THE CAG’s Report No. 20/2009-10 submitted to Parliament this month states,

M/s Satyam Computer Services Ltd., in Hyderabad II Commissionerate, engaged in providing consulting engineers services, man power recruitment agency services etc., availed of cenvat credit on several input services and used such services for rendering taxable as well as non-taxable services (i.e. software development services relating to information technology to various agencies located within and outside India). Service tax credit on input services used in IT services rendered within India/exported out of India was not admissible as IT services cannot be regarded as output services/export of taxable services within the meaning of rule 2(p) of the Cenvat Credit

Rules/rule 3 of the Export of Services Rules, 2005. However, the assessee incorrectly availed credit of the service tax paid on input services used for IT services. The credit attributable to such ineligible IT services for the period 2004-05 to 2006-07 worked out to Rs. 8.81 Crore.

On this being pointed out (December 2007), the department stated (March 2008) that a service provider who provided both taxable services and non-taxable services (i.e. not covered under service tax act) was not prohibited from availing full credit on common inputs/input services if the utilisation of credit was limited to 20 per cent of the tax payable as laid down in rule 6(3)(c) of the Cenvat Credit Rules. It also argued that availing of credit on common input goods/input services used in software development services for home consumption/export was permissible under cenvat provisions since these input services were not utilised exclusively for such exempted services. The reply of the department was not acceptable as the enabling provisions contained in section 94(2)(ccc) of the Finance Act, 1994/section 37(2)(xvia) of the Central Excise Act, 1944, under which cenvat credit rules were framed, limit the scope of cenvat benefits only to taxable services and not to services which are outside the purview of the Finance Act. The term ‘exempted

services’ as defined in rule 2(e) of the said rules covered only taxable services which were covered by section 65 of the Finance Act but were not chargeable with service tax because of exemption. The interpretation given by department for the definition of exempted services was not correct as the word ‘includes’ appearing in rule 2(e) should not be read in isolation but should be read in conjunction with the word ‘taxable services’. The provisions of the Finance Act, 1994 or the Cenvat Credit Rules could not have application to a service which was outside the scope of the Finance Act and hence the credit availed on corresponding input services used in software development services needs recovery along with interest.

Reply of the Ministry had not been received (December 2008).

Audit recommends that Government should amend the Finance Act to include ‘IT services’ in the list of services which are liable to service tax.

This is a Report submitted in July 2009. Is the CAG not aware that IT Services has already been included in the list of taxable services with effect from 16.5.2008? Maybe next year they can claim credit for its inclusion, though they are not aware of it as of now!

Interest on wrong credit of CENVAT – another A-SATYAM

The CAG Report further states:

M/s Satyam Computers Services Ltd., in Hyderabad II Commissionerate, engaged in rendering of consulting engineers services, manpower recruitment agency services etc., took credit of Rs. 4.15 crore during the period between February 2006 and July 2007, of the service tax paid on health insurance services obtained from insurance companies for the welfare of their employees. The internal audit wing of the department objected to these wrong credits in August/October 2007 and in pursuance of these objections, the assessee reversed the entire credit on 31 August 2007. However, the interest payable on these incorrect credits from the date of taking credit to the date of reversal, amounting to Rs. 46.37 lakh, was neither paid by the assessee nor was it demanded by the department.

On this being pointed out (December 2007), the department stated (May 2008) that since the assessee did not utilise the excess availed amount, charging of interest on the credit lying unutilised was not warranted in view of a plethora of judicial decisions of Tribunals/High Courts.

The fact, however remains that under rule 14 of the Cenvat Credit Rules, 2004, it was statutorily required that where cenvat credit had been taken or utilised wrongly, the same along with interest was recoverable. The anomalous situation that had cropped up due to judicial pronouncements needs to be remedied by Government by making the relevant provisions more explicit and unambiguous, as otherwise the provisions of the said rule with regard to recovery of interest were not enforceable even though the assessees commit breach of cenvat provisions by taking wrong credits on ineligible services.

Audit recommends that Government should amend the Rules, in view of past judicial pronouncements, to bring the provisions of the rules, consistent with these.

