K.VAITHEESWARAN ADVOCATE & TAX CONSULTANT

Transcription

1 IMPORTANT CASE LAWS OF 2015 INDIRECT TAXES K.VAITHEESWARAN ADVOCATE & TAX CONSULTANT Mobile: s : vaithilegal@yahoo.co.in vaithilegal@gmail.com Flat No.3, First Floor, No.9, Thanikachalam Road, T. Nagar, Chennai , India Tel.: / , Front Wing, House of Lords, 15/16, St. Marks Road, Bangalore , India Tel : /

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3 Originally, Notification No.4/1997, C.E. provided for exemption from excise duty in respect of certain goods through Serial No.51 and falling under Chapter 38 of the Central Excise Tariff Act. The Notification referred to Concrete mix manufactured at the site of construction for use in construction work at such site. In the case of Larsen & Toubro, the Company was constructing its own cement plant at Ananthapur and for the purpose of construction of civil structure, the concrete mix was prepared at site with the help of machinery and captively consumed in the construction of the plant. The Company claimed the benefit of exemption from excise duty under Notification No.4/1997.

4 Exemption was denied and ED was imposed on the ground that the way L&T produced the concrete mix by using machinery at site indicates that the product is ready mix concrete and not concrete mix. What distinguishes ready mix concrete (RMC) from concrete mix (CM) is the manner in which it is manufactured, the high degree of precision, and the stringent quality control over the mix of ingredients. The Tribunal observed that the facility put up by L&T involved various machines coupled with sophisticated process which was indicative of the fact that it was for the manufacture of RMC and the only reason for manufacture thereof at site was that the larger quantities of RMC which was required by L&T.

5 The Tribunal held that it is a high degree of precision and stringent quality control observed in the selection and processing of ingredients namely aggregates, cement, sand, additives and water which made the product as RMC in contra distinction with CM. The Supreme Court in the case of Larsen & Toubro Ltd. Vs. CCE vide judgment dated has held that (i) (ii) (iii) It is the process of mixing the concrete that differentiates between Concrete Mix (CM) and Ready Mix Concrete (RMC). RMC and CM are different and the exemption Notification exempts only CM. It is only the process that would determine whether the produce could be termed as CM or RMC.

6 (iv) (v) RMC is an expression now well understood in the market and used to refer to a commodity bought and sold with clearly distinguishable features and characteristics as regards the plant and machinery required to be set up for its manufacture and the manufacturing process involved as well as its own properties and the manner of delivery. The earlier decision of the Supreme Court in the case of Simplex Infrastructures has not discussed whether RMC is different from CM. The Supreme Court remanded the matter to the Assessing Officer to look into the matter afresh keeping the observations in the judgment.

7 Currently Sl. No.144 in Notification No.12/2012 provides for an exemption in respect of Chapter 38 being concrete mix manufactured at the site of construction for use in construction work at such site. The industry has been availing exemption in respect of the mix that is manufactured at the site. The Department is likely to apply the principles laid down by the Supreme Court in the context of the current notification. Fresh litigation is likely on the issue. In terms of Notification No.1/2011 as amended, ready mix concrete falling under Chapter Heading attracts excise duty of 2% without cenvat credit on inputs and input services.

8 Section 4(1)(a) of the Central Excise Act provides for certain conditions to be satisfied for the transaction value to be accepted and one of the conditions is that goods must be sold for delivery at the time and place of removal. Place of removal means A factory or any other place or premises of production or manufacture of excisable goods; A warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty. A depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory From where such goods are removed.

9 Transportation charges from factory to depot forms part of value since depot is also a place of removal. Transportation charges from factory to customer location does not form part of value since customer location is not a place of removal but a place of delivery.

10 In the case of CCE Vs. Roofit Industries Ltd. (2015) 319 ELT 221 the manufacturer was clearing goods from the factory and the agreement contemplated delivery of the goods at the place of the buyer. The terms and conditions indicated that supply was accepted only at the place of delivery. Price of the goods was inclusive of cost of material, excise duty, loading, transportation, transit risk and unloading charges. Even transit damage and breakage was to the assessee s account.

11 Ownership remained with the assessee till delivery. 100% payment was to be made only after receipt and verification of material. The Supreme Court on these facts held that sale of goods did not take place at the factory gate of the assessee but only at the place of the buyer on delivery. Expenses incurred upto that stage has to be included in value.

