No Service tax Return Filing Till New ST3 – CBEC

All Service Tax assessees are hereby informed that they will not be able to file ST 3 returns in ACES now and have to wait until the modified version of ST 3 Form is made available in a few weeks. 

Please revisit ACES website(http://www.aces.gov.in) for further information. Inconvenience caused is regretted.

Message From CBEC

All about Service Tax Exemption to Small Service Providers – Upto Rs. 10 Lacs

Service Tax act/Rules has provided exemption to small scale service provider from service tax up to aggregate value of taxable services provided of 10 lakh in a Financial Year . This exemption was available before 01.07.2012 and continued even after 01.07.2012 in negative list regime with few changes wef 01.04.2012.

If in the previous financial year the aggregate value of taxable services provided by you was less than Rs.10 lakh and in the present financial year the aggregate value of taxable services provided by you is also less than Rs.10 lakh. Then no need to pay service tax .

If in the previous financial year aggregate value of taxable services provided was less than 10 lakh but this year aggregate value of taxable services provided is more than 10 lakh them you start paying service tax after crossing the threshold of Rs 10 lakh.

If in the previous financial year aggregate value of taxable services provided was more than 10 lakh but this year aggregate value of taxable services provided is less than 10 lakh them you start paying service tax from rupee one.

Aggregate value of Taxable Services provided
Service Tax applicable
Preceding Financial  Year
Current Financial year
Less than 10 lakh
Less than 10 lakh
No service tax
Less than 10 lakh
More than 10 lakh
Service tax applicable after 10 lakh
More than 10 lakh
Less than 10 lakh
service tax applicable from Rs one ,No exemption available

The Finance Act 2012, has amended the provision relating to small scale exemption recognizing that theaggregate value up to Rs 10 Lakhs will be in terms of invoices issued/to be issued for taxable services and not payments received.(Notification no.33/2012-ST dated 20.6.2012). This is w .e .f 1.7.2012. 

1.Meaning of aggregate value :The small service provider exemption of ` 10 Lakh is available towards “aggregate value not exceeding ` 10 Lakhs”, means the sum total of value of taxable services charged in the first consecutive invoices issued during a financial year but does not include value charged in invoices issued towards such services which are exempt from whole of service tax leviable thereon under section 66B of the said Finance Act under any other notification.

The definition of the ‘aggregate value’ has been amended w.e.f. 01.04.2012 whereby the sum total of the value of taxable services charged in the first consecutive invoices issued/required to be issued during the financial year shall be considered instead of payments received.

The exemption as to small service provider is provided for the keeping the small service provider outside the tax net.

2Single Limit for all services By same person : where a taxable service provider provides one or more taxable services , the exemption under this notification shall apply to the aggregate value of all such taxable services and not separately for each  services; 

Suppose A person is providing service XXX and YYY . To avail this exemption aggregate service provided for service XXX and YYY should be less than 10 Lakh

the aggregate value of taxable services rendered by a provider of taxable service from one or more premises, does not exceed ten lakh rupees in the preceding financial year. 

3Single Limit for all offices /Location : where a taxable service provider provides taxable services from one or more premises, the exemption under this notification shall apply to the aggregate value of all such taxable services and from all such premises and not separately for each premises; 

Example:In service Tax person can get separate registration for deferential location .To calculate 10 lakh Limit ,Aggregate value of taxable services at all location ,even having different registration number , is to be considered.

In brief this exemption is available person wise not location or service wise.

4.Cenvat Credit not available if Exemption of 10 lakh  has been availed. 

5. Exemption is optional not mandatory : This exemption  is optional so that even such small service providers can opt to pay tax instead of availing the benefit of exemption. In case of such opting to pay service tax, the service provider would get the benefit of CENVAT Credit of duties and taxes paid on capital goods, inputs and input services. By this mechanism the CENVAT credit can get passed on whereby the basic cost of output service would get reduced if the service receiver can avail CENVAT credit.  

6.Once exercised Can not be reversed : The option as to non-availment of such small scale exemption and opting to pay tax once exercised, cannot be withdrawn during the remaining part of such financial year. 

Option is granted to service provider to avail benefit of threshold exemption to the tune of ` 10/- lakhs. In case option is exercised by service provider, service tax would be applicable only if the aggregate value of taxable service ( provided during the previous financial year exceed ` 10 Lakhs )

7.No exemption where service tax is payable under Reverse Charge: However the above exemption shall not be available to the person made liable to pay service tax under sec (68)(2) [Reverse Charge and Joint Charge liabilities]  

The liability of the service provider and service recipient are different and independent of each other. Thus in case the service provider is availing exemption owing to turnover being less than Rs 10 lakhs, he shall not be obliged to pay any tax. However, the service recipient shall have to pay service tax which he is obliged to pay under the partial reverse charge mechanism.

