESTAT SMB), it was held that credit is not available in respect of service tax paid on telephones installed at residence of proprietor.

Mobile phones eligible for Cenvat Credit – Earlier Service Tax Rules required ‘installation’ of telephones in the business premises. Hence, CBE&C had clarified vide circular No. 59/8/2003-ST dated 20-6-2003 that Cenvat credit will not be available in case of mobile phones. Now there is no such requirement. Hence, service tax paid on mobile phones will be eligible for Cenvat credit w.e.f. 10-9-2004, so long as these are used for ‘activity relating to business’ – view confirmed in Indian Rayon v. CCE 2007 (6) STT 328 = 4 STR 79 (CESTAT SMB) – followed in Nice Telecommunication v. CCE (2007) 8 STT 159 (CESTAT) * Excel Crop Care v. CCE (2007) 9 STT 249 = 7 STR 451 (CESTAT SMB) * Rajasthan Textile Mills v. CCE (2007) 10 STT 349 = 7 STR 400 = 215 ELT 362 (CESTAT SMB) * CST v. Stic Travels (2007) 8 STR 495 (CESTAT) * Maini Precision Products v. CST (2008) 12 STT 182 (CESTAT SMB) * CCE v. Ultra Tech Cement (2008) 15 STT 28 (CESTAT SMB) * Vasavdatta Cement v. CCE (2008) 223 ELT 90 (CESTAT SMB) * CCE v. GKN Sinter Metals (2008) 16 STT 182 (CESTAT SMB) * N K Paper Tube v.

CCE (2008) 16 STT 250 (CESTAT SMB) * Mundra Port & SEZ Ltd. v. CCE (2009) 18 STT 314 (CESTAT) * Grasim Industries v. CCE (2009) 18 STT 381 (CESTAT SMB) * Wiptech Peripherals v. CCE (2008) 232 ELT 621 (CESTAT SMB) * CCE v. J K Cement Works (2009) 20 STT 254 (CESTAT SMB) * CCE v. Stanzen Toyotetsu (2009) 20 STT 69 (CESTAT SMB) * ITC Ltd. v. CCE (2009) 20 STT 110 (CESTAT SMB) * CCE v. Hindalco Industries (2009) 21 STT 388 (CESTAT SMB) * CCE v. BSBK P Ltd. (2009) 22 STT 31 (CESTAT SMB) * Finolex Cables v. CCE (2009) 22 STT 87 (CESTAT SMB) * CCE v. Hindustan Coca Cola Beverages (2009) 22 STT 100 (CESTAT) * CCE v. Showa Engineering (2009) 240 ELT 736 = 27 VST 242 (CESTAT SMB) * CCE v. Greaves Cotton (2009) 239 ELT 137 (CESTAT SMB) * CCE v. Wheels India (2009) 23 STT 91 (CESTAT SMB) * CCE v. T G Kirloskar Automotive (2009) 23 STT 99 (CESTAT SMB) * CCE v. Ultratech Cement (2009) 23 STT 241 (CESTAT SMB) * CCE v. HEG Ltd. (2010) 24 STT 9 (CESTAT SMB) * CCE v. K L Steels (2010) 24 STT 22 (CESTAT SMB) * DIC India v. CCE (2010) 24 STT 99 (CESTAT SMB).

There is presumption that mobile phones are used in connection with business of assessee. Hence, Cenvat credit of service tax paid on mobile phones is available unless department proves that the use was not for purpose of business of assessee – Telenet Systems v. CCE (2009) 23 STT 205 (CESTAT SMB).

In para 8.3 of CBE&C Circular No. 97/8/2007-ST dated 23-8-2007, it is reiterated that Cenvat credit is available of service tax paid on mobile phones.

The view has been confirmed in CCE v. Excel Crop Care (2009) 20 STT 164 (Guj HC DB).

In Force Motors v. CCE (2009) 22 STT 530 (CESTAT SMB), employees were allowed use of mobile upto a limit and excess use was debited to the account of employees. It was held that Cenvat credit is allowable upto the allowable limit.

Mobile phones in name of employees eligible for Cenvat - In Wiptech Peripherals v. CCE (2009) 19 STT 306 (CESTAT SMB), it was held that Cenvat credit on mobile phones will be eligible even if the cell phones are in name of employees, if the phone is used for business of assessee.

Internet services eligible – Cenvat credit is available in respect of internet services, as it is utilised for information relating to manufacture, sale and despatch – Universal Cables Ltd. v. CCE (2007) 7 STR 310 (CESTAT).

Canteen services – Canteen is in relation to business of assessee. Fringe benefit tax (FBT) is paid on those expense, which means those are related to business of assessee. Hence, canteen service is input service eligible for Cenvat Credit – Victor Gaskets v. CCE (2008) 14 STT 403 (CESTAT).

Canteen services eligible for Cenvat credit - Stanzen Toyotetsu India v. CCE (2009) 21 STT 321 (CESTAT) * Stanzen Toyotetsu India v. CCE (2009) 23 STT 40 (CESTAT) * Tata Motors v. CCE (2010) 24 STT 103 (CESTAT SMB)

Canteen is a statutory requirement. Hence, credit of service tax paid on canteen bills is allowable as it is ‘input service’ – Indian Card Clothing v. CCE (2008) 15 STT 79 (CESTAT SMB).

However, in Bajaj Electricals Ltd. v. CCE (2008) 14 STT 461, it was held that assessee has not made a prima facie case for complete waiver of pre-deposit of tax (in respect of service tax paid on canteen services) and he was asked to pre-deposit certain amount for admission of appeal.

Maintenance, AMC services - Maintenance, AMC services are eligible– CCE v. CCL Products (2009) 22 STT 36 (CESTAT). Maintenance and repair services are eligible as without these services factory cannot run – Cadilla Healthcare v. CCE (2009) 23 STT 224 (CESTAT).

Garden services – Garden and cleaning services are eligible, if in relation to business - HEG Ltd. v. CCE (2009) 23 STT 157 (CESTAT SMB).

R&D and trial manufacture – Even trial manufacture and R&D conducted in respect of drugs which do not reach market have to be considered as part of manufacturing process and business activity and hence input services used are eligible for Cenvat credit – Cadilla Healthcare v. CCE (2009) 23 STT 224 (CESTAT).

Courier service – Courier service is eligible as it is in connection with business activities of assessee - CCE v. HEG Ltd. (2010) 24 STT 9 (CESTAT SMB).

Security services – Security services for plant area, residential and mining area are eligible - GHCL Ltd. v. CCE (2009) 23 STT 89 = 242 ELT 468 (CESTAT SMB).

Showroom is place of removal if sale takes place from showroom, and all services in showroom are eligible for Cenvat - In Metro Shoes v. CCE (2008) 14 STT 280 = 2008-TIOL-417 (CESTAT), assessee was selling shoes from its showrooms. It was held that showroom is the ‘place of removal’. Hence all expenses upto sale of  goods at showroom like GTA, warehousing facilities, C&F agents, insurance, internet services, security, courier services, telecom services, pest control services, bank services etc. are eligible for Cenvat credit. Only services which are directly and wholly attributable for traded goods will not be eligible.

Services at depot - In Mangalam Cement v. CCE (2007) 8 STR 639 (CESTAT), strong prima facie view was held that if services relate upto the depot, service tax credit will be available.

Place of consignment agent is ‘place of removal’ and hence service tax paid on GTA service availed upto place of consignment agent will be eligible for Cenvat credit – CCE v. Rajhans Metals (2009) 19 STT 246 (CESTAT SMB).

Windmills for generation of electricity which are away from factory - In PSG & Sons v. CCE (2009) 243 ELT 411 (CESTAT SMB), assessee availed Cenvat credit in respect of erection, commissioning and installation of windmills for generation of electricity. This was supplied to grid and corresponding quantum was withdrawn at the factory. It was held that the services availed at windmill are not ‘input services’ – relying on L G Balakrishnan v. CCE (2009) 13 STR 498 (CESTAT).

Services in relation to aircraft used for conveyance of officers – Assessee was using aircraft for conveyance of its officials. The aircraft was stationed at airport and availed various services from Air port Authority of India (AAI). In Force Motors v. CCE (2009) 23 STT 160 (CESTAT SMB), it was held that these are in relation to business activity of assessee and eligible for Cenvat credit.