Is the CAG suggesting yet another retrospective legislation?

Sixth Pay Commission Arrears - Taxability of second instalment in the FY 2008-09

Consequent to the acceptance of the recommendations of the Sixth Pay Commission, the Department of Expenditure vide its O.M.F.No. 1/1/2008-IC dated 30-8-2008 issued an instruction that the first instalment of the salary arrears, amounting to 40% of the total arrears would be paid in the financial year 2008-09, and that separate orders will be issued in respect of payment of second instalment of salary arrears.

CBDT has considered the question of taxability of the second instalment of salary arrears in the financial year 2008-09, i.e., the assessment year 2009-10.

Section 15(1)(c) of the Income-tax Act, 1961, provides that arrears of salary shall be chargeable to tax in the previous year in which they are paid or allowed.

It has accordingly been decided that the second instalment of salary arrears, comprising of 60%, arrears of salary, cannot to be brought to tax in the assessment year 2009-10 as the arrears had neither been paid nor allowed up to March 31, 2009.

What if the DDOs had considered the second instalment of salary arrears also for the purpose of taxable income and deducted the tax at source during FY, 2009? While CBDT can afford to issue a clarification on TDS pertaining to FY 2008-09 i.e. AY 2009-10 at leisure, DDOs cannot afford to have that luxury of waiting for this long pending clarification to decide on TDS deductions. After all TDS deductions cannot be withheld by the DDOs, lest they should be held liable for penal action. CBDT could have come up with this two line clarification much before March 31, 2009.

CBDT Instruction F.No. 173/163/2008/IT(A-1), dated 26-6-2009

Plight of Textile Sector in getting Refund/Rebates – CBEC should provide prompt Clarification

In DDT 1146 03.07.2009, we highlighted the plight of manufacturer-exporters of textile goods falling under Chapter 63, who endured a lot of pain and suffering for getting rebate of duty paid on goods exported, from Central Excise authorities and failed miserably. This was due to an anomaly in duty rates by virtue of Notification 58/2008-CE which prescribed Nil duty whereas Notification 59/2008-CE which prescribed a duty of 4%.

A brief recap:

The assessee, who is leading textile export house, was keen to avail the benefit of Notification 59/2008-CE which would facilitate them in getting rebate of duty paid on export goods while allowing them to avail CENVAT benefit on inputs/input services. Departmental authorities rejected their plea on the ground that when finished goods are absolutely exempted by virtue of an exemption notification they are bound to avail that exemption and not pay duty in terms of another notification. When they approached us we suggested that there is a TRU clarification dated 29.02.2008 which addressed this problem in their favour.

Budget amendment:

Immediately thereafter, in the Budget 2009, Notification 11/2009-CE dated 07.07.2009 was issued amending Notification 29/2004-CE dated 09.07.2004 as amended, by virtue of which, goods attracting Nil duty hitherto shall attract 4%. So, to an extent the anomaly of dual effective duty rates for finished products of Chapter 63 was resolved.

Did this really solve the problem:

While the problems faced by the assessees are perennial, the solutions come only in a trickle. This seems to be the case with the above amendments as well. Yesterday, we received an email from a leading textile manufacturer and exporter citing our commentary in DDT 1146, followed by the Budget amendment immediately thereafter and came up with the following poser:

“Now with this budget, this problem is solved by amending the said notification (58/2008-CE) by Notification 11/2009-CE. But what about the intervening period i.e. from 07.12.2008 to 06.07.2009. CBEC should clarify”

A possible solution:

In this case, it appears the assessee was availing Nil duty benefit in terms of Notification 29/2004-CE as amended by Notification 58/2008-CE which is in contrast to the problem highlighted by us in DDT 1146.

In our view, if finished goods attracted Nil duty during the intervening period and if such exempted goods are exported, even then there is no bar for such exporters in availing the refund of unutilized input tax credits in terms of Rule 5 of CENVAT Credit Rules, 2004.