12 In the case of CCE Vs. Ispat Industries Ltd. (2015) 324 ELT 670, transit insurance policy was in the name of the manufacturer. The Supreme Court held that in the instant case, the prices were exworks as in the case of Escorts JCB. Goods were cleared from the factory on payment of sales tax indicating that the goods had been sold at the factory gate. Invoices were prepared only at the factory directly in the name of the customer in which the name of the insurance company as well as the number of the transit insurance policy was mentioned. Excise invoice was prepared at the time of the goods leaving the factory. When the goods were handed over to the transporter, the respondent had no right to the disposal of the goods nor did it reserve such rights inasmuch as title had already passed to its customer. On facts, Roofit judgment is wholly distinguishable. Excise duty is not payable on the freight.

13 Transfer of title to the goods Ex-factory Where (i) sale price is inclusive of freight; (ii) sale is FOR; (iii) transfer of title happens only at the buyer location Wherever excise duty is being paid based on transaction value, the freight element from the factory to the customer should also be included in the value for the purpose of calculation of excise duty. Where the sale is FOR, then the freight forms part of sale price for the purpose of CST or VAT as the case may be. Since freight has been included in the value, for the purpose of excise duty, the question is whether cenvat credit can be availed on the service tax paid under GTA on the outward transportation.

14 In the case of Madras Cements Ltd. Vs. ACCE (TS- 371 HC 2015 KAR EXC), service tax credit on GTA was availed by the manufacturer on outward transport from the place of removal for the period after The contention of the Company was that sale of cement was completed only after delivery was made to the buyer. Prices have been calculated in the invoice and the terms of the invoice refer to FOR destination. The High Court held that so long as the sale of goods is finalized at the destination which is the doorstep of the buyer, the change in the definition of input service from would not make any difference. The assessee would be entitled to the benefit of cenvat credit on outward transportation of goods even after

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16 Transaction Value Section 14 of the Customs Act. Valuation Rules, 2007 Rule 10 cost and services Where the cost of transport is not ascertainable such cost shall be 20% of the FOB. Where the cost of insurance is not ascertainable, 1.125% of the FOB would be taken as cost of insurance. Loading, unloading and handling charges shall be 1% of FOB + freight + insurance. The Rule contemplates mandatory addition of 1% of FOB + freight + insurance irrespective of whether these charges are incurred or not.

17 The Supreme Court in the case of Wipro Ltd. Vs. ACC (2015) 319 ELT 177 has read down the provision which provided for mandatory addition of 1% of FOB value towards cost of loading / unloading and handling charges. The Court has held that the said clause can apply only when the actual charges are not ascertainable. The Court held that addition of charges on fictional basis even where the actual cost paid was available was violative of Section 14 of the Customs Act. The provision is arbitrary with no nexus and contrary to the objective of Section 14 and violative of Article 14 of the Constitution of India.

18 When a Rule or a provision provides for a mandatory percentage ignoring the actual charges or actual quantum available then the Rule can be challenged in the light of Wipro judgment.

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20 The Division Bench of the Sikkim High Court in the case of Future Gaming and Hotel Services Private Limited Vs. Union of India (TS-564- HC-2015) has struck down the Explanation 2 to Section 65B(44) introduced by Finance Act, 2015 in the context of promotion/ marketing of lottery tickets. The Court has held that the activity carried out by the Petitioners in relation to promotion of marketing, organising, selling of lottery or facilitating in organising lottery of any kind in any other manner, would clearly not fall within the meaning of service as provided under Clause (44) of Section 65B as the two essential elements (a) that the activity should be carried out by a person for another and (b) that such activity should be for a consideration, are unmistakably lacking.

21 The Petitioners in buying and selling the lottery tickets is not rendering service to the State and, therefore, their activity does not fall within the meaning of service as provided under Clauses (31A) and (44) of Section 65B and, therefore, outside the purview of Explanation 2 to the said Section.

22 In Future Gaming Case (2015) and Future Gaming Case (2014) it has been held most unequivocally, inter alia, that the activity of the Petitioners comprising of promotion, organising, reselling or any other manner assisting in arranging the lottery tickets of a State Lottery does not establish the relationship of a principal and an agent but that of a buyer and a seller on principal to principal basis there being bulk purchase of lottery tickets by the Petitioners from the State Government on full payment on a discounted price as a natural business transaction and other related features and, of there being no privity of contract between the State Government and the Stockists, agents, sellers, etc., under the Petitioners. In our view, in this case also the very same conclusion would be applicable as the nature of the relationship between the Petitioners and the State Government and the Petitioners and the Stockists, agents, resellers, etc., does not appear to have been altered.

23 The Court also held that since the selling and marketing agents purchase the tickets from the Petitioners/ Distributors as goods on payment of price, it cannot be considered as a service.

