prashant.maheshwari@icai.

org 1 Controversial Issues in Service

Tax
Issue No. 1:
If the rate of service tax is increased by Finance Act and the service has been
provided before the Act while the amount is received after passing of the Act, at
what rate service tax has to be paid? At the increased rate or at the rate
applicable prior the passing of the Act?

Answer:-
The issue is that rate of service tax applicable on which date shall be relevant? Of the date
when service is provided or of the date when amount is received?

Specific provision under different laws

As per Rule 5 Central Excise Rules, 2002
Rate of the duty shall be of the date when the goods are removed from the factory.

As per Section 15 of the Customs Act, 1962

Rate of duty shall be of the date whei1 bill of entry is furnished.

But there is no specific provision in the service tax law covering such contingency.

In the absence of any specific provision it can be said that rate of duty should be of the
taxable event.

Taxable Event
Now the question comes what is the taxable event under service tax law?

As per Rule 6 of Service Tax Rules, 1994

Service tax has to be paid when the amount is received and not when the service is
provided.

But this does not mean that receipt of amount is the taxable event.

As per third proviso to Rule 6 of the rules

Provided further that notwithstanding the time of receipt of payment, no service tax shall
be payable for the part or whole of the value of services which is attributable to services
provided during the period when such services were not taxable.

It proves that although payment of service tax has to be made when the amount is
received but still the taxable event remains the providing of service.

As per Circular no. 56/5/2003 dated 25-4-2003 [Vol 154, page T26
ELT(2003)]
A further question raised is relating to payments receivable in foreign exchange for the
services performed prior to March 1, 2003 when the rate of service tax applicable was 5%
but the payments are received after March 1, 2003. The enhancement of the rate of
service tax from 5% to 8% would be applicable only when the Finance Bill is passed.
If payments are received in the aforesaid case after the Finance Bill is passed, the
prashant.maheshwari@icai.org 1 Controversial Issues in Service
Tax
rate of tax applicable would be 5% so long as the billing has been made prior to the date
of passing of the Finance Bill. If the billing is made subsequent to the date of the passing
of the Finance Bill, the service tax would be applicable at the enhance rate of 8 %.

Applicability of special duties and taxes imposed by Finance Act

1996 (83) E.L.T. 3 (S.C.)
COLLECTOR OF C. EX., HYDERABAD Versus VAZIR SULTAN TOBACCO CO. LTD.
Dutiability of goods manufactured prior to levy of duty but cleared thereafter - Such goods
not liable to excise duty - Collection of duty at the stage of removal is for the sake of
convenience.

Special Excise Duty not leviable on goods manufactured or produced prior to the date of
levy even though they are cleared or removed after the imposition of such levy - Section
37 of the Finance Act, 1978 - as applicable to special excise duty.

- This levy came into effect only on and from March 1, 1978 which means that the goods
produced prior to that date were not subject to such levy. If that is so, the levy cannot
attach nor can it be realized because such goods are removed on or after March 1, 1978.

Special excise duty is independent, separate and distinct from duty of Central
Excise leviable under Central Excises and Salt Act, 1944 - Section 37 of the Finance Act,
1978 - Section 3 of the Central Excises and Salt Act, 1944.

Special excise duty - Adoption of provisions of Central Excise Act for levy and
collection of special excise duty does not mean that wherever excise duty is
payable the special excise duty is also payable automatically - Section 37 of the
Finance Act, 1978.

- Once the levy is not there at the time when the goods are manufactured or produced in
India, it cannot be levied at the stage of removal of the said goods. The idea of collection
at the stage of removal is devised for the sake of convenience

Issue No 2:-
Whether service tax paid on mobile phones provided to employees is available
as credit to eligible service providers of output service and manufacturers?

Answer:-
As per Rule 2(1),
Input service means any service used by
(i) Provider of taxable service for providing output service.
(ii) Manufacturer
- in or in relation to manufacture of Final products; whether directly or
indirectly
- in or in relation to clearance of final products from place of removal; whether
directly or indirectly

Telephones (Landlines)
prashant.maheshwari@icai.org 1 Controversial Issues in Service
Tax
As per Service Tax Credit Rules 2002, credit for service tax paid on telephone sets
installed only in the premises were available. But as per Cenvat credit Rules 2004, it was
inconsistent.
As per Rule 16(1) of Cenvat Credit Rules 2004, it shall be valid only to the extent it is
relevant and consistent as per Cenvat Credit Rules 2004.