8. No Exemption If Service are provided under brand name or trade name of others :The person providing service under the brand name or trade name of others. Some persons are providing the services under name of brand name owner. These service providers would not be eligible to the exemption which is available to the small service providers.

If service provided under own brand name or trade name then eligible : If a person is providing a service under his own brand name, he would be entitled to the exemption.

9. The Basic Exemption subject to above condition is available to all type of Person :The basic exemption is not restricted only to individual or partnership firm but it is available to all assessees.

‘Person’ is not restricted to natural person. ‘Person’ has been defined Section 65 B of the Act.  The following shall be considered as persons for the purposes of the Act:

  1. an individual
  2. a Hindu undivided family
  3. a company
  4. a  society
  5. a  limited liability partnership
  6. a firm
  7. an association or body of individuals, whether incorporated or not
  8. Government
  9. a  local authority,  or
  10. every artificial juridical person, not falling within any of the preceding sub-clauses.

10. Abatement and exempted services is not to be counted for calculation of 10 Lakh: Various services has been exempted from service tax vide notification 25/2012 .If service provider is providing both exempted and taxable services than turnover of exempted services is not be added for calculation of 10 lakh .
Similarly abatement from gross amount charged by service provider  has been defined in notification 26/2012  .To calculate 10 lakh part only taxable part after abatement is to be considered.

Example: Person is providing services of renting motor vehicle designed to carry passengers. In a given financial year he has charged gross Rs 20 lakh for services . In notification 26/2012 only 40% part i.e 8 Lakh is taxable for renting of motor vehicle designed to carry passengers  (40% of 20 Lakh) . So he can can avail 10 lakh exemption available to small service provider ,as taxable part of services provided by him is less than 10 lakh Limit.


Relevant notification is given here under 

SECTION 66B OF THE FINANCE ACT, 1994 – CHARGE OF SERVICE TAX ON AND AFTER FINANCE ACT, 2012 – EXEMPTION TO SMALL SERVICE PROVIDERS

NOTIFICATION NO. 33/2012-ST, DATED 20-6-2012

[SUPERSESSION OF NOTIFICATION NO. 6/2005-ST, DATED 1-3-2005]

In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994) (hereinafter referred to as the said Finance Act), and in supersession of the Government of India in the Ministry of Finance (Department of Revenue) notification No. 6/2005-Service Tax, dated the 1st March, 2005, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide G.S.R. number 140(E), dated the 1st March, 2005, except as respects things done or omitted to be done before such supersession, the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts taxable services of aggregate value not exceeding ten lakh rupees in any financial year from the whole of the service tax leviable thereon under section 66B of the said Finance Act:

Provided that nothing contained in this notification shall apply to,-

 (i)  taxable services provided by a person under a brand name or trade name, whether registered or not, of another person; or

(ii)  such value of taxable services in respect of which service tax shall be paid by such person and in such manner as specified under sub-section (2) of section 68 of the said Finance Act read with Service Tax Rules,1994.

2. The exemption contained in this notification shall apply subject to the following conditions, namely:-

(i)  the provider of taxable service has the option not to avail the exemption contained in this notification and pay service tax on the taxable services provided by him and such option, once exercised in a financial year, shall not be withdrawn during the remaining part of such financial year;

(ii)  the provider of taxable service shall not avail the CENVAT credit of service tax paid on any input services, under rule 3 or rule 13 of the CENVAT Credit Rules, 2004 (herein after referred to as the said rules), used for providing the said taxable service, for which exemption from payment of service tax under this notification is availed of;

(iii)  the provider of taxable service shall not avail the CENVAT credit under rule 3 of the said rules, on capital goods received, during the period in which the service provider avails exemption from payment of service tax under this notification;

(iv)  the provider of taxable service shall avail the CENVAT credit only on such inputs or input services received, on or after the date on which the service provider starts paying service tax, and used for the provision of taxable services for which service tax is payable;

(v)  the provider of taxable service who starts availing exemption under this notification shall be required to pay an amount equivalent to the CENVAT credit taken by him, if any, in respect of such inputs lying in stock or in process on the date on which the provider of taxable service starts availing exemption under this notification;

(vi)  the balance of CENVAT credit lying unutilised in the account of the taxable service provider after deducting the amount referred to in sub-paragraph (v), if any, shall not be utilised in terms of provision under sub-rule (4) of rule 3 of the said rules and shall lapse on the day such service provider starts availing the exemption under this notification;

(vii)  where a taxable service provider provides one or more taxable services from one or more premises, the exemption under this notification shall apply to the aggregate value of all such taxable services and from all such premises and not separately for each premises or each services; and

(viii)  the aggregate value of taxable services rendered by a provider of taxable service from one or more premises, does not exceed ten lakh rupees in the preceding financial year.

