ii - Bombay Chartered Accountants' Society · PDF file · 2017-10-17We wish to...

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Managing Committee 2012-2013

PresidentDeepak R. Shah

Vice PresidentNaushad A. Panjwani

Hon. SecretariesNitin P. Shingala

Raman H. Jokhakar

Hon. TreasurerChetan M. Shah

Members

Aliasgar Z. Kherodawala

Bharatkumar K. Oza

Himanshu V. Vasa

Jayesh M. Gandhi

Krishna Kumar S. Jhunjhunwala

Manish P. Sampat

Mukesh G. Trivedi

Nandita P. Parekh

Narayan K. Varma

Narayan R. Pasari

Pradip K. Thanawala

Saurabh P. Shah

Sonalee A. Godbole

Suhas S. Paranjpe

Sunil B. Gabhawalla

Toral Mehta

Bombay Chartered Accountants’ Society

Indirect Taxes & Allied Laws Committee

ChairmanGovind G. Goyal

Ex-OfficioDeepak R. Shah

Naushad A. Panjwani

ConvenorsSantosh M. Jain

Suhas S. ParanjpeSunil B. Gabhawalla

MembersA. R. KrishnanAmar N. ShuklaAshit K. ShahBakul B. Mody

Bharat M. ShemlaniBhavna G. Doshi

Chandrakant B. ThakarChirag B. Mehta

Hasmukh H. KamdarJanak K. VaghaniJayraj S. ShethKanu S. ChokshiMandar U. TelangManish R. ChokshiNaresh K. ShethParind A. Mehta

Pranay H. MarfatiaPuloma D. DalalRajiv J. Luthia

Rajkamal R. ShahRaman H. Jokhakar

Ravi A. ShahSagar N. Shah

Samir L. KapadiaSanjay M. DhariwalSurendra S. Gupta

Toral MehtaUday V. SathayeUdayan Chokshi

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MessageWe have great pleasure to welcome you to the 7th Residential Study Course on Service Tax & VAT, being organized by Indirect Taxes and Allied Laws Committee of Bombay Chartered Accountants’ Society, from 14th June to 16th June 2013 at Hotel Express Inn, Nashik.

As we know, the Service Tax provisions have undergone major changes in last one year or so. There is a paradigm shift in the taxation of services. The earlier approach of taxing service on selective basis has now changed to comprehensive taxation with a small list of exemptions. The new regime i.e. negative list based taxation of services, effective from 1st July 2012, is said to be an important step in moving forward to implement the proposed Goods and Services Tax. (GST)

There is no doubt that our country has to have an appropriate system of taxation whereby all kinds of indirect taxes, which are being levied at present by various authorities of Central and State Governments, have to merged together so as to have one and only one tax in the nature of indirect tax, on goods as well as services, to be collected and shared by all those who are authorized to collect tax by the Constitution of India. Let’s hope the GST, with an appropriate module, is adopted and implemented as early as possible.

Meanwhile, till the GST Law is enacted, it is necessary to carefully look into the impact of changes, in existing provisions, affecting major sectors of the economy. Every change has its own impact, and, if there are major changes entire spectrum may get affected. Recent amendments, in the existing law of service tax, such as definition of service, declared service, negative list, reverse charge mechanism, CENVAT credit rules, place of service rules, exemptions and abatements, etc., are such that one has to ponder upon, discuss, re-discuss and try to understand the real impact thereof on various segments of trade, industry and profession. The need of hour is to learn what is new by unlearning what was already learned. However, the complexities of law have made the task of understanding new provisions and interpreting the changes therein more and more challenging. And one also has to take care of recently amended and extremely harsh provisions relating to penalties, prosecution & recoveries, etc.

This study course is structured accordingly to deal head on with this need – to bring current controversies to light and nourish our knowledge base through case studies, discussions and interactions with fellow members and experts having vast experience. We have in all three papers for group discussion and two for interactive session of presentation.

We are fortunate enough that Shri Sushil Solanki, the Commissioner of Service Tax-I, Mumbai, has kindly consented to inaugurate this Study Course and also to deliver key note address. His golden words of advice will certainly enlighten all of us.

We are thankful to our paper writers for kindly accepting our invitation to guide us through their rich knowledge and experience, and to spare some time, out of their busy schedule, to be with us all throughout the studies.

We wish to acknowledge the efforts put in by convenors and members of Indirect Taxes and Allied Laws Committee who have worked tirelessly in structuring the course contents and making other arrangements, and of course, you, the participants for joining this course to make it so successful. We are confident that this study course will be an enriching and fulfilling experience.

While every effort has been made to take care of the smallest of details, we would be happy to receive your feedback and suggestions for improvements so that future course can be still better.

Deepak R. Shah Govind G. GoyalPresident, BCAS Chairman

Indirect Taxes and Allied Laws CommitteeMumbaiDated 6th June, 2013

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BCAS AT YOUR SERVICEA voluntary organisation established on 6th July 1949, BCAS has more than 9,000 members from all over the country at present and is a principle-centred and learning-oriented organisation promoting quality service and excellence in the profession of Chartered Accountancy and is a catalyst for bringing out better and more effective Government policies & laws and for clean & efficient administration and governance.

THE DIVERSE ACTIVITIES OF BCAS INCLUDE: BCA Journal: The Bombay Chartered Accountant Journal (BCAJ) is a publication with a track record of over 40 years and is considered as an outstanding publication by tax and accounting professionals in practice or in industry. It includes analytical articles and updates on the subjects such as Direct Tax, Indirect Tax, International Tax, Accounting and Auditing and Information Technology.

BCAS Web TV (www.bcasonline.tv): BCAS Web TV is a new initiative of BCAS based on the Internet Video Streaming Service where you can see video or hear audio recordings of select events conducted by BCAS on your computer or on your internet enabled mobile device.

Publications: Every year BCAS publishes Referencer along with a CD which is an indispensable tool for professionals as well as those in the industry. We also publish books on varied topics of professional interest such as Audit Check-list, TDS, Fraud, Transfer Pricing, FEMA, Laws & Business and Charitable Trust.

Representations: BCAS makes representations to various authorities on different laws as well as on procedural issues, with a view to making them just and friendly to the general public. The representations include pre and post budget memoranda to the Ministry of Finance, Government of India, Ministry of Company Affairs, and Central Board of Direct Taxes among others.

Educational Activities: BCAS conducts various educational activities such as seminars, workshops, residential refresher courses, study circles, lecture meetings, e-learning programme on XBRL.

Free Advisory Clinics: BCAS conducts following free clinics: Accounts & Audit Clinic, Charitable Trust Clinic and RTI Clinic to help the members & non-members in respective areas. Eminent experts provide free advice at these clinics on pre-fixed days.

BCAS Website: The website of BCAS viz. www.bcasonline.org, apart from giving the latest news, circulars and notifications relevant for professionals, also serves as a “Knowledge Portal”, and is an excellent source of information.

Please visit us at our Cyber Addresses, and share your views

with us:

Linkedin : http://in.linkedin.com/in/bcasglobal

Twitter : http://twitter.com/bcasglobal

Facebook Group : globalcharteredaccountants

Our blog : http://globalcharteredaccountants.wordpress.com

Our website : www.bcasonline.org

BCAS Web TV : www.bcasonline.tv

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7th Residential Study Course on Service Tax & VATFriday, 14th June to Sunday, 16th June, 2013

Venue: Hotel Express Inn, Nashik

Subjects & Paper WritersPapers for Discussion

Case Studies on CENVAT Credit Rules Adv. Bharat Raichandani

Case Studies – Indirect Taxes on Hospitality Industry CA Parind Mehta(Hotels, Restaurants, Caterers, etc.)

Case Studies on Negative List and Reverse Charge CA S. S. Gupta Mechanism under Service Tax (and Rules of Interpretation)

Papers for Presentation

Implications of Service Tax on Logistic Sector Adv. Prasad Paranjape

Power to Arrest, Offences, Prosecution and Recoveries CA Girish Ramanunder Service Tax Law

Group Leaders

1 2 3Case Studies on CENVAT

Credit RulesCase Studies – Indirect

Taxes on Hospitality Industry (Hotels,

Restaurants, Caterers, etc.)

Case Studies on Negative List and Reverse Charge Mechanism under Service

Tax (and Rules of Interpretation)

Adv. Bharat Raichandani CA Parind Mehta CA S. S. GuptaNarendrakumar Ganpatlal Soni Kevin Nitin Shah Sudhir V. S.

Mandar Ulhas Telang Pranav Prakash Mehta Rajiv LuthiaBhishan R. Shah Vikram D. Mehta Leena Doshi

Jayesh Morarji Gogri Sagar N. Shah Isha Sekhri

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7th Residential Study Course on Service Tax & VATFriday, 14th June to Sunday, 16th June, 2013

Venue: Hotel Express Inn, NashikInaugural Address: Shri. Sushil Solanki, Commissioner of Service Tax-I, Mumbai

PROGRAMME SCHEDULEFriday 14th June 2013

10.00 am onwards : Welcome & Check-in12.30 to 02.00 pm : Lunch03.15 to 05.15 pm : Group Discussion (Paper I) “Case Studies on CENVAT Credit Rules” 05.30 to 08.30 pm : General Assembly – Inaugural Session: Inauguration by: Shri Sushil Solanki, Commissioner of Service Tax-I, Mumbai Hi-Tea Presentation of Paper and Reply to Queries by Paper Writer: Adv. Bharat Raichandani8.30 to 10.00 pm : Dinner

Saturday 15th June 2013

07.30 to 08.15 am : Breakfast08.30 to 10.30 am : Group Discussion (Paper II) – “Indirect Taxes on Hospitality Industry – Case Studies”10.45 to 01.15 pm : General Assembly – Presentation of Paper IV by: Adv. Prasad Paranjape “Implications of Service Tax on Logistic Sector” Presentation of Paper and Reply to Queries by Paper Writer: CA. Parind Mehta01.15 to 02.15 pm : Lunch02.30 to 08.30 pm : Visit (*)08.30 to 10.00 pm : Dinner

Sunday 16th June 2013

07.30 to 08.15 am : Breakfast08.30 to 10.30 am : Group Discussion (Paper III) – “Case Studies on Negative List and Reverse Charge

Mechanism under Service Tax”

10.45 to 01.15 pm : General Assembly – Presentation of Paper V by: CA Girish Raman “Power to Arrest, Offences, Prosecution and Recoveries

under Service Tax Law” Presentation of Paper and Reply to Queries by Paper Writer: CA S. S. Gupta01.15 to 02.30 pm : Lunch3.00 pm : Vidai

Note: Address of the Venue: Hotel Express Inn, Pathardi Phata, Mumbai Agra Road, Ambad, Nashik – 422 010. Maharashtra, India. Phone: +91-253-2227777, 0253 6641111

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Our Faculty

Shri Bharat B. Raichandani is a practising Advocate. He specializes in areas of Central Excise, Service Tax, Customs, VAT and Intellectual property Laws.