4 Tribunal decisions taking restrictive view

In many Tribunal decisions as stated below, a restrictive view has been taken that

‘input service’ should have relation with manufacture or provision of service.

In view of the 3 member decision of Tribunal in ABB Ltd and GTC Industries , validity

of these decisions is now doubtful, particularly because some of these decisions

given below are only prima facie views expressed at the time of considering stay

application.

Cenvat credit cannot extend beyond removal of goods -  In Gujarat Ambuja Cement Ltd. v.

CCE (2007) 8 STT 122 = 212 ELT 410 = 6 STR 249 (CESTAT). Hon. Tribunal in para 12 of the

decision has observed, ‘Crucial point to be noted in regard to Cenvat Credit is that credit

availability is in regard to 'inputs'. The credit covers duty paid on input materials as well as tax

paid on services, used in or in relation to the manufacture of the 'final product'. Therefore,

extending the credit beyond the point of duty paid removal of the final product, would be contrary

to the scheme of Cenvat Credit Rules’.

Service should have relation to manufacture - In Colgate Palmolive P Ltd. v. CCE (2008) 12

STT 269 = 7 STR 294 (CESTAT), a prima facie view was expressed that credit of input services

which are common to manufactured as well as exempted/traded goods is not available. A prima

facie view was also expressed that even services in the inclusive part of definition should be ‘in

relation to manufacture’.

In Coca Cola India v. CCE (2007) 7 STR 529 = 223 ELT 69 (CESTAT), assessee was

manufacturing concentrate for cold drinks. He was incurring expenditure for advertisement of

aerated water and not concentrate. It was held that advertisement expenses is not his ‘input

service’ since it is not related to manufacture of ‘concentrate’ but related to sale of aerated

waters. The reason given was that such advertisement expenses are not includible in assessable

value of base essence.

Service of CHA is not input service - In Excel Crop Care v. CCE (2007) 9 STT 249 = 7 STR

451 (CESTAT SMB), it was held that services of CHA (Customs House Agent) in relation to

export is not in relation to manufacture and clearance and hence Cenvat credit is not eligible.

Same prima facie view was held in GHCL Ltd. v. CCE (2007) 10 STT 254 (CESTAT) – this view

has been specifically not accepted in CCE v. Rolex Rings (2008) 16 STT 193 = 230 ELT 569

(CESTAT SMB) and CCE v. Adani Pharmachem (2009) 19 STT 239 (CESTAT SMB).

Construction services relating to sign boards - In Excel Crop Care v. CCE (2007) 9 STT 249

= 7 STR 451 (CESTAT SMB), it was held that construction services for setting up circles/gardens

for putting sign boards is not in relation to advertisement of the product and is not eligible.

Club house fees for recreation of workers - In Mundra Port & SEZ Ltd. v. CCE (2009) 18 STT

314 (CESTAT), it was held that service tax paid on club house fees, meant for recreation of

workers is not eligible for credit as it is not used for providing output service.

Residential quarters is not input service - In VMT Spinning Co. Ltd. In re (2008) 16 STT 514 =

232 ELT 169 = 17 VST 369 (AAR), it has been held that construction of residential quarters for

workers inside the factory is not ‘input service’ as it has no relation with manufacturing activity.

In GHCL Ltd. v. CCE (2007) 10 STT 254 (CESTAT), prima facie view was held that services

received at residential colonies of staff do not qualify as ‘input service’ – similar prima facie view

in India Cements v. CCE (2008) 9 STR 65 (CESTAT SMB).

Windmills for generation of electricity which are away from factory - In Rajhans Metals v.

CCE (2007) 8 STR 498 (CESTAT SMB), assessee availed Cenvat credit in respect of erection,

commissioning and installation of windmills for generation of electricity. This was supplied to grid

and corresponding quantum was withdrawn at the factory. It was held that electricity is not

excisable and hence the services availed at windmill are not ‘input services’ – similar prima facie

view in India Cements v. CCE (2008) 9 STR 65 (CESTAT SMB) – same view in Ellora Times Ltd.

v. CCE (2009) 19 STT 381 = 235 ELT 661 (CESTAT SMB), but the reason given was that there is

no direct nexus between services provided in power plant and items manufactured in factory.

Contrary decisions of Tribunal in respect of outward freight - The decision of Tribunal in

Gujarat Ambuja Cement was followed in India Japan Lighting P Ltd. v. CCE (2007) 11 STT 498 =

8 STR 124 = 218 ELT 103 (CESTAT) * HEG Ltd. v. CCE (2008) 13 STT 96 (CESTAT SMB) *

CCE v. Sound Castings (2009) 18 STT 185 (CESTAT SMB) * Bharat Starch Industries v. CCE

(2008) 223 ELT 395 (CESTAT) – same prima facie view in stay petition in Ultratech Cement v.

CCE (2007) 8 STT 152 = 6 STR 364 (CESTAT) – view reiterated in para 8.2 of CBE&C Circular

No. 97/8/2007-ST dated 23-8-2007. The decision of Tribunal in Gujarat Ambuja Cement was also

followed in Universal Cables Ltd. v. CCE (2007) 10 STT 271 = 7 STR 310 (CESTAT SMB), in

respect of courier services utilised for despatch of finished goods.

In CCE v. NHK Springs Ltd. (2007) 9 STT 548 = 7 STR 63 = 215 ELT 354 (CESTAT SMB) also, it

was held that credit of service tax on outward freight is not available - followed in Orissa Concrete

v. CCE (2008) 10 STR 16 (CESTAT).

In  CCE v. Adishiv Forge (2008) 12 STT 359 (CESTAT SMB), it was held that Cenvat credit can

be availed of service tax paid on inward freight but not in respect of outgoing consignments.

Now these decisions stand impliedly overruled in view of decision of three member bench

of Tribunal and judgment of Punjab & Haryana High Court.

5. Summary

Apart from the fact that definition of ‘input service’ is very wide and it includes any service in

relation to business of assessee, following factors need consideration.

Purpose is to move towards GST - The purpose of wide definition of ‘input service’ has been stated by

Finance Minister in para 148 of his budget speech on 8-7-2004 as follows, ‘I propose to take a major step

towards integrating the tax on goods and services. Accordingly, I propose to extend credit of service tax

and excise duty across goods and services’.

The integration of Cenvat credit of excise duty and service tax is a pre-cursor to GST (Goods and

Service Tax), where intention is to eliminate distinction between goods and services. The whole

scheme of credit of ‘input service’ is designed from this point of view.

Avoiding cascading effect of taxes - One basic purpose of Cenvat credit is to avoid cascading effect. These

purposes cannot be ignored while interpreting the definition of ‘input service’.

Conclusion - In my view, decision of large bench of Tribunal in ABB Ltd. and Bombay High court in Coca

cola correctly interprets the definition of ‘Input service’ [Unless the definition is changed in next budget].

Thus, any service in relation to business of assessee is ‘input service’ and eligible for Cenvat credit..

Budget 2010-11 – Highlight of changes

Budget 2010-11 and Finance Bill 2010 was presented before Parliament on 26-2-2010 at 11 AM by Finance Minister. Following are the changes made in relation to Central excise. Some of these charges have become effective from 27-2-2010, while some changes will become effective after Finance Bill 2010

A. Changes in Central Excise RatesGeneral rate on non-petroleum products – General rate of excise duty is increased from 8% to 10% w.e.f. 27-2-2010. It may be noted that it is not necessary to pay higher duty in case of goods lying in godowns or depots which are already duty paid.

Duty on cement – Duty on cement has been correspondingly increased.

Duty on large cars, MUV - Large cars, Multi Utility Vehicles and Sports Utility Vehicles etc. and chassis thereof hitherto attracted excise duty rates of 20% and 20% + Rs. 15,000 per unit. The ad-valorem component of both these rates has been increased from 20% to 22%. The specific component of duty on such vehicles remains unchanged.

Duty on tobacco products - Duty on tobacco products increased.

Chewing tobacco are liable to pay duty on basis of production capacity - Duty on basis of production capacity under section 3A of the Central Excise Act has been imposed on chewing tobacco and branded un-manufactured tobacco packed in pouches with the aid of packing machines, w.e.f. 8-3-2010 [Notification No. 16/2010-CE dated 27-2-2010, Notification No. 10/2010-CE(NT) dated 27-2-2010 and Chewing Tobacco and Un-manufactured Tobacco Packing Machines (capacity Determination and Collection of Duty) Rules, 2010.].