Mobile Phones
As per sub-rule 3(6), Circular No. 59/8/2003, dated 20-6-2003,
Department denied to allow credit on service tax paid on mobile phones as the same is
used for making personal calls also. But as per Cenvat Credit Rules 2004, there is no such
restriction on Mobile Phones and hence credit is available.

Mobile Phones provided to employees

[2007] 6 STT 328 (MUM.- CESTAT)
Indian Rayon & Industries Ltd. Vs. CCE, Bhavnagar
It was held that credit can be claimed for service tax paid on Mobile Phones.

Issue No. 3
Whether expenditure incurred by service receiver himself will be includible
while determining the value of taxable service or not?

Answer
After Finance Act, 2006 the concept of valuation under service tax has been radically
changed by introduction of new section 67 w.e.f. 18-4-2006 and service tax valuation rules
w.e.f. 19-4-2006. Provisions are made for valuation in cases where consideration is partly
in money and also for cases where consideration is not ascertainable. Service tax is
payable on reimbursement of expenses incurred by service provider while providing a
taxable service.

OUT OF POCKET EXPENSES

The service provider often claims reimbursement of expenses incurred by him while
providing the taxable service like traveling, boarding etc. These are known as “out of
pocket expenses”. Earlier the department had clarified through a circular that these
expenses were deductible and were not subject to service tax.
As per the new rules read with circular no. B1/4/2006 all such expenses will be includible
in “value” of the taxable service.

As per Rule 5 which deals with the various inclusions and exclusions in the value states
that:-
(1) Inclusion:-
 Where any expenditure or costs are incurred by the service provider in the course
of providing taxable service,
 all such expenditure or costs shall be treated as consideration for the taxable
service and
 shall be included in the value for charging service tax.
Rule 5(1) only deals with the cases where the service provider incurs such expenses and
claims reimbursement from the service receiver. The said rule is silent about those
situations where the service receiver himself incurs the expenditure directly from his
pocket.
prashant.maheshwari@icai.org 1 Controversial Issues in Service
Tax
Let us take an example. Out of a bill of Rs. 10,000, a service provider used to show Rs.
2,000 as traveling expense. Prior to Finance Bill, 2006, he was supposed to pay tax on Rs.
10,000 only but now he has to pay tax on Rs. 12,000. This situation is very clear. But what
will happen when the client employs his own car and driver for the service of the CA. Since
this situation is not very clearly given in Rule 5(1) different authors are forming different
and distinct opinions.

Section 67(1)(ii) deals with the situation when the consideration is partly in non monetary
terms. The value of taxable service is taken to be amount in money equivalent to the
consideration for such services provided or to be provided.
Thus such “out of pocket expenses” will be includible in the value of the taxable service.

SALE OF MATERIAL
The departmental clarification prior to Finance Act, 2006 also gave deduction in respect of
sale of material in the course of providing service.
This deduction has also been mentioned in the Valuation Rules, 2006 under Rule 5(2)

(2) Exclusion:-
 The expenditure or costs incurred by the service provider
 as a pure agent of the receiver of service,
 shall be excluded from the value of the taxable service
 if some conditions are satisfied.

Explanation 2 to Rule 5 - The value of the taxable service is the total amount of
consideration consisting of all components of the taxable service
and it is immaterial that the details of individual components of the
total consideration is indicated separately in the invoice.

Authorized Service Station

The department has further clarified in its circular 87/05/2006 dated 6-11-2006 for an
authorized service station that as regard, the issue of claiming exemption on the cost
of consumables that get consumed during the course of providing service, notification
no. 12/2003 exempts service tax to the extent of the value of the goods and materials
sold by the service provider to the service recipient, if documentary evidence of such
sale exists and no credit of excise duty paid on such consumables have been taken.

SECTION 67
1. Gross amount charged for services
In case of additional consideration or in-kind money value of such additional
consideration shall be added. If money value cannot be determined, then charges
for similar service.