He has received a trophy from Shiv Sena President Shri. Uddhav Thackeray during the year 1996 for outstanding achievement in academics. He is a University Gold Medalist at Law for all three years. The Gold Medal was awarded to him by the Governor of State of Maharashtra Shri. S M Krishna

He is a profound speaker on Excise, Customs, Service tax and Budget lectures.

He has successfully argued large number of matters relating to Excise, Customs and Service Tax laws before the Bombay High Court such as Coca Cola, ONGC, Maharashtra Chamber of Commerce etc, Appellate Tribunal as well as Departmental Authorities.

CA. Parind Mehta

Qualifications

• Fellow Member of the Institute of Chartered Accountants of India

• Bachelor of Commerce from University of Bombay, India

Experience

• Parind is a Partner with B.S.R. & Co. in the Indirect Tax practice at Mumbai, India

• Parind has over 18 years post qualification experience in consulting and advisory practice

• Represents clients before tax authorities at various forums

• Committee Member of various Professional and Trade Associations actively involved in discussions, representations, etc. with and before Tax department

• Regularly speaks at conferences and seminars conducted by Professional and Trade Associations and has authored / co-authored various papers and publications on professional subjects

Sector

• During his tenure as a professional, Parind has dealt extensively in the areas of Value Added Tax, Central Sales Tax, Service Tax across an Industry spectrum consisting of Automobile, Healthcare, Hospitality, Banking and Financial services, Engineering, Ports and Shipping, Utilities, Construction, etc.

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CA. S. S. GUPTA is a practising chartered accountant, having his office at 102-106, 1st Floor, Zaitoon Apartment, A Wing, 182, Station Road, Goregaon (W), Mumbai – 400 062. [E-mail: [email protected]]Being a chartered accountant, cost accountant as well as company secretary, he has to his credit several honours and awards, such as 8th & 26th Rank in Inter & Final respectively of ICAI and 3rd & 6th Rank in Inter & Final respectively of ICWAI.

He has also been awarded Sydenham Golden Jubilee Scholarship, J.R.D. Tata Merit Scholarship, Sir Ibrahim Rahimtoola Scholarship, Maharaja Takthaji of Bhavnagar Scholarship, Narsee Monjee College Merit Scholarship, Institute of Cost & Works Accountants of India Cash Prize & Certificate of Merit and many more.

After serving for 6 years in industry, he started practising as a chartered accountant specializing in Central Excise, Customs, Service Tax and EXIM Policy. Being in exclusive practice of indirect taxation for last 25 years he has rich experience in providing practical solutions to each aspect of indirect taxation.

He has contributed articles to various professional journals and has been a faculty member for the seminars, conferences, refresher courses and lectures organized by ICAI, ICWAI, IMA and IMC.

He has also authored the book ‘Service Tax – How to meet your obligations’ which is being published by Taxman Publications.

He has also been involved in various charitable activities as trustee and active member of reputed organizations such as Sankalp (Welfare Trust), Mangesh Vishwastha Mandal (runs school for children), Bharat Vikas Parishad and Punarvas Vikalang School.

Shri Prasad Paranjape, Partner, PDS Legal

He has close to 20 years of professional experience where during some part of his career he was with corporates, in consulting practice with Big 4 Firms, and now as a counsel.

He represents clients on Indirect tax litigation before the Tribunal, High Court, Settlement Commission, Authority for Advance Ruling and other forums.

Prasad advises clients on Indirect taxes and connected litigation matters. While his clientele spannes across various industry segments, some of the key clients he served has been from the oil & gas, telecom, information technology, entertainment and financial services industries.

His experience includes advising clients on complex tax issues, suggesting tax-optimum structures, recommending tax-planning avenues, maximizing incentives/ benefits under various tax and regulatory fronts.

Before consulting and counsel practice, he was engaged with large Indian corporates in their corporate tax function engaged in planning and advising on indirect taxes, managing litigation and involved in internal controls and compliance.

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From the Archive

1ST RESIDENTIAL STUDY COURSE ON SERVICE TAx

Dates: 6th to 8th April, 2007 Venue: Hotel Usha Ascot, Matheran

No. of Participants: 106

President: Himanshu V. Kishnadwala Chairman: Dilip V. Lakhani

Co-chairman: Govind G. Goyal

Convenors: Anup P. Shah, Raman H. Jokhakar and Sunil B. Gabhawalla

Topics Paper Writers

Papers for Group Discussion

Import and Export of Services CA Jayraj Sheth

CENVAT Credit Mechanism for Service providers Adv. Vipin Jain

Valuation of Taxable Services CA Puloma Dalal


Impact of VAT on Service Tax : Some Issues CA Parind A. Mehta

Real Estate Transaction Service Tax Implications CA Sunil B. Gabhawalla

2ND RESIDENTIAL STUDY COURSE ON SERVICE TAx

Dates: 7th to 9th December, 2007 Venue: Treasure Island Resort, Lonavala


President: Rajesh S. Kothari Chairman: Pranay H. Marfatia

Co-Chairman: Govind G. Goyal

Convenors: Raman Jokhakar, Shardul D. Shah and Sunil B. Gabhawalla



Service Tax & VAT on Composite Transactions Adv. P. K. Sahu

Service Tax on Financial Services CA Sunil Kothare

Case Studies in Service Tax CA A. R. Krishnan

Paper for Presentation

Service Tax on Cross Border Transaction Rohan Shah, Solicitor

Applicability of excise provisions and propositions on Service tax CA S. S. Gupta

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3RD RESIDENTIAL STUDY COURSE ON SERVICE TAx

Dates: 6th to 8th March, 2009 Venue: Treat resort, Silvassa


President: Anil Sathe Chairman: Pranay H. Marfatia

Convenors: Raman H. Jokhakar, Satish B. Kanodia and Toral C. Mathuria



Recent issues in CENVAT Credit Rules Service Tax Perspective CA Bakul B. Mody

Case Studies on Information Technology & Software Services – VAT & Service tax perspective.

Adv. K. Vaitheeswaran

Case Studies in Service Tax Adv. V. Raghuraman

Paper for Presentation

Adjudication and Appellate Procedure in Service Tax Adv. Naresh S. Thacker Adv. Karthik Sundaram

Service Tax Compliance – Putting Systems & Procedures in Place CA Nihal Kothari

4TH RESIDENTIAL STUDY COURSE ON SERVICE TAx

Dates: 2nd to 4th July, 2010 Venue: Silent Hill Resort, Manor, Palghar


President: Ameet N. Patel Chairman: Pranay H. Marfatia

Convenors: Suhas S. Paranjpe and Toral C. Mathuria


Papers for Discussion

Case Studies on Works Contracts Adv. V. Sridharan

Case Studies on Refunds & Rebates Adv. M. H. Patil

Case Studies on the Topics other than Above Adv. K. S. Ravi Shankar


GST – Way Forward Adv. Santosh Dalvi

SEZ – Indirect Tax Issues Adv. Prasad Paranjpe

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5TH RESIDENTIAL STUDY COURSE ON SERVICE TAx & VAT

Dates: Friday to Sunday, 24th to 26th June 2011 Venue: The Corinthians, Pune


President: Mayur B. Nayak Chairman: Govind G. Goyal

Convenors: Sunil B. Gabhawalla, Toral N. Mehta and Suhas S. Paranjpe



Recent Amendments to CENVAT Credit Rules & Impact thereof Adv. Shailesh Sheth

Indirect Tax Issues in Media & Entertainment Industry CA Parind Mehta

Controversies in Service Tax - Case Studies Adv. G. Shivadass


Dual Taxation and Levy of Service Tax on Hotels & Restaurants CA S. S. Gupta

Practice in Service Tax – Some Musings CA A. R. Krishnan

6TH RESIDENTIAL STUDY COURSE ON SERVICE TAx & VAT

Dates: Friday to Sunday, 22nd to 24th June, 2012 Venue: Rio Resort, Arpora, Goa


President: Deepak R. Shah Chairman: Govind G. Goyal

Convenors: Santosh M. Jain, Sunil B. Gabhawalla and Suhas S. Paranjpe



Negative List based Taxation of Services, Concept Definitions, Exclusions, Exemptions and Valuation

CA Sunil Gabhawalla

Sale versus Service - Overlap of VAT and Service Tax Adv. P. K. Sahu

Case Studies on Point of Taxation Rules, 2011 CA A. R. Krishnan

Indirect Tax issues in Real Estate Industry – Case Studies Adv. K. Vaitheeswaran


Analysis of Place of Provision of Services Rules CA A. R. Krishnan

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ContentsTopics Paper Writer Page No.

1. Case Studies on CENVAT Credit Rules Shri Bharat Raichandani Advocate

1 – 14

2. Case Studies – Indirect Taxes on Hospitality Industry (Hotels, Restaurants, Caterers, etc.)

CA Parind Mehta 15 – 48

3. Case Studies on Negative List and Reverse Charge Mechanism under Service Tax (and Rules of Interpretation)

CA S. S. Gupta 49 – 56

4. Implications of Service Tax on Logistic Sector

Shri Prasad Paranjape Advocate

57 – 68

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7th Residential Study Course on Service Tax & VAT

Case Studies on Cenvat CreditBharat Raichandani

Advocate

1. M/s. Jay Ltd., Mumbai, established in 2010 is in the business of construction of buildings and infrastructure projects like public road, port etc. It had branches in Hyderabad and Chennai which are separately registered under the respective jurisdictional service tax departments.

