OVERVIEW OF COMPOSITION, SERVICE TAX & ABATEMENT

1. OVERVIEW OF COMPOSITION, SERVICE TAX & ABATEMENT E-10A, Kailash Colony, Greater Kailash – 1, New Delhi – 110048 Telefax: 011-46664600, 29245500/5522/5533 | Email: akg@akgindia.in www.akgindia.in | www.charteredaccountantnewdelhi.com

2. VALUATION OF SERVICE • VALUE OF SERVICE FOR PAYMENT OF SERVICE TAX • Gross amount charged by service provider for service provided or to be provided –section 67. • Value of taxable service + service tax = Gross amount charged. • If service tax not charged separately, the gross amount charged should be taken as inclusive of service tax and then back calculations should be made to arrive at value of service and service tax payable thereon. • Amount may be received before, during or after provision of service. • Any specific service not defined w.e.f. 1-7-2012. Hence, scope of service can be determined by mutual agreement between service provider and service receiver. • NO TAX ON VALUE OF GOODS • Price of goods cannot be included in value of services – Bharat Sanchar Nigam Ltd. v. UOI (2006) 3 SCC 1 = 152 Taxman 135 = 3 STT 245 (SC 3 member bench). • In Imagic Creative Pvt. Ltd v. CCT (2008) 2 SCC 614 = 12 STT 392 (SC), it has been held that service tax and Vat (sales tax) are mutually exclusive. In case of a composite contract, Vat cannot be imposed on portion relating to value of service. As an obvious corollary, service tax cannot be imposed on value of material. • Section 67 – Service tax only on ‘gross amount charged by service provider for such taxable services provided or to be provided’. • Section 66B – service tax on value of service (i.e. not on value of goods) • ISSUES RELATING TO SOME SERVICES • Spare parts used while repairs –not taxable if billed separately – It is not works contract service. • The reason is that the definition of ‘deemed sale’ in Article 366(29A) does not say that the definition is only for purpose of sales tax. Thus, that definition will be applicable to all contracts executed in India after 1983. • Photography paper or Xerox paper – my view – It is ‘works contract service’ as per definition revised w.e.f. 1-7-2012 • Cleaning material used while providing cleaning services – in my view – includible as it gets consumed and its property is not transferred to the customer (service receiver). E-10A, Kailash Colony, Greater Kailash – 1, New Delhi – 110048 Telefax: 011-46664600, 29245500/5522/5533 | Email: akg@akgindia.in www.akgindia.in | www.charteredaccountantnewdelhi.com

3. CONSIDERATION OTHER THAN MONEY • Consideration for service – partly money partly other than money – then value of such consideration to be added. • Valuation will be on basis of ‘amount equivalent to consideration’ as provided in section 67(1)(ii) [faulty drafting]. • FUEL SUPPLIED TO SERVICE PROVIDER • Fuel supplied to service provider (e.g. for construction equipment, rented vehicle) • In my view if scope of service specifically excludes such supply, its value is not includible • The reason is that w.e.f. 1-7-2012, any specific service has not been defined – thus, scope of service can be decided by mutual agreement • Valuation Rules • Valuation Rules apply subject to section 67 • Gross amount charged for similar services [rule 3(a)] • Equivalent money value of consideration which shall not be less than cost [rule 3(b)] • Distinction between cost and value • Charges which are not part of value of service • Some expense incurred by service provider for administrative convenience and then recovered from service receiver. • Reimbursements of expenses incurred by service receiver which are not part of value of service are not includible. • This is the basic concept of ‘pure agent’ contained in Service Tax Valuation Rules. • Gross Amount charged for service • Service tax is not payable on any other amount charged and/or recovered from service receiver if it is not part of value of taxable service • Examples – Advertisement Agent collecting advertisement charges plus his commission, Air Travel Agent collecting air fare plus his commission, Customs House Agent paying for various expenses incurred by him at Port on behalf of customer and then recovering the same plus his charges • In aforesaid cases, the advertisement charges, air ticket charges or expenses incurred by CHA in port are not part of value of service and hence not includible in value for service tax. E-10A, Kailash Colony, Greater Kailash – 1, New Delhi – 110048 Telefax: 011-46664600, 29245500/5522/5533 | Email: akg@akgindia.in www.akgindia.in | www.charteredaccountantnewdelhi.com