Clean energy cess - A Clean Energy Cess is being imposed on coal, lignite and peat produced in India. This cess would be levied and collected as a duty of excise from coal mines. The rate of the cess, the date from which it will be effective and the rules and procedure for its collection shall be notified after the enactment of the Finance Bill, 2010. This cess would apply to imported coal as CVD. Duty rate indicated is Rs 100 per ton.

Petrol and diesel costly by one rupee - The rates of excise duty on Motor Spirit (petrol) and HSD (diesel) have been increased by Re.1 per litre. The increase is applicable to both branded and unbranded products (Actual impact on price is much hire due to cumulative effect of State Vat and other taxes). The rates of duty on other petroleum products remain unchanged.

Duty on Corrugated boxes reduced to 4% - Duty on cartons, boxes and cases, of corrugated paper or paperboard falling under chapter heading 4819 10 manufactured by ‘stand-alone’ manufacturers has been reduced to 4% w.e.f. 27-2-2010 by inserting Serial No. 96E  to Notification No. 4/2006-CE dated 1-3-2006. The condition is that the cartons, boxes or cases should be manufactured by unit starting from the stage of bought out kraft paper and not having the facility to manufacture kraft paper in the same factory. Thus, the

exemption is available to all corrugated boxes and cartons falling under 4819 10 using bought out kraft paper. Other material required can be either bought out or manufactured in the same factory.

A1. Excise duty and service tax on software

Hamlet had said ‘To be or not to be, that is the question’. Indian assessees are saying ‘Software is goods or service (or both), that is the question’.

Software falls in heading 8523 80 20 of Central Excise Tariff. However, all software, except canned software i.e. software that can be sold off the shelf, is ‘exempt’. Duty on packaged software is 10% w.e.f. 27-2-2010, while there is no excise duty on tailor made i.e. customised software - Sr No. 27 of notification No. 6/2006-CE dated 1-3-2006 as amended w.e.f. 27-2-2010.

‘Packaged software or canned software’ means a software developed to meet the needs of variety of users, and which is intended for sale or capable of being sold, off the shelf [Explanation to Notification No. 17/2010-CE dated 27-2-2010 and Sr No. 27 to Notification No. 6/2006-CE dated 1-3-2006]

The issue is whether both service tax and CVD/excise duty are payable on software. I have tried my best to understand the statutory provisions and my views are as follows (though obviously ten people can have ten different views on the issue).

Single use packaged or canned software – Manufacturer/importer should pay excise duty/CVD on entire value of consideration received from buyer and then no service tax is will be payable (Notification No. 2/2010-ST dated 27-2-2010 in respect of excise duty and Notification No. 17/2010-ST dated 27-2-2010 in respect of CVD on imports. 

The term ‘single use’ has not been defined. If the software is permitted to be used on more than one computers, it can be termed as ‘multi-use’ (as the term used is ‘single use’ and not ‘single user’).

SSI units can avail exemption from excise duty but then they will be liable to pay service tax as the exemption under Notification No. 2/2010-ST is subject to condition that ‘appropriate duties of excise’ should have been paid (Of course, they can argue that they can claim deduction of value of material under Notification No. 12/2003-ST dated 20-6-2003 and then ‘value’ for purpose of service tax is Nil).

In my view, traders of such software will not be liable (Indeed they are even otherwise not liable as sale and purchase of goods cannot be subjected to service tax, but I understand that in some Commissionerates, traders are being asked to pay service tax on sale of packaged software).

Other packaged or canned software – In case of other packaged software (i.e. multi-use), excise duty will be payable on consideration paid or payable for transfer of right to use such software [Notification No. 17/2010-CE dated 27-2-2010]. In case of imports, corresponding CVD will be payable [Notification No. 31/2010-Cus dated 27-2-2010].

CBE&C has clarified that value of software can be split into software media and right to use software (i.e. IPR relating to software) as the notification itself envisages such splitting – MF(DR) Instruction No. 354/189/2009-TRU dated 4-11-2009 in respect of imported software but will equally apply to packaged software manufactured in India.

It may be noted that in case of branded (tailor made) software, there is no ‘sale’ of software as such as entire property in software is never passed on to buyer.. Only right to use is transferred (some times for a limited period, which has to be renewed by paying further amount). There will be ‘sale’ of software only if source code and entire property in software is transferred to buyer.

If the manufacturer/service provider charges some amount over and above the consideration received for transfer of right to use (may be for installation, customisation etc.), service tax will be payable on such amount. Service tax cannot be demanded on amount on which excise duty has been paid, since assessee can claim deduction of value of material under Notification No. 12/2003-ST.

SSI units can avail exemption of excise duty but they will be exposed to liability of service tax, though they can argue that value of service is Nil.

Renewal of license of packaged software – Sometimes, the license to use packaged software is for limited period (usually one year). The license is renewed on payment of renewal fee by giving password. Thus, ‘packaged software ‘is not sold. In such cases, in my view, service tax will become payable, since packaged software ‘packed with document providing right to use’ is not given.

Customised software – Customised software is subject to service tax but assessee can claim deduction of value of material under Notification No. 12/2003-ST dated 20-6-2003.

Conclusion – The issue is still confusing and prone to litigation. Hence, whatever you decide to do, it is better to inform department in writing, to avoid charge of suppression of facts (I am sure department is as confused as you are).

Position prior to 27-2-2010 – Prior to 27-2-2010, there was no distinction between single use and multi use packed or canned software. However, in my view, even prior to 27-2-2010, manufacturer could claim deduction of value of material under Notification No. 12/2003-ST though factually, many large manufacturers were charging (may be still charging) both Vat/CST and service tax on entire amount of the Bill.

 A2. Duty on medical and toilet preparations

Duty on medical and toilet preparations payable under Medical and toilet Preparation Act has been reduced from 16% to 10% w.e.f. 27-2-2010 (Notification No. 1/2010-M&TP dated 27-2-2010. This duty is not payable on medical and toilet preparations manufactured in SEZ. Though this amendment will be effective on enactment of Finance Bill 2010, it is doubtful if the duty can be levied even prior to that, in view of overriding provisions of SEZ Act.

Rate of abatement on toilet preparations covered under this Act has been reduced from 40% to 35% (Notification No. 2/2010-M&TP dated 27-2-2010).

A3. Deemed manufacture in case of stone blocks and aluminium tubes and pipes

As per note 3 to chapter 68 of CETA (inserted w.e.f. 27-2-2010), in relation to products of headings 6802 and 6810, the process of cutting or sowing or sizing or any other process, for converting stone blocks into   slabs or tiles shall amount to ‘manufacture’.

Thus, slabs or tiles classifiable under 6802 or 6810 manufactured out of blocks of natural stone or agglomerated artificial are taxable w.e.f. 27-2-2010. However, marble slabs and tiles (falling under chapter 25) and marble tiles (falling under chapter 68) attract same rate of Rs 30 per SqM. Hence, finishing processes like cutting, sawing etc. on duty paid slabs or tiles of marble will not attract excise duty, if there is no change in classification (Explanatory Note No. 68.1 given with finance Bill 2010)

As per note 2 to chapter 76 of CETA (inserted w.e.f. 27-2-2010), in relation to products of heading 7608 (Aluminium tubes and pipes), the process of drawing or redrawing shall amount to ‘manufacture’

B. Changes in Central Excise Rules

B1. SSI to pay duty on quarterly basis

SSI unit has to pay excise duty on quarterly basis by 5th of the month following the quarter. (by 6th in case of e-payment) (against present time limit of 15/16 days after each month). In case of March, duty is payable by 31st March, as hitherto [second proviso to Rule 8(1) of Central Excise Rules substituted w.e.f. 1-4-2010].