M/s. Jay Ltd. avail services of Contractors providing works contract service for construction of buildings and other projects. It has also availed services of security agencies, banking and finance, telephone and Chartered Accountants, cab rentals for which bills are received in Mumbai Head Office. It has imported certain Framework material (used for high rise building constructions) and paid CVD along with basic and additional customs and duties. The assessee is having JCB which is provided to other contractors when idle. The CEO while conducting the audit in Mumbai HO has objected availing CEnVAT credit on the following issues:a) That the assessee cannot avail CEnVAT credit of common input services of security,

telephone, banking and Chartered Accountants as they are not maintaining separate records for use of these services for providing taxable and exempt services.

b) That they have wrongly availed CEnVAT credit on rent-a-cab and insurance of motor vehicles including the JCB.

c) That the Framework (covered under Ch. 73 of Central Excise Tariff Act) does not fit into the definition of “capital goods” in R. 2(a) of CCR, 2004.

d) That they have taken credit of Chennai and Hyderabad offices in Mumbai without centralised registration and also without using mechanism of “Input Service Distributor”.

e) M/s. Jay Ltd. is also having a container depot division adjacent land. The empty containers of International Shipping Companies are stored there, cleaned and repaired. The containers are stacked one above another, like in the five layers and moved with heavy cranes. The land surface has to be hard enough to bear the load. For hard surfacing, Jay Ltd. has entered into contract with a construction firm for laying murrum and other material from time to time on the land and maintain the same sufficiently hard. For prevention of water accumulation and caving in of the ground, it has installed pipelines beneath the ground. An engineer is appointed to oversee and certify the work of contractors from time to time which is a requirement of shipping companies. The construction firm is registered under works contract service.

The Service Tax department has issued notice to Jay Ltd. that the credit of input service cannot be availed as the work done by the contractor is of civil nature and covered under construction service. Also the same cannot be said to have been “used for providing output service” and it has no nexus. Jay Ltd. seeks your opinion in the matter.

The issue may be examined for the period 1.4.2008 to 31.3.2013

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2. M/s. Lovely Builders are engaged in developing and selling residential flats. They usually sell 90% of flats while under construction and 10% after receipt of CC. From 1.7.2012, when 50% of the work was completed, they started availing credit of input services. As of March, 2013 they completed construction and CC was received in May, 2013. Out of total 50 flats constructed on 20,000 sq. ft. they sold 45 flats of total area of 16,000 Sq. Ft. by May, 2013 and remaining are unsold. Are they required to reverse of CEnVAT credit already taken? If your answer is in affirmative, please advise them as to how and when the CEnVAT credit can be reversed or care should be taken to avoid availment of excess credit.

Further, on enquiry from service tax department, they have also been asked to reverse the credit on 75% abatement that they have availed. Is this correct and in accordance with the law?

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3. M/s. Big Bull Broking Pvt. Ltd. (“Big Bull”) is a stock broking entity and is a member of the National Stock Exchange (“NSE”). Big Bull broking has rented a 2,000 sq. ft. office premises in a prime business district in Mumbai. Activities of Big Bull among other things include the following:

Big Bull provides broking services to its clients who want to trade/buy/sell shares and securities on the NSE. For this, Big Bull charges a fixed rate of brokerage, separately. Big Bull also recovers amounts towards stamp duty, turnover/transaction charges, demat charges etc. Big Bulls pays service tax on the amounts collected.

Big Bull is also engaged in the activity of distributing schemes of mutual fund. This service is provided to clients who may be clients for broking business also. In some cases, clients engage Big Bull only for mutual fund related support services. For these activities, Big Bull does not charge any money to its clients, but it earns commission/incentive from the mutual fund/Asset Management Company whose products are distributed. Big Bull does not pay any service tax on the amounts received for these activities.

Big Bull is also engaged in pro trading i.e. trading in shares and securities on its own account.

Big Bull is sharing office premises and other infrastructure with a sister concern M/s. Big Bear Commodities Pvt. Ltd (“Big Bear”). All expenses related to rental of property, maintenance of property, Telephone, etc. is shared on a proportionate basis (proportion is decided on a rationale basis). Big Bull does not charge/recover any additional amount for sharing the office premise and infrastructure.

Big Bull tells us that they are paying service tax on receipt of the following services:

i. Stock Exchange services

ii. Chartered Accountants services

v Telecommunication/Internet

v Leased lines services for trading terminal

iii. Courier services for delivery of contract notes and clients performance statements (Mutual funds)

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iv. Rent and maintenance of immovable property

v. Information data services and Web-hosting services for pushing market related information and advertising its own services on the corporate website.

The following implications need to be examined from CENVAT credit perspective from 1.4.2010 to 31.3.2013, assuming that separate accounts are not maintained for the above.

A. Whether reversal under rule 6(3) will be required on account of pro trading activities entered into by Big Bull. If so, how will the reversal be calculated?

B. Whether any reversal will be required on account of any activity related to distribution of schemes of Mutual Funds

C. Big Bull has received show cause notice seeking reversal of CEnVAT credit on input services shared with Big Bear. The show cause notice alleges that:

i) Reversal is required because Big Bull is utilizing input services for rendering of taxable as well as exempt services.

ii) In case of input services, which are partly utilised by Big Bull, the service tax department is of the view that these are not eligible for credit since Big Bear has not utilised these for rendering any output services.

iii) Would your answer differ if Big Bear directly pays to the service provider instead of reimbursing cost (at actual) to Big Bull. In such a case, can Big Bear claim credit of the service tax paid on the expenses borne by it?

Big Bull seeks your assistance on the above.

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4. M/s. APL Ltd. received show cause notice for wrong availment of CEnVAT credit on certain Input Services for the period 2011-12 and also proposed to impose interest under rule 14 and penalty under rule 15(1) for wrong availment and under rule 15(3) read with Section 78 for suppression of facts with intent to evade tax. The Adjudicating Authority confirmed the demand of wrong availment and imposed interest under rule 14, 100% penalty under rule 15(1) and 100% penalty under rule 15(3) read with section 78. The Company wishes to know:

a) Whether just for wrong availment interest is leviable under rule 14?

b) Since the availment of credit was recorded in specified records maintained by the company whether they are entitled to pay 50% of penalty under rule 15(3) if paid within 30 days from the date of receipt of order.

c) If yes, then whether penalty under rule 15(1) will also get concession (50%) as provided to rule 15(3) read with Section 78 or it is to be paid full 100%. Is it justified?

d) Is there any provision, either express or implied in the FA, 1994 enabling the rule making authority, namely the Central Government to frame the rules under section

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94 of FA, 1994 relating to levy of interest and penalty in case of wrong availment of CEnVAT credit of service tax paid on taxable services.

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5. M/s. AB&B is a major telecom service provider and is providing telecom service across the state of Maharashtra.

In 2011, M/s. AB&B had purchased several items for the purpose of their activities these inter alia include laptops, computers for their engineers working at office and in the field, batteries and generators for their base stations, heavy duty modems for transmission of signals. M/s. AB&B has availed and utilised credit of duty paid on these items.

In April 2013 the management of AB&B has resolved to do the following:

a) Write off the value of modems in the books of account book value of Rs. 10,000/- because:

(i) the modems were lost/damaged in an accidental fire at one of the sites.

(ii) they are no longer in a usable condition and are not capable of being repaired

(iii) they are being removed as scrap at value of Rs. 100/-

b) Write off value of batteries in the books of accounts as these batteries are completely discharged and no longer usable. The company is trying to sell the used batteries as scrap but there are no buyers.

c) In case of laptops book value of Rs. 5 lakhs because the laptops were stolen from the site.

Please advise M/s. AB&B as to what its obligations are under the CENVAT Credit Rules, 2004.

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6. M/s. ABC is engaged in manufacturing and trading of medicines. They have availed CEnVAT Credit of service tax paid on the following input services.

a. Testing of clinical samples by various drugs prior to commencement of commercial production (all of the drugs may not be manufactured). These samples were manufactured in small batches and removed after payment of excise duty.

b. Commission paid to selling agents

c. Repair/maintenance of copier machine, air conditioner, water cooler

d. Clearing and forwarding Agents services for distribution of finished and traded goods

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e. Manpower recruited for packing/repacking of finished goods on which the company is paying 75% of service tax on RCM.

Please discuss whether above services are ‘input services’ for the pre and post amended period of 1.4.2011. In trading business they have the margin of 12% including 3% of purchase cost of transportation.

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7. M/s. MM Films Producers have started production work of a film on 1.4.2013. They intend to sell distribution rights for exhibition in cinema theatres. Later on they also intend to sell distribution rights on TV channels and reproduction rights for DVDs. They would like to take CEnVAT Credit of service tax paid to Artists, Directors, Musicians, and other service providers whose services are utilised for production of film. In view of the peculiar nature of the film production business, it is uncertain for what amount the film rights will be sold for distribution in theatres/TVs/for reproduction as DVDs. Please advise M/s. MM Films Producers.

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annexure

Cenvat CRedit Rules, 2004

Rule 2(e) “exempted seRviCe” MEAnS A–(1) taxable service which is exempt from the whole of the service tax leviable thereon; or

(2) service, on which no service tax is leviable under section 66B of the Finance Act; or

(3) taxable service whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken;

but shall not include a service which is exported in terms of rule 6A of the Service Tax Rules, 1994.

