PRE-BUDGET MEMORANDUM

2013-14

INDIRECT TAXES

Bangalore Chamber of Industry and Commerce No. 3/4, 3rd Floor, C Block, Unity Buildings, JC Road, Bangalore 560 002 Ph : (080) 22223321, 24-25 Fax : (080) 22232233 Email: bcic@bcic.org.in

PRE-BUDGET MEMORANDUM 2013-14 1. 2. 3. 4. 5. Goods and Service Tax (GST) Education Cess Taxation of Services based on Negative list Dual Levies on software-VAT and Service Tax Non-applicability of service tax on charges/ recoveries towards electricity supplies 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. Place of Provision of Service Rules, 2012 (Pop Rules) Transactions between Branch / Head Office MEGA Notification Point of Taxation Rules Special Economic Zones Service Tax Rebate Service Tax Refunds Bundled Services Exchange Rate Reverse charge provisions Scope of support services rendered by Government CENVAT Credit Rules, 2004 Customs Duty Solar Energy Proposals relating to Biscuit Manufacturing Proposals relating to Automobile Manufacturing Procedural issue Central Sale Tax (CST) 06 07 09 11 13 14 20 22 25 25 25 27 27 35 39 40 40 42 44 03 04 05 05

PART II - INDIRECT TAX ISSUES 1. 1.1. GOODS AND SERVICE TAX (GST) Union GST

The GST proposes to replace the plethora of indirect taxes with one single levy, a system that will help all stakeholders (Central and State Governments, Business and Consumers) by removing cascading effect of taxes, broadening the revenue base, preventing leakage and lowering the incidence of tax. Issue The GST was to be rolled out from April 1, 2010, but has been delayed pending resolution of issues between States and the Centre. However, due to the absence of adequate consensus, the GST law subsuming State Indirect Taxes, could get deferred beyond April 1, 2013. Recommendation a) The GST legislation may be implemented for all Central Levies effective April 1, 2013. This will give a clear direction towards a Unified GST. b) The rate of CST should be reduced to 1% w.e.f. April 1, 2013. c) The Revenue Neutral Rate may be kept determined in a manner that the Unified GST Rate (when State Taxes are subsumed) is not greater than 16 18%. This will ensure that GST is not an additional / enhanced burden on the consumers. 1.2. Issue The taxable event proposed under the GST law is supply, which means that the supply of goods and services between two divisions of an entity would fall within the taxable event. In the context of services, the Place of Provision of Services Rules notified with the ushering in of Taxation of Services based on Negative List is wholly inadequate and needs significant deliberations before these rules are adopted for the GST regime. Further, valuation of supply would be critical, particularly in inter-state trade. Administration of the same taxable base by two authorities is a serious concern and the least that is required is common appellate forums. There is also a concern that classification disputes would continue if the rates for goods and services are different. The whole objective GST allowing a unified market access would diminish significantly, if the States are allowed to adopt differential rates. Petroleum products constitute a
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Issues in GST discussion papers

significant part of the tax collections and early proposals suggest that the petroleum sector would continue under the current taxation regime. Recommendation It is recommended that the Government removes the above concerns before the draft legislation is prepared. The Government should also provide timelines on introduction and implementation of GST with a roadmap as to subsuming of indirect taxes such as Octroi. The Central Government should also lay down sufficient time for stakeholder consultation as any change in the law would require larger consensus all over again. 2. EDUCATION CESS a) A 2% Education Cess was introduced in the year 2004. Additional secondary and higher education cess of 1% was introduced in 2007. Levying Education cess may not be required at all, if Companies are pursuing initiatives on Corporate Social Responsibility (CSR). Hence, Education Cess may be levied only when CSR initiatives are not undertaken by a company. b) This 3% educational cess is calculated on the aggregate of customs duty payable on the imported item. Further, this 3% educational cess on customs duty is not allowed for the purpose of availing CENVAT credit. Consequently, it increases the cost of import. Such costs hinder the exporters in being price competitive in the international market. Therefore, educational cess on customs duty should either be abolished or else CENVAT credit of educational cess on customs duty should be allowed. Such a measure would be a step in right direction considering the present economic crisis.

c) The Accounting treatment of two types of education cess also leads to lot of complications. Therefore, the education cess may be merged for the convenience of the Trade and Industry.

3.

TAXATION OF SERVICES BASED ON NEGATIVE LIST Trade Associations had recommended that taxation of services based on negative list be introduced only along with GST. However, the new scheme has come into force from July 1, 2012. It is stated that the objective of taxation based on negative list is that all services, except those specified in the negative list, will be subject to taxation unless specifically exempt. Under this regime, there should be no requirement to report the value of each taxable service. Thus, the existing regime, which has the superseded the previous regime where only services of specified description were subjected to tax, should be given effect with all force. Thus, the Service Tax Return should not require the service providers to provide the value of taxable services meeting the specified description, as in the previous regime. Otherwise, service providers will have to ensure compliance with two regimes, which will not only impose a higher cost of compliance but is also be administratively onerous as the systems have been re-organized to meet the requirements of the current regime.

4.

DUAL LEVIES ON SOFTWARE-VAT AND SERVICE TAX

The Central Board of Excise and Customs (CBEC) has issued an Education Guide [Taxation of Services An Education Guide] which in para 6.4.4 states that prepackaged or canned or shrink wrapped software, when supplied on a media, is goods and hence would not be liable to Service tax. However, the Education Guide further states that if software or any programme contained is delivered online or is down loaded on the internet the same would not be treated as goods (thereby implying that service tax shall be payable). Issues a) Historically, while packaged software has been treated as goods, customized software has been treated as services. b) However, the clarification in Education Guide remains contentious on whether the mode of delivery would make any difference to classification as goods since VAT is being levied even on electronically delivered software. c) Dual levy is currently applicable on software wherein both VAT and Service Tax are being discharged on full value. However, being an indirect tax which is passed on in transactions, there are disputes in settling the service tax charged in invoices. d) Applicability of VAT, Service Tax and Tax Deducted at Source on Software makes it very difficult for the Product companies, with low margins, to do business in India.

Recommendation Considering the definition of service u/s 65B(44), CBEC should clarify that packaged software, including license to use such software, whether delivered electronically or on a media, is not be subject to service tax. In case it is not possible to so clarify, it may be clarified that Central Sales Tax is not applicable in inter-state transaction of packaged software. This will give a clear message that the Central Government is removing the possibilities of dual levies. Notification No. 25/2011 CUS is still valid which exempts payment of Customs duty for Software license, if service tax is paid, but the corresponding notification under service tax no. 53/2010 stands rescinded in 2012, which provided for exemption from service tax if Customs duty is paid. It is recommended that a similar notification should be notified again. 5. Non-applicability of service tax on charges/ recoveries towards electricity supplies a) Section 66D (negative list of services) lists transmission or distribution of electricity by an electricity transmission or distribution utility. b) Section 66B(23) defines electricity transmission or distribution utility as the Central Electricity Authority; a State Electricity Board; the Central Transmission Utility or a State Transmission Utility notified under the Electricity Act, 2003; or a distribution or transmission licensee under the said Act, or any other entity entrusted with such function by the Central Government or, as the case may be, the State Government. c) The definition of services excludes transfer of property in goods. Issue: Various developers of real estate parks supply electricity to their tenants (either generated through the DG sets or obtained from the state electricity board). However, only electricity transmitted or distributed by an electricity transmission or distribution utility is specifically exempted under service tax. However, there is no specific exemption for electricity supplied by developers to its tenants. Consequently, the controversy at the ground level is whether, electricity is goods and hence its supply should not attract service tax at all. Recommendation Electricity constitutes goods under the VAT and Central Excise laws and judicial precedents have upheld this view. Accordingly, CBEC should clarify that charges/ recoveries for supply of electricity by developers would not get covered under the purview of service tax. This should cover electricity supplied either through captive diesel generation sets or through a State electricity board where the developer recovers the costs with regard to such supply from the tenants.
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6. 6.1

PLACE OF PROVISION OF SERVICE RULES, 2012 (POP Rules) Scope of the term intermediary To exclude within its ambit Call center/ BPO/ KPO

Rule 9 of the POP Rules provides that the place of provision of intermediary services by shall be the location of the service provider. Rule 2(f) defines intermediary. Issue a) Intermediary as defined could have larger scope than covering broker or agent in B2C service transactions. b) The Education Guide in Para 5.9.6 clarifies that persons such as callcenters, who provide services to their clients by dealing with the customers of the client on the clients behalf, but actually provided these services on their own account, will not be categorized as an intermediary. c) The Education Guide does not address the issue of those call centres which have been set up specially for marketing the services of its overseas service recipients (such as those in the financial sector). d) Prior to the Negative list regime, such services qualified as export in terms of erstwhile Export of Services Rules. Denying export benefit on such transactions would lead to unnecessary burden and would also result in exporting taxes along with services. e) As the Education Guide is only a reference document, the Service tax authorities could take a contrary view i.e. treat Call-center, BPO, KPO and other similar service providers as intermediary. Recommendation Intermediary should be restricted to B2C transaction. In order to avoid ambiguity and litigation, insert an explanation to the definition of intermediary as given under Rule 2(f) of the POPS RulesExplanation: For the removal of doubts, it is hereby clarified that an intermediary does not include persons engaged in providing any customized electronic data, online training or providing services of outsourced business processes, knowledge management processes or other similar service which is wholly transmitted through voice, data, video, internet or other electronic means. Simultaneously, CBEC may issue a circular clarifying that intermediary service does not include services provided by Call-centre, BPO, KPO and other similar service providers.
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6.2

Export of Testing Services

Overseas clients outsource testing services to service providers in India. Testing is usually performed on software or hardware in which software is etched or embedded. Rule 4 of the POPS Rules deals with place of provision of performance based services. Rul4 (a) states that: Services provided in respect of goods that are required to be made physically available by the receipient of service to the provider of service, or to a person acting on behalf of the provider of service, in order to provide the service; The Guidance note (Para 5.4.1) states that technical testing / inspection / certification / analysis of goods are covered by Rule 4. Testing activities are carried out in labs in India and the test reports are made available to the overseas clients for consideration in convertible foreign exchange. Accordingly, such services may be construed as provided in India and hence liable to Service tax. Levying service tax on testing services which are exported would make such exports wholly unviable. Testing services generate substantial employment in India. India earns substantial foreign exchange from testing services. Recommendation Sub rule 4(a) of the POPS Rules should be amended to provide an exception that in respect of testing service performed on goods, the place of provision of service is the location of the service recipient (i.e. to whom the test report or exception report, if any, is required to be delivered).