B2. SSI to file quarterly return by 10th w.e.f. 1-4-2010

Time limit for filing of quarterly return by SSI has been reduced to 10 days from existing 20 days w.e.f. 1-4-2010 [third proviso to rule 12(1) to Central Excise Rules inserted w.e.f. 1-4-2010]

B3. SSI to enjoy facility of quarterly payment and quarterly return even if they pay duty at full rate

It is clarified that facility of quarterly payment of excise duty and filing of quarterly return is available to SSI for the whole financial year even if he is paying excise duty at full rate  (good relief) [Explanation 2 to second proviso to rule 8(1) inserted w.e.f. 1-4-2010, Explanation 2 to third proviso to rule 12(1) of Central Excise Rules inserted w.e.f. 1-4-2010 and confirmed in para 10.1.1 of DO letter No. 334/1/2010-TRU dated 26-2-2010 issued by MF(DR) ]

B4. Pre-authentication of invoice no more required

Pre-authentication of invoices has been dispensed with [Rule 11(5) of Central Excise Rules omitted w.e.f. 1-4-2010] (old hangover at last gone!)

B5. SSI exemption extended to branded plastic bottles and plastic containers

SSI exemption has been extended to branded plastic bottles and plastic containers if used as packing material by the person whose brand name such goods bear (amendment to Notification No. 1/2003-CE dated 1-3-2003 w.e.f. 27-2-2010).

B6. E-filing and e-payment mandatory w.e.f. 1-4-2010

CBE&C has undertaken an ambitious project of automation in excise and service tax administration. ‘Automation of Central Excise and Service Tax’ (ACES) has been introduced in all 104 Commissionerates of excise and service tax.

One major initiative is that e-filing of returns and e-payment of taxes has been made mandatory w.e.f. 1-4-2010 in case of assessees who had paid service tax or excise duty of rupees ten lakh or more in the preceding financial year (either in cash or by utilising Cenvat credit or both).

C. Changes in Cenvat Credit Rules

C1. Accelerated depreciation in case computers are removed after use

As per second proviso to rule 3(5) of Cenvat Credit Rules, inserted w.e.f. 13-11-2007, if capital goods are removed after use, the manufacturer or output service provider shall pay an ‘amount’ (not ‘excise duty’) equal to Cenvat credit taken on the said capital goods, reduced by 2.5% for each quarter of a year or part thereof from the date of taking the Cenvat credit.

This rate of reduction (really depreciation) very low in case of computers (really it is low in many cases in view of raid changes in technology). Hence, second proviso to rule 3(5) (as amended w.e.f. 27-2-2010) provides that in case of computer and computer peripherals, the rate of reduction shall be as follows – (a) 10% for each quarter in first year (i.e. total 40% in first year) (b) 8% for each quarter in second year (i.e. total 32% in second year) (c) 5% for each quarter in third year (i.e. total 20% in third year) (d) 1% for each quarter in fourth and fifth year (i.e. total 8% in fourth and fifth year).

Thus, at the end of fifth year, the value becomes Nil.

C2. SSI can avail entire Cenvat credit on capital goods in first year

Rule 4(2)(a) of Cenvat Credit Rules provides that Cenvat credit on capital goods is required to be availed in two years, i.e. upto 50% credit can be availed when these are received and balance in

any subsequent financial year. The condition for taking balance credit is that the capital goods should be in possession of manufacturer of final products in subsequent years.

Second proviso to rule 4(2)(a) as inserted w.e.f. 1-4-2010 provides that in case of units availing SSI exemption, entire Cenvat credit can be availed by them in first year itself. This provision will apply only in respect of capital goods acquired on or after 1-4-2010.

C3. Jigs and fixtures can be sent outside even when raw material is not sent

As per rule 4(5)(b) of Cenvat Credit Rules, moulds, dies, jigs and fixtures, can be sent to a job worker for production of goods on behalf of and according to specifications of the manufacturer sending the moulds, dies, jigs and fixtures.

The requirement that the capital goods/input must come back within 180 days is not applicable to moulds and dies, as that provision applies only to capital goods sent under rule 4(5)(a) – confirmed in Videocon Industries v. CCE (2008) 232 ELT 325 (CESTAT) * CCE v. Guala Closures (2009) 237 ELT 493 (CESTAT SMB).

The rule did not provide for a situation where the manufacturer sends only moulds, dies, jigs and fixtures without any raw material. It is true that in Monica Electronics v. CCE 2000(123) ELT 1047 (CEGAT), it was held that moulds can be sent even if no raw material is sent to job worker, i.e. sending of only mould and dies is also permissible.

However, the issue was litigation prone. Hence, rule 4(5)(b) of Cenvat Credit Rules amended w.e.f. 27-2-2010 now provides that moulds, dies, jigs and fixtures can be sent outside (i) to another manufacturer for production of goods according to his specifications or (ii) a job worker for production of goods on his behalf according to his specifications (In case of past transactions, issue can be argued on basis of Tribunal decision cited above. This can be justified on the ground that under Central Excise, job worker can use his own material also).

C4. Rule 6(6) will apply to goods imported for power projects

Rule 6 of Cenvat Credit Rules makes provision for reversal of Cenvat of payment of ‘amount’ when assessee is engaged in manufacture of exempted goods or provision of exempted services. Rule 6(6) of Cenvat Credit Rule states that provisions of rules 6(1), 6(2), 6(3) and 6(4) are not applicable, if excisable final product is despatched without payment of duty, in cases where supply is to EOU, SEZ, UN, International competitive bidding etc.

Now, w.e.f. 27-2-2010, rule 6(6) will also be applicable in case of goods supplied to a power project from which power supply has been tied up through tariff based competitive bidding or to a power project awarded to a developer through tariff based competitive biddings in terms of Notification No. 6/2006-CE dated 1-3-2006.

Thus, in such cases, if Cenvat credit has been availed, proportionate reversal or payment of 5%/6% amount will not be required.

C5. Penalties under Cenvat Credit rules

Rule 15(1) of Cenvat Credit of Rules provided penalty and confiscation of offending goods for wrongly taking Cenvat credit in respect of inputs and capital goods. This rule has been substituted by new rule 15(1) w.e.f. 27-2-2010 to provide that penalty can be imposed and offending goods can be confiscated for taking or utilising Cenvat credit in respect of inputs, input services and capital goods [Really, how Cenvat Credit can be utilised without ‘taking’ ? Thus, penalty provisions were even otherwise applicable. Provisions of wrong availment of Cenvat credit was already there in earlier rule 15(3). Thus, amendment really makes little sense].

C6. Provision of proportionate reversal under rule 6 will apply even prior to 1-4-2008, if dispute is pending

Provision in respect of proportionate reversal when assessee is engaged in manufacture of exempted goods or provision of exempted services was introduced w.e.f. 1-4-2008.

However, even in respect of period prior to 1-4-2008, Tribunal had held that proportionate reversal is permissible.

In Nicholas Piramel (I) Ltd. v. CCE (2008) 17 STT 411 (CESTAT 3 member bench 2 v. 1 order), assessee was using common inputs in dutiable and exempted final products. He reversed proportional Cenvat credit on inputs attributable to exempted final products. It was held that this is sufficient and payment of 8%/10% (now 5%/6%) ‘amount’ is not required – same view in Esab India v. CCE (2009) 243 ELT 429 (CESTAT).

However, this decision has been overruled in CCE v. Nicholas Piramal (India) Ltd. (2010) 24 STT 66 = 244 ELT 321 (Bom HC DB), where it was held that Court cannot read in rule something different. Rule 6(2) is mandatory and not directory. Hardship in following rule cannot result in giving goby to language of the rule and make the rule superfluous.

To overcome the difficulty created by Bombay High court decision, rule 6(7) is proposed to be inserted  with retrospective effect from 1-9-1996 to provide that where any dispute is pending, proportionate reversal will be permissible even in cases prior to 1-4-2008. (clauses 68 to 72 of Finance Bill 2010),

The amendment applies only where dispute is ‘pending’ i.e. show cause notice should have been issued or appeal with Commissioner (Appeals) or Tribunal or High Court or Supreme Court is pending. Thus, assessees who had paid 8%/10%/5%/6% amount without raising any dispute will not be eligible to get benefit of the retrospective amendment.

This is one of the rare cases where retrospective amendment is made in favour of assessee.

C7. Refund of Cenvat credit in case of export of services

Rule 5 of Cenvat Credit Rules provides for refund of Cenvat credit.

Notification No. 5/2006-CE(NT) dated 14-3-2006 makes provision for refund of Cenvat credit in case of export of services.