Rule 2(a) “Capital goods” MEAnS:–(A) the following goods, namely:

(i) all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, 1[heading 6805, grinding wheels and the like, and parts thereof falling under heading 6804] of the First Schedule to the Excise Tariff Act;

(ii) pollution control equipment;

(iii) components, spares and accessories of the goods specified at (i) and (ii);

(iv) moulds and dies, jigs and fixtures;

(v) refractories and refractory materials;

(vi) tubes and pipes and fittings thereof,

(vii) storage tank; and

(viii) motor vehicles other than those falling under tariff headings 8702, 8703, 8704, 8711 and their chassis [but including dumpers and tippers]

used–

(1) in the factory of the manufacturer of the final products, but does not include any equipment or appliance used in an office; or

(1A) outside the factory of the manufacturer of the final products for generation of electricity for captive use within the factory; or

(2) for providing output service.

(B) motor vehicle designed for transportation of goods including their chassis registered in the name of the service provider, when used for–

(i) providing an output service of renting of such motor vehicle; or

(ii) transportation of inputs and capital goods used for providing an output service; or

(iii) providing an output service of courier agency.

(C) motor vehicle designed to carry passengers including their chassis, registered in the name of the provider of service, when used for providing output service of–

(i) transportation of passengers; or

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(ii) renting of such motor vehicle; or

(iii) imparting motor driving skills.

(D) components, spares and accessories of motor vehicles which are capital goods for the assessee.

Rule 2(l) “input seRviCe” MEAnS Any SERVICE–(i) used by a provider of output service for providing an output service; or

(ii) used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products up to the place of removal,

and includes services used in relation to modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage up to the place of removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation up to the place of removal;

but excludes–

(A) service portion in the execution of a works contract and construction services including service listed under clause (b) of section 66E of the Finance Act (hereinafter referred as specified services) in so far as they are used for–

(a) construction or execution of works contract of a building or a civil structure or a part thereof; or

(b) laying of foundation or making of structures for support of capital goods,

except for the provision of one or more of the specified services; or

(B) services provided by way of renting of a motor vehicle, in so far as they relate to a motor vehicle which is not a capital goods; or

(BA) service of general insurance business, servicing, repair and maintenance, in so far as they relate to a motor vehicle which is not a capital goods, except when used by–

(a) a manufacturer of a motor vehicle in respect of a motor vehicle manufactured by such person; or

(b) an insurance company in respect of a motor vehicle insured or reinsured by such person; or

(C) 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;

Rule 2(k) “input” MEAnS–(i) all goods used in the factory by the manufacturer of the final product; or

(ii) any goods including accessories, cleared along with the final product, the value of which is included in the value of the final product and goods used for providing free warranty for final products; or

(iii) all goods used for generation of electricity or steam for captive use; or

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(iv) all goods used for providing any output service; but excludes-

(A) light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol;(B) any goods used for-

(a) construction or execution of works contract of a building or a civil structure or a part thereof; or

(b) laying of foundation or making of structures for support of capital goods, except for the provision of service portion in the execution of a works contract or

construction service as listed under clause (b) of section 66E of the Act;(C) capital goods except when used as parts or components in the manufacture of a final

product;(D) motor vehicles;(E) any goods, such as food items, goods used in a guest house, residential colony, club

or a recreation facility and clinical establishment, when such goods are used primarily for personal use or consumption of any employee; and

(F) any goods which have no relationship whatsoever with the manufacture of a final product.

Explanation.– For the purpose of this clause, “free warranty” means a warranty provided by the manufacturer, the value of which is included in the price of the final product and is not charged separately from the customer.

Rule 3(5)When inputs or capital goods, on which CEnVAT credit has been taken, are removed as such from the factory, or premises of the provider of output service, the manufacturer of the final products or provider of output service, as the case may be, shall pay an amount equal to the credit availed in respect of such inputs or capital goods and such removal shall be made under the cover of an invoice referred to in rule 9:

provided that such payment shall not be required to be made where any inputs or capital goods are removed outside the premises of the provider of output service for providing the output service:

provided further that such payment shall not be required to be made where any inputs are removed outside the factory for providing free warranty for final products:

Rule 3(5a) If the capital goods, on which CEnVAT credit has been taken, are removed after being used, whether as capital goods or as scrap or waste, the manufacturer or provider of output services shall pay an amount equal to the CEnVAT credit taken on the said capital goods reduced by the percentage points calculated by straight line method as specified below for each quarter of a year or part thereof from the date of taking the CEnVAT credit, namely:

(a) for computer and computer peripherals:

for each quarter in the first year @ 10% for each quarter in the second year @ 8% for each quarter in the third year @ 5% for each quarter in the fourth and fifth year @ 1%

(b) for capital goods, other than computer peripherals @ 2.5% for each quarter:

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provided that if the amount so calculated is less than the amount equal to the duty leviable on transaction value, the amount to be paid shall be equal to the duty leviable on transaction value.

Rule 3(5B) If the value of any,

(i) input, or

(ii) capital goods before being put to use,

on which CEnVAT credit has been taken is written off fully or partially or where any provision to write off fully or partially has been made in the books of account then the manufacturer or service provider, as the case may be, shall pay an amount equivalent to the CEnVAT credit taken in respect of the said input or capital goods:

provided that if the said input or capital goods is subsequently used in the manufacture of final products or the provision of output services, the manufacturer or output service provider, as the case may be, shall be entitled to take the credit of the amount equivalent to the CEnVAT credit paid earlier subject to the other provisions of these rules.

Explanation– If the manufacturer of goods or the provider of output service fails to pay the amount payable under sub-rules (5), (5A) and (5B), it shall be recovered, in the manner as provided in rule 14, for recovery of CENVAT credit wrongly taken.

Rule 3(5C) Where on any goods manufactured or produced by an assessee, the payment of duty is ordered to be remitted under rule 21 of the Central Excise Rules, 2002, the CEnVAT credit taken on the inputs used in the manufacture or production of said goods shall be reversed.

Rule 3(6)The amount paid under sub-rule (5) and sub-rule (5A) shall be eligible as CENVAT credit as if it was a duty paid by the person who removed such goods under sub-rule (5) and sub-rule (5A).

Rule 4(7)The CEnVAT credit in respect of input service shall be allowed, on or after the day on which the invoice, bill or, as the case may be, challan referred to in rule 9 is received:

provided that in case of an input service where the service tax is paid on reverse charge by the recipient of the service, the CEnVAT credit in respect of such input service shall be allowed on or after the day on which payment is made of the value of input service and the service tax paid or payable as indicated in invoice, bill or, as the case may be, challan referred to in rule 9:

provided further that in case the payment of the value of input service and the service tax paid or payable as indicated in the invoice, bill or, as the case may be, challan referred to in rule 9, is not made within three months of the date of the invoice, bill or, as the case may be, challan, the manufacturer or the service provider who has taken credit on such input service, shall pay an amount equal to the CEnVAT credit availed on such input service and in case the said payment is made, the manufacturer or output service provider, as the case may be, shall be entitled to take the credit of the amount equivalent to the CEnVAT credit paid earlier subject to the other provisions of these rules:

provided also that if any payment or part thereof, made towards an input service is refunded or a credit note is received by the manufacturer or the service provider who has taken credit on such input service, he shall pay an amount equal to the CEnVAT credit availed in respect of the amount so refunded or credited:

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provided also that CEnVAT credit in respect of an invoice, bill or, as the case may be, challan referred to in rule 9, issued before the 1st day of April, 2011 shall be allowed, on or after the day on which payment is made of the value of input service and the service tax paid or payable as indicated in invoice, bill or, as the case may be, challan referred to in rule 9.

Explanation I– The amount mentioned in this sub-rule, unless specified otherwise, shall be paid by the manufacturer of goods or the provider of output service by debiting the CEnVAT credit or otherwise on or before the 5th day of the following month except for the month of March, when such payment shall be made on or before the 31st day of the month of March.

Explanation II– If the manufacturer of goods or the provider of output service fails to pay the amount payable under this sub-rule, it shall be recovered, in the manner as provided in rule 14, for recovery of CEnVAT credit wrongly taken.

Explanation III– In case of a manufacturer who avails the exemption under a notification based on the value of clearances in a financial year and a service provider who is an individual or proprietary firm or partnership firm, the expressions, “following month” and “month of March” occurring in sub-rule (7) shall be read respectively as “following quarter” and “quarter ending with the month of March”.

Rule 6(1)The CEnVAT credit shall not be allowed on such quantity of input used in or in relation to the manufacture of exempted goods or for provision of exempted services, or input service used in or in relation to the manufacture of exempted goods and their clearance upto the place of removal or for provision of exempted services, except in the circumstances mentioned in sub-rule (2):

provided that the CEnVAT credit on inputs shall not be denied to job worker referred to in rule 12AA of the Central Excise Rules, 2002, on the ground that the said inputs are used in the manufacture of goods cleared without payment of duty under the provisions of that rule.

Rule 6(2)Where a manufacturer or provider of output service avails of CEnVAT credit in respect of any inputs or input services and manufactures such final products or provides such output service which are chargeable to duty or tax as well as exempted goods or services, then, the manufacturer or provider of output service shall maintain separate accounts for–

(a) the receipt, consumption and inventory of inputs used–

(i) in or in relation to the manufacture of exempted goods;

(ii) in or in relation to the manufacture of dutiable final products excluding exempted goods;

(iii) for the provision of exempted services;

(iv) for the provision of output services excluding exempted services; and

(b) the receipt and use of input services–

(i) in or in relation to the manufacture of exempted goods and their clearance up to the place of removal;

(ii) in or in relation to the manufacture of dutiable final products, excluding exempted goods, and their clearance up to the place of removal;

(iii) for the provision of exempted services; and

(iv) for the provision of output services excluding exempted services,

and shall take CENVAT credit only on inputs under sub-clauses (ii) and (iv) of clause (a) and input services under sub-clauses (ii) and (iv) of clause (b).