6.3

Performance of projects entirely outside India

There are various situations where contracts are entered into between parties located in India for provision of services which would be performed entirely outside India such as software testing, IT project implementation etc. Under the erstwhile regime of taxation of services (i.e. prior to Negative List regime of taxation), such services were considered as outside the purview of the Service tax law on the premise that such services were entirely performed outside India. Hence, Service tax was not levied on such services.

Issue Under Negative List regime, in terms of Rule 8 of the POPS Rules, where the location of the provider of service and the recipient of service is in India, place of provision of such service would be construed in India (viz. the location of the recipient of service) irrespective of the place of performance of service. With the introduction of this Rule, even where services are fully performed outside India, Services are construed as provided in India (and are subject to Service tax) since both service recipient & service provider are located in India. This has specifically resulted in levying Service tax on agreements entered into by IT companies in India with Government of India for provision of IT services/ implementation of IT projects outside India. Recommendation A suitable amendment in the POPS Rules may be made so as to exclude from the Service tax law specifically those services which are entirely performed outside India. 6.4 Need for clarity on Jurisdiction

Section 64(3) of the Finance Act, 1994 covers only the services provided and not the services received or consumed. This ambiguity gives rise to the doubt whether services received or consumed outside India would be taxable in India under the reverse charge method. Apparently, the provisions of section 64(3) are in conflict with the Place of Provision of Services Rules, 2012. Recommendation Section 64(3) should read as It shall apply to taxable services provided, received or consumed on or after the commencement of this Chapter and suitable clarification be issued stating that services rendered and consumed outside India would not be subjected to service tax under the Act. 7. TRANSACTIONS BETWEEN BRANCH / HEAD OFFICE

Under the Negative list regime, an Explanation 3(b) has been inserted in the definition of service under section 65B (44) by virtue of which any transaction between an establishment outside India and an establishment in India would be treated as a service.

Issue i. As per the explanation a branch or any other establishment of a person located in a non-taxable territory would be deemed to be a distinct person for service tax purposes. By way of implication, provision of services by an establishment outside India to its head office in India would be regarded as import of services, requiring payment of service tax on reverse charge basis. Per contra, when services are provided by a head office in India to an establishment outside India, the same shall not be qualify as export as per Rule 6A of the Service Tax Rules and the CENVAT credit pertaining to the same would be required to be reversed. Under the negative list based taxation of services, given the wide nature of the definition of service, it is apprehended that, even accounting entries recorded in the books for meeting overseas compliances and funds transfers for meeting regular day to day expenses of the establishment outside India, may be treated as consideration for the activity and on the basis thereof the field authorities may seek to collect service tax under the reverse charge mechanism. The legal fiction caused by Explanation 3(b), which is intended to limit the jurisdiction for levying service tax on services consumed in India (other than J&K) as a taxable territory, is expanding the jurisdiction scope, ignoring the place where the services are actually performed and where they are consumed. Thus, a single legal fiction is not adequate to express the legislative intent as it creates a parallel taxation regime within the service tax law that deals with Head Office in India and overseas establishments (or vice versa) in a quite different way from the reality of the transactions that takes place.

ii.

iii.

iv.

Recommendation a) Clarify that services provided by a branch outside India to clients outside India shall not be regarded as import of service for the reason that contracts with the clients have been concluded by the head office in India and the client remits the consideration to the head office in India. b) Clarify that entries in the books recorded with a view to meet overseas compliances shall not be construed as consideration for services. c) Clarify that transfer of funds from a head office in India to an overseas branch located in a non-taxable territory, for meeting regular expenses of the branch, would be outside the purview of the levy of service tax. d) Clarify that for any services provided by a Head Office/ Branch in India to its counterpart abroad should be non taxable and there should be no requirement of any CENVAT credit reversal. e) Transactions between branch and head office requiring receipt of foreign exchange into India should be sufficient for providing export benefits to the transaction.
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8. 8.1

MEGA NOTIFICATION EXEMPTIONS FOR INPUT SERVICES AVIALED BY ENTITIES REGISTERED UNDER SECTION 12AA OF I.T ACT / ESIC AND HEALTHCARE

Notification No. 25 / 2012 ST dated 20th June 2012 has been issued as Mega Exemption Notification and envisages exemption of taxable services from the whole of the service tax leviable thereon under section 66B of the Finance Act, 1994. By exempting service tax on output services, the Central Government has effectively kept the socially important services outside the tax net. Issue This exemption has the effect of input taxes becoming a cost and thereby constraining the objectives for which the exemption is granted. For example, if the services received by an entity registered under section 12AA of the Incometax Act, 1961 for the purposes of providing charitable activities [Entry No. 34 in Mega Notification] is subject to service tax, the charitable institutions would incur a higher cost on such services and thereby reduce its social objectives. Likewise, if the services received by Employees State Insurance Corporation (ESIC) [Entry No. 36 in the Mega Notification] suffer service tax, it would enhance ESICs cost of providing services to the persons receiving the services of ESIC. An authorized medical practitioner or para-medics [Entry No.2 in the Mega Notification] is exempt from the levy of service tax but rent paid for the immovable property used for providing healthcare services is not exempt.

Recommendation The Exemption Notification may be expanded to grant exemption from the whole of service tax on services received by not for profit entities serving the social sector. This would sub-serve the objectives of the Mega exemption notification. For healthcare services, we recommended that on the lines of educational institutions in Entry No.9, the following Entry be added after Entry 39 in the Mega Exemption Notification: Services provided to a clinical establishment, an authorized medical practitioner or para-medic, in respect of healthcare services listed at Entry 2, by way of renting of immovable property. 8.2 Clarification with regard to the scope of Entry No.13

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Entry No. 13 of Notification No. 25/2012 dated 20.06.2012 reads as: Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,a. A road, bridge, tunnel, or terminal for road transportation for use by general public; Issue All services which inextricably linked to the services specified with regard to road, bridge, etc. such as painting & marking of lanes, installation of traffic signals and installation of CCTV cameras etc. may be construed as not covered by the exemption in Entry No.13 Recommendation Necessary clarification may be made to include the word pertaining to in Sl. No. 13 of Notification No. 25/12, The word pertaining to exempts other services as well which would be inextricably linked to the main service. Such exemption is necessary to avoid needless litigation on the scope of the activity and also avoid falling into the situation of bundled services.

8.3

Exemption for services relating to construction of power plant

Power plants are infrastructure projects like an airport, port or railways. Services by way of construction, erection, commissioning or installation of original works pertaining to a power plant is not finding an entry under Entry No. 14. Recommendation An entry may be inserted for power plant under Entry No. 14 in the Mega Notification. 8.4 Exemption for transportation of Employees Entry No. 23 provides for exemption with regard to transport of passengers by a contract carriage for the transportation of passengers, excluding tourism, conducted tour, charter or hire. The term contract carriage has been defined in Clause 7 of Section 2 of Motor Vehicles Act, 1988

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(7) "contract carriage" means a motor vehicle which carries a passenger or passengers for hire or reward and is engaged under a contract, whether expressed or implied, for the use of such vehicle as a whole for the carriage of passengers mentioned therein and entered into by a person with a holder of a permit in relation to such vehicle or any person authorised by him in this behalf on a fixed or an agreed rate or sum(a) on a time basis, whether or not with reference to any route or distance; or (b) from one point to another, and in either case, without stopping to pick up or set down passengers not included in the contract anywhere during the journey, and includesa maxicab; and a motorcar notwithstanding the separate fares are charged for its passengers; Issue While transporting employees from their office to home or vice versa or between offices under contracts with State Transport Companies and other cab service providers having a valid permit are apparently covered within the above exemption, yet there is ambiguity owing to the linkage with the Motor Vehicles Act. Recommendation It may be clarified that service providers having a contract with employers to provide transport of its employees from point to point, are exempted under the exemption provide in Entry No. 23. 9. Point of Taxation Rules Rule 5 of Point of Taxation (POT) Rules, 2011 states: Payment of tax in case of new services where a service is taxed for the first time, then,a) No tax shall be playable to the extent the invoice has been issued and the payment received against such invoice before such service became taxable; b) No tax shall be payable if the payment has been received before the service becomes taxable and invoice has been issued within fourteen days of the date when the service is taxed for the first time.
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Issue In view of the above, mere issuance of invoice is not sufficient; the payment should also have been received before the service became taxable. Service tax is payable only if the levy is attracted during the relevant period. Mere non-receipt of consideration from the service recipient should not alter the position, since the normal period for payment will be between 30 - 120 days. Recommendation Service tax levy should not be applicable in a scenario when the invoice is issued but the payment for such invoice received subsequently relating to such newly introduced services. Necessary amendment should be made in Rule 5 of POT Rules, 2011. 10. Special Economic Zones