4. Cost and Expenditure relating to service is includible • Travelling Expenses, hotel expenses incurred by CA, Maintenance Engineer or Management Consultant in the course of providing his service • Out of pocket expenses incurred while providing taxable service – these are includible as service cannot be provided without incurring these expenses. • Now the issue arguable under new provisions w.e.f. 1-7-2012, as any specific service is not defined – thus it can be argued that scope of service can be fixed by mutual agreement. • Pure Agent • Various charges recovered by service provider from service receiver and paid to concerned third party are not includible in value if these expenses which is not part of service. • Liability of service receiver, but expenses incurred by service provider for administrative convenience and recovered from customer. • These are not part of value of taxable service and not includible (even if all requirements of pure agent not satisfied). • Requirement of pure agent • Payment to third party on behalf of service provider under authority • Amount to be separately indicated in Invoice • Only actual amount should be recovered • Title in goods and services not held by pure agent • Illustrations of pure agent • Octroi/Entry tax paid by Agent • Customs duty, transport, warehousing charges paid by Custom House Agent (CHA). • Parking fees, toll naka charges by person renting motor vehicle for transport of passengers (rent-a-cab operator). • Air fare/rail fare paid by Agent • Distinction between ‘bundled service’ and service as ‘pure agent’ – Bundled service means all expenses incurred or sub-services provided are part of main service, while in case of ‘pure agent’, the expenses incurred are not part of the  service. E-10A, Kailash Colony, Greater Kailash – 1, New Delhi – 110048 Telefax: 011-46664600, 29245500/5522/5533 | Email: akg@akgindia.in www.akgindia.in | www.charteredaccountantnewdelhi.com

5. Illustration when payment not as Pure Agent • Rent, telephones, transport expenses incurred by C&F Agent\ • Travelling expenses of Auditor, Consulting Engineer, Maintenance Engineer, Management Consultant (now issue arguable) • Charges of salary of labour by Labour Contractor (though in my view, issue is debatable since the service of labour contractor is only to bring labour to the Principal Employer). • Service provider padding the amounts to be recovered from customer • As per the definition of ‘pure agent’, the amount recovered from customer is not includible  if it is recovered on actual basis. • In many cases (e.g. CHA, goods transport, freight forwarder etc.), the expenses are padded and higher amounts are charged in the Bill. • In Bax Global India v. CST (2008) 13 STT 263 (CESTAT), it was held that if the service provider earns profit on these activities, it is not includible in value of his services – relying on Baroda Electric Meters Ltd. v. CCE 1997 (94) ELT 13 (SC 3 member). • However, surely the issue is litigation prone. • Other provisions in service tax valuation • Service tax is payable on net amount excluding Vat, if payable on that transaction. • Vat payable on service tax amount if State Law definition covers such amount. • Service tax is payable on gross amount including TDS. • No service tax on (really) free services • Service tax, excise duty and customs duty are independent duties. • Rate of customs duty is relevant for valuation in case of export and import of services. In such cases, rate of exchange as notified in Customs Notification is relevant and not RBI reference rate of rates notified by FEDAI or rate at which the amount is credited or debited by the Bank to account of service provider/service receiver. • Composition Schemes • In some cases, finding of value of service is not easy e.g. sale or purchase of foreign exchange, air travel agent – in such cases, optional composition schemes provide • In case of composite contracts, e.g. construction, finding value of service is difficult. In such cases, optional composition schemes are available • Abatement schemes • In case of some services, abatement is available i.e. part of tax is exempted – e.g. 40% in case of air travel, 25% in case of GTA service • Restrictions on Cenvat Credit E-10A, Kailash Colony, Greater Kailash – 1, New Delhi – 110048 Telefax: 011-46664600, 29245500/5522/5533 | Email: akg@akgindia.in www.akgindia.in | www.charteredaccountantnewdelhi.com