2. Including
any charges or expenses incurred for providing service even if separately shown.
Ex 1 – audit fees 1,00,000 (amount paid to article assistants
was Rs. 90,000)
Out of pocket expenses 2,00,000
3,00,000
Service tax shall be charged on Rs. 3,00,000
Ex 2 - market research agency 50,000
Charges for services, salary
of employees, staff traveling 20,000
prashant.maheshwari@icai.org 1 Controversial Issues in Service
Tax
70,000
Service tax shall be charged on Rs. 70,000
3. Excluding
a) charges for services only
Ex 3 - telephone service
Advance deposit 3,000
Calling charges 800
3,800
Service tax shall be charged on Rs. 800
Ex 4 - Rail travel agent
Charges for ticket 20,000
Service charges (comm.) 1,000
21,000
Service tax shall be charged on Rs. 1,000
b) sale of material
Ex 5 - beauty parlour service 500 (including Rs. 100 for the material
consumed)
Sale of cream 200
700
Service tax shall be charged on Rs. 500
Ex 6 - Authorized service station
Sale of perfume 1,000
Service charges 400 (including Rs. 100 of consumables)
1,400
Service tax shall be charged on Rs. 400
c) acting as agent
Ex 7 - Purchasing agent
Purchase of goods 5,000 (in the name of principal)
Commission 400
5,400
Service tax shall be charged on Rs. 400
Ex 8 - Interior decorator
Charges for curtain 15,000
Service charges 5,000
20,000
Service tax shall be charged on Rs. 5,000
prashant.maheshwari@icai.org 1 Controversial Issues in Service
Tax
Issue No. 4
Is it always beneficial to take exemption based on Value of clearance?

Answer
To explain this let us take an example of EXCISE
Mr. B, a small scale manufacturer purchases inputs from Mr. A worth Rs. 1,000 on which
rate of duty is 10%. Thus, duty element in this case is Rs. 100 and Mr. B pays Rs. 1,100 to
Mr. A. Value added by Mr. B is Rs. 1,000. Assuming B sells the goods to Mr. C and the rate
of duty applicable on these goods is 5%.
As per CAS 4, that part of duty of which credit cannot be taken by the manufacturer
becomes a part of cost.
Mr. A Mr. B Mr. C
(SSI)
(manufacturer)
1,000 + 1,000
Excise duty - 100
Mr. B has two options.
Option I : to avail exemption
Mr. B Mr. C
S.P. = Rs. 2,100
Excise duty = NIL
Cost to Mr. C = Rs. 2,100 + No credit
Option I : not to avail exemption
Mr. B Mr. C
Rate of duty = 5%
Cum duty price = Rs. 2,100
AV = 2,100 x 100 = Rs. 2,000
105
Excise duty = 2,000 x 5% = Rs. 100
Cost to Mr. C = Rs. 2,100 + Rs. 100 credit

We can apply a similar situation in SERVICE TAX as well.

Mr. A Mr. B Mr. C
Input service provider (SSP)
(manufacturer)
1,000 + 1,000
Service tax - 100
Mr. B has two options.
Option I : to avail exemption
Mr. B Mr. C
S.P. = Rs. 2,100
Service tax = NIL
Cost to Mr. C = Rs. 2,100 + No credit
Option II : not to avail exemption
Mr. B Mr. C
Rate of tax = 5%
Cum duty price = Rs. 2,100
AV = 2,100 x 100 = Rs. 2,000
105
Service Tax = 2,000 x 5% = Rs. 100
Cost to Mr. C = Rs. 2,100 + Rs. 100 credit
prashant.maheshwari@icai.org 1 Controversial Issues in Service
Tax

Issue No 5
If the services are provided to SEZ whether credit of input services used in providing such
services can be taken or not?

Answer:-
Exemption
If the services are provided to SEZ or UNO etc. then such services are exempted by NN
4/2004 and NN 16/2002 respectively.

Applicability of Special provisions of credit

As per rule 6(1) of CCR
Cenvat credit shall not be allowed on such quantity of input service which is used in the
exempted services.
As per rule 5
Where any input services are used in providing output service which is exported the
cenvat credit in respect of the input services so used shall be allowed.

But as per Rule 6(6)

The provisions of sub-rule (1), (2), (3), and (4) shall not be applicable in case goods are
cleared to SEZ, 100% EOU, UNO etc.

Actual treatment of credit

Rule 6(2)
Where a provider of output service avails of cenvat credit in respect of any input service
and provides output service which are chargeable to tax as well as exempted then the
provider shall maintain separate accounts for input service meant for use in taxable
service and for use in exempt service.

Rule 6(3)(b)
The manufacturer opting not to maintain separate accounts shall pay an amount equal to
10% of the total sale price of the exempted final product.

Rule 6(3)(c)
The provider opting not to maintain separate accounts shall utilize credit only to the
extent of an amount not exceeding 20% of the amount of service tax payable on taxable
output service.

Rule 6(5)
Notwithstanding anything contained in sub-rules (1), (2) and (3) credit of the whole of
service tax aid on specified taxable service shall be allowed unless such service is used
exclusively in providing exempted services.