Amendments/ clarifications sought in relation to the Service tax exemption for SEZ developers/ units under Notification 40/2012-ST dated 20 June 2012 Notification 40/2012-ST dated 20 June 2012 providing exemption from Service tax on taxable services procured by a SEZ developer/ unit with effect from 1 July 2012, supersedes Notification 17/2011-ST dated 01 March 2012. Issue The practical difficulties foreseen under notification 40/2012-ST are listed below: 10.1 Loss of refund on account of manner of computation prescribed under Para 2(b) Para 2(b) of notification 40/2012-ST prescribes the following formula restricting the refund amount with respect to services which are not wholly consumed within the SEZ unit: (Export turnover of goods Service tax paid on services other than wholly + services of SEZ unit/ developer) consumed services (both for SEZ and DTA units) Total turnover for the period Issues The mathematical formula is unworkable since there is no harmony in the components. As Service tax needs to be deposited by the SEZ units on the supplies made to DTA, a loss occurs on account of the following:
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(a) Notification 40/2012-ST provides that CENVAT credit cannot be availed. Hence, Service tax on all DTA supplies of the SEZ unit need to be paid in cash; and (b) Refund is also not available on the Service tax paid on services in proportion to the DTA supplies of the SEZ unit as the numerator of the above formula provides refund in proportion to the export turnover of the SEZ unit. While Export turnover is of the SEZ Unit / Developer there is ambiguity with regard to Total Turnover - whether it refers only to the total turnover of the SEZ Unit / Developer. If the Total Turnover and Service Tax Paid are of the entity as a whole for a single service tax registration, the factors determining the refund amount would not have nexus with the SEZ Unit / Developer. The cost of compliance for claiming the refund would increase significantly and the entire procedure would frustrate a multi-business / multi-location entity.

Recommendation The numerator of the prescribed formula should be suitably amended to read as Turnover of the SEZ unit, which would include all supplies made by the SEZ unit (Export/ DTA/ Taxable or Non Taxable). 10.2 CENVAT credit of service tax paid Explanation under Para 2(b) interalia provides that no CENVAT credit of service tax paid on specified services used for the authorized operations in a SEZ has been taken under the CENVAT Credit Rules, 2004. The entire service tax is not eligible for refund as the refund amount is to be computed proportionately as per the mathematical formula under Para 2(b). The CENVAT credit may be used for DTA supplies of the SEZ. The legal entity may use the CENVAT credit to the extent of its other taxable domestic supplies. Taking CENVAT credit should be restricted only to the refund amount and not to the entire service tax paid on specified services. Recommendation Clause (g) of the Explanation under Para 2(b) should be amended to provide that CENVAT Credit of service tax paid on the specified services used for the authorized operations, which has been taken under the CENVAT Credit Rules, 2004, should be reversed to the extent of the refund amount.

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Further, it should be clarified that 1. Only to the extent of the refund claimed the SEZ unit / Developer shall be ineligible to take CENVAT credit under CENVAT Credit Rules, 2004. This can be achieved by reversing the CENVAT Credit availed to the extent of the refund claimed instead of an embargo on availing the CENVAT credit itself. 2. On similar lines as that of Circular 142/11/2011-ST, the DTA units would be eligible to claim the CENVAT credit on the proportionate amount of Service tax paid on the shared services. 10.3 Refund of services exclusively used by SEZ unit of entity having both SEZ and DTA operations not available in entirety Notification 40/2012-ST advances benefit by way of upfront exemption on services which are wholly consumed within the SEZ and by way of refund on services not wholly consumed. The services which are not wholly consumed can be segregated into two types i.e. services exclusively used by a SEZ unit and services shared between a SEZ unit and a DTA unit of the same entity. On reading the notification, it appears that a SEZ unit would have to file for refund in the proportion of the export turnover to total turnover [as prescribed under Para 2(b)] even with respect to services which are exclusively used by the SEZ unit. This would lead to extreme hardship as the refund of Service tax with respect to services which are only used by a SEZ unit would not be available in entirety and would get reduced because of the formula prescribed under Para 2(b). In such a situation, the SEZ unit should have an option to file refund claim under Rule 5 of the CENVAT Credit Rules. Similar situation was being faced under the earlier Notification No. 17/2011-ST. Later, Circular No. 142/11/2011-ST dated 18 May 2011 was issued to clarify issues faced by assesses in claiming SEZ refunds. Among other issues, it clarified that 100% refund of exclusively used services would be available. Recommendation A clarification should be issued on similar lines as that of Circular No. 142/11/2011-ST stating that 100% upfront exemption would be available for the services exclusively used by the SEZ unit/ developer and the definition of exclusively used services should be re-instated. Alternatively, the Notification should provide for granting of exemption by way of 100% refund of service tax for services exclusively used by SEZ Unit / Developers.

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10.4 Inclusion of turnover relating to SEZ activities Issue Taxable services are exported from multiple locations across India via SEZ, STPI as well as DTA units operating under a centralized service tax registration. The service provider has an option to either claim refund under Rule 5 of CENVAT Rules or an upfront exemption/refund of service tax on input services received by SEZ units under Notification 40/2012-ST dated June 20, 2012. For administrative ease and convenience, the service exporters mostly file a single and consolidated refund claim under Rule 5 of CENVAT Rules for exports undertaken by all units (SEZ, STPI as well DTA) on a consolidated basis under their centralized registration. The adjudicating authorities are denying refund attributable to SEZ units under the Rule 5 Notification as under: i. ii. Removal of SEZ exports from the export turnover for computation of refund Removal of credits relating to input services received by SEZ units from the CENVAT amount eligible for computation of refund

Recommendation Clarify that a right to claim a refund as per Notification No. 40 / 2012, if not exercised, would not preclude claiming a refund as per Rule 5 of the CENVAT Credit Rules. Clarify that SEZ units are entitled to avail CENVAT credit of service tax on inputs services with respect to which no upfront exemption has been claimed and consequently, the service provider is entitled to opt for refund under the Rule 5 Notification of the consolidated CENVAT credit. 10.5 No clarity of the procedure to take approval for services Notification 40/2012-ST requires a SEZ unit/ developer to obtain an approval of a list of services which are liable to Service tax and are required for performing the authorized operations. With the introduction of the negative list regime effective from 1 July 2012, the classification of services has ceased to exist. There is no clarity on how a SEZ unit would apply for an approval for a list of services in the absence of service categories. Further, default list of services prescribing different formats and conditions are being issued by various jurisdictions which may result in non-standardization of the process of filing for application for approvals by an entity have SEZ units located at different jurisdictions.

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Further, due to absence of any clarity with regard to the approval procedure, there may arise a time lag between the date on which the notification has come into force, the date on which approvals are applied for and the date on which approvals are granted. SEZ units/ developers have faced this issue in the past, where the approvals were received at a later date and the refund claim had to be filed during the interim period. Service tax authorities have been rejecting refund claims on such grounds that the SEZ unit did not have an approval of services during the period for which refund was filed. Recommendation While the list of services is approved by the Unit Approval Committee of the SEZ, the refunds are administered by the Service Tax authorities. i. A standard list (default list) containing description of services should be issued by the CBEC to ensure uniformity across jurisdiction. The standard list should be considered approved for the purpose of claiming service tax exemption with a provision to apply for additional services to the jurisdictional UAC for exemptions. It may also be clarified that till the time the approvals under the SEZ notification are not received, the approvals granted to a SEZ unit under notification 17/2011-ST (on the basis of description of service provided by the unit/ developer) shall hold good and benefit of refund cannot be denied on this ground.

ii.

10.6 Submission of documents in original is not practically feasible Para 3(f)(ii) of the SEZ Notification No. 40/2012-ST prescribes submission of invoices billed to the SEZ unit and document evidencing payment of Service tax in original. Compliance of this condition creates practical difficulties as the original documents are required for other statutory purposes as well. Recommendation The words Certified copies of should be inserted before the words invoice or bill in Para 3(f)(ii) of the SEZ Notification and the words in original should be deleted. 10.7 Certification by statutory auditor Explanation under Para 4 defines statutory auditor for the purposes of the Notification. It could be a Chartered Accountant certifying the annual accounts of the unit of a SEZ or developer for the purposes of the Companies Act, 1956 or the Income-tax Act, 1961.