6. ABATEMENTS AND COMPOSITION UNDER SERVICE TAX • Composition Schemes • In some cases, finding of value of service is not easy e.g. sale or purchase of foreign exchange, air travel agent – in such cases, optional composition schemes provided. • In case of composite contracts, e.g. construction, finding value of service is difficult. In such cases, optional composition schemes are available. • Each contract is a different contract and can be valued on different basis. • 1.A Services Under Composition Schemes • Air Travel Agent – 0.6% (domestic travel) – 1.2% (international booking) of basic fare – Rates specified in Rule 6(7) • Sale and Purchase of Foreign Currency – Rates specified in Rule 6(7B) • Life Insurance Service – Rates specified in rule 6(7A) • Lottery Ticket Promotion – Rates specified in Rule 6(7C) • 1.B Composition Scheme (Continued) • Restaurant service – On 40% amount excluding Vat • Works Contract Service – On 40%/60%/70% value – Rules 2A of Valuation Rules • 25% Abatement Scheme if gross amount includes value of land E-10A, Kailash Colony, Greater Kailash – 1, New Delhi – 110048 Telefax: 011-46664600, 29245500/5522/5533 | Email: akg@akgindia.in www.akgindia.in | www.charteredaccountantnewdelhi.com

7. ABATEMENTS AND COMPOSITION UNDER SERVICE TAX • Abatement schemes • Notification No. 26/2012-ST dated 20-6-2012 provides for abatement. • In case of some services, abatement is available i.e. part of tax is exempted – e.g. 40% in case of air travel, 25% in case of GTA service, 40% in case of renting or hire of motor vehicle to carry passengers. • Restrictions on CenvatCredit • In some cases, abatement scheme is used as composition scheme • 2.A Abatements • Mandap, Shamiana or convention along with food – 70% of amount • Chit Related Services – 70% – No Cenvat • Financial leasing and hire purchase – Management fee, processing fees plus 10% of interest • Renting of motor vehicle – 40% – No Cenvat [reverse charge in some cases] • Renting of hotels, guest houses, clubs – 60% • Tour Operator – Package Tour – 25%, mere booking of hotel (including room rent charges) – 10%, Other cases – 40% • Rail Transport  of goods and AC/First class passengers – 10% w.e.f. 1-10-2012 [if not further extended] • GTA – 25% – No Cenvat • Passenger transport by air – 40% – Cenvat of only input services allowable • 2.B Valuation under rule 6 • Some abatements and compositions are subject to condition of non-availment of Cenvat • In such cases, if Cenvat credit is taken, valuation for purpose of rule 6 of Cenvat Credit Rules (for payment of 6% ‘amount’ or reversal of Cenvat) as per provisions in those Rules • 2.C Abatement and Exemption Schemes at a glance E-10A, Kailash Colony, Greater Kailash – 1, New Delhi – 110048 Telefax: 011-46664600, 29245500/5522/5533 | Email: akg@akgindia.in www.akgindia.in | www.charteredaccountantnewdelhi.com

8. 2.C Abatement and Exemption Schemes at a glance E-10A, Kailash Colony, Greater Kailash – 1, New Delhi – 110048 Telefax: 011-46664600, 29245500/5522/5533 | Email: akg@akgindia.in www.akgindia.in | www.charteredaccountantnewdelhi.com

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10. E-10A, Kailash Colony, Greater Kailash – 1, New Delhi – 110048 Telefax: 011-46664600, 29245500/5522/5533 | Email: akg@akgindia.in www.akgindia.in | www.charteredaccountantnewdelhi.com

11. E-10A, Kailash Colony, Greater Kailash – 1, New Delhi – 110048 Telefax: 011-46664600, 29245500/5522/5533 | Email: akg@akgindia.in www.akgindia.in | www.charteredaccountantnewdelhi.com

12. E-10A, Kailash Colony, Greater Kailash – 1, New Delhi – 110048 Telefax: 011-46664600, 29245500/5522/5533 Email: akg@akgindia.in www.akgindia.in | www.charteredaccountantnewdelhi.com DISCLAIMER: The information contained in this document is for information purposes only and does not constitute a legal advice from AKG or solicitation or an offer to sell any products or services. Reasonable efforts are being made to provide correct and updated information by us, however, users are advised to use their own prudence and seek independent professional advise before taking any decision based on this document.