FEBRUARY 20, 2015

By Sanjay Dwivedi, Advocate

1. TAXATION of Software

Taxation of software and services related thereto has become very complex and confusing. Corrective action is required to rectify following aspects:

a. The software developers and traders - both end up paying VAT as well as Service Tax on the entire value of the product.

b. Selling of licence too, is being taxed as service as well as,as goods. It ought to be appreciated that through licences , one actually sells the ‘copy righted material' viz. the software. One can compare this to sale of a book. There can be no ground to levy Service Tax on sale of book even if it were sold in electronic form.

c. Resale or trading of Software needs to be exempted from payment of Service Tax. It is immaterial as to whether the re-sale is by way of electronic download or on a physical media. In both the cases, it is mere trading and cannot be termed as service.

2. Exemption to goods manufactured and used for providing service:

It is suggested that notification 67/95-CE may be amended so as to grant exemption to the goods manufactured and used by the manufacturer for providing output service. There is no point in first paying the duty on the goods as a manufacturer and then availing CENVATCredit of the same as a service provider.

3. CENVATCredit on input services received ‘free':

Where duty paid inputs are supplied free to a job-worker, the job-worker is entitled to avail credit of the same. This logic needs to be extended to services as well. The principal should be permitted to distribute credit of service tax to its job-workers. There should not be a requirement that the job-work himself should purchase and pay for the services. In Sunbell Alloys Company of India Ltd. v/s. CCE & C, Belapur - 2014-TIOL-38-CESTAT-MUM credit has been denied to the job-worker on the ground that office of the principal cannot be considered as an office of the ‘manufacturer'. Suitable amendment is required to overcome the decision.

4. Invoice issued by Service Provider for removal of inputs or capital goods as such, needs to be prescribed under rule 9 of CCR, 2004.

As per rule 3(5) of CCR, 2004, when inputs or capital goods, on which CENVAT credit has been taken, are removed as such from the premises of the provider of output service, he is required to pay an amount equal to the credit availed and to make the removal under the cover of an invoice referred to in rule 9 of CCR, 2004.

However, rule 9 does not prescribe “such invoice” issued by a service provider. Consequently, invoice issued by a service provider for removal of inputs or capital goods as such is not a “valid document” under rule 9 on the basis of which one can avail credit.

The Central Government should carry out the requisite amendment in rule 9 of CCR, 2004 and mention that the same has retrospective application.

5. Amendment to rule 16 of C. Excise Rules, 2002: The rule may be amended to allow -

a. Availment of credit on imported goods.

b. Removal of goods without payment of duty for export, SEZ supplies, EOU supplies and other purposes specified in rule 6(6) of Cenvat Credit Rules, 2004.

6. Supply to SEZ:

Several notices have been issued to deny rebate on supplies made to SEZ units/ developers on the ground that such supplies are not ‘export' under rule 18 of C. Excise Rules, 2002. Obviously, this is not the intention of the government.

It is suggested that clear provisions may be incorporated, defining SEZ supplies as export for the purposes of (a) Rule 18 and 19 of C. Excise Rules, 2002; and (b) rule 5 of Cenvat Credit Rules, 2004.

7. Amendment required in Rule 6 of Cenvat Credit Rules, 2004

7.1. In Thyssenkrupp Industries (I) Pvt. Ltd. v/s. CCE, Pune 2014-TIOL-1825-CESTAT-MUM the Hon'ble Tribunal acknowledged that the formula given in rule 6 (3A) results into anomaly. This needs to be corrected. It is suggested that assessees be given an option to maintain following three credit accounts and then to apply the formulae only to the third account discussed below:

i. Credit on inputs & input services used exclusively in dutiable goods or taxable services

ii. Credit on inputs & input services used exclusively in exempted goods and exempted services

iii. Credit on inputs & input services that are common to both of the above.

7.2. Rule 6 (3A) (b) (ii) of Cenvat Credit Rules, 2004 (reversal of credit on inputs credit attributable to inputs used for provision of exempted services) needs to be split into two clauses:

a. to permit reversal on the basis of actual quantity of input used for providing exempted service

b. to permit reversal on the basis of formula given in the rule.

Necessity of the first option (mentioned above) arises particularly when the manufacturer does not provide any exempted service but is engaged insubstantial quantum of trading (where obviously no input credit has been taken).

8. Drafting of sr. 30 (c) of notification 25/2012-ST may be aligned with notification 214/86-CE:

The language of the entry 30(c) in the notification 25/2012-ST has given rise to several disputes. The notification exempts the activity of ‘carrying out intermediate production process as job-work in relation to any goods on which appropriate duty is payable by the principal manufacturer'. The language does not take care of the following situations:

a. Where the principal is availing value based exemptions

b. Where the final products are exempted but the principal is complying with rule 6 of Cenvat Credit Rules, 2004.

c. Where the goods are supplied to EOUs/ SEZ etc. or are exported without payment of duty.

Moreover, unlike notification 214/86-CE it does not require any undertaking from the principal and consequently the onus to prove that the principal has paid appropriate duty lies on the job-worker, which is a formidable task.

9. Unfair Rate of Interest for delayed Payment of Service Tax:

The rates of 24% and 30% of interest are apparently in the nature of penalty. It would be proper that penalty is levied as penalty and not under the guise of interest. Too much difference between the interest charged on delayed payment of tax and the prevailing bank rate is unjustified.

Secondly, the extremely low rate of interest on refunds is also not justified. It is no secret that government ultimately loses more than 80% cases made by it. Denying a fair rate of interest to the trade further compounds its agony. A fair rate of interest would cause the government to think on its litigation policy and would act as deterrence to the officers from making frivolous cases.

10. Definition of 'input service':

The definition has become too narrow. In fairness, credit should be allowed on all the business expenses. If it is permissible to debit an amount to Profit & Loss a/c, credit must be allowed of the tax involved.