3. For the purposes of determining aggregate value not exceeding ten lakh rupees, to avail exemption under this notification, in relation to taxable service provided by a goods transport agency, the payment received towards the gross amount charged by such goods transport agency under section 67 of the said Finance Act for which the person liable for paying service tax is as specified under sub-section (2) of section 68 of the said Finance Act read with Service Tax Rules, 1994, shall not be taken into account.

Explanation. – For the purposes of this notification,-

(A)  "brand name" or "trade name" means a brand name or a trade name, whether registered or not, that is to say, a name or a mark, such as symbol, monogram, logo, label, signature, or invented word or writing which is used in relation to such specified services for the purpose of indicating, or so as to indicate a connection in the course of trade between such specified services and some person using such name or mark with or without any indication of the identity of that person;

(B)  "aggregate value" means the sum total of value of taxable services charged in the first consecutive invoices issued during a financial year but does not include value charged in invoices issued towards such services which are exempt from whole of service tax leviable thereon under section 66B of the said Finance Act under any other notification."

4. This notification shall come into force on the 1st day of July, 2012.

Service Tax on Directors

The Finance Act, 2012 has ushered in a new system of taxation of services popularly known as negative list. The new changes are a paradigm shift from the system in force upto 30th June, 2012 where only services of specified descriptions were subject to tax. In the new system all services except those specified in the negative list will be subject to taxation. In short, it has changed the methodology for applicability of service tax from “inclusive” to “blanket applicability with the exception of certain specific categories”. 

What is Service?

Service has been defined in clause 44 of new Section 65(B) of the Finance Act, 2012 as follows:


“Service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-
(a) An activity which constitutes merely,
(i) A transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
(ii) Such transfer, delivery or supply of any goods which is deemed to be sale with the meaning of clause 29(A) of article 366 of the Constitution; or
(iii) A transaction in money or actionable claim;                               
(b)   a provision of service by an employee to the employer in the course of or in relation to his employment;
(c) fees taken in any Court or tribunal established under any law for the time being in force.


Is Service Tax payable on Sitting Fees/Commission paid by companies to Directors?


The services performed by a director (other than Managing Director/Executive Director/Wholetime Director who are employees of the Company) of a company fall within the ambit of taxable services with effect from 1st July, 2012. 
In respect of services provided by any non-resident director who does not have any fixed establishment in India or is not a resident in India, the companies would be statutorily required to pay the service tax in respect of any consideration which is given to such non-resident directors.
Accordingly, service tax would be applicable on sitting fees and/or commission to Non-Executive Directors of the Company (NEDs).


Is Service Tax payable on reimbursement of expenses of NEDs by the company?


There is a ‘Pure Agent’ concept in service tax.  Reimbursement of expenses to ‘Pure Agent’ is not liable to Service Tax. 


In some cases, travelling and hotel expenses incurred by NEDs to attend meetings are reimbursed by the company. This would also attract Service Tax as NEDs would not fit within the definition of ‘Pure Agent’ as they do not perform any activity on behalf of the principal.


Can company bear the service tax payable by the NEDs Is it a deemed Remuneration?


As per the explanation to section 198 of the Companies Act, 1956 (“the Act”), the term ‘remuneration’ includes any expenditure incurred by the company in respect of any obligation which, but for such expenditure by the company, would have been incurred by the Director.


There is a view that payment of service tax is a liability or obligation of the NED. However NEDs have a right to pass it on to the service receiver i.e. the company. Since the company incurs expenditure in respect of such obligation, it may tantamount to ‘remuneration’. This may in some cases be treated as increase in remuneration compelling companies to apply to the Ministry of Corporate Affairs (“MCA”). 


For example, if a company is paying the maximum permissible sitting fee to its NEDs, the payment of service tax would tantamount to increase in the remuneration beyond the maximum permissible limit or if a company is paying maximum permissible 1% commission on net profits to its NEDs, the payment of service tax could tantamount to payment of commission over and above the maximum permissible.


While considering the concept of "expenditure", it is important to dwell upon the concept of "Out of pocket". The expenditure that the company incurs in paying service tax to the director can be treated as 'input services' and can be set off by the company against its excise/service tax liability. However, depending upon the type of business, this may not be totally offset.


There are varying views emerging on liability of Service Tax on directors.


Whilst one view is that the Service Tax is merely collected by the NED from the company and paid to the authorities, the other view is that it is a liability of the NED which is assumed by the company attracting deemed remuneration requiring the Central Government approval.


The Service Tax, being an indirect tax, it is an established fact that the service providers (NEDs in the present case) generally collect the service tax from the service receivers (company in the present case) and pay it to the Government. The company when paying the Service Tax amount to the NED, does not pay it on his behalf to a third party. The NED in turn is supposed to pay it to the Government and discharge his statutory obligation.


The Board of Directors of a company, if required, can pass a suitable resolution authorising payment of service tax on sitting fees and / or commission to NEDs but it appears that if it is treated as a deemed remuneration, it would require approval of Central Government.