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The Certificate essentially involves verification of facts from the books of accounts. Such verification could be done by any Chartered Accountant. Recommendation Explanation under Para 4 may be amended to provide that statutory auditor refers to any Chartered Accountant within the meaning of Chartered Accountants Act, 1949 (38 of 1949). Statutory Auditor requirement has been relaxed in the case of refund of unutilized CENVAT credit under rule 5 of the Credit Rules read with Notification No. 27 / 2012 CE(NT) dated June 18, 2012. Similarly, the requirement should be relaxed under the SEZ Notification. 10.8 Consolidated Refund claim by entity having multiple SEZ unit A clarification should be issued in following line for notification 40/2011 as was clarified under Circular No.142/11/2011 ST dated 18th May 2011 for notification 17/2011, to enable an entity having centralized service tax registration to file consolidated refund for multiple SEZ units. Whether consolidated refund claim under 40/2012-ST can be filed by an entity having more than one SEZ unit and a centralized service tax registration? If an entity is having multiple SEZ Units with a centralized service tax registration, consolidated refund claim can be filed, provided separate accounts are maintained for receipt and use of services for the authorised operations in SEZ Unit. 10.9 Form A-I for import of services Issue As per the notification 40/2012-ST, FORM A-1 is mandated for all categories of services. Currently there are substantial delays on issue of Form A-I where several documents are being asked for by the field officers. Recommendation It may be clarified that FORM A-1 should be issued at the earliest as a delay has an impact on the exemption from service tax. A checklist of documents required for the issue be made available to the companies. FORM A-1 requires the name of the service provider with service tax registration number to be mentioned. It may be clarified that since service tax registration number will not be available in case of foreign service provider, service tax registration is not be a mandatory field and the name of the service provider itself is sufficient.

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Service Tax Rebates / Refunds 11. SERVICE TAX REBATE

11.1 RESTORING REBATE FOR EXPORT OF SERVICES POST JULY 1, 2012 Rule 5 of the Export of Service Rules, 2005 allowed a rebate of service tax paid on taxable services which are exported. Pursuant to the said rule, the Central Government issued Notification No. 11/2005-ST dated 19.04.2005 to enable sanction of rebate of the whole of service tax and cess paid on taxable services exported in terms of Rule 3 of Export of Service Rules. With Notification No. 11 / 2005 in force, exporters had accumulated the CENVAT Credit without claiming a refund of the input tax since it was possible to claim a rebate of the service tax and cess paid on the taxable services which are exported by using the CENVAT Credit so accumulated. Issue a) Notification No. 28 /2012 ST dated 20.06.2012 has notified the Place of Provision of Services Rules, 2012 and these rules have replaced the Export of Services Rules, 2005. Thus, the Notification No.11 / 2005-ST dated 19.04.2005 for granting of rebate of service tax and cess on export of taxable services stands rescinded. In the absence of a rebate of service tax and cess on taxable services which are exported, CENVAT Credit accumulated over the years cannot be used by an exporter of services. There is also no possibility of claiming a refund of such accumulated CENVAT Credit as per Rule 5. Thus, the exporters are required to incur huge costs on account of the inability to realize the CENVAT Credit. b) Rule 6A of the Service Tax Rules inserted by the Service Tax (Second Amendment) Rules, 2012 w.e.f. 1-7-2012 vide Notification No. 36 / 2012 dated 20-06-2012 deals with Export of Services. Sub-rule 2 provides for granting of rebate of only the service tax or duty paid on input services or inputs used in any service which is exported. c) The service tax rebate notification which stands rescinded is similar to Excise rebate notification whereby an exporter of goods is permitted to export excisable goods against payment of excise duty and claim of rebate. While exporters of goods continue to claim rebate of excise duty, exporters of services are now precluded from July 1, 2012.

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Recommendation a) The notification for granting rebate of service tax and cess paid on exported services should be restored so that export of service is treated on par with export of goods. b) Alternatively, the Central Government should grant the refund of accumulated CENVAT Credit as at 30th June 2012 within three months of the claim so that exporters predicament of lapsing the accumulated CENVAT Credit and incurring a huge cost is mitigated. 11.2 Pending Service Tax rebate claims for granting service tax rebate on export of services Notification No. 11/ 200-ST5 dated 19-04-2005 was issued to enable sanction of rebate of whole of service tax and cess paid on taxable services exported in terms of Rule 3 of Export of Service Rules. However, despite providing detailed documentation such as Invoices, contract copies, FIRCs evidencing payment received in convertible foreign currencies, SOFTEX forms, CENVAT register, Chartered Accountants certificate, rebate claims are being denied on various technical / procedural issues, such as under: Technical issues a) No evidence that the service has actually been exported, or that the service exported is a taxable service, though similar services provided to domestic clients-are subject to Service Tax. b) Rebate denied when service tax paid using CENVAT credit and not in cash. c) Inspite of annual audits of CENVAT credit, the tax authorities doubt that input tax is paid on input services on the grounds that there is no nexus between the output services exported and input services availed. d) Service Tax is paid through CENVAT credit and not shown on Invoice. Procedural issues a) No list of documents prescribed for filing of rebate claims. b) Address shown in the FIRC is that of Corporate Office whereas exports were made by delivery centres. c) Invoices do not indicate the nature of services even though the description of services provided is specified as per the terms of the contract entered into with the clients

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Recommendation A standard list of documents as given below should be circulated to all the field formations with strict instructions to follow the said guidelines for the purpose of granting rebate of Service tax: a) Invoices raised on overseas customer customers with corresponding FIRCs should be enough to evidence export of services. b) Accept certified copies of service tax returns reflecting the payment of service tax on exported services along with CA certificate as sufficient evidence of the tax being paid on such exported services. For the purpose of rebate claim, tax paid on export of services made through CENVAT credit should also be acceptable. c) Accept FIRCs or entries in the bank statements as sufficient proof for the consideration being realized in convertible foreign exchange. d) Process the rebate claims within a statutory prescribed time of 15 days. e) Alternatively, in case the rebate is not allowed, service exporters may be given an option of restoring the CENVAT Credit used for paying the service tax on exported services. 12. SERVICE TAX REFUNDS

12.1 Delay in sanctioning of refund claims Issue Though the Government notified refund scheme for exporters and has also attempted to simplify these schemes through issuance of Circulars/ Clarifications from time to time, practical difficulties are still being faced to obtain refunds at ground level on account of following reasons: a) Internal Circulars/ Instructions prescribing upper time limit for refund processing are not being followed; b) Varying practices are followed by authorities at different jurisdiction for processing of refunds; c) Documentation for statutory compliances especially SOFTEX Forms, FIRCs, etc are disregarded. d) Chartered Accountants certificate, the list of documents for refund claims as per the Central Board of Excise and Customs (CBEC) website and many other additional documents called for are being disregarded. e) There is lack of clear guidelines on the manner and extent of verification; and f) Entire refund claim is being rejected even if minor discrepancies in the documentation are found. Form overrides substance.

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Recommendation To ensure that the backlog is quickly cleared, accumulated refund claims should be granted based objective guidelines before end of March 2013. Where it is not possible to have a refund scheme on the lines mentioned above, following options should be given:

Authorities may issue certificate of outstanding credit Such certificates can be used by the assessee for paying tax on future transactions. Cenvat credit pertaining to services exported should be allowed to be utilized for discharging tax liability under reverse charge mechanism, including Service tax payable in case of import of services. 12.2 New Rules Issues related to Rule 5 Refund vide Notification 27/2012-CE (NT) dated 18 June 2012 The concerns arising out of new refund notification 27/2012-CE (NT) read with amended Rule 5 of the CENVAT Credit are as below: a) Issues arising out of the change in methodology of computing export turnover under the new notification Transition Issue The amended Rule 5 of the Credit rules prescribes Export Turnover of a period as the sum total of payment received in that period, irrespective of the period of export billings (after certain adjustments on account of advances). This is different from the earlier Notification No. 5/2006-CE (NT). The definition of the Export Turnover under amended Rule 5 of the Credit Rules is different from the definition of the Export Turnover in terms of earlier Notification No. 5/2006-CE (NT) (issued in exercise of the powers conferred by erstwhile Rule 5 of the Credit Rules) in as much as this Notification defines the Export Turnover as sum total of value of output services exported during the given period. In light of the above, there is no clarity in respect of the transition period i.e. whether a payment considered as part of export turnover in a claim governed by erstwhile Rule 5 of the Credit Rules should be reconsidered while filing a claim governed by amended Rule 5 of the Credit Rules, if such payment is received post implementation of new Rule. In addition, a company may not have any receipts in a particular quarter but would have export billings, apart from Cenvat credit availed during such quarter.
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Recommendation It is recommended to issue a clarification on manner of calculating export turnover during the transition period (i.e. whether to consider export realizations in the current export turnover whose corresponding billing have already been included in the previous periods) should be suitably clarified. 12.3 Scope of auditors certificate for refund application Issue The auditor is required to certify the exports, total turnover and correctness and eligibility of CENVAT credit as per Annexure A of the notification 27/2012-CE (NT), dated 18/06/2012. Recommendation For ease of certification and operation, we recommend the CBEC consider the following clarification: 1. The certificate should be considered acceptable if it merely certifies the value of export turnover and total turnover of the services mentioned at S No 2 and 7 in the table in Form A as per books of account and relevant records is true and correct. 2. The format of the CA certificate as provided in Annexure A-I of the new notification shall be sufficient to grant refund to the exporters of services. 3. While the refund authority may seek other documents to process the claim, the documents requested should relate to export services only and should not relate to input services or inputs e.g. verification of the availment of CENVAT credit by the claimant. 12.4 Service Tax refunds as per New rules Issue For arriving at the export turnover, as per notification no. 05/2006-CE, the turnover pertaining to SEZ units are excluded, on the ground that SEZs refunds are governed by a separate notification, whereas the same is included in the total turnover due to which refund amount is substantially reduced. Recommendations It may be clarified that the SEZ turnover should be included both in Export and Total turnover.

