MARCH 04, 2015

By S Sivakumar, LL.B., FCA, FCS, ACSI, MBA, Advocate

ONE striking feature of this Budget insofar as service tax is concerned, seems to be that, of overcoming certain High Court decisions which have gone against the Revenue.

As most of us know, the decision of the Delhi High Court, in Intercontinental Consultants and Technocrats Pvt Ltd v Union of India & Anr, reported in - 2012-TIOL-966-HC-DEL-ST,has now been statutorily overruled. This celebrated case has been followed in several subsequent decisions by the High Courts and the CESTAT. The Delhi High Court had held that Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 which provides for inclusion of the expenditure or costs incurred by the service provider in the course of providing the taxable service in the value for the purpose of charging service tax is ultra vires Section 66 and 67 of the Finance Act, 1994 and travels much beyond the scope of those sections.

To specifically overcome this decision, the Government is proposing to amend Section 67 by amending the definition of 'consideration' as under:

(a)  "consideration"  includes-

(i)  any amount that is payable for the taxable services provided or to be provided;

(ii)  any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service, except in such circumstances, and subject to such conditions, as may be prescribed;

(iii) any amount retained by the lottery distributor or selling agent from gross sale amount of lottery ticket in addition to the fee or commission, if any, or, as the case may be, the discount received, that is to say, the difference in the face value of lottery ticket and the price at which the distributor or selling agent gets such ticket.

The sweeping impact of this amendment could bring under the service tax net, even 'pass through' transactions and cost recoveries, to the detriment of the Industry. In my personal opinion, however, this new definition of 'consideration' would still be subject to litigation before the High Courts, vis-à-vis the levy of service tax on reimbursements, where the very essential element of 'service' is not present or alternatively, in the case of a reimbursement, there is no 'consideration' as well.

Be that as it may…. a closer look at what seems to be a very harmless proposal, an explanation (1A) is to be added to Rule 5 of the Cenvat Credit Rules, 2004, after clause (1) as under:

"(1A) " export goods"means any goods which are to be taken out of India to a place outside India".

This amendment will undo the impact arising out of the decision of the Gujarat High Court in Commissioner of Central Excise and Customs v NBM Industries reported in - 2011-TIOL-677-HC-AHM-CX, which has been followed in several subsequent decisions by the High Courts and the CESTAT, wherein, it had been held that, 'deemed exports' are to be treated on par with physical exports, for purposes of refund of unutilized cenvat credit under Rule 5 of the Cenval Credit Rules, 1994. Though this decision was in the context of sales by one100% EOU in the DTA, the principle that 'deemed exports' are to be treated as 'physical exports' for purposes of refunds has been expanded by the CESTAT.

With this proposed statutory amendment, assessees would be denied the benefit of claiming refund of the unutilized cenvat credit on deemed exports, though, there is no bar on availing of cenvat credit attributable to 'deemed exports'.

As we know…..the Sikkim High Court had, in Future Gaming Solutions Pvt Ltd v. Union of India and Others,reported in - 2012-TIOL-1096-HC-SIKKIM-ST, had struck down the then prevailing clause (zzzzn) to sub-section 105 of Section 65 of Finance Act, 1994 as being ultra vires to Constitution of India having been enacted in contravention to Entry 97, List I to Seventh Schedule read with Article 248 of Constitution of India. As we know, Sectuon 65(105)(zzzzn), as it then prevailed, read as under:

"to any person, by any other person, for promotion, marketing, organising or in any other manner assisting in organising games of chance, including lottery, Bingo or Lotto in whatever form or by whatever name called, whether or not conducted through internet or other electronic networks;"

Moreover, the Delhi High Court had, in Delhi Chit Fund Association v. Union of India & Anr - 2013-TIOL-331-HC-DEL-ST, held that, no service tax is chargeable on the services rendered by the foreman in a business chit fund.

Now, these two important decisionsare sought to be undone by the Government by proposing to insert an explanation to Section 65B(44)(g) (vide Clause 105 of the Finance Bill, as under:

(g) in clause (44), for Explanation 2, the following Explanation shall be substituted, namely:-

'Explanation 2. - For the purposes of this clause, the expression "transaction in money or actionable claim"shall not include-

(i) any activity relating to use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged;

(ii) any activity carried out, for a consideration, in relation to, or for facilitation of, a transaction in money or actionable claim, including the activity carried out-

(a) by a lottery distributor or selling agent in relation to promotion, marketing, organising, selling of lottery or facilitating in organising lottery of any kind, in any other manner;

(b) by a foreman of chit fund for conducting or organising a chit in any manner.';

These are some of the HC decisions which caught my immediate attention. Perhaps, there are more devils in the details.

Before concluding….

If GST is to be implemented from April 1, 2016, where is the justification for overruling several decisions of the High Courts with the sole objective of garnering more service tax revenues? Could the Government not have waited for the GST regime to get introduced and handle all of these changes in one go, in the GST law?

Where is the need to remove from the negative list, Section 66D(j), in terms of which, service tax is not leviable on entry to entertainment events or access to amusement facilities? These activities are already subject to the levy of entertainment tax by the States? Could't this be handled as part of the GST regime?

Why this kolaveri, dear FM Sir?