As many companies would bear the service tax component of sitting fees / commission / reimbursement of out of pocket expenses payable to NEDs, MCA will be flooded with multiple applications on this subject.


Service Tax Additional burden on NEDs


Applicability of service tax on sitting fees / commission to NEDs would inter-alia put following additional burden on the NEDs.


1) Obtain service tax registration number.
2) Raise invoice for sitting fees and service tax component separately for each and every meeting of Board / Committee and for commission and Service Tax as and when the commission becomes payable.
3) Issue invoice within 30 days of completion of service/receipt of payment, whichever is earlier, on a running serial number commencing from No.1 for the Financial Year.
4) Pay service tax quarterly i.e. 5th of the month following the quarter (or 6th if deposited thru internet banking) in which the service is provided.  However, Service Tax for the month of March or quarter ending in March is to be paid by 31st March of the financial year.
5) Electronic filing of Return is mandatory by 25th of the month following the half year (viz. for April to Sept. by 25th Oct and Oct to March by 25th April). Nil return to be filed, even if no services have been provided.
6) Submit list of all accounts maintained at the time of filing first return.


Liberalised Scenario


The recent amendments made to Schedule XIII to the Companies Act dealing with the ‘Managerial Remuneration’ have liberalized the ‘Managerial Remuneration’ to a great extent. As per the new provisos introduced, a company which is neither a listed company nor a subsidiary of the listed company need not approach Central Government for permission for managerial remuneration subject to fulfillment of certain conditions. Similarly, the listed companies and its subsidiaries have also been exempted from the Central Government approval subject to fulfillment of certain conditions as stipulated in the amended Schedule XIII.


The Companies Bill, 2011 which has substantially liberalized the Managerial Remuneration does not envisage approval of Central Government in such cases. 
 
Clarifications required from MCA 


It would be in the interest of fairness that reimbursement of service tax should be kept outside the purview of ‘Managerial Remuneration’.


It would also be in the interest of the NEDs as well as the corporates if MCA issues a circular clarifying that the payment of Service Tax by the company to the Director in respect of sitting fees and/or commission would not tantamount to remuneration / increase in remuneration of the Director.


Clarifications required from MOF


CBEC vide its circular No. 115/09/2009 dated 31st July 2009 had clarified that the service tax is not payable on fees and commission payable to the Non Executive Directors on the Board of a company as they do not provide taxable service. The directors have fiduciary duties towards the shareholders and remunerations paid to Directors of companies would not be liable to service tax.. Even today, there is no change in the role of NEDs and the logic on which the CBEC had issued the said circular still holds good.


It would be in the interest of the NEDs as well as the corporates if MOF confirms that the clarification issued by CBEC vide Circular No. 115/09/2009 dated 31st July 2009 equally applies to fees and commission payable / reimbursement of expenses to Non-Executive directors and as such is not a taxable service under the newly inserted Section 66B of the Finance Act 2012.


If for some reason it is considered taxable under Section 66B, then it is requested to apply ‘reverse charge’ principle under which the company on whose Board they are appointed may be made liable to pay service tax on such payments. 

By: Narayan Shankar, Sr. VP & Company Secretary, M&M 

The author would like to thank Mohan Raghavan, VP (Excise), M&M for his inputs.

Disclaimer: The views expressed above are the individual views of the authors. These views are not of the organisations they belong to and the organisation need not necessarily subscribe to their views. 


In addition to the above – 


The CBEC has issued following notifications dated August 7, 2012 which are summarised here below :

Notification No. 45/2012-ST dated 7-8-2012 has amended the Notification No. 30/2012-ST dated 20-6-2012 and expanded the scope of reverse charge mechanism. With effect from 7-8-2012, two additional services will be covered under reverse charge mechanism:

S. No. Description of service % of service tax payable by person providing service % of service tax payable by person receiving service
1) Services provided or agreed to be provided by a director of a company to the said company Nil 100%
2) Security services provided or agreed to be provided by an-  Individual, Hindu Undivided Family, Partnership firm, whether registered or not, Association of persons

 

to a Business entity registered as a body corporate

25% 75%

The definition of Security services has been inserted vide Notification No. 46/2012-ST dated 7-8-2012 as Rule 2(1)(fa) of Service Tax Rules, 1994 which is given below:

“Security services” means services relating to the security of any property, whether movable or immovable, or of any person, in any manner and includes the services of investigation, detection or verification, of any fact or activity.

Partial Reverse Charge for Security Services: – The service provider is liable to charge & pay full Service taxfor a period up to and inclusive of 6th August, 2012 and from 7th August, he is liable to pay 25% of service tax and a Body Corporate has to pay 75% service tax.

Resolution with Problem:-

Service by Directors to the Company: As per this amendment, the services provided by a Director to the Company, the entire service tax has to be paid by the Company under Reverse charge 

Issues still Remain?