This notification is proposed to be amended with retrospective effect from 14-3-2006, to ensure faster and fair settlement of refund claims. This notification is proposed to be amended to provide that both services used in and services used in relation to provision of taxable output services. Similarly, inputs used for providing taxable services will be eligible for Cenvat credit. It is also provided that refund of Cenvat should not be linked to Cenvat taken in a particular period (clause 73 of Finance Bill 2010).

The amendment is basically to validate various instructions given in CBE&C circular No. 120/02/2010-ST dated 19-1-2010.

The form appended to notification No. 5/2006-CE(NT) has been amended (with prospective effect) to incorporate aforesaid changes.

One more rare example where amendment beneficial to assessee is made with retrospective effect.

D Proposed Statutory Changes in Central Excise Act Following statutory changes are proposed. These will be effective after receipt of assent by President.

D1. Settlement Commission

After 1-6-2007, the Settlement Commission had practically become workless. Now, the amendments made in 2007 have been partially withdrawn. Following changes are now proposed, which will expand the cases which can be taken up by Settlement Commission.

Section 32E(1) of Central Excise Act is proposed to be amended by replacing  the words ‘but excluding the goods in respect of which no proper record has been maintained by the assessee in his daily stock register‘ with ‘or otherwise’. Effect of the amendment is that so far if the assessee had not maintained proper records of goods in his DSA, (Daily Stock Account), he could not approach Settlement Commission. Thus, cases relating to clandestine removal

could not be taken up by Settlement Commission. Now, almost any case relating to evasion of excise duty can be taken up by Settlement Commission since the words now used are ‘or otherwise’.Section 127B(1) of Customs Act is proposed to be amended by replacing  the words ‘but excluding the goods not included in the entry made under this Act‘ with ‘or otherwise’. Effect of the amendment is that so far if applicant has smuggled the goods without making any Bill of Entry, he could not approach Settlement Commission. Thus, cases relating to smuggling could not be taken up by Settlement Commission. Now, almost any case relating to evasion of customs duty can be taken up by Settlement Commission since the words now used are ‘or otherwise’.Section 32F(6) of Central Excise Act and section 127C(6) of Customs Act provided that if Settlement Commission does not pass an order within nine months from the last day of the month in which application for settlement was made, the application will abate automatically and the application will go back to adjudicating authority before whom the proceedings were pending, Now, an explanation has been added to these sections to provide that the Settlement Commission can extend the period for further three months, for reasons to be recorded in writing.Section 32-O of CEA provided that application for Settlement Commission can be made only once in life time of an applicant. Now the proposed amendment provides that this provision applies only in respect of cases as specified in (amended) section 32-O(1) of Central Excise Act. In other cases, repeated application is permissible.Similarly, section 127L of Customs Act provided that application for Settlement Commission can be made only once in life time of an applicant. Now the proposed amendment provides that this provision applies only in respect of cases as specified in (amended) section 127L(1) of Customs Act. In other cases, repeated application is permissible.

D2. No penalty if excise duty and interest paid before show cause notice, except in case of suppression of facts, fraud, misstatement

It is possible that a person who is liable to pay the excise duty due, may like to pay the duty   voluntarily on his own, if he is convinced that duty is legally payable. In such case, he can pay the duty on his own and inform the proper officer in writing. The assessee will also have to pay interest for delayed payment as may be due u/s 11AB of CEA

Section 11A(2B) of Central Excise Act provides if assessee pays central excise duty due on his own before issue of show cause notice, the officer shall not issue any show cause notice.

The intention was to close the issue once excise duty and interest is paid (except where short payment or non-payment or erroneous refund was due to collusion, wilful mis-statement or suppression of facts).

Departmental confirmation - Luckily, CCE, Madurai vide trade notice No. 48/2008 dated 3-10-2008 [17 STT 4 (St)] has confirmed that if service tax and interest is paid before SCN, show cause notice shall not be issued except in case of situations mentioned in section 11A(2B) of CEA (i.e. fraud, suppression of facts etc.)

Clarification by CBE&C - CBE&C letter No. 137/167/2006-CX-4 dated 3-10-2007  – 21 STT 1 (ST) has clarified that if tax and interest is paid before show cause notice, all proceedings are concluded. Conclusion of proceedings under Finance Act, 1994, includes proceedings under sections 73, 76, 77 and 78 [This principle would apply to excise and customs also].

On basis of above clarification, in Santhi Casting Works v. CCE (2009) 20 STT 459 (CESTAT), it was held that once tax and interest is paid, no further action is warranted against assessee – same view in VST Tillers Tractors v. CCE (2009) 20 STT 460 (CESTAT SMB) * Manipal County v. CST (2010) 24 STT 248 (CESTAT)..

SCN were being issued despite these instructions - Inspite such clear instructions, often show cause notices were issued for imposing penalty.

Hence, explanation 3 is proposed to be added to section 11A(2B) of CEA for removal of doubt, that once duty and interest is paid under section 11A(2B), then on penalty shall be imposed under provisions of Central Excise Act.

Similar explanation 2 is proposed to be added to section 73(3) of Finance Act, 1994, relating to service tax.

Since the explanation is only to remove doubt, it will apply to pending cases also.

However, if there is suppression of facts, wilful misstatement or fraud, penalty can be levied even if tax/duty and interest is paid before SCN.

E. Changes in Customs Provisions

E1. Change in customs duty rates

Basic customs duty – General rate of basic customs duty on non-agricultural goods continues to be 10%

Duty on petroleum products increased – Basic customs duty on crude petroleum, petrol, diesel etc. has been increased w.e.f. 27-2-2010 by 5% each from previous level of customs duty.

Customs duty on gold, silver and Platinum increased - Customs duty on gold, silver and Platinum imported as cargo or baggage has been increased as follows, w.e.f. 27-2-2010  – (a) Serially numbered gold bars – Rs 300 per 10 gms (earlier Rs 200) (b) Other forms of gold – Rs 750 per 10 gms (earlier Rs 500) (c) Silver – Rs 1,500 per Kg (earlier Rs 1,000) and (d) Platinum – Rs 300 per 10 gms (earlier Rs 200) [Notification No. 17/2010-Cus dated 27-2-2010].

Customs Duty on medical equipment – Duty on medical equipment is rationalised to uniform rate of 5% basic customs duty, 4% CVD and Nil special CVD (total duty 9.2%). There will be full exemption for specialised medical devices.

Customs Duty on motion pictures, music and gaming software - Duty on motion pictures, recorded on CD/DVD and  music/gaming software (not imported in pre-packed form for sale) will be payable on cost of carrier medium, freight and insurance. This value applies to basic customs duty, CVD and special CVD [Notification No. 27/2010-Cus dated 27-2-2010].

Duty on promotional material like trailors, making of film etc. imported for electronic promotion kits/Betacams is fully exempted [Sr No. 603 of Notification No. 21/2002-Cus dated 1-3-2002 as amended on 27-2-2010].

Customs duty on packaged software – CVD is payable on value which represents consideration paid or payable for transfer of right to use the software. Service tax will not be payable on these amounts [Notification Nos. 31/2010-Cus and 17/2010-ST both dated 27-2-2010].

CVD on medical and toilet preparations on MRP basis - CVD on medical and toilet preparations will be payable on MRP basis. This change will take effect after enactment of Finance Bill (clause 61 of Finance Bill 2010).

E2. Outright exemption of special CVD when goods covered under MRP and some other goods

All goods imported are subject to payment of special CVD of 4% under section 3(5) of Customs Tariff Act. Trader are entitled to claim the refund under Notification No. 102/2007-Cus dated 14-9-2007. The

procedure is clumsy. Hence, in respect of following goods,  the 4% special CVD has been fully exempted – (a) Goods packed for retail sales covered under Standards of Weights and Measurement Act (b) Wrist watches and pocket watched (c) Telephones for cellular networks (d) Articles of apparel excluding parts of made-up clothing accessories), (good relief and simplification) [Notification No. 29/2010-Cus dated 27-2-2010].

For other products, the provision of refund continues.

E3. Other changes in customs provisions

Other charges are summarised below.