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13.

BUNDLED SERVICES

Section 66F of the Finance Act deals with the principles of interpretation of specified descriptions of services or bundled services. Sub-section 3 provides that if various elements of a bundled service are not naturally bundled in the ordinary course of business, it shall be treated as provision of the single service which results in the highest liability of service tax. Issues Natural bundling is a matter of custom, which gets evolved. A factual finding on whether a particular service is bundled or not will be a subject matter of litigation. It also vitiates the market for the services as the service tax is dependent on how it is used. Commercial contracts cannot be re-negotiated for the only reason that there is a consolidated consideration for the services. Recommendation Clause (b) under Section 66F(3) may be amended to bring about the principle of proportionality so that an exempt service or a service appearing in the negative list does not suffer service tax for the only reason that it is bundled with a taxable service. This is required to ensure equity. 14. EXCHANGE RATE

Explanation to Section 67A of the Finance Act provides that for determination of value of services, custom notified exchange rate will be the basis to arrive at the value of service and calculate the tax. Issue Companies would be maintaining its books of accounts by applying exchange rates which are consistent for meeting the requirements of mandatory accounting standards. Further, the method followed will be regularly employed. To re-state the transactions by adopting the custom notified exchange rate will significantly enhance the cost of compliance. Suggestion The exchange rate applied to record transactions in the books of accounts of companies should be the basis for determining the value of services. 15. REVERSE CHARGE PROVISIONS

Reverse charge for domestic service providers is applicable on the basis of constitution of service provider.
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Issue 1. This payment of reverse charge on various services by identifying the constitution of service providers is casting administrative burden on the service receivers. 2. Assessment by the authorities of reverse charge discharged by the service receipient has to be transaction specific. Thus, the service receipient will have to incur a significant compliance cost as his compliance will be assessed for each transaction occurring randomly. 3. Needless litigation will emerge on scope of the terms used like Manpower supply for any purpose, Support Service, which can be widely construed by the field authorities. Thus, the service receiver may be visited with litigation on service tax by way of reverse charge. 4. The burden of tax compliance is better discharged by the service provider, who will always be in a position to determine his nature of business and discharge his obligations under law. The enforcement will also be better since the authorities will not be required to verify random transactions in the books of multiple service receivers but instead can proceed to efficiently assess the service provider. 5. The service receivers will be served notices from the authorities seeking information. Addressing these notices will also enhance the cost of compliance. 6. The very purpose of shifting the charge to the service receivers arises out of the concern that service providers in the specified category would default in their compliances. Removing the compliance obligations for such category of service providers within the taxable territory and shifting the onus on service receivers only enhances the mindset of non-compliance. Suggestions 1. Payment of tax under reverse charge should be restricted only to the extent of services received from outside India. 2. The absence of enforcement mechanism through the field authorities should not result in placing the burden of tax collection and litigation on the service receivers. 3. Alternatively, the service receiver should be required to discharge 100% of the reverse charge in all cases.

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16.

Scope of support services rendered by Government

The Finance Act 2012, provides the liability to pay service tax under reverse charge for any support services rendered by the Government [Ref: Notification No. 30/2012-ST, dated 20-Jun-2012]. In this regard, the term support services defined in Section 65B (49) is as under: "support services" means infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis. Issue The scope of the said term support services is ambiguous. Recommendation Clarifications may be issued with illustrations to explain the meaning and scope of the term support services. 17. CENVAT CREDIT RULES, 2004

17.1 Exclusions in the definition of input in rule 2(k) and input service in rule 2(l) Definition of input under rule 2(k) and input service in rule 2(l) of the Cenvat Credit Rules, 2004 have exclusions. Para (B) of Rules 2(K) and Para (1A) in Rule 2(l) have exclusions with regard to goods used for construction of immovable property and input services such as construction service, works contract service, etc used for constructing immovable property. Issue Construction of building or civil structure symbolize the commencement of a new business activity. The exclusions break the CENVAT credit chain and artificially enhance the cost of buildings and civil structures used for productive purposes. Recommendation

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The exclusions in Para (B) of Rules 2(K) and Para (1A) in Rule 2(l) be omitted so that owing a new building is not placed economically less viable than using rented buildings. 17.2 Amendment to input definition in rule 2(k) of the Cenvat Credit Rules to include High Speed Diesel (HSD), Light Diesel Oil (LDO) and Petrol: Under the CENVAT credit Rules, 2004 there is specific restriction on availing CENVAT credit on High Speed diesel and Light diesel oil. Issue Owing to significant shortfall in power provided by utilities, manufacturers and service providers have to contend with enhanced use HSD and LDO as fuel for the purpose of generation of electricity. Thus, manufacturers have to not only contend with a significant higher cost of generating captive power but also have to contend with denial of CENVAT Credit on HSD and LDO, which enhances the effective cost. Recommendation It is earnestly requested that HSD/LDO should also be allowed as eligible inputs for the purpose of availing CENVAT credit. 17.3 Para (C) under Rule 2(l): The aforesaid Para has exclusion of services such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel concession, when such services are used primarily for personal use or consumption of any employee. Issue The expression when such services are used primarily for personal use or consumption of any employee is very ambiguous and susceptible to divergent interpretations. Similar kind of expression is also found in the definition of input in rule 2(k) substituted w.e.f.1.4.2011. The above expression has lead to divergent views. For instance, doubts arise on whether service tax charged by the outdoor caterer is available as CENVAT credit when an employer is statutorily or by custom obligated to provide food (either free of cost or concessional rate or subsidized food) to his employees.

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Recommendation Amend the exclusion clause to bring in clarity with regard to personal use or consumption of any employee. For instance, denial of CENVAT credit is intended to the extent it is attributable to the recovery of any amount by the employer from its employees. 17.4 Exempted goods or Nil rate goods or services if exported out of India, the benefit of Cenvat credit and refund thereof to be provided in the Rules: Under the Cenvat Credit Rules, no Cenvat credit is allowed on inputs or input services used in the manufacture of exempted goods or exempted services. Issue If the exempted goods or exempted services are exported, the Departmental authorities are denying the benefit of credit and are proposing to deny the refund. It is the policy of the Government that export only goods or services should be exported and not to export the duties or taxes either on the goods exported or on the inputs/materials used in the manufacture of exported goods. This policy is also recognized in various schemes and exemptions under various other laws such as Foreign Trade Policy and also under rules 18 and 19 of the Central Excise Rules, 2002. In terms of rules 18 and 19, the manufacturer is entitled to procure inputs/materials without payment of duty or on payment of duty but on claim for rebate. Illustration: In case of export of iron ore or any other mineral ore, the ores are no doubt final product as per rule 2(h) of the Cenvat Credit Rules, 2004. However, since the same are exempted goods, the exporter of ore is not given any benefit of refund of duty or service tax paid on inputs or input services used for export of ore. Recommendation Keeping in view the above Policy of the Government, it is submitted that under the Cenvat Credit Rules, rules 5 or 6 be amended so that the manufacturer of exempted goods or provider of exempted services should be allowed to take Cenvat credit on inputs or input service used in the manufacture of exempted goods or providing of exempted services which is exported out of India and to grant refund of the said duty or direct refund of duty or service tax paid on inputs or input services.

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17.5 Definition of capital goods in rule 2(a)(B) to include motor vehicles in respect of many more taxable service: Clause (B) under rule 2(a) provides that motor vehicles used in providing specified output services qualify as capital goods. It essentially follows the principle that the motor vehicle should be inseparably integral to the specified output services Issue Motor vehicles are inseparable and integral to the rendering or providing of service and to include the following taxable services: a. ATM operation, maintenance and management services b. Broadcasting service c. Clearing and forwarding service d. Construction services e. Dredging service f. Erection, commissioning or installation service g. Supply of tangible goods service Recommendation Include motor vehicles as capital goods for the above output services. Further, allow Cenvat Credit of duty paid on motor vehicles used by the manufacturers for movement of inputs, semi-finished goods and final product by amending rule 2(a). 17.6 Amendment to rule 3(4)(c) of the Cenvat Credit Rules, 2004 to provide for utilizing the Cenvat credit towards payment of amount equal to the Cenvat credit taken on capital goods if such capital goods are removed after being used Rule 3(4) of the Cenvat Credit Rules provides for utilization of Cenvat credit. As per sub-clause (c), the credit can be utilized for payment of an amount equal to the cenvat credit taken on capital goods if such capital goods are removed as such. With effect from 13.11.2007, in terms rule 3(5) of the Cenvat Credit Rules, if the capital goods on which Cenvat credit has been taken are removed after being used, then the manufacturer is required to pay an amount equal to the Cenvat credit taken on the capital goods reduced by 2.5% for each quarter or part thereof.