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Rule 6(3)Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer of goods or the provider of output service, opting not to maintain separate accounts, shall follow any one of the following options, as applicable to him, namely:

(i) pay an amount equal to six per cent of value of the exempted goods and exempted services; or

(ii) pay an amount as determined under sub-rule (3A); or

(iii) maintain separate accounts for the receipt, consumption and inventory of inputs as provided for in clause (a) of sub-rule (2), take CENVAT credit only on inputs under sub-clauses (ii) and (iv) of said clause (a) and pay an amount as determined under sub-rule (3A) in respect of input services. The provisions of sub-clauses (i) and (ii) of clause (b) and sub-clauses (i) and (ii) of clause (c) of sub-rule (3A) shall not apply for such payment.

provided that if any duty of excise is paid on the exempted goods, the same shall be reduced from the amount payable under clause (i).

provided further that if any part of the value of a taxable service has been exempted on the condition that no CEnVAT credit of inputs and input services, used for providing such taxable service, shall be taken then the amount specified in clause (i) shall be six per cent of the value so exempted.

provided also that in case of transportation of goods or passengers by rail the amount required to be paid under clause (i) shall be an amount equal to 2 per cent of value of the exempted services.

Explanation I– If the manufacturer of goods or the provider of output service, avails any of the option under this sub-rule, he shall exercise such option for all exempted goods manufactured by him or, as the case may be, all exempted services provided by him, and such option shall not be withdrawn during the remaining part of the financial year.

Explanation II– For removal of doubt, it is hereby clarified that the credit shall not be allowed on inputs used exclusively in or in relation to the manufacture of exempted goods or for provision of exempted services and on input services used exclusively in or in relation to the manufacture of exempted goods and their clearance up to the place of removal or for provision of exempted services.

Explanation III– no CEnVAT credit shall be taken on the duty or tax paid on any goods and services that are not inputs or input services.

Rule 6(3d)Payment of an amount under sub-rule (3) shall be deemed to be CENVAT credit not taken for the purpose of an exemption notification wherein any exemption is granted on the condition that no CEnVAT credit of inputs and input services shall be taken.

Explanation I– ”Value” for the purpose of sub-rules (3) and (3A)–

(a) shall have the same meaning as assigned to it under section 67 of the Finance Act, read with rules made thereunder or, as the case may be, the value determined under sections 3, 4 or 4A of the Excise Act, read with rules made thereunder;

(b) in the case of a taxable service, when the option available under sub-rules (7), (7A), (7B) or (7C) of rule 6 of the Service Tax Rules, 1994, has been availed, shall be the value on which the rate of service tax under section 66B of the Finance Act, read with an exemption notification, if any, relating to such rate, when applied for calculation of service tax results in the same amount of tax as calculated under the option availed;

(c) in case of trading, shall be the difference between the sale price and the cost of goods sold (determined as per the generally accepted accounting principles without including

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the expenses incurred towards their purchase) or ten per cent of the cost of goods sold, whichever is more;

(d) in case of trading of securities, shall be the difference between the sale price and the purchase price of the securities traded or one per cent of the purchase price of the securities traded, whichever is more;

(e) shall not include the value of services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount.

Explanation II– The amount mentioned in sub-rules (3), (3A) and (3B), unless specified otherwise, shall be paid by the manufacturer of goods or the provider of output service by debiting the CEnVAT credit or otherwise on or before the 5th day of the following month except for the month of March, when such payment shall be made on or before the 31st day of the month of March.

Explanation III– If the manufacturer of goods or the provider of output service fails to pay the amount payable under sub-rules (3), (3A) and (3B), it shall be recovered, in the manner as provided in rule 14, for recovery of CENVAT credit wrongly taken.

Explanation IV– In case of a manufacturer who avails the exemption under a notification based on the value of clearances in a financial year and a service provider who is an individual or proprietary firm or partnership firm, the expressions, “following month” and “month of March” occurring in sub-rules (3) and (3A) shall be read respectively as “following quarter” and “quarter ending with the month of March.

Rule 14: ReCoveRy of Cenvat CRedit wRongly taken oR eRRoneously Refunded

Where the CEnVAT credit has been taken and utilised wrongly or has been erroneously refunded, the same along with interest shall be recovered from the manufacturer or the provider of the output service and the provisions of sections 11A and 11AA of the Excise Act or sections 73 and 75 of the Finance Act, shall apply mutatis mutandis for effecting such recoveries.

Rule 15: ConfisCation and penalty

(1) If any person, takes or utilises CENVAT credit in respect of input or capital goods or input services, wrongly or in contravention of any of the provisions of these rules, then, all such goods shall be liable to confiscation and such person, shall be liable to a penalty not exceeding the duty or service tax on such goods or services, as the case may be, or two thousand rupees, whichever is greater.

(2) In a case, where the CENVAT credit in respect of input or capital goods or input services has been taken or utilised wrongly by reason of fraud, collusion or any wilful misstatement or suppression of facts, or contravention of any of the provisions of the Excise Act, or of the rules made thereunder with intent to evade payment of duty, then, the manufacturer shall also be liable to pay penalty in terms of the provisions of section 11AC of the Excise Act.

(3) In a case, where the CENVAT credit in respect of input or capital goods or input services has been taken or utilised wrongly by reason of fraud, collusion or any wilful misstatement or suppression of facts, or contravention of any of the provisions of these rules or of the Finance Act or of the rules made thereunder with intent to evade payment of service tax, then, the provider of output service shall also be liable to pay penalty in terms of the provisions of section 78 of the Finance Act.

(4) Any order under sub-rule (1), sub-rule (2) or sub-rule (3) shall be issued by the Central Excise Officer following the principles of natural justice.

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exemption entRy no. 29 undeR notifiCation no. 25/2012 – st

Services by the following persons in respective capacities–

(a) sub-broker or an authorised person to a stock broker;

(b) authorised person to a member of a commodity exchange;

(c) mutual fund agent to a mutual fund or asset management company;

(d) distributor to a mutual fund or asset management company;

(e) selling or marketing agent of lottery tickets to a distributor or a selling agent;

(f) selling agent or a distributor of SIM cards or recharge coupon vouchers;

(g) business facilitator or a business correspondent to a banking company or an insurance company, in a rural area; or

(h) sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempt.

ooo

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1. IntroductIonThe hospitality industry has undisputedly emerged as one of the key industries driving the growth of the tertiary/service sector in India. While the global economic slowdown has translated into a sluggish growth for the industry in the last few years, the impact on the Indian industry perhaps has been comparatively lesser than that on global counterparts. The fortunes of the hospitality industry are only an indicator of the performance of several other wheels such as hotels, restaurants, entertainment and the tourism.

In 2012-13, the share of services in India’s Gross Domestic Product has been a whooping 56.6 per cent with trade, hotels and restaurants being the largest contributor with 18 per cent share as a group among various sub-sectors1. India stood 42nd in the world rankings in terms of foreign tourist arrivals in the country2. The World Travel and Tourism Council named India as one of the fastest growing tourism industries for the next 10 to 15 years3.

Even if these were dismissed as mere statistics, one cannot remain oblivious of the increasing presence of international brands in India – it’s only an indicator of the untapped potential/ market in India.

Some of the policy decisions and initiatives announced by the Government have evidently been a growth catalyst in an industry expected to grow to USD 431.7 billion by the end of 2020. This coupled with the paradigm shift in the demographics, spending habits of consumers and lifestyles have triggered greater expenditure on leisure services. According to Industry projections, India’s luxury market is expected to touch USD 14.73 billion by 2015 from an estimated USD 8.21 billion in 2013.

The increasing revenues are in geometric proportion to the attention the sector garners from the tax authorities – each wanting its share in the pie. This paper seeks to briefly touch upon the Indirect taxes in the hospitality industry in India, the stand taken by the Centre and the State Value Added Tax (‘VAT’) authorities and the possible interpretation of the different transactions involved.

For the sake of brevity, the provisions of the indirect tax laws, the undisputed interpretations and classifications or the evident overlaps have not been discussed in detail. The case studies discussed in this paper are intended to highlight issues the industry is or will be faced with, some of which have probable answers whilst other open to judicial debate.

2. restaurants, Lounges, Pubs, etc.Restaurants traditionally perceived as eating places have transformed into an entertainment place of sorts. Apart from the food and drinks, modern day restaurants offer an unending list of add-ons like karaoke, sports telecast, live performances, gourmet festivals, cooking classes, ladies nights, etc.. Who would have imagined a restaurant teaching how to use chopsticks?

1. Advance Estimates for 2012-13, Economic Survey 2012-132. ‘Competitiveness of Tourism Sector in India with Selected Other Countries of the World’ by Ministry of

Tourism, Indiaa3. ‘Competitiveness of Tourism Sector in India with Selected Other Countries of the World’ by Ministry of

Tourism, India

Indirect Tax Issues in the Hospitality Industry – Case Studies

ca Parind a. Mehta


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As the age old adage goes, there are no free lunches in life (pun intended)! Each of these has a price tag, and with the price tag comes an indirect tax, sometimes undisputed, often disputed. The evolution of the restaurant industry and the indirect taxes they attract have been simultaneous.

Traditionally a restaurant only recovered the spends on food and/or drinks from a customer. Today, a restaurant, in addition to the spends on food/ drinks recovers service charges.

While the levy of service tax, and the valuation for the purpose of service tax has been the subject of umpteen spam mails, the levy of VAT, if not the mechanism, is pretty much settled today.

To trace the levy of VAT/Central Sales Tax (‘CST’) on food one would have to go back to the Forty Sixth Amendment Bill, 1981 which was enacted as The Constitution (Forty Sixth Amendment) Act, 1982. However, before discussing the Forty Sixth Constitutional Amendment it may be worthwhile to know the trigger for the Amendment.

This started with the case of Associated Hotels of India4, where the Apex Court held that there was no sale involved in the supply of food or drinks by a hotelier to a person lodged in the hotel. The States proceeded on the basis that the principle laid down in the case of Associated Hotels of India applied only to supply of food or drinks by a hotelier to a person lodged in the hotel, and as a logical consequence sales tax was leviable on the sale of food stuff by a restaurant. The Apex Court overruled the decision in the case of Associated Hotels of India while hearing the case of Northern India Caterers (India) Limited5. In Northern India Caterers (India) Limited, the Supreme Court held that service of meals whether in a hotel or restaurant did not constitute a sale of food for the purpose of levy of sales tax but ought to be regarded as the rendition of a service in the satisfaction of a human need or ministering to the bodily want of human beings.