Project Imports - Following are added to list of eligible projects for 5% basic customs duty  – (a) Cold storage, cold rooms (b) project for installation of mechanical handling systems for food grains and sugar (5% basic customs duty, no CVD or special CVD – see Sr No. 602 of Notification No. 21/2002-Cus dated 1-3-2002 as amended) (c) Mono rail projects (d) Digital head end and digital cinema development projects [Notification Nos. 15/2010-Cus 17/2010-Cus both dated 27-2-2010]

Machinery imported for road construction projects - Road construction machinery imported for specified projects is fully exempt. It cannot be sold or disposed of for a period of five years. Now, it is provided that it can be sold or disposed off earlier, on payment of customs duty on depreciated value, The machinery can also be diverted for another project for which it would have been otherwise eligible for exemption.

Import of free samples - The limit is increased from Rs one lakh to Rs three lakhs per annum (Notification No. 154/94-Cus dated 13-7-1994 amended on 27-2-2010).

Electrical energy supplied by SEZ to DTA and non-processing area of SEZ - Electrical energy falling under heading 2716 00 00 supplied by SEZ to DTA and non-processing area of SEZ will attract customs duty of 16% plus Nil special CVD. Other supplies will be exempt [Notification No. 25/2010-Cus dated 27-2-2010]. The change is with retrospective effect from 26-6-2009, for which Notification Nos. 21/2002-Cus dated 1-3-2002 and No. 20/2006-Cus dated 1-3-2006 are proposed to be amended with retrospective effect as per clause 60 of Finance Bill 2010 [there does not seem to be any rationale in this heavy duty. SEZ unit has hardly any cost advantage over DTA unit]

CVD on electricity supply is  fully exempt [Notification No. 26/2010-Cus dated 27-2-2010].

Settlement Commission – The provisions are liberalised. Application can be made even in respect of smuggled goods without Bill of Entry. Multiple-applications can be made except in specified cases. Settlement Commission can extend the period of deciding case by three months, if case cannot be decided within nine months [Amendments proposed to sections 127C and 127L of Customs Act, 1962 in Finance Bill 2010, discussed above]‘

Overview of changes in Service tax in budget 2010-11 

1 Proposed new services

Eight services are being included in the list of taxable services, These will be effective from a date to be notified (expected date is 1-6-2010). These services are as follows –Lottery and game of chance - Services of promoting, marketing or organizing of games of chance, including lottery will be taxable [proposed Section 65 (105) (zzzzn)] (The service is now removed from ‘Business Auxiliary Service’).

Health services - Health services, i.e. health check up undertaken by hospitals or medical establishments for the employees of business entities and health services provided under health insurance schemes offered by insurance companies will be taxable [proposed Section 65 (105) (zzzzo)] [The tax on these health services would be payable only to the extent payment for such medical check up or preventive care or treatment etc. is made directly by the business entity or the insurance company to the hospital or medical establishment. Thus, all ‘cashless’ medical insurance schemes will get covered. The hospital will have to charge service tax but insurance company will be able to avail Cenvat credit of service tax charged by hospitals].

Maintenance of medical records Services provided for maintenance of medical records of employees of a business entity will be taxable  [proposed Section 65 (105) (zzzzp)].

Promotion of brand - Services of promoting of a ‘brand’ of goods, services, events, business entity etc will be taxable [proposed Section 65 (105) (zzzzq)] In fact, these are already covered under Business Auxiliary Service. However, the scope is restricted to promotion of goods and services. Now, simple promotion of a ‘brand’ (without any specific goods or service) will also be taxable under the new head. Promotion of specific goods or service will continue to be covered under BAS. Thus, ‘brand ambassadors’ will be subject to tax.

Permitting commercial use of an event - Services of permitting commercial use or exploitation of any event organized by a person or organisation will be taxable [proposed Section 65 (105) (zzzzr)]. Events like IPL, Filmfare Awards, beauty contests, celebrities’ marriage will get covered under this head.

Electricity exchange - Services provided by Electricity Exchanges in relation to assisting, regulating, controlling the business of trading, processing and settlement pertaining to sale or purchase of electricity will be taxable [proposed Section 65 (105) (zzzzs)]. This is like a ‘commodity exchange’. These are authorised by Central Electricity Regulatory Commission (CERC).

Copyright of cinematographic film and sound recording - Services related to temporary transfer or permitting use of copyright  of (a) cinematographic films; and (b) sound recordings will be taxable. These are actually part of ‘Intellectual Property Right (IPR)’ which was so far excluded from IPR service [proposed Section 65 (105) (zzzzt)]. Thus, royalty payable on both imported and indigenously produced films will be subject to service tax.

Service of transfer or permitting use of copyright in original literary, dramatic, musical and artistic works’ will not be taxable to encourage authors and artists. Individual artists, composers, performers etc. will not be subject to service tax (Thank Pranabda – poor authors like me are spared!).

Preferential location or development in residential complex - Special services provided by a builder etc. to the prospective buyers such as providing preferential location or external or internal development of complexes on payment of extra charges will be taxable, except charges for providing parking space [proposed Section 65 (105) (zzzzu)].

2, Expansion of scope of existing service

Scope of certain existing services is being widely expanded.

Domestic travel will be subject to service tax - The scope of ‘air transport of passengers’ service is proposed to be expanded to cover domestic journey also. Thus, domestic air travel will be costly by 10.2%. Tax is not payable on government taxes, if shown separately in the ticket issued by airlines.

All ser ices provided within airport will be ‘airport service’  - The definition of ‘Airport Services’ [section 65 (105) (zzm)] is proposed to be amended to provide that - (a) all services provided entirely within the

airport premises would fall under these services; and (b) an authorization from the airport authority would not be a precondition for taxing these services.

Auctioneer’s service - An explanation is being added in the definition of ‘Auctioneer’s Service’ [section 65 (105) (zzzr)] to clarify that the phrase ‘auction by Government’ means an auction involving sale of government property by any auctioneer and not when the government acts as an auctioneer for sale of the private property.

Amendment to ‘commercial training and coaching’ service with retrospective effect – An explanation is being added in the definition of ‘Commercial Training or Coaching Service’ [section 65 (105) (zzc)] to clarify that the term ‘commercial’ appearing in the relevant definitions, only means that such training or coaching is being provided for a consideration, whether or not such training or coaching is conducted with a profit motive. This change is being given retrospective effect from 01-07-2003.

In my view, the retrospective amendment can be challenged by way of writ petition as the amendment is not merely to clarify the intention of legislature but is to put a completely artificial meaning to the commonly understood understanding of the term ‘commercial’. Such amendment can be valid prospectively but not retrospectively.

In any case, the retrospective amendment will apply only to cases pending before adjudicating or appellate authority. If no show cause notices were issued, the demands beyond period of one year will be time barred.

Vocational Training Institutes – Commercial coaching and training service is exempt if it is provided by Vocational Training Institute. As per Explanation (i) to Notification 24/2004-ST dated 10-9-2004 as amended w.e.f. 27-2-2010, ‘Vocational Training Institute’ means an Industrial Training Institute or an Industrial Training Centre affiliated to the National Council for Vocational Training, offering courses in designated trades as notified under the Apprentices Act, 1961.

Till 27-2-2010, the definition was as follows – ‘Vocational Training Institute means a commercial training or coaching centre which provides vocational training or coaching that impart skills to enable the trainee to seek employment or undertake self-employment, directly after such training or coaching’.

Most of earlier case law is now not applicable after 27-2-2010.

Construction service - The definitions of ‘Construction of Complex service’ [section 65 (105) (zzzh)], and ‘Commercial or industrial construction service’ [section 65 (105) (zzq)], are being amended to provide that unless the entire consideration for the property is paid after the completion of construction (i.e. after issuance of completion certificate by the competent authority), the activity of construction would be deemed to be a taxable service provided by the builder/promoter/developer to the prospective buyer and the service tax would be charged accordingly.

Practically, service tax will be payable in almost 100% of cases since it usually takes a very long time to get ‘completion certificate’ and often completion certificate is obtained years after the flats/premises are actually occupied.

In case of construction partly complete as on 1-6-2010, in my view, service tax is not payable in case of construction completed prior to 1-6-2010. of course, calculating such value is not a easy job at all.

Information Technology Service – Scope of taxable service is proposed to be expanded to cover cases where IT service is used even for purposes other than business and commerce.