But what will happen for the period from 1st July 2012 and till 6th August 2012 – there was no reverse charge mechanism for the service by Director to the Company was taxable.

So, for the payment received by the Director for this period, has the Director to pay the tax? Does it mean all the directors have to obtain registration for payment of service tax for one month and 6 days, file ST 3, etc?

New Service Tax Accounting Code w.e.f 1st Jul 2012

Accounting Code for payment of service tax under the Negative List approach to taxation of services, with effect from the first day of July 2012 – regarding.

Negative List based comprehensive approach to taxation of services came into effect from the first day of July, 2012. For payment of service tax under the new approach, a new Minor Head – ‘All taxable Services’ has been allotted under the Major Head “0044-Service Tax”.

2. Accounting codes for the purpose of payment of service tax under the Negative List approach, with effect from 1st July, 2012 is as follows:

Name of Services
Accounting codes
Tax collection
Other Receipts
Penalties
Deduct refunds
All Taxable Services
00441089
00441090
00441093
00441094

NOTE: (i) service specific accounting codes will also continue to operate, side by side, for accounting of service tax pertaining to the past period (meaning, for the period prior to 1st July, 2012); 

(ii) Primary Education Cess on all taxable services will be booked under 00440298 and Secondary and Higher Education Cess on all taxable services will be booked under 00440426; 

(iii) a new sub-head has been created for payment of “penalty”; the sub-head “other receipts” is meant only for payment of interest etc. leviable on delayed payment of service tax; 

(iv) the sub-head “deduct refunds” is not to be used by the assessees, as it is meant for use by the Revenue/Commissionerates while allowing refund of tax.

3. Trade Notice/Public Notice may be issued to the field formations and tax payers. Please acknowledge the receipt of this Circular. Hindi version follows.

Comments – 

In short it means – 

All Service Tax Payments pertaining to periods upto 30th June 2012, existing or old category wise accounting codes are to be used.

Service Tax Payments pertaining to periods from and onwards 1st July 2012, the new (Above-mentioned) codes are to be used. 

Service Tax Exemption to Small Service Providers – New Notification

Notification No. 33/2012 – Service Tax, dated- 20th June, 2012

G.S.R. (E).-  In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994) (hereinafter referred to as the said Finance Act),  and in supersession of the Government of India in the Ministry of Finance (Department of Revenue) notification No. 6/2005-Service Tax, dated the 1st March, 2005,  published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide G.S.R. number 140(E), dated the 1st March, 2005, except as respects things done or omitted to be done before such supersession, the Central Government, being satisfied that it is necessary in the public interest so to do,  hereby exempts taxable services of aggregate value not exceeding ten lakh rupees in any financial year from the whole of the service tax leviable thereon under section 66B of the said Finance Act:        

Provided that nothing contained in this notification shall apply to,-

(i) taxable services provided by a person under a brand name or trade name, whether registered or not, of another person; or

(ii) such value of taxable services in respect of which service tax shall be paid by such person and in such manner as specified under sub-section (2) of section 68 of the said Finance Act read with Service Tax Rules,1994.

2. The exemption contained in this notification shall apply subject to the following conditions, namely:-

(i) the provider of taxable service has the option not to avail the exemption contained in this notification and pay service tax on the taxable services provided by him and such option, once exercised in a financial year, shall not be withdrawn during the remaining part of such financial year;

(ii) the provider of taxable service shall not avail the CENVAT credit of service tax paid on any input services, under rule 3 or rule 13 of the CENVAT Credit Rules, 2004 (herein after referred to as the said rules), used for providing the said taxable service, for which exemption from payment of service tax under this notification is availed of;

(iii)the provider of taxable service shall not avail the CENVAT credit under rule 3 of the said rules, on capital goods received, during the period in which the service provider avails exemption from payment of service tax under this notification;

(iv) the provider of taxable service shall avail the CENVAT credit only on such inputs or input services received, on or after the date on which the service provider starts paying service tax, and used for the provision of  taxable services for which service tax is payable;

(v) the provider of taxable service who starts availing exemption under this notification shall be required to pay an amount equivalent to the CENVAT credit taken by him, if any, in respect of such inputs lying in stock or in process on the date on which the provider of taxable service starts availing exemption under this notification;

(vi) the balance of CENVAT credit lying unutilised in the account of the taxable service provider after deducting the amount referred to in sub-paragraph (v), if any, shall not be utilised in terms of provision under sub-rule (4) of rule 3 of the said rules and shall lapse on the day such service provider starts availing the exemption under this notification;

(vii) where a taxable service provider provides one or more taxable services from one or more premises, the exemption under this notification shall apply to the aggregate value of all such taxable services and from all such premises and not separately for each premises or each services; and

(viii) the aggregate value of taxable services rendered by a provider of taxable service from one or more premises, does not exceed ten lakh rupees in the preceding financial year.