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Issue Though, the purpose of rule 3(5) is to reverse the CENVAT Credit already availed on capital goods being removed, the field authorities can raise an objection against the utilization of CENVAT credit, if capital goods are removed after being used. Recommendation The above rule 3(4)(c) may be suitably amended so that CENVAT credit could be used for removal of used capital assets. 17.7 Capital goods removed as such or after putting to use by the service provider Clarity on documentation: In terms of rule 3(5) deals with removal of capital goods on which CENAVT credit has been taken. If the capital goods so removed by a provider of output service are received by another manufacturer or service provider, it would still qualify capital goods in his hands. The receiver of the capital goods would be entitled to Cenvat credit in terms of rule 3(6). Issue Rule 3(5) provides that the removal of capital goods shall be made under the cover of an invoice referred to in rule 9. Under rule 9(1) there is no document, which is applicable to a provider of output service who removes Cenvat credit availed capital goods as per rule 3(5). Owing to the above lacuna, the purchaser or procurer of capital goods from a provider of output service removing the said capital goods is put to hardship in availing the Cenvat credit. There is an unintended lack of inter-linkages between rule 3(5), rule 3(6) and rule 9(1) insofar as removal of capital goods by a service provider. Recommendation The provisions of rule 9(1) of the Cenvat Credit Rules, 2004 should be suitably amended to provide invoice/bill issued by the service provider under rule 4 of the Service Tax Rules, 1994 and the provisions of rule 4 of the Service Tax Rules, 1994 should also be suitably amended. 17.8 Expansion of scope of rule 6(6) of the Cenvat Credit Rules, 2004: Presently, rule 6(6) of the Cenvat Credit Rules, 2004 provides for certain exceptions in sub-clauses (i) to (vii) wherein the mischief of rule 6(1) to rule 6(4) of the said rules is not attracted to the said exempted clearances and the
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manufacturer is allowed to take Cenvat credit on input or input services as the case may be. Issue Under the Central Excise Act, 1944, by virtue of section 5A of the said Act there are exemptions given from the whole of duty to goods cleared to defence purposes, public research institutions, infrastructural projects such as Metro railway, etc. The final goods manufactured and cleared by a manufacturer for the above purposes though exempted from payment of duty, the manufacturer is not given the benefit of Cenvat credit of duty paid on inputs or input services, as the case may be, used in relation to the above goods. The public interest is being seriously impaired. Recommendation The provisions of rule 6(6) of the Cenvat Credit Rules requires to be amended to expand and include clearances of goods without payment of duty to defence, public research institutions, infrastructural projects etc 17.9 Exclusion of Trading Value for the purpose of Cenvat reversal under sub-rule 3 of Rule 6 covering the supplies effected to customers / projects covered under clauses (i) to (vii)of sub-rule 6 of Rule 6 of Cenvat Credit Rules, 2004 As per rule sub rule (3) of Rule 6 of Cenvat Credit Rules,2004 a manufacturer of provider of output services who does not opt to maintain separate accounts as mentioned in sub-rules (1) and (2) of rule (6) has to follow any of the options as mentioned in sub rule 3 (i) (ii) or (iii) of the said rules. As per sub-rule 6 of rule 6, the provisions of sub-rules (1), (2) , (3) & (4) are not applicable if the excisable goods are removed without payment of duty for the purpose as mentioned in serial number (i) to (vii) mentioned therein. Similarly as per sub-rule 6A of rule 6, the provisions of sub-rules (1), (2), (3) and (4) are not applicable in case the taxable services are provided without payment of Service Tax to a Unit in a Special Economic Zone or to a Developer of a Special Economic Zone for their authorized operations. Explanation under Rule 2(e) provides that Exempted Services includes trading. Issue and Recommendation Reversals as above, leads to export of tax and reduces competitiveness. Hence, for the purpose of reversal under sub-rule 3 of Rule 6, exemption from reversal should be extended to the trading portion of the supplies effected to Customers/ Projects referred under clauses ( i) to (vii) of sub-rule 6 of Rule 6

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17.10 Goods cleared to EOUs under CT-3 certificates or supplied to SEZ developer/unit Rule 5 refund should be extended to such clearance as well: Rule 5 of the Cenvat Credit Rules, 2004 provides for refund of Cenvat credit in respect of input or input services used in the manufacture of goods exported under bond or LUT or final product used in the intermediate product cleared for export. Though the expression final product used in the intermediate product cleared for export also envisages within its fold goods cleared to Export Oriented Units (EOU) under CT-3 certificates without payment of duty, it is felt that there should be a clear-cut provision preferably by way of an Explanation below rule 5. Issue Recently, the Tribunal in CCE v. Tiger Steel Engineering (India) Pvt. Ltd, 2009 (242) ELT 378 (T-Mum) allowing the stay application filed by the revenue observed that refund of credit under rule 5 is applicable only in respect of physical export of goods out of the country and not in respect of goods cleared to SEZ developer/unit. Though this is only an interim order, but yet it is clearly contrary to SEZ provisions. This will frustrate the purpose and object of the provisions of the Special Economic Zones Act, 2005 and other cognate statutes like Customs Act, 1962, the Central Excise Act, 1944, etc. Recommendation It is suggested that an Explanation below rule 5 may be inserted to provide that in respect of final product cleared to EOU without payment of excise duty under CT3 certificates and/or goods cleared to SEZ developer or unit would also be entitled for refund of Cenvat credit as envisaged in rule 5 of the Cenvat Credit Rules, 2004. 17.11 Amendment to rule 4(2) of the Cenvat Credit Rules, 2004 Avoid giving Cenvat credit on capital goods on installment basis: Cenvat credit on capital goods is allowed in two installments i.e. upto 50% of the duty paid in the first financial year of receipt inside the factory and the balance in any subsequent financial year. Issue The present system of granting credit in two on installments in respect of capital goods is posing unnecessary paper work and diligent tracking.

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Recommendation Provide that the entire CENVAT Credit may be availed in the first financial year itself. 17.12 Credit of ADC paid by service providers The Cenvat Credit Rules, 2004 do not provide for availability of credit of Additional Duty of Customs (ADC) paid by service providers, whereas, the same is available to a manufacturer. Therefore it is suggested that ADC paid by a service provider at the time of import of goods/ equipment should be allowed to be available as CENVAT credit. 17.13 Cenvat credit on import of goods by courier To provide for credit on the basis of courier bill of entry: At present there is no specific provision for availing Cenvat credit based on courier receipts or package receipts though countervailing duty is paid on such imports through a common Bill of entry prepared for all imports by Courier Agency belonging to different importers. Now a days it has become inevitable that urgent requirements of spare parts of plant and machinery or other inputs are to be met by import through courier. The importer also promptly discharges the countervailing duty against such couriers or baggage. However, there is no provision under CENVAT credit Rules to recognize the countervailing duty payment made against such imports through courier. The courier will file a combined Bill of entry for all the consignments belonging to different importers and discharge the import duty also together. The courier agent will forward a photocopy of the Bill of Entry to each importer. However, CENVAT is not allowed to be taken on such copy. As duty has been paid, an appropriate provision may be inserted in the CENVAT credit Rules to avail CENVAT credit based on certified copies of such Bill of Entry. This will help manufacturer / exporters to avail CENVAT on duty paid by them. 17.14 Cenvat Credit on endorsed bill of entry: At present CENVAT credit is allowed on Bill of Entry against import. There are many traders who are not registered under Central Excise, who import material and forward the goods to the registered manufacturers for the purpose of conversion of the material on job work basis. As the non-Registered unit/trader cannot issue CENVATABLE invoice against such import, the situation forces such trader to get registered under Central Excise so as to issue CENVATABLE invoice. Consequently, such registration is only a procedural compliance under Central Excise and does not serve any other purpose except for issuing CENVATABLE invoice. This has caused immense hardship to small traders. Therefore, the Rule should be amended to provide that
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the Bill of Entry duly endorsed by such non-Registered trader should also be recognized for the purpose of availing CENVAT credit when the material is sent to the registered manufacturer for the purpose of conversion of material on job work basis. 17.15 Amendment to the definition of exempted goods in rule 2(d) of the Cenvat Credit Rules, 2004: When goods are manufactured or produced under various job work procedure either under rule 4(5) of the Cenvat Credit Rules, 2004 or under Notification No.214/86-CE, the principal manufacturer is under an obligation to pay duty on such goods produced/manufactured. Ultimately, the goods produced by a person on job work basis would be duty paid in the hands of the principal manufacturer. Under these circumstances, the goods manufactured on job work basis cannot be construed as exempted goods. Issue There have been a series of litigations on the issue as to whether the goods manufactured or produced on job work basis either under the procedure envisaged under the Cenvat Credit Rules i.e. rule 4(5) or by working under the procedure under Notification No.214/86-CE dated 25.3.1986 could be considered as exempted goods or not? Whether the persons manufacturing / producing goods under job work procedure are entitled to Cenvat credit on inputs used for such job-work produced goods? Recommendation The definition of exempted goods in rule 2(d) of the Credit Rules, 2004 may be amended to clarify that goods produced or manufactured on job work where the principal manufacturer is under the obligation to pay duty on such goods is not exempted goods. This would avoid multiple incidence of duty on the very same goods and avoid unnecessary litigation. Recently, the Karnataka High Court in the case of CCE v. Bharat Fritz Werner Limited, 2007 (218) ELT 177 (Kar.) upheld the said principle. 18. Customs Duty