24 Selling and buying transactions on a principal principal basis. Whether the Explanation introduced to Section 65B(44) to provide that an unincorporated association or a body of persons as the case may be and a member thereof shall be treated as distinct persons can be challenged on similar grounds?

25 Consulting Engineers Erection, commissioning and installation Technical testing and analysis Commercial construction Construction of residential complex Works contract

26 The Supreme Court has held that works contract service will not be liable to service tax prior to in the absence of charging and machinery provisions WCT is a separate species of contract distinct from contracts for services simpliciter recognized by the world of commerce and law as such and has to be taxed separately as such. The Court held that since works contract includes both goods & service element, there has to be a specific mechanism to identify the service element in the works contract and only that portion of the works contract could be subject to service tax. The goods portion is a State subject and can only be subject to VAT and since there existed no such mechanism to identify the service portion in a works contract prior to , there was no question of bringing the same under service tax net prior to the said period.

27 The charge to tax under the five heads in Section 65(105)(g), (zzd), (zzh), (zzq), (zzzh) would only be service contracts simpliciter and not composite indivisible works contracts. Section 67 post amendment by Finance Act, 2006 for the first time prescribed value of taxable services in the case of indivisible works contract. Rule 2A has followed Gannon Dunkerley in segregating the service component of works contract from the goods component. GD Builders decision disapproved. Delhi High Court has completely misread the Mahim Patram s case.

28 The conclusion of the Delhi High Court to the effect that service tax can be levied on the service component of any contract involving service with sale of goods etc. and that computation of service component is a matter of detail and not a matter relating to validity is wholly incorrect. Since levy itself has been found to be non-existent, there is no question of any exemption.

29 USL was registered under the category cargo handling services and entered into contracts to provide services in relation to stevedoring / barging / loading / unloading / transportation of cargo by barges from mother vessels to jetty. The Department was of the view that the shipping charges and shipping freight realized by the Appellant were includable in the value under Section 67. The Tribunal held that when goods are being transported by the barges from another vessel to the jetty, that activity is part of the import transaction of bringing the goods into India from a place outside India.

30 The question of rendering any service in respect of such goods by way of cargo handling or otherwise can take place only after the customs transaction is completed. There is no question of levying service tax on the transportation by barges since the activity is part of the import transaction leviable to import duty. This is also evident from Section 14 of the Customs Act and the Customs Valuation Rules which specifically includes barge charges and handling charges in the transaction value of imported goods. The Civil Appeal filed by the Department against the decision of the Tribunal has been dismissed by the Supreme Court.

31 Rule 10 of the Valuation Rules includes freight, insurance and handling charges in the transaction value for the purpose of customs duty. Ocean freight billed on the Indian importer by an Indian service provider after purchasing the freight slot from his overseas counterpart who purchases the same from the liner.

32 Tata Unisys Ltd. entered into an agreement with Unisys Corporation and was granted license to use technical information, know how and system software relating to manufacture of document processing system. Know how was defined to mean trade secrets and other information and knowledge which is applicable to the development, manufacture, assembly, testing, repair and refurbishment of the products. TUL was required to pay license fees / royalty to Unisys on sale of products to parties other than Unisys. Subsequently, TUL was renamed as TIL and was merged with TCS.

33 SCN was issued demanding service tax on the royalty paid under IPR services. The Tribunal in the case of TCS Vs. CST (2015-TIOL-2370) has held that Definition of IPR must be satisfied to term the service is received as IPR service. We find no clue at all in the records as to which type of IPR is being assigned to the technical know how received by the appellant. It is obvious from the definition of IPR that the right has to be a specific right under a specific law. Technical know how received and the royalty payment is no where established to result from the use of any IPR. IPR should be a right under Indian law and right not covered by Indian laws would not fall under IPR services.

34 Section 66E(c) provides for service tax on temporary transfer or permitting the use or enjoyment of any intellectual property right. IPR not defined in service tax law post CBEC Education Guide provides that IPR has to be understood to include copyright, patent, trademark, design, any other similar right to intangible property. Section 65B(25) defines goods to mean every kind of movable property. Sale of goods as well as transfer of right to use goods is excluded from the definition of service. Whether technical know how can be considered as goods? Associated Cements Supreme Court

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36 Section 7D of the UP Trade Tax Act, 1948 provides for composition of amount at an agreed rate on the turnover of the dealer in lieu of the taxes payable by it under the Act. The proviso provides that when there is any change in the rate of tax on the goods, such increase will proportionately affect the rate of compounding of tax.