3. For the purposes of determining aggregate value not exceeding ten lakh rupees, to avail exemption under this notification, in relation to taxable service provided by a goods transport agency, the payment received towards the gross amount charged by such goods transport agency under section 67 of the said Finance Act for which the person liable for  paying service tax is as specified under sub-section (2) of section 68 of the said Finance Act read with Service Tax Rules, 1994, shall not be taken into account.

Explanation.- For the purposes of this notification,-

(A) “brand name” or “trade name” means a brand name or a trade name, whether registered or not, that is to say, a name or a mark, such as symbol, monogram, logo, label, signature, or invented word or writing which is used in relation to such specified services for the purpose of indicating, or so as to indicate a connection in the course of trade between such specified services and some person using such name or mark with or without any indication of the identity of that person;

(B) “aggregate value” means the sum total of value of taxable services charged in the first consecutive invoices issued during a financial year but does not include value charged in invoices issued towards such services which are exempt from whole of service tax leviable thereon under section 66B of the said Finance Act under any other notification.”

4. This notification shall come into force on the 1st day of July, 2012.

 [F.No. 334 /01/2012- TRU]

(Raj Kumar Digvijay)

Under Secretary to the Government of India

Service tax Exemption on property tax paid on immovable property

Notification No. 29/2012- Service Tax, Dated – 20th June, 2012

G.S.R……(E).- In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994) (hereinafter referred to as the Finance Act), and in supersession of the Government of India in the Ministry of Finance (Department of Revenue) notification No. 24/2007-Service Tax, dated the 22nd May, 2007, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i) vide number G.S.R. 370 (E), dated the 22ndMay, 2007, except as respects things done or omitted to be done before such supersession, the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable service of renting of an immovable property, from so much of the service tax leviable thereon under section 66B of the said Finance Act, as is in excess of the service tax calculated on a value which is equivalent to the gross amount charged for renting of such immovable property less taxes on such property, namely property tax levied and collected by local bodies:

            Provided that any amount such as interest, penalty paid to the local authority by the service provider on account of delayed payment of property tax or any other reasons shall not be treated as property tax for the purposes of deduction from the gross amount charged:

            Provided further that wherever the period for which property tax paid is different from the period for which service tax is paid or payable, property tax proportionate to the period for which service tax is paid or payable shall be calculated and the amount so calculated shall be excluded from the gross amount charged for renting of the immovable property for the said period, for the purposes of levy of service tax. 

Example:

Property tax paid for April to September = Rs. 12,000/-

Rent received for April  = Rs. 1, 00,000/-

Service tax payable for April     = Rs. 98,000/- (1, 00,000 -12,000/6) * applicable rate of   service tax

2.         This notification shall come into force on the 1st day of July, 2012.

[F.No. 334 /01/2012- TRU]

(Raj Kumar Digvijay)

Under Secretary to the Government of India

Joint development agreement with land owners to construct residential complex attracts Service Tax

Service Tax - Construction of complex service -The Appellants argue that there is no relationship of service provider and service recipient between the Developer and the Land Owner. According to them it is a relationship in a joint venture for profit. Both the parties have joined together in the business of construction of complex and the land owner brings in the capital by way of his land. The Developer by way of his capital and services and they jointly construct the complex and use or sell the flats for profit. He argues that CBEC had clarified the position that no service arises in such context. This clarification dated 29-01-09 is examined later in this order.

On the contrary we find that the Joint Development agreement does not indicate any terms on the above lines. The parties were neither taking risks jointly or doing any common activity. There was no participation by the land Owners in organizing or carrying out the activity. The Joint Development Agreement as one in which the land owner transfers part of his rights in the land and gets the value of such rights transferred, in the form of constructed flats which consist of value of material used and services rendered by the Developer. After the Land Owner transfers a part of his rights through the agreement, his share of UDS is registered in his name and he is like any other prospective buyer for whom construction of complex is carried out under an agreement for construction of flats except that he has a guaranteed right to get his share of the number of flats constructed. We further examine the various issues raised in the light of this finding.

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FULL TEXT OF THE JUDGMENT IS AS FOLLOWS:-

IN THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
SOUTH ZONAL BENCH AT CHENNAI

Appeal No.ST/774/2010

(Arising out of Order-in-Original No.40/2010 dated 13.09.2010
passed by the Commissioner of Service Tax, Chennai)

Date of Decision: 03.05.2012

LCS CITY MAKERS PVT LTD

Vs

COMMISSIONER OF SERVICE TAX, CHENNAI

FINAL ORDER No. 507/2012

Per: Mathew John:

M/s.LCS Property Development (P) Ltd. (appellant herein) are engaged in construction of residential complexes. For this purpose, they used to enter into Joint Development Agreements with land owners, in terms of which they would undertake construction of residential flats/houses in the land owned by such land owners. As per the terms of the Joint Development Agreement, a portion of the constructed area, in the form of flats / houses, would be assigned in favor of the land owners and the remaining constructed area, in the form of flats/houses, would be sold by the appellant to various buyers. While selling the residential flats/houses belonging to the appellant, firstly the Undivided Share of the land (UDS) would be sold to the buyer and a construction agreement would also be entered into with the buyer, for construction of a flat/ house, in accordance with the agreed specifications. The constructed area in the form of flats/houses, allotted in favor of the land lord, would be dealt with by him according to his wish.