Port and other port service - The definitions of the ‘Port Service’ [section 65 (105) (zn)] and the ‘Other Port Service’ [section 65 (105) (zzl)] are being amended to provide that - (a) all services provided entirely within the port premises would fall under these services; and (b) an authorisation from the port authority would not be a precondition for taxing these services.

Renting of immovable property and vacant land - Amendments are being made in the definition of ‘Renting of immovable property service’ [section 65 (105) (zzzz)] to- (i) provide explicitly that the activity of ‘renting’ itself is a taxable service. This change is being given retrospective effect from 1-6-2007 and (ii) provide that renting of vacant land, where the agreement or contract between the lessor and lessee provides for undertaking construction of buildings or structures on such land for furtherance of business or commerce during the tenure of the lease, shall be subjected to service tax.

Sponsorship service - In the definition of ‘Sponsorship Service’ [section 65 (105) (zzzn)], the exclusion relating to sponsorship pertaining to sports is being removed. Thus, sponsorship of sports events will also be a taxable service.

Change in mode of Valuation of ULIP Management service - The definition of ‘Management of Investment under ULIP Service’ [section 65 (105) (zzzzt)] is being amended to provide that the value of the taxable service for any year of the operation of policy shall be the actual amount charged by the insurer for management of funds under ULIP or the maximum amount of fund management charges fixed by the Insurance Regulatory & Development Authority (IRDA), whichever is higher. The method of computation for monthly payment of service tax will be prescribed in due course.

3. Exemptions

Exemption to services provided by Indian news agency - Business Auxiliary Services and On-line information and database access or retrieval services provided by Indian News Agency are exempt, if the Indian news agency is exempt under section 10(22B) of Income Tax Act and the income is not distributed in any manner to its members – Notification No. 13/2010-ST dated 27-2-2010.

Service of transmission of electricity - Service of transmission of electricity has been exempted w.e.f. 27-2-2010 – Notification No. 11/2010-ST dated 27-2-2010. Dispute in relation to earlier period continues.

Exemption to Government taxes from value of ‘air transport of passenger’ service – Service tax will not be payable on taxes levied by any Government on any passenger travelling by air, if shown separately in ticket issued to passenger – Rule 6(2)(iv) of Valuation Rules w.e.f. 27-2-2010.

Exemption to erection, installation of food grains handling, cold storage etc. - Following are exempt from the whole of the service tax w.e.f. 27-2-2010 - (i) erection, commissioning or installation of mechanised food grain handling systems (ii) erection, commissioning or installation of equipment for setting up or substantial expansion of cold storage and (iii) installation and commissioning of machinery or equipment for initial setting up or substantial expansion of units for processing agricultural, apiary, horticultural, dairy, poultry, aquatic and marine products and meat [Notification No. 12/2010-ST dated 27-2-2010].

Exemption to Group personal accident insurance scheme of Rajasthan government withdrawn - Scheme of Rajasthan Government of group personal accident policy was exempt under notification No. 1/2000-ST dated 9-2-2000. This exemption has been withdrawn w.e.f. 27-2-2010.

Testing and analysis of seeds exempt – Testing and analysis of seed done by Central or State Testing Laboratory and Central or State Certifying Agency notified under Sees Act is exempt from service tax w.e.f. 27-2-2010 – Notification No. 10/2010-ST dated 27-2-2010.

Transport of food grains and pulses by roads exempt - Transport of food grains or pulses  by road has been fully exempted from service tax w.e.f. 27-2-2010 (amendment to notification 33/2004-ST dated 3-12-2004 w.e.f. 27-2-2010).

4. Cash Refund if Cenvat credit cannot be utilised by exporter

If the credit cannot be used for payment of duty on any other final goods or service tax on other services, manufacturer or service provider can get cash refund of the same, if final products or output services were exported without payment of duty (either under bond or after giving Letter of undertaking), or if these were used in the intermediate product cleared for export. Refund is not admissible if exporter has availed duty drawback or has claimed rebate of duty in respect of such duties or has claimed rebate of service tax under Export of Service Rules - Rule 5 of Cenvat Credit Rules.

This provision is only for physical exports and not for deemed exports or home clearances.

Procedure for claiming refund of service tax paid on input services and excise duty on inputs has been specified in notification No. 5/2006-CE(NT) dated 14-3-2006.

There were defects in the notification due to which exporters were finding difficulties in getting refunds. Hence, this notification is proposed to be amended with retrospective effect from 14-3-2006, to ensure faster and fair settlement of refund claims. The proposed amendment provides that both services used in and services used in relation to provision of taxable output services are eligible. Similarly, inputs used for providing taxable output services or final products will be eligible. It is also provided that refund of Cenvat should not be linked to Cenvat taken in a particular period. The amendment is basically to validate various instructions given in CBE&C circular No. 120/02/2010-ST dated 19-1-2010.

The form appended to notification No. 5/2006-CE(NT) has been amended (with prospective effect) to incorporate aforesaid changes.

This is one of the few assessee friendly change made with retrospective effect.

5. No penalty if service tax and interest is paid before SCN, except in case of suppression of facts, fraud etc.

An explanation 2 is proposed to be added to section 73(3) of Finance Act, 1994 to clarify, beyond doubt, that once service tax and interest is paid under section 73(3) of Finance Act, 1994, then no penalty shall be imposed under provisions of Finance Act, 1994. Since the explanation is only to remove doubt, it will apply to pending cases also.

Similar provision has been made in Central Excise Act also.

6. Amendment to Export of Services Rules

‘Use outside India’ no more required to prove a service as export of service - Till 27-2-2010, following conditions were common in respect of all taxable services, for treating the service as export of service. - (a) The service should be provided from India and used outside India [rule 3(2)(a) of Export of Service Rules now omitted w.e.f. 27-2-2010] and (b) Payment for such service is received by the service provider in convertible foreign exchange [rule 3(2)(b) of Export of Service Rules].

Now, the condition in clause (a) has been deleted w.e.f. 27-2-2010. Thus, it is not necessary to prove that the service is used outside India. Now, only conditions as specified in rule 3(1) plus condition that payment is received in foreign exchange will apply to treat a service as export of service.

Some controversy and confusion was created by Tribunal decision in Microsoft Corpn v. CST (2009) 22 STT 201 (CESTAT). Now (hopefully) the dispute is over at least for future period.

Change in category of services for purpose of Export of Service Rules - Till 27-2-2010, following services were covered in rule 3(1)(ii)of Export of Service Rules - Chartered Accountant’s Services (s) * Cost Accountant Services (t) * Company Secretary Services (u) and * Mandap keeper (m).

Now, the mandap service has been transferred to rule 3(i) and other services will be in residual category in rule 3(iii).

Thus, now, w.e.f. 27-2-2010, mandap service will be ‘Export of Service’ only if immovable property is situated outside India (condition impossible to fulfil).

The services of practising CA, CWA and CS will qualify for export of service even if provided from India. Till 27-2-2010, these qualified as export of service only if at least performed outside India.

7. Services provided to construction or installations, structures and vessels in the continental shelf of India and the EEZ taxable in some cases

Definition of ‘India’ has been modified for purpose of Import and Export of services in Budget 2010.

Now, ‘India’ includes the installations, structures and vessels located in the continental shelf of India and the exclusive economic zone of India, for the purposes of prospecting or extraction or production of mineral oil and natural gas and supply thereof . – rule 2(e) of Import of Service Rules (Note – The words in italics have been inserted w.e.f. 27-2-2010) [similar amendment has been made in definition of ‘India’ is rule 3(3) of Export of Service Rules w.e.f. 27-2-2010].

[The ‘Exclusive Economic Zone’ extends upto 200 nautical miles inside the sea from base line].

Thus, w.e.f. 27-2-2010, provisions of service tax for purpose of import of service are applicable to installations, structures and vessels in the continental shelf of India and exclusive economic zone of India, only for the purposes of prospecting or extraction or production of mineral oil and natural gas and supply thereof.

During 7-7-2009 to 27-2-2010, ‘India’ included ‘installations, structures and vessels in the continental shelf of India and the exclusive economic zone of India’. Thus, all services provided to installations, structures and vessels were taxable (e.g. maintenance and repairs and other services provided to vessels). Probably, that was not the intention.