18.1 Transfer of CENVAT credit of additional duty leviable under subsection (5) of section 3 of the Customs Tariff Act: A simplified scheme of transfer of SAD credit has been introduced under Rule 10A of the CENVAT Credit Rules, 2004 vide Notification number 18/2012 dated 17/03/2012. As per the new scheme, a manufacture can transfer SAD incurred and lying in balance unutilized credit with one of his registered premises to

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another registered premise when the registration of both the premises is taken under the Central Excise Rules, 2002. Issue: The term manufacturer or producer in Rule 10A appears to be with reference to Company and not restricted to the Unit transferring the SAD. However, there is ambiguity whether the transfer of SAD credit of 1st Stage and 2nd Stage dealer to other unit (both having the same PAN) is permitted under Rule 10A. The provision allows transfer to other units for which registration is taken under Central Excise Rules on the basis of a common PAN. This needs to be extended to even service provider. Hence the benefit should be extended to transferee unit which is registered either under Excise Act or as service provider under the Finance Act, 1994. Suggestion: To address both the above issues, an amendment is required in Rule 10A as detailed below in Rule 10A sub rule (1): A manufacturer or producer of final products or services, having more than one registered premises for each of which registration under the Central Excise Rules, 2002 including 1st Stage Dealer and 2nd stage dealer registration or service tax registration under Finance Act 1994 on the basis of a common Permanent Account Number.. 18.2 SAD exemption for IT products imported from foreign countries In 2011 Union Budget, the Govt. for the first time extended exemption from payment of SAD on IT products and hence vide Notification No. 32/2011-Cus dated 24th March 2011 inserted S.No.83 in Notification number 20/2006-Cus dated 1/3/2006. S.No.83 is nothing but replica of item listed in S.No.17 of the Notification number 6/2006-CX dated 1/3/2006. Issue The Government has not concurrently removed Note 2 reproduced below from notification number 20/2006 while extending exemption for items mentioned under S.No.17. 2. Nothing contained in this notification shall apply to the goods specified in column (3), against S. Nos. 17 and 28 of the Table annexed to the notification of the Government of India in the Ministry of Finance (Department of Revenue) No. 6/2006-Central Excise, dated the 1st March, 2006, G.S.R. 96(E), dated the 1st March, 2006..
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When the main part of the notification extends the exemption for SAD on IT products, retaining note 2 in the said notification is an anomaly. However, showcause notices are issued questioning the correctness of claiming the said exemption. Recommendation Having introduced exemption for IT products vide notification 32 of 2011, the Govt. should remove note 2 in notification 20/2006 since the note is inadvertently retained in the said notification. 18.3 Relaxation of conditions of Customs Notification No. 102/2007 Customs Notification No. 102/2007 dated 14th Sept 2007, exempts the whole of the additional duty of customs by way of refund provided the goods are imported for sale. While claiming for refund, the importer has to produce large volume of VAT invoices. Since production of such huge volumes of document creates administrative hardship, this condition may please be relaxed. We suggest that such refunds should be allowed based on an independent Chartered Accountants certificate in this regard. This notification being one related to refunds, would fall under the purview of Sec 27 of the Customs Act, that requires any refund claims to be made within 6 months from the date of import. There would very often be bulk imports to achieve economies of scale and the refund is related to sale of such imports. Therefore, we request that this notification be exempted from the period of limitation of 6 months. Ironing these anomalies will certainly yield great relief to the Trade and Industry 18.4 Exemption for import of capital items under EPCG Scheme At present importers having export market are allowed to import capital goods under EPCG Scheme by paying 5% basic customs duty at the time of import. The peak rate of customs duty on several plant and machinery is 7.5%, the import of capital goods under EPCG scheme at 5% may not be worth availing. Therefore, the imports under EPCG Scheme should be either wholly exempted to achieve the objective of this export promotion Scheme or available as credit to manufacturers. This measure will encourage the Indian exporters undertake modernization/ diversification, so necessary to compete in the International market. 18.5 Projects financed by international agencies under ICB Construction equipment imported for road projects and financed by international agencies such as UN, World Bank, ADB etc., are allowed to make
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imports at zero duty provided they are made under international competitive bidding (ICB). However, customs exemptions/ concessions are not available with regard to inputs imported by manufacturer and suppliers of such goods for manufacture of equipment, which may be used for executing such projects. Therefore, in order to have a level playing field, it is suggested that the Government should either: a) allow domestic equipment manufacturers to import inputs at zero duty; or b) allow deemed export benefits equipment manufacturer-supplier 18.6 Amendment to Section 15 of the Customs Act Under section 72(1)(b), the warehoused goods which are remaining in the warehouse beyond the period specified in section 61(1) of the Customs Act, shall be deemed to have been improperly removed and the Proper Officer is entitled to demand duty on such improperly removed warehoused goods. This section has been examined by the Honble Supreme Court in the case of Kesoram Rayon v. CC, 1996 (86) ELT 464 (SC) wherein it has been held that in the case of improper removal of warehoused goods in terms of section 72(1)(b), the warehoused goods are deemed to have improperly removed on the expiry of warehousing period, the relevant date for determining the rate of duty and value of such goods shall be date of expiry of warehousing period. There is apprehension in the minds of assessees that the above decision of the Honble Supreme Court is per incurium since the same is without considering the specific provisions in section 15 of the Act. Hence, the same needs immediate clarification. 18.7 Interest free warehousing period for imported goods The Customs Act presently provides for warehoused goods to be kept in-bond for a period of one year. However, interest on Customs duty is chargeable on warehoused goods if the same are not ex-bonded within 3 months. It is suggested that warehoused goods should be allowed to be kept in-bond for a period of at least 6 months without payment of interest. 18.8 Applicability of Advance Rulings Owing to restricted scope of the advance ruling provisions, there have been very few applications. The Authority for Advance Ruling is not authorized to allow the application where the question raised in the application is the same matter as in a matter already decided by the Appellate Tribunal or any Court. This is a sweeping restriction as it essentially has the effect of stating that there cannot be any ruling on any question of law, which is already in dispute, though not in the Applicants case. An Applicant who is not a party to the case before the Appellate Tribunal or the Court is also prevented from seeking a ruling. The objective of

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seeking certainty through a ruling is frustrated, particularly where there are two conflicting decisions of the Appellate Tribunal or any Court. The scope of Applicant is also narrow. Every resident or non-resident should be qualifying as an Applicant in respect of a cross-border transaction. In the case of service tax, a resident required to pay service tax under the reverse charge mechanism should be included as an applicant in respect of applicability of reverse charge on import of services. 19. SOLAR ENERGY

19.1 Import of assemblies/sub-assemblies components for the manufacture and supply of final products for initial setting up of a project or facility for the generation of power using solar energy Notification No. 1/2011 Customs Dt.06-01-2011 exempts all items of machinery, required for the initial setting up of a solar power generation project or facility, when imported into India, from so much of the duty of customs leviable thereon which is specified in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975), as is in excess of 5% ad valorem, and from the whole of the Additional Duty of Customs leviable thereon under section 3 of the said Customs Tariff Act, subject to certain conditions stipulated therein Notification no.15/2010-Excise gives exemption from the payment of excise duty on goods manufactured indigenously and supplied to such projects & Notification 25/2012 CE (NT) also gives exemptions from Cenvat reversal as required under Rule 6(3) of CCR. Issue The indigenous manufacturers who imports assemblies, sub-assemblies & components for the manufacture and supply of finished products for the initial setting up of a solar power generation project or facility are put at disadvantage to the extent of ~ 6.5% of Customs Duty when compared to the finished goods importer who imports at concessional rate of 5% as per the Customs Notification No.1/2011 referred above Recommendation To provide level playing field to the domestic manufacturers, the Government should give similar concession to the extent of 5% of BCD for such imports by indigenous manufacturer. It can be given through a separate notification similar to the one like Customs Notification No.25/99 Dt.28-02-1999 and covered under Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001

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19.2 Reversal of Cenvat Credit against exempted Domestic Supplies to Mega & Ultra Mega Power Projects (UMPP) Notification No.12/2012-Central Excise Dt.17-03-2012 provides for full Excise Duty exemption for the equipments supplied for the list of UMPP (Sl.No.337-List 10),MPP(Sl.No.338-List 11) and expansion of MPP (specified under Sl.No.339) subject to the conditions mentioned under sl. No.42-44 mentioned therein Rule 6 (6) of Cenvat Credit Rules, 2004 provides for the exemption from reversal for the supplies effected to such projects. The sub-clause (vii) (1) (c) of this rule still refers Notification No.6/2006-CE Dt.01-03-2006 instead of Notification No.12/2012-CE 17-03-2012 referred above. Recommendation It is suggested that the words Notification No.6/2006-CE Dt.01-03-2006 be replaced by Notification No.12/2012-CE 17-03-2012 to avoid litigation. 20. Proposals relating to Biscuit Manufacturing