2. In this connection, the department conducted verification of the appellant’s liability for payment of service tax and a show cause notice dated 11.02.2008 was issued to the appellant, stating various grounds of short levy of service tax and proposing a service tax demand of Rs.83,98,962/- from the appellant, for the period 16.06.2005 to 31.03.2007 and also proposing imposition of penalties.

3. After due process of law, an Order-in-Original No.60/2008 dated 22.12.2008 has been passed by the Commissioner of Service Tax, confirming the above demand of service tax of Rs. 83,98,962/-, along with interest and imposing a penalty of Rs.84,00,000/- under Section 78 of the Act. An amount of Rs.58,45,507/- paid by the appellant was appropriated towards the above demand. Aggrieved by the said order-in-original, the appellant preferred an appeal before the Hon’ble Tribunal, which vide its Final Order No.1125/2009 dated 31.8.2009 remanded the matter for fresh adjudication observing as under:

“2. M/s.LCS City Makers Pvt. Limited are engaged in construction of residential premises. Shri G. Natarajan, Ld. Counsel appearing for the appellants states that the appellants had entered into Joint Development Agreement with land owners for undertaking construction of residential flats/houses. He states that the impugned order relates to three such Joint Development Agreements for three projects, namely TA Enclave, Himadri and Kamakotivilasam. The appellants are challenging the impugned order on various grounds. He also states that the appellants have also taken a new ground in respect of each of the three projects to the effect that the sale value of the land alone to the flat buyers should be considered as the value. Further, the appellants are also relying on the Board’s Circular No.108/02/2009-ST dated 29.1.2009 which was not before the adjudicating Commissioner who has passed the impugned order on 22.12.2008. In view of the new grounds taken and the later circular of the Board relied upon by the appellants, both sides agree that the matter can be remanded to the lower authority for fresh decision after taking into account the new ground taken by the appellants and the contents of the Board is Circular dated 29.1.2009.

3. Ld. JCDR Shri V.V. Hariharan appearing for the Revenue states that a similar matter has been remanded for fresh consideration by the Final Order No.805/2009 dated 14.5.09 in Appeal No.S/94/08.

4. Keeping in view the foregoing including the consent of both sides, we set aside the impugned order and remand the matter to the adjudicating Commissioner for fresh decision. All issues are kept open. The appellants shall be given a reasonable opportunity of being heard before passing a fresh order.”

4. In pursuance thereof, after due process of law, the Commissioner of Service Tax, Chennai has passed the impugned Order-in-Original No.40/2010 dt. 13.9.2010 wherein the demand of service tax amount of Rs. 83,98,962/- has been once again confirmed along with interest and a penalty of Rs.84,00,000/- has been imposed on the appellant under Section 78 of the Finance Act, 1994. Aggrieved by the impugned order, the appellant is now in appeal before the Tribunal.

5. The service tax demand is in respect of the following projects:-

(i) TA Enclave, Velacherry consisting of 81 units

(ii) Himardri, T.Nagar consisting of 20 units

(iii) Kamakotivilasam, Madipakkam consisting of 16 residential units

6. We have heard both sides. We find that the disputes can be grouped under three major headings. These are,-

(i) disputes in respect of constructed flats/ houses handed over to the land owners, in the nature of non-payment of tax;

(ii) disputes in respect of constructed flats/ houses sold by the developer to the individual buyers, in the nature of shot payment of tax on account of undervaluation;

(iii) disputes in respect of Kamakotivilasam Project in the nature of non-payment of tax, which dispute involves questions of facts and law.

7. Since these disputes are somewhat different in nature and hence are being treated separately. Further, many legal issues are argued under each of the above disputes. So we consider it proper to record arguments issue-wise and give findings.

8. The Appellants argue that there is no relationship of service provider and service recipient between the Developer and the Land Owner. According to them it is a relationship in a joint venture for profit. Both the parties have joined together in the business of construction of complex and the land owner brings in the capital by way of his land. The Developer by way of his capital and services and they jointly construct the complex and use or sell the flats for profit. He argues that CBEC had clarified the position that no service arises in such context. This clarification dated 29-01-09 is examined later in this order.