This was reiterated by the Supreme Court while deciding the review petition in the case of Northern India Caterers (India) Limited6.

To clear the air, the Forty Sixth Constitutional Amendment amended Article 366 of the Constitution to incorporate clause (29A) to define tax on sale or purchase of goods to include “(f)the supply, by way of or as part of any service, of food or any drink for cash, deferred payment or other valuable consideration” as a deemed sale. Thus, the levy of VAT on foods and/ or drinks.

Service tax on the other hand was a rather recent development. While we were still following the positive list of Service tax, in the Union Budget of 2011, the Finance Minister announced the addition of two new taxable services, one of which was services provided by a restaurant having air conditioning facility in any part of the restaurant, anytime during the year, and having a licence to serve alcoholic beverages. This was perhaps a conscious decision to cash in on the avenues the decision of the Delhi High Court in the case of Federation of Hotels and Restaurant Association of India7 opened up when it held that there was an element of service provided by a restaurant which was incidental to ordering of any article for consumption. However, the coverage was restricted only to restaurants having air conditioning facility in any part of the restaurant, anytime during the year and having a license to serve alcoholic beverages. This decision in some way perhaps was an extension of the decision of the Apex Court Northern India Caterers (India) Limited. Also by virtue of this amendment the service portion of a deemed sale under Article 366(29A) was brought within the purview of service tax.

While the scope of the service was still being debated, with the introduction of the negative list in July 2012, “the service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity” was constituted a declared service under section 66E of Chapter V of the Finance Act, 1994 (Finance Act’).

4. AIR 1972 SC 11315. AIR 1978 SC 15916. 1980 (045) STC (0212) SC7. AIR 2007 Delhi 137

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However, an exemption was also extended to “services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, other than those having the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year”.

2.1 Issues for consideration

2.1.1 Taxability of a restaurant bill Recoveries by most restaurants nowadays comprise price of food and/ or drinks along with a service charge. The service charge is a fairly new phenomenon, and usually adds up to 5 to 10 per cent of the value of food and beverages.

The issue for consideration is the appropriate taxability of the components of the bill and the valuation thereof.

Is VAT leviable only on the food and beverages or does it include the service charge?

Is service tax leviable at the rate of 12.36 per cent on the service charge only; or on the entire bill at the rate of 4.94 per cent (equivalent to 40 percent of 12.36 percent); or is the Delhi High Court Bar Association justified in publishing a notice interpreting that service tax should be levied at the rate of 4.94 per cent only on the service charge in a restaurant bill?

Vat on service chargeThe service charges are typically covered towards two elements. One is a common pool of tips distributed between the service staff and second to cover routine breakage. A service charge on the bill is distinct and in addition to any tips a patron may leave. Therefore, can it be argued that the service charge is not towards any sale or deemed sale for it to form a part of sale price and attract VAT?

The leviability of VAT on service charges has already been settled by the Bombay High Court in the case of Sun-N-Sand Hotel Private Limited v. The State of Maharashtra8. Although it was argued that the service charges were recovered to cover payments to employees and breakage it was held that service charges constituted part of sale price and ought to be included in the dealer’s gross turnover and subjected to sales tax.

service taxDetermination of value of service portion involved in supply of food or any other article for human consumption or any drink in a restaurant is governed by the provisions of Rule 2C of the Service tax (Determination of Value) Rules, 2006 (‘Valuation Rules’).

According to Rule 2C of the Valuation Rules, in an activity wherein goods, being food or any other article of human consumption or any drink is supplied in any manner as a part of the activity, the service portion is required to be determined according to the rate specified in this regards i.e. 40 per cent of the total amount charge for the supply. Effectively, tax is payable at the rate of 12.36 per cent on 40 per cent of the total amount charged for supply of food including service charge.

2.1.2 Taxability of proceeds from a jukeboxMany restaurants and pubs setup jukeboxes which allow patrons to choose songs from a set playlist. To play a song patrons have to insert money of set denomination like in vending machines. There is usually no restriction on the number of songs requested for a patron who is willing to pay for the songs.

The issue under consideration is the taxability of proceeds from the jukebox. Should these attract service tax? Does this qualify as a service?

8. 1969 (23) STC 507


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The definition of service effective July 2012 is broad enough to include any activity carried out by one person for another. What is important to determine in this case is whether there are two parties involved and is there a definite service provider-service recipient relationship?

Is it just the jukebox and the patron? Would it be appropriate to say that by setting-up a jukebox the restaurateur becomes the service provider the patron the service recipient and the jukebox just a medium? Is the intent to provide service necessary or is an incidental service also within the purview of service tax? Is there a transfer of right to use?

Typically the restaurateur sets up a jukebox and allows the patrons to operate it. However, the upkeep of the machine is the responsibility of the owner i.e. the restaurateur. While there is limited recourse that a patron has against the restaurateur for a dysfunctional jukebox, a patron does have recourse in case of deficient services. In fact the restaurateur even reserves the right to restrict the use of the jukebox. With all these factors, the transaction, though ancillary to the operations of the restaurant, does qualify as a service transaction, and the proceeds should be liable to service tax.

Having said that can this qualify as a transfer of right to use and also attract VAT?

In order to qualify as transfer of right to use it is necessary to demonstrate transfer of possession and control, both of which are missing in this transaction. Therefore, classifying this as a transfer of right to use may not be appropriate.

2.1.3 Taxability of trade-off on promotional material displayed on tablesOften as a part of promotional campaigns liquor brands distribute promotional/display material to restaurants to increase visibility. Typically, in such instances there could exist two types of contracts - one where the restaurants distinguish a consideration for allowing the display of promotional material, and another where the restaurant does not receive direct consideration for allowing display, but certain additional discounts for purchases of that brand.

The issue for consideration is regarding the taxability of the consideration attributable to the display of the promotional material.

In the first scenario where the restaurant and brand agree upon a consideration for display of material, this would qualify as a sale of space for advertisement.

Prior to 1st July, 2012, sale of space or time for advertisement (excluding advertisement in print media and sale or time slots by broadcasting agency or organisation) was liable to service tax under the taxable category of section 65(105)(zzzm) of the Finance Act.

Sale of space or time for advertisement was defined to include, –

(i) providing space or time, as the case may be, for display, advertising, showcasing of any product or service in video programmes, television programmes or motion pictures or music albums, or on billboards, public places, buildings, conveyances, cell phones, automated teller machines, internet;

(ii) selling of time slots on radio or television by a person, other than a broadcasting agency or organisation; and

(iii) aerial advertising.

Effective, 1st July, 2012, an arrangement for sale of space for advertisement, other than advertisements broadcast by radio or television, is covered under the negative list, clause (g) of section 66D of the Finance Act, and would not attract service tax.

Regardless of the exemption, the transaction is that of a service.

Would the treatment remain the same in case of the second scenario? In such an instance the restaurant does not receive any direct consideration. Instead the restaurant reaps the benefits by way of additional discounts. Accordingly, the purchase price of products the restaurant purchases

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from the brand is reduced on account of such an arrangement. Consequentially, the price on which the liquor brand pays VAT also reduces. Would the reduction qualify as consideration towards the sale of space for advertisement?

In paragraph 2.2.4 of the Taxation of Services – An Education Guide, released on 20th June, 2012, (‘Education Guide’) non-monetary consideration has been illustrated with an example of supply of goods in return for provision of service. In such instances it is necessary to establish the nexus between the incentives and rendition of services. If there exists a direct co-relation, the reduction could be regarded as consideration for sale of space for advertisement, and in such a case service tax could be leviable.

2.1.4 Taxability of cover chargeOften lounges, pubs, discotheques, and even clubs recover a fee from patrons upfront. Such fee could fetch a patron –

• only entry;

• entry plus a reserved place/private area;

• entry plus food and/or drinks worth whole or part of the entry fee;

• entry plus unlimited food and/or drinks;

• entry to an entertainment event hosted at the location, such as a live performance, a match telecast on the big screen, a culinary event, etc.;

• entry to an entertainment event plus food and/or drinks worth whole or part of the entry fee; or

• entry to an entertainment event plus unlimited food and/or drinks.

It is also possible that the lounge, pub, discotheque or club offers one or more of these but at a different price band. The issue under consideration is the taxability of the cover charge and the valuation for the purpose of computing the tax liability.

The most basic scenario of those listed above is an entry charge recovered by a lounge, pub or club. While the industry is inclined not to pay service tax on this, the possibility of this being construed as right to access/entry cannot be ruled out. The negative list, i.e. section 66D of the Finance Act, in this regard only covers service by way of access to a road or a bridge by payment of toll charges and access to an amusement facility under clause (h) and clause (j), respectively. The first, i.e. access to a road or a bridge is clearly ruled out. Can it be argued that the entry fee is for access to an amusement facility?

Amusement facility has been defined u/s 65B(9) of the Finance Act, as “a facility where fun or recreation is provided by means of rides, gaming devices or bowling alleys in amusement parks, amusement arcades, water parks, theme parks or such other places but does not include a place within such facility where other services are provided”. So, an amusement facility is essentially the likes of say Essel World, Water Kindgom, Imagica, etc.

Therefore, given the present definition of services under section 65B(44) of the Finance Act, the possibility of such entry fee attracting service tax cannot be ruled out.

Would the answer remain the same, if the lounge, pub or club was hosting an event? Perhaps not. The negative list also includes admission to entertainment events under clause (j) of section 66D of the Finance Act.

What qualifies as an entertainment event is subject to the definition of entertainment events u/s 65B(24) of the Finance Act. An entertainment event has been defined to mean “an event or a performance which is intended to provide recreation, pastime, fun or enjoyment, by way of exhibition of cinematographic film, circus, concerts, sporting event, pageants, award


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functions, dance, musical or theatrical performance including drama, ballet or any such event or programme.”

Having said that in order to qualify for the exemption under the negative list it is indispensible that the dominant intention of the arrangement is admission to an entertainment event. If the intention is admission to a place and the entertainment event is only incidental or ancillary, it may not fall under the purview of section 66D(j) of the Finance Act, and may attract service tax.