The Central Government, in recognition of the merits of biscuits as an agro-based packaged food item produced for mass consumption including population in all age groups and socio-economic segments and for providing relief during natural calamities, granted a complete exemption from excise duty on biscuits sold at a per KG MRP equivalent of below Rs 100. Issue This above limit of per KG MRP equivalent of below Rs 100 was fixed in 2007. The past few years have witnessed significant increase in the cost of production of low priced biscuits on account of high commodity prices and fuel prices. The input prices have increases since 2007 by over 75%. Recommendation As indirect taxes are a direct pass-through to the consumers, a recalibration of the exemption threshold to Rs 200 (as the per KG MRP equivalent) be allowed. This will continue to serve the purposes recognized while allowing the earlier exemption limit. 21. Proposals relating to Automobile Manufacturing

21.1 Excise on Multi utility vehicles

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It is the long pending demand of Industry to bring parity of excise duty rates on all segments of passenger Motor vehicles, irrespective of engine capacity of the vehicle for creation of level playing field. Recommendation In order to remove this disparity, it is very essential that excise duty need to be harmonized across the board irrespective of the physical features of the Motor vehicle. 21.2 National Electric Mobility Mission Plan Finance Minister , Government of India announced in their Budget proposal that GOI will come out with National Electric Mobility Mission plan (NEMMP) to promote and make India as the Base for manufacturing and export of High Technology product like Electric Vehicle (EV) and Hybrid Vehicle (HV) so that precious resources like Crude oil is preserved. National Council of Electric Mobility (NCEM) under the chairmanship of Minister of Heavy Industry approved NEMMP 2020 plan during August 2012, which will be unveiled to the nation by Prime Minister of India during October 2012. To implement this vision of GOI, Union budget 2012 announced vide Nfn.12/2012 CUS dtd 17.03.2012 certain concessions like full exemptions on Basic custom duty on certain critical components used in the manufacture of hybrid vehicles. The list of critical components are as under: Battery pack, Battery charger, AC/DC Motor, AC/DC Motor controller, Engine for HV (Atkinson cycle), Transaxle for HV, Power control unit, Control ECU for HV, Generator, Brake system for recovering, Energy motor and Electric compressor. This notification is applicable only upto March 2013, whereas the detailed policy guidelines are still to be made known to the Automobile industry. By extending the benefit of customs duty exemption on above goods, GOI has taken a proactive measure to encourage manufacture of hybrid vehicles in the country. The National Electric Mobility Mission Plan 2020 is a long term plan to support the auto industry till year 2020 towards strong promotion and encouragement for manufacture of hybrid vehicles in the country. Therefore, Basic customs duty exemption need to be continued / extended in respect of above 11 specific critical components is essential till year 2020 towards promotion of domestic manufacture of hybrid vehicles.
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Recommendation Government to continue and extend benefit of Basic customs duty exemption on critical components of HV/EV Vehicles covered under customs notification 12/2012 till year 2020, (entire tenure of NEMMP Plan 2020). 21.3 Manufacture of Electric and Hybrid vehicles
[Granting zero customs duty benefit for import of Capital goods used in

the manufacture of Electric and Hybrid vehicles and also in the manufacture of parts and components of these vehicles] To make India as base for domestic and export markets for Electric and Hybrid vehicles, Capital goods required for manufacture of EV/HV Vehicles may be allowed to import at zero rate of custom duty till year 2020. This will encourage domestic Electric and Hybrid vehicle manufacturers to augment production of Electric and Hybrid vehicles with optimum cost of production. Similarly, it is also necessary that benefit of zero customs duty be allowed for import of Capital goods for manufacturing of parts and components used for domestic assembly of Electric and hybrid vehicles as a booster for domestic manufacture of Electric and Hybrid vehicles till 2020. Recommendation Allow customs duty exemption on capital goods used in the manufacture of Electric and Hybrid vehicles and also for manufacture of parts and components of Electric and Hybrid vehicles in line with NEMMP plan to encourage manufacture of HV / EV vehicles so as to make the product available at affordable price to common public and to make noble mission success Government of India in their Union Budget 2012, the Government reduce excise duty on hybrid vehicles (Four Wheeler) from 12% to 6%. Also consider in reduction of Excise duty to 4% on both Electric and Hybrid vehicle (Four Wheeler) over next two years. 22. Procedural Issue

22.1 Stay orders of the Appellate Tribunal In terms of 2nd Proviso to section 35C(2A) of the CEA, 1944 or section 129B(2A) of the Customs Act, 1962, if the Tribunal does not dispose of the appeal within a period 180 days as envisaged in first proviso to the said sections, the stay order shall stand vacated on the expiry of 180 days. The Supreme Court in the case of CCE v. Kumar Cotton Mills, 2005 (180) ELT
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434 (SC) held that Tribunal can extend stay when there is good cause and there is fault of Tribunal in not deciding the appeal within 180 days and not attributable to the assessee. Also the Gujarat High Court in Poly Fill Sacks v. UOI, 2005 (183) ELT 344 (Guj.) held that there is no requirement to pass any order extending stay of recovery already ordered and that stay order passed shall remain valid till final disposal of the appeal. Recently, the Karnataka High Court in CCE v. Indian Oil Corporation, 2010 (258) ELT 504 (Kar.) observed that the Tribunal is empowered to grant extension of stay after the expiry of 180 days but the same is not automatic and extension of stay requires application by assessee. Issue and Recommendation It is felt that 2nd proviso to section 35C(2A) of CEA, 1944 and section 129B(2A) of the Customs Act, 1962 need to be deleted for more than one reason. Firstly, the CESTAT is flooded with innumerable number of appeals and also stay applications and invariably the CESTAT is constrained from deciding the appeals within the prescribed period of 180 days for various reasons which are beyond control of both the assessee. Hence, prescribing a mandate on the CESTAT to dispose of the appeals within the prescribed period of 180 days is unworkable. In the light of Karnataka High Court decision, if the assessees are required to file application seeking extension of stay order, then it would result in innumerable applications, listing, hearing and passing orders on the said applications and various other added administration work on the Registry of the CESTAT. Also, there is no such parallel provision under the Finance Act, 1994 and hence the above contingency arises only under the Central Excise and Customs provisions. Hence, no effective purpose is being served, on the contrary, the Tribunal and High Courts are engaged in resolving litigation arising out of a principle of natural justice.

22.2 Bringing about parity in interest rates Interest payable by assesses on duty short levied /short paid or not levied /not paid is 13%. Interest payable by the department on delayed refunds is 6%. Since interest represents compensation for delayed payment / refund, the rate of interest may be kept uniform. 22.3 Clarification on relevant date in case of refunds The Finance Act, 2007 amended the provisions of section 11B of the Central Excise Act, 1944 and section 27 of the Customs Act, 1962 by amending the definition of relevant date to include in case where the duty becomes refundable as a consequence of judgment, decree, order or direction of appellate authority, Appellate Tribunal or any court, the date
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of such judgment, decree, order or direction shall be the relevant date. In the light of the above amendment, now, if any duty becomes refundable to the assessee, then such refund of duty arising as a consequence of the decision of the appellate authorities including the Court is subject to section 11B of the CEA, 1944 or section 27 of the Customs Act, 1962 as the case may be. The expression duty is defined in section 2(15) of the Customs Act, 1962 to mean duty chargeable under section 12 of the Customs Act, 1962. Issue and Recommendation The above amendment would lead to litigation in examining the meaning of the expression duty. Whether the amount of pre-deposit under section 35F or section 129E would amount to duty? Further whether the amounts collected coercively or amounts paid during investigation would tantamount to duty. Therefore there is a need for clarity on the purport of the expression duty. 22.4 Amendment to section 27 of the Customs Act, 1962 Section 27 of the Customs Act, 1962 provides that any person claiming refund of any duty and interest if any paid on such duty inter alia paid by him in pursuance of an order of assessment subject to conditions and procedure envisaged in the said section. The expression pursuance of an order of assessment has been the issue in litigation in many cases before various Courts including the Tribunal. Recommendation Amend the above expression pursuance of an order of assessment to read as pursuance of an order of assessment whether appealed or not. It is submitted that this would avoid unnecessary litigation and would safeguard the interests of both the assessee as well the Revenue losing their right to claim refund or to demand duty from the assessee. 23. CENTRAL SALE TAX (CST)

23.1 Issue of Form I by SEZ units Issues Under SEZ Act and Rules, SEZ units/Developers are entitled for CST exemption on interstate procurement of goods used for setting up, for authorized operations on furnishing Form I declaration from the authority duly filled in and signed by the registered dealer to whom such goods are sold.

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SEZ units, Units / Developer, sub-contract many of the activities to third party service providers who in-turn sub-contract the work to other sub-contractors. The second lvel sub-contractor would supply the goods directly to the SEZ premises and invoice such supplies on the sub-contractor who placed the order for such supplies. Sub-contractor cannot issue Form I to his supplier since he is not a SEZ unit. Further, SEZ units/Developer also cannot issue Form I since the sub-contractor is the purchaser of goods. This results in additional cost to the SEZ unit to the extent of CST tax charged by the suppliers to sub-contractor. This indeed defeats the intention of providing fiscal benefits to SEZ units. Recommendations It is recommended to make a suitable amendment in the CST provision to enable the SEZ units to issue Form I to the supplier of the goods even though the purchaser is the sub-contractor as long as SEZ unit also gives a declaration that such goods are received by the SEZ units/developer for its authorized operation.

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