Normally, ‘India’ only includes territorial waters, i.e. upto 12 nautical miles from land mass. However, now the scope of service tax has been extended much beyond this area for the limited purposes as explained above.

Construction of installations, structures and vessels doe not fall under ‘import of service’ - The effect of the change is that only services in respect of ‘prospecting or extraction or production’ of mineral oil and natural gas and supply thereof. will be liable to service tax under import of Services. Thus, construction of installations, structures and vessels within continental shelf and EEZ of India should  not be ‘import of service’ or ‘export of service’ (even if scope of Notification 14/2010-ST dated 27-2-2010 is wide to cover even constriction). Similarly, other services (e.g. maintenance or repairs of vessels) not connected with ‘prospecting or extraction or production’ of mineral oil and natural gas and supply thereof. will not be subject to tax, except when these fall within 12 nautical miles from the base line.

Person liable to pay service tax – If the specified service in the specified area is provided by a person from outside India, it will be ‘import of service’ and person receiving the service will be liable to service tax under reverse charge method if the service is provided from outside India.

If service is provided in this area by assessee from India, it will not be treated as ‘export of service’ and then he will be liable to pay service tax as this service will not qualify as export of service.

Coverage of service tax to areas outside 12 nautical miles from base line of India - Provisions of service tax have been extended to following areas vide Notification No. 14/2010-ST dated 27-2-2010.

1. Whole of continental shelf and exclusive economic zone of India – for purpose of any service provided for all activities pertaining to construction of installations, structures and vessels for the purposes of prospecting or extraction or production of mineral oil and natural gas and supply there of..

2. The installations, structures and vessels within the continental shelf and the exclusive economic zone of India, constructed for the purposes of prospecting or extraction or production of mineral oil and natural gas – for the purpose of any service provided or to be provided by or to such installations, structures and vessels and for supply of any goods connected with the said activity.

[Till 27-2-2010, as per Notification No. 1/2002-ST dated 1-3-2002, the provisions of service tax were extended to ‘installations, structures and vessels in the continental shelf of India and exclusive zone in India, i.e. part 2 of above was covered but not part 1].

Though the scope of Notification 14/2010-ST dated 27-2-2010 is wide to cover even constriction of installations, structures and vessels, the definition of ‘India’ as given in Export of Service rules and Import of Service Rules does not cover ‘construction’.

8 Excise duty and also service tax on packaged software

Hamlet had said ‘To be or not to be, that is the question’. Indian assessees are saying ‘Software is goods or service (or both), that is the question’.

Software falls in heading 8523 80 20 of Central Excise Tariff. However, all software, except canned software i.e. software that can be sold off the shelf, is ‘exempt’. Duty on packaged software is 10% w.e.f. 27-2-2010, while there is no excise duty on tailor made i.e. customised software - Sr No. 27 of notification No. 6/2006-CE dated 1-3-2006 as amended w.e.f. 27-2-2010.

‘Packaged software or canned software’ means a software developed to meet the needs of variety of users, and which is intended for sale or capable of being sold, off the shelf [Explanation to Notification No. 17/2010-CE dated 27-2-2010 and Sr No. 27 to Notification No. 6/2006-CE dated 1-3-2006]

The issue is whether both service tax and CVD/excise duty are payable on software. I have tried my best to understand the statutory provisions and my views are as follows (though obviously ten people can have ten different views on the issue).

Single use packaged or canned software – Manufacturer/importer should pay excise duty/CVD on entire value of consideration received from buyer and then no service tax is will be payable (Notification No. 2/2010-ST dated 27-2-2010 in respect of excise duty and Notification No. 17/2010-ST dated 27-2-2010 in respect of CVD on imports. 

The term ‘single use’ has not been defined. If the software is permitted to be used on more than one computers, it can be termed as ‘multi-use’ (as the term used is ‘single use’ and not ‘single user’).

SSI units can avail exemption from excise duty but then they will be liable to pay service tax as the exemption under Notification No. 2/2010-ST is subject to condition that ‘appropriate duties of excise’ should have been paid (Of course, they can argue that they can claim deduction of value of material under Notification No. 12/2003-ST dated 20-6-2003 and then ‘value’ for purpose of service tax is Nil).

In my view, traders of such software will not be liable (Indeed they are even otherwise not liable as sale and purchase of goods cannot be subjected to service tax, but I understand that in some Commissionerates, traders are being asked to pay service tax on sale of packaged software).

Other packaged or canned software – In case of other packaged software (i.e. multi-use), excise duty will be payable on consideration paid or payable for transfer of right to use such software [Notification No. 17/2010-CE dated 27-2-2010]. In case of imports, corresponding CVD will be payable [Notification No. 31/2010-Cus dated 27-2-2010].

CBE&C has clarified that value of software can be split into software media and right to use software (i.e. IPR relating to software) as the notification itself envisages such splitting – MF(DR) Instruction No. 354/189/2009-TRU dated 4-11-2009 in respect of imported software but will equally apply to packaged software manufactured in India.

It may be noted that in case of branded (tailor made) software, there is no ‘sale’ of software as such as entire property in software is never passed on to buyer.. Only right to use is transferred (some times for a limited period, which has to be renewed by paying further amount). There will be ‘sale’ of software only if source code and entire property in software is transferred to buyer.

If the manufacturer/service provider charges some amount over and above the consideration received for transfer of right to use (may be for installation, customisation etc.), service tax will be payable on such amount. Service tax cannot be demanded on amount on which excise duty has been paid, since assessee can claim deduction of value of material under Notification No. 12/2003-ST.

SSI units can avail exemption of excise duty but they will be exposed to liability of service tax, though they can argue that value of service is Nil.

Renewal of license of packaged software – Sometimes, the license to use packaged software is for limited period (usually one year). The license is renewed on payment of renewal fee by giving password. Thus, ‘packaged software ‘is not sold. In such cases, in my view, service tax will become payable, since packaged software ‘packed with document providing right to use’ is not given.

Customised software – Customised software is subject to service tax but assessee can claim deduction of value of material under Notification No. 12/2003-ST dated 20-6-2003.

Conclusion – The issue is still confusing and prone to litigation. Hence, whatever you decide to do, it is better to inform department in writing, to avoid charge of suppression of facts (I am sure department is as confused as you are).

Position prior to 27-2-2010 – Prior to 27-2-2010, there was no distinction between single use and multi use packed or canned software. However, in my view, even prior to 27-2-2010, manufacturer could claim deduction of value of material under Notification No. 12/2003-ST though factually, many large manufacturers were charging (may be still charging) both Vat/CST and service tax on entire amount of the Bill.

10.Transport of goods by rail taxable w.e.f. 1-4-2010

Service tax is payable on 30% of value of service w.e.f. 1-4-2010 on service of transport of goods by rail [S No. 11 of Notification No. 1/2006-ST as amended w.e.f. 1-4-2010]. Food articles, defence equipment, kerosene oil, parcels, relief material, passenger luggage etc. are fully exempt from service tax [Notification No. 8/2010-ST dated 27-2-2010]

Transport of goods by rail except by containers was exempt upto 31-3-2010 - There was some flip flap in respect of service tax on transport of goods by rail. Service tax was imposed on transport of goods by rail. The tax was to be effective from 1-9-2009 and in fact, Notification Nos. 28/2009-ST and 29/2009-ST dated 31-8-2009 were issued granting full exemption to certain food articles, defence equipment, petroleum products, parcels and other items and abatement to the extent of 70% for service tax on rail transport of remaining goods.  However, Government had sudden change of heart and revised Notification Nos. 33/2009-ST and 34/2009-ST both dated 1-9-2009 was issued, within 24 hours of the earlier notifications! (Now, Notification No. 33/2009-ST has been rescinded w.e.f. 1-4-2010).

Thus, transport of all goods by rail (other than transport of goods in containers by rail by any person other than Government Railway) was completely exempted vide Notification No. 33/2009-ST dated 1-9-2009. Thus, the position as existing prior to Budget 2009 was restored i.e. only transport of goods in container by rail by any person other than Government Railway, was liable to service tax on 30% of the gross value charged [Notification No. 1/2006-ST dated 1-3-2006, as amended vide Notification No. 34/2009-ST dated 1-9-2009].

Now, tax has been re-imposed w.e.f. 1-4-2010 as explained above.