The phrase used in the opening sentence of this Rule is ‘any input or input service is used in the manufacture of final product which is cleared for export under bond or letter of undertaking…’. So if a manufacturer-exporter is engaged in the manufacture of final products which are cleared for export under bond or LUT, then credit availed on inputs or input services can be utilized for payment of duty of excise on any final product cleared for home consumption or ‘for export on payment of duty’ or as service tax on output service. In case such utilization (or adjustment as indicated in the Rule) is not possible, such manufacturer-exporter shall be allowed refund of such unutilized credits.

Refund of unutilized credit is a substantive benefit provided by the CENVAT scheme for exporters and there are a plethora of judicial pronouncements which have held that substantive benefits accruing to an assessee cannot be denied on flimsy grounds. Further, this Rule when read with Rule 6(6) (v) ibid clearly allows availment of CENVAT credit and refund of unutilized credit.

This is also supported by judicial pronouncements as in the case of Repro India Ltd vs. Union of India & Anr 2007-TIOL-795-HC-MUM-CX where Mumbai High Court held that the phrase ‘excisable goods’ employed in Rule 6(6) ibid has a wider connotation and includes both dutiable and exempted goods.

Also, in Neo Foods Pvt Ltd vs. CC (Appeals) 2009-TIOL-976-CESTAT-BANG, CESTAT held that Rule 6(1) of CENVAT Credit Rules, 2004 is not a bar to avail CENVAT credit on inputs/input services utilized in export of exempted goods by 100% EOU. The CESTAT also exhorted that the principle of excise taxation envisages only export of goods/services but not taxes and therefore refund of unutilized credit by a 100% EOU is allowable in terms of Rule 5 ibid.

The principles enunciated by the Bombay High Court and the Bangalore Bench of CESTAT would certainly hold good for the issue on hand.

DDT hopes that the benign CBEC will come out with a suitable clarification for the benefit of trade and industry.

Jurisprudentiol–Wednesday\'s cases

Central Excise

No jurisdiction with authorities to impose penalty lesser than mandatory penalty, which has to be co-extensive with duty payable – SC orders in Dharamendra Textile case and Rajasthan Spinning & Weaving Mills followed: Bombay High Court

THE question, therefore, of having paid the amount before issuance of the show cause notice or after issuing the show cause notice cannot result in holding that there is no requirement of determination. That argument, therefore, must be rejected.

Income Tax

Cash payments in excess of Rs 20,000 made to employees working in rigs - covered by exceptions provided in rule 6DD(j) and not liable to be disallowed under section 40A(3): ITAT

There is no dispute that all the employees in the present case were posted for a continuous period of 28 days on Rigs, which was more than the minimum period of 15 days stipulated in rule 6DD(j) and they were not maintaining any bank there. As such, considering all the facts of the case, the payments in question made by the assessee-company in cash in excess of Rs. 20,000 were duly covered by the exceptions provided in rule 6DD(j) and this being so, the same were not liable to be disallowed under section 40A(3).

Service Tax

Construction service – Service to self not taxable – No tax on ‘works contract’ prior to 1.6.2007 – matter remanded: CESTAT

Appellants employed its own labour for execution of the various projects and are not a contractor doing construction work for another person. In respect of constructed property sold by the appellants to various buyers it cannot be held that PFL rendered ‘commercial or industrial construction service’ and ‘construction of complex service’ to the buyers. Appellants rendered such services to itself.

No tax on ‘works contract’ prior to 1.6.2007 – Appellants carried out the construction activity, finishing work etc., in respect of which demands have been raised, in execution of works contracts. ‘Works contract service’ was brought under tax net on 1.6.2007, after the impugned activities were undertaken by PFL. As rightly argued by the appellants, the Tribunal had held in Diebold Systems case that activity such as erection/commissioning forming part of a works contract could not be taxed under erection/commissioning service prior to 1.6.2007. The contracts basic to the construction of commercial premises/residential premises were indivisible and involved a service element. In view of the ratio of the decision of the Tribunal, prima facie, the impugned demand is not sustainable.

See our columns Tomorrow for the judgements

Until Tomorrow with more DDT

Have a nice day.

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