9. On the contrary we find that the Joint Development agreement does not indicate any terms on the above lines. The parties were neither taking risks jointly or doing any common activity. There was no participation by the land Owners in organizing or carrying out the activity. The Joint Development Agreement as one in which the land owner transfers part of his rights in the land and gets the value of such rights transferred, in the form of constructed flats which consist of value of material used and services rendered by the Developer. After the Land Owner transfers a part of his rights through the agreement, his share of UDS is registered in his name and he is like any other prospective buyer for whom construction of complex is carried out under an agreement for construction of flats except that he has a guaranteed right to get his share of the number of flats constructed. We further examine the various issues raised in the light of this finding.

PART-I-MATTERS RELATING TO CONSTRUCTED FLATS HANDED OVER TO LAND OWNERS

10. The argument that the Contracts are Work Contracts and liable to pay tax only from 01-06-2007 and not before.

10.1. The Appellant argues that the contracts were in the nature of works contract involving supply of material and service. Since such service became taxable only from 01-06-2007, there cannot be any tax on such work carried out prior to that date. The Counsel relies on the decision of the Tribunal in the case of Turbotech Precision Engg. P. Ltd. Vs. CCE – 2006 (3) S.T.R. 765 (Tri. – Bang.).

10.2. We have examined this argument. What we find is that the entry in section 65 (105) (zzzza) of Finance Act, 1994, called as “Works Contract Service” covers certain services which are covered by entries in section 65(105)(zzd), 65 (105) (zzq), 65 (105)(zzt), 65(105) (zzzh), etc of the said Act, before and after the introduction of the new entry for works contract. So this cannot be interpreted as an altogether new entry. It only provides a new method of determining the liability on such services at the option of the service provider. Accepting the argument of the appellants would render all taxes levied and collected on such services prior to 01-06-2007, as without authority of law. A reading of the entry in section 65 (105) (zzzza), Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 and Rule 2A of Service Tax (Determination of Value) Rules, 2006, does not warrant such an interpretation.

10.3. We also note the Apex Court has held in BSNL Vs. UOI – 2006 (2) S.T.R. 161 (S.C.) held that the nature of a composite contract should be decided with reference to intention of the parties and also with reference to the dominant aspect of the contract. Further it was held that a contract of the nature of composite contract as defined in Article 366 (29A) of the Constitution of India can be spilt into sale and service. In this case the Land Owners parted with partial rights in their land to be paid for in the form of constructed flats. Construction of flat is in the nature of a composite contract specified in Article 366 (29A). So the value of the material supplied and the service provided can be separated and subjected to service tax. While levying service tax such splitting is done by providing abatements from the total value of contract.

10.4. The decision of the Karnataka High Court in Turbo-Tech (Supra) is with reference to the question whether the entry for “Consulting Engineer Service” during the period 1997 to 2001 could cover the activities of design, development in a contract for “Design, development and supply of turbo power pack and spares”. In the first place the levy extended to only professionally qualified engineer or an engineering firm and not to a corporate entity as the respondent in that case. Further in that situation there was a basic question whether the contract was for supply of goods or for providing service. In the case of construction of a complex, which is the impugned service in this case, the contract is for providing service considering the aspect theory laid down by the Apex Court in the case of BSNL Ltd (Supra) and also in Tamil Nadu Kalyana Mandapam Assn. Vs. UOI – 2006 (3) S.T.R. 260 (S.C.). This service is different from design and service involved in supply of material where the main aspect is supply of service.

10.5. Further the argument basically challenges the vires of certain taxing entries in Finance Act 1994, both for the period prior to 01-06-2007 and after that and Tribunal is not an appropriate forum for such challenge.

10.6. So we reject this argument of the appellant.

11. The argument that the flats handed over to the Land Owners were for their personal use, and hence the activity is not covered by the definition of the service.

11.1. The appellants argue that the definition of “residential complex” excludes the construction of such flats intended for personal use as recipient of service and Explanation under Section 65 (91a) specifically states that “personal use” includes permitting the complex for use as residence by another person on rent or without construction. It is submitted that the fact that the land owners were given more than one residential unit, should not be a reason to disregard their claim that the flats given to the land owners were for their personal use. It is also his submission that land owners had joint families and subsequent to construction of the flats, the land owners desired to split the joint family into small families and live in individual flats and, therefore, there cannot be a conclusion that all flats in excess of one flat handed over to the land owners were not for personal use.

11.2. We have considered this argument.

11.3. The definition of “residential complex” as defined at section 65 (91a) reads as under:

(91a) “residential complex” means any complex comprising of -

(i) a building or buildings, having more than twelve residential units;

(ii) a common area; and

(iii) any one or more of facilities or services such as park, lift, parking space, community hall, common water supply or effluent treatment system,

located within a premises and the layout of such premises is approved by an authority under any law for the time being in force,but does not include a complex which is constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex is intended for personal use as residence by such person.

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