37 The Supreme Court in the case of State of Uttar Pradesh Vs. Systematic Conscom Ltd. (2014) 75 VST 267 has held that Change in the rate of tax would mean any such change in the already existing standard or measure of computing the tax payable but not the introduction of yet another kind of tax for levy and collection. State Development Tax at the rate of 1% on the taxable turnover is an independent charge. State Development Tax has therefore not led to any change in the rate of tax. There is a difference between the change in the rate of tax and introduction of altogether a new provision or a new kind of tax for levy and collection from dealers.

38 Swach Bharath Cess A new levy under Section 119 of the Finance Act, 2015 Rule 5 of the PoT Rules relevant to tax on new services cannot be applied. Rule 4 of the PoT Rules relevant to change in effective rate cannot be applied. Section 67A CCE Vs. Vazir Sultan Tobacco Co. Ltd. (1996) 83 ELT 3 Supreme Court.

39 Pennar Industries was awarded a contract by Rajasthan State Bridge Construction Corporation Ltd. for fixing of works profile safety barrier at toll plaza. The Department was of the view that providing and fixing profile safety steel banker at hazardous locations in NH-8 was not related to road. The question before the Rajasthan High Court was whether this contract was execution of works contract relating to buildings, bridges, dams, roads and canals.

40 The Court held that Road has not been defined any where but as per the dictionary it is a track suitable for wheeled traffic. Merely putting concrete grit, coal tar cannot be said to be a road but in present day conditions latest technology and safety measures installed would certainly be part and parcel of roads. Fixing of safety barriers is certainly relating to part of the road.

41 Concept of road. Entry 13, Notification No.25/2012 provides for an exemption from service tax in respect of services by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation or alteration of road, bridge, tunnel or terminal for road transportation for use by general public.

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43 The Supreme Court in the case of State of Punjab Vs. Nokia India P. Ltd. (2015) 77 VST 427 has held that a mobile phone charger is an accessory to the cell phone and is not a part of the cell phone. It is an independent product which can be sold separately without selling the cell phone. Entry 60(6)(g), Schedule-B, Punjab VAT Act deals with cell phone and does not mentioned accessories. Cell phone charger has to be charged at 12.5% under the residual entry. The charger is not an integral part of the mobile phone making it an item of composite goods. Merely making a composite package of the cell phone charger will not make it composite goods.

44 The Supreme Court in the case of Cochin Port Trust Vs. State of Kerala (2015) 80 VST 341 has held that a port trust is a dealer under the KGST Act since the definition of dealer is wide and specifically includes persons who have effected sale or transfer of goods irrespective of the sale or transfer being in the course of business or not. In the Kerala Act, the necessity of a person carrying on business to be placed under the definition of dealer is absent.

45 The Madras High Court in the case of HDFC Bank Ltd. vide its judgment dated in TC (Revision) Nos.64 to 67 of 2015 has held as under:- It is true that in a hypothecation the ownership remains with the person creating the hypothecation but a bank which advances facilities enters into a hypothecation agreement which has clauses empowering the bank to repossess the vehicle in the event of default and also to bring the vehicle to sale through public auction or by private negotiation without even involving the owner of the vehicle. The sale by the banks and the financial institutions are in the nature of compulsory sales for realization of debts and to say that banks sell hypothecated goods only as agents of the owners may not be true completely. Explanation III covers even the sale of unclaimed goods. If sale of unclaimed goods can be included within the purview of Explanation III, the distinction sought to be drawn between a statutory right of sale and a contractual right of sale, cannot stand.

46 The decision of the Supreme Court in the case of Sai Publication has not been considered by the Madras High Court. The issue has to whether the bank is in the business of buying and selling has not been considered. The fact that the character of the transaction or the relationship has not changed during the stage of lending and at the time of taking action for recovery of the amounts due has not been examined. The bank or the financial institution does not own the goods and the goods are in possession not on account of purchase but on account of hypothecation and the transaction is not accounted as purchase in the books.

47 Sale and purchase are two sides of the same coin. When hypothecation by the borrower to the bank does not constitute a sale, it cannot be considered as a purchase by the bank. The Court has not examined the fact that the owner continues to exist and it is the owner who is the seller having the primary liability to pay tax. Revenue neutrality.

48 K.VAITHEESWARAN ADVOCATE & TAX CONSULTANT Mobile: s : vaithilegal@yahoo.co.in vaithilegal@gmail.com Flat No.3, First Floor, No.9, Thanikachalam Road, T. Nagar, Chennai , India Tel.: / , Front Wing, House of Lords, 15/16, St. Marks Road, Bangalore , India Tel : /