For instance, if a pub advertises telecast of a live match on a large screen, and recovers certain charges for admission to the telecast, then it should fall within the scope of entry in the negative list as entry to a musical performance. However, if the pub recovers an entry charge regardless of the fact that there are perhaps televisions in the place telecasting a match, it may not be covered under section 66D(j) of the Finance Act, because the intention is not to telecast/showcase the match, and could be liable to service tax.

Therefore, entry fee, unless for an entertainment event as defined u/s 65B(24) of the Finance Act could attract service tax.

Having discussed the applicability of Service tax on any entry fee separately recovered, it is necessary to evaluate the taxability of food and drinks. Since levy of VAT on food and/ or drinks is already settled it has not been discussed again to avoid repetition. Nonetheless, for convenience the possible tax position for the scenarios detailed above have been put in buckets and summarised below -

no. transaction service tax Vat1 Entry fee 3 –2 Entry fee to an entertainment event – –3 Composite charge for entry and reserving a private area 3 –4 Composite charge for entry with full/partial cover for food/drinks 3 3

5 Composite charge for entry to an entertainment event with food and drinks

3 3

One may question the levy of service tax in category 5, i.e. composite charge for entry to an entertainment event with food and drinks, on the grounds that the entry to an entertainment event falls under the negative list. In this case it is also necessary to consider that the place under consideration is still a lounge, pub or club, which is predominantly engaged in serving food and drinks, and the taxability would be akin to that of a restaurant.

Having said that, in such instances, it may be argued that the entry and service of food/drinks are naturally bundled, and therefore, by virtue of section 66F of the Finance Act, should be treated as a single service which gives the bundle its essential character. In that event, if entry to the entertainment event gives the bundle its essential character then the taxability ought to be determined in the same manner as entry to the entertainment, which is covered by the negative list. Otherwise, if it’s the service of food/ drinks that gives the bundle its essential character, the transaction would derive its taxability accordingly.

The next question that merits consideration is the value on which Service tax and VAT may be paid.

In case of only entry fee, the question of valuation does not arise. However, in case of composite charge for entry and food/drinks, where both are taxable, it is necessary to determine the taxable value for supply of food/drinks and services.

In instances where the fee for entry and supply of food/drinks cannot be distinguished, the lounge, pub or club may consider exercising the option of composition under VAT.

As regards service tax, can the lounge, pub or club claim abatement under Rule 2C of the Valuation Rules in such instances?

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2.1.5 Takeaways As the term suggests, in normal parlance, takeaways essentially are meals that patrons procure from an eating place for consumption elsewhere, i.e. not for consumption in the restaurants. In a takeaway model patrons walk into the eating place, place an order and pick up the food themselves. From a business perspective takeaway customers are always preferred over walk in customers because, though they pay the same price they do not occupy the eating place, which is always a blessing on busy nights because it only translates into more business from walk in customers. In fact some places even incentivise patrons for takeaways by offering complementary sweets, meal/ discount coupons, etc. Some fast food joints have a separate counter to cater to patrons only intending to takeaways meals.

The issue under consideration is the taxability of takeaways. Will a takeaway from a restaurant having centralised air-conditioning/ heating throughout the year be required to pay service tax on the amount billed?

Presently service tax is levied on “the service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity”. In order to levy service tax, it is necessary to at least demonstrate the existence of a service or declared service. While the Supreme Court has on more than one occasion observed that supply of food or drinks by a hotel/restaurant involves an element of service, in most instances this is with reference to food or drinks served at the hotel/restaurant. In case of takeaways, the patrons, unlike walk in customers do not acquire the right to access the eating place, or enjoy the service/ambience of the eating place or other things incidental/ancillary. Therefore, takeaways should not attract service tax, unless the eating place recovers some sort of service charge which is not a usual practice.

If takeaways from eating places should not subject to service tax, would the position remain the same if the takeaways was from a stall in the food court of a mall, and the meal was consumed in the common seating area in the food court? In such instances, a patron may purchase food items from one or more stalls set-up in the food court. The food courts are usually furnished with tables and chairs to allow patrons to seat themselves and consume their meal. More often than not the seating area is also air-conditioned, well lit and is sufficiently ventilated. In such a case would such an arrangement also fall outside the purview of service tax?

The food court in a mall is usually set up, operated and maintained by the mall owner. The stall owners usually do not have a claim towards any space, or furnishings in the seating area. While a patron is entitled to procure meals from the stalls in the food court and eat it in the seating area, they are not restricted from using the seating area to consume food procured from a place other than the stalls in the food court or for that matter just occupy the seating area without purchasing anything from the food court. In order to attract service tax, a service provider and service recipient are indispensible to the arrangement. In the present case, the stall owners/operators are only supplying food/drinks to patrons, the food court add-ons if any are not courtesy the stall owners/ operators.

Would such an arrangement attract service tax?

Next consider a scenario where a mall owner agrees to maintain a seating area in the food court, but recover a certain costs/ consideration from the stall owners towards the maintenance and upkeep of the area. The mechanism for recovery of costs may vary from assigning certain number of seats to a stall and allocating cost per seat, or recovering a lump sum/ad-hoc maintenance or the rent could be a consolidated compensation for the stall and the seating area. In such a case, would it be possible to take a view that the seating is perhaps indirectly, provided by the stall owner? Would that change the nature of transaction? Would the stall assume the nature of a restaurant?

Then assume a scenario where the stall owner commits to maintain a seating area for the stall owners, may be under an agreement distinct from the agreement for renting the stall. Under the agreement the mall owner agrees to assign certain fixed seats to a particular stall, for


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consideration or otherwise. Essentially a stall could identify the seats allocated to it. Would the stall then assume the nature of a restaurant and consequentially change the taxability/ nature of transaction?

2.1.6 eligibility of credit of service tax paid on restaurant billsIt is usual for employees to incur expenses on work and work related travel and then claim them from the company at a subsequent point in time. These expenses could range from cab fare, to toll charges to restaurant/food bills.

Assume an employee travels from Mumbai to Chennai for a client meeting and pays for the to and fro travel, and the meals consumed on the travel which are subsequently reimbursed by the company on the basis of expense claims and invoices submitted by the employee.

The first issue under consideration is the availability of credit of service tax paid on the restaurant bills to the company.

While the definition of input service under rule 2(l) of the CENVAT Credit Rules, 2004 (‘Credit Rules’) includes services used by a provider of output service for providing an output service, with effect from 1st April, 2012 the definition categorically excludes services used primarily for personal use or consumption of any employee.

Can the restaurant services received by the employee in this scenario said to be used for personal use or consumption of the employee? Would the company be entitled to claim credit of such service tax?

In this case the employee is travelling on work, and the meals are also had in the course of employment. They are essential to the provision of output services. Therefore, to classify these as services used for personal consumption may not be justified.

What would be the treatment of service tax on restaurant bills an employee submits for expenses incurred on an all-expense paid trip to Goa, as a incentive for making the highest sales in the month? Would these qualify as input services on which the company could avail credit?

2.1.7 Availment of credit of service tax paid on restaurant billsTypically when a restaurant issues an invoice it usually contains the name of the restaurant, the address, the specifics of the meal and/or drinks supplied under that invoice, other components such as taxes and service charge and the service tax, VAT and CST registration number.

Rule 4A of the Service tax Rules, 1994 (‘Service tax Rules’) prescribes the details required to be mentioned on an invoice which, among other details includes the name and address of the service recipient. These details are also indispensible for the claim of credit of service tax.

While other requirements of Rule 4A of the Service Tax Rules may be complied with, it is rare for a restaurant to issue an invoice with the name and address of the service recipient. Perhaps possible where a person staying in a hotel has the meal had at a restaurant in the hotel added to the accommodation bill, but not otherwise.

Rule 4A of the Service Tax Rules categorically makes an exception for banking and financial institutions by dispensing with/relaxing certain requirements but such is not the case for restaurants.

Further, Rule 9(2) of the Credit Rules lays down that no credit of service tax may be availed if the document on the basis of which credit is sought to be availed does not contain all the details prescribed under the Service tax Rules and the Credit Rules.

The issue for consideration is the possibility of availing credit of the service tax on the restaurant bills (obviously only if qualifying as ‘input services’), in the absence of details prescribed under Rule 4A of the Service Tax Rules. Can it be dismissed as a mere procedural requirement?

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Such a scenario is sought to be addressed by the second proviso to Rule 9 of the Credit Rules. The proviso provides that the Deputy Commissioner of Central Excise or the Assistant Commissioner of Central Excise may allow credit if the document on the basis of which credit is sought does not contain all the particulars prescribed under Rule 4A of the Service Tax Rules, but contains the details of service tax payable, description of the taxable service, assessable value, Service Tax Registration number of the person issuing the invoice, name and address of the provider of taxable service, if he is satisfied that the goods or services covered by the said document have been received and accounted for in the books of the account of the recipient.

Assuming the authorities exercise their discretion and deny credit, is there any other/additional document that could perhaps address the deficiency?

When a customer decides to settle the bill with a credit card, the payment slip contains the card holder’s name and the location where the card was swiped. Can the payment slip along with the invoice address the requirement laid out in Rule 4A of the Service Tax Rules and suffice for availment of credit? Depending on the quantum of the input credit, it is perhaps an argument worth pursuing, but still this does not address a scenario where the payment is made in cash.

2.1.8 Valuation of cocktailsIt is not unusual to go to a restaurant and order a drink, say whiskey and receive ice, water/ soda, and quick bites/ chakna like peanuts, papad, etc., for a composite consideration.

The composite consideration is actually attributable to alcohol i.e. the whiskey, which usually attracts VAT at a higher rate of 20-25 per cent, soda/water which attracts a rate of 5-12.5 per cent, and the chakna which also attracts a rate of 5-12.5 per cent. The issue under consideration is in the absence of a separate consideration for each of the items, what rate of tax should be levied on the composite consideration.

In such an instance, unless there is a separate contract/agreement between the restaurant and the patron which attributes separate consideration for the alcohol, soda/water and snacks, the composite consideration would suffer tax at the highest rate applicable to any goods supplied under the composite consideration, in this example whiskey.

(Refer – Hotel India Sun DDQ-1199/Admn-5/40/B-2 dated 12th June, 2003)

2.1.9 Availability of set-off under VATVAT laws in most States allow credit of goods, including capital goods, used in the manufacture of goods intended for sale, as well as goods purchased for resale. The restrictions on the quantum of credit available and the period over which it should be availed may vary from State to State.

In the State of Maharashtra, a restaurant with 100 per cent turnover attributable to restaurant sales may claim set-off of the VAT paid on purchase of capital goods, goods purchased for re-sale, as well as goods used in the preparation of goods intended for sale. As regards office equipment, furniture or fixture treated as capital goods, the restaurant may claim setoff, after reduction of the set-off by three per cent of the purchase price under Rule 53(7A) of the Maharashtra Value Added Tax Rules, 2005 (‘MVAT Rules’).

Consider a scenario where a restaurant’s gross receipts on account of sales are 48 per cent, and other income such as service income, interest and dividend account for 52 per cent. Would such a restaurant still be entitled to the same quantum of set-off?

According to Rule 53(6)(a) of the MVAT Rules, a restaurant having less that 50 per cent receipts on account of sales is entitled to claim set-off only on purchase corresponding to the foods and drinks which are sold or re-sold, and capital assets and consumables pertaining to the kitchen, sale and resale of food and drinks.


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2.1.10 Purchases against Form CIn the usual course of business a restaurant, among other goods, requires equipment and utensils for the kitchen, cutlery and furniture for the service area, electronics for operations as well as entertainment. Some of this may be procured locally while some for commercial considerations including tax cost, may be procured inter-State.

The issue under consideration is whether a restaurant can procure goods against Form C. If yes, what kind of goods can a restaurant procure against Form C?

The primary condition of issuance of Form C is that the purchase should be a registered dealer. The next test is the fulfilment of conditions for issuance of Form C by a dealer.

Under the present laws, a dealer may issue Form C for concessional rate of taxes on inter-State purchase of goods only if –

(i) The goods intended to be procured are listed in the CST registration certificate of the purchaser; and

(ii) The goods are intended to be purchased for one or more of the following –

a. Manufacture/processing of goods for sale;

b. Resale;

c. Use in telecommunication network;

d. Mining; and

e. Generation of electricity or power.

The question of mining, generation of electricity and use in telecommunication network do not arise in case of a restaurant and is therefore not discussed.

In case of a restaurant, resale is usually restricted to packaged water, liquor sold by bottle, ice cream, etc. If these are listed in the dealer’s registration, they may be procured against Form C.

What restaurants do invest heavily on is the capital equipment used in the kitchen for preparation of meals, the cutlery used for service and the furniture and electronics. Do these qualify as goods for manufacture/ processing of goods for sale?

In the case of kitchen equipment used for cooking, it can certainly be said that the equipment is used to prepare the food supplied to the customers.

Is that the case for cutlery, the furniture, electronics, etc., used in service or entertainment?

While it’s not disputed that these goods are indispensible to a restaurant and to service the patrons, these are not used in the manufacture/ processing, in this case more appropriately put, as preparation of food. Therefore, a restaurant would not be entitled to procure these goods against Form C.

Can a restaurant purchase tiles against Form C?

Prima facie one may answer that in negative on the basis that tiles cannot said to be used in the preparation of food, and certainly not for any of the other four reasons. Interestingly, the Maharashtra Sales Tax Tribunal, in the case of M/s. Rajiv Hotel Private Limited acknowledged that the kitchen was essential to a hotel and held that a hotelier was entitled to purchase tiles for the kitchen against Form C. The same principle would apply to a restaurant. But the same may not extend to tiles laid in the service area.

Can a restaurant purchase packing material for takeaways and doggy bag against Form C?

Takeaways are essentially food and/or drinks supplied by a restaurant, not for consumption in the restaurant. These are meals sold by the restaurant. However, restaurant usually sells/re-sells the

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food and drinks, not the container in which they are sold. In such a case is a restaurant entitled to purchase such containers against Form C?

Similarly the restaurants also purchase doggy bags which are neither used in the preparation of food nor purchased for resale. Could they be regarded as packing material, and eligible for purchase against Form C?

2.1.11 Situs of franchise agreementsTypically a franchise agreement is a contract in which a business consents to provide its brand, operational model and required support to another party for them to set up and run a similar business in exchange for a consideration. The consideration the franchisor receives usually comprises a fixed fee and pre-agreed share of the income generated. Operation of the franchise, upkeep, maintenance are all responsibilities of the franchisee with limited assistance from the franchisor.

Service tax on franchise services was introduced with effect from 1st July, 2003.

In the State of Maharashtra sale or deemed sale of specified intangible goods is liable to VAT. Intangibles which qualify as goods have been listed in Notification No. VAT 1505/CR-114/Taxation-1 dated 1st June, 2005. This includes a franchise which covers “an agreement by which the franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any process identified or associated with the franchisor, whether or not a trademark, service mark, trade name, logo or any symbol, as the case may be, is involved.”

Before discussing the situs of sale, it is necessary to evaluate what constitutes as transfer of right to use for a transaction to attract VAT/ CST.

The attributes for a transaction to constitute as transfer of right to use have been laid down by the Apex Court in the case of Bharat Sanchar Nigam Ltd & Another vs. Union of India & Others9 as under -

1. “There must be goods available for delivery;

2. There must be a consensus ad idem as to the identity of the goods;

3. The transferee should have a legal right to use the goods. Consequently all legal consequences of such use including any permissions or licenses required therefore should be available to the transferee;

4. For the period during which the transferee has such legal right, it has to be the exclusion to the transferor this is the necessary concomitant of the plain language of the statute viz. a “transfer of the right to use” and not merely a licence to use the goods;

5. Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.”

In the case of M/s. Smokin’ Joe’s Pizza Private Limited the Maharashtra Sales tax Tribunal10 has reiterated the principal that in order to qualify as a transaction of transfer of right to use intangible goods liable to VAT, the transferee must have a legal right to the exclusion of the transferor. Instances where the permission to use the intangible goods is granted to multiple parties simultaneously i.e. non-exclusive right, should qualify as a licence to use the intangible goods, and not the transfer thereof and such transactions should not liable to VAT.

In such cases is it possible to take a view that no VAT should be leviable on transactions where royalty is paid on account of transfer of non-exclusive licence since it results into merely a license to use goods wherein the owner of technology can again transfer the same rights to others?

9. 2006 (003) STT 245 (SC)10. 2008 (ST1) GJX 0291 STMAH. The matter is presently pending before the Bombay High Court for final

adjudication


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Having discussed the taxability, the situs of sale/deemed sale is the next issue under consideration.

Consider a situation where the franchisor executed an agreement with a franchisee in the State of Maharashtra, to operate a franchise in Maharashtra. In this case, what will be the situs of sale?

In this simplistic example, since the agreement is executed in Maharashtra, the parties are in Maharashtra, and the franchise is intended to be operated in Maharashtra, the answer to all questions relevant in determining the taxability of the transactions perhaps have the same answer i.e. Maharashtra.

Consider a situation where the franchisor in Delhi enters into a franchise agreement with a franchise operator in Maharashtra, to run a franchise in Goa, and the franchise agreement is executed in Maharashtra. What will be the situs of sale in this case?

One view is that franchise as goods of incorporeal and intangible character are omnipresent. In case of a franchise agreement, the transfer of representational right takes place merely by executing the agreement and nothing needs to be done further to entitle the recipient to use or enjoy the rights relating thereto. Accordingly, the franchisor should pay VAT in the State of Maharashtra i.e. the place of agreement.

(Reference may be made to the decision of the Supreme Court in the case of 20th Century Finance Corporation Ltd. vs. State of Maharashtra – 119 STC 182 (SC))

An alternate view is that the right moves from the person granting the right to the recipient and in such a case, the transaction can be a local, inter-State or an export sale. Accordingly, when an agreement is signed with a customer outside the State, the transactions constitutes an inter-State sale and therefore should be covered under the provisions of the Central Sales Tax Act, 1956. The franchisor should pay CST in the State of Maharashtra. While this is a view expressed by the Maharashtra Sales tax Department in regard to taxability of copyright, it is possible to draw an analogy nonetheless.

(Reference may be made to Circular No 32T of 2007 dated 3rd April, 2007 issued by the Maharashtra VAT department).

3. HoteLsHotel has its etymological origin in the French word hôtel/hôte which means host. Traditionally hôtel referred to a French version of a townhouse or any other building seeing frequent visitors. In contemporary usage hotels are a place offering accommodation.

The revenues of a hotel include but are not restricted to receipts from room charges, restaurant sales, room service, minibar sales, conference rooms, banquet service, ancillary services such as laundry/dry cleaning services, spa sales, merchandise sales at the spa, forex income and concierge revenues.

In the normal course of business, hotels also recover income from arrangements other than the actual operation in the form of royalty under brand agreements and fee or part profits under management agreements.

3.1 Issues for consideration

3.1.1 Taxability of cancellation chargesWhile most hotels allow patrons to book hotels in advance, they also allow patrons to cancel bookings. Depending on the timing of cancellation and the hotels policy, the hotel may retain/ forfeit part of the booking fee. For instance, a hotel may have the policy to allow 100 per cent refund if the booking is cancelled say three weeks before the period for which the booking was intended, but the same hotel may forfeit the entire amount if the booking is cancelled say within seventy two hours of the period for which the booking was intended. Most hotels communicate the terms of cancellation at the time of booking.

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The issue under consideration is the taxability of the cancellation charges forfeited by the hotel. It is not disputed that if the booking had not been terminated, it would culminate into a service arrangement with the hotel as the service provider and the patron booking the hotel as the service recipient. By virtue of cancelling the booking the customer, who otherwise would have been a service recipient terminates the very contract of service. In such circumstances should the cancellation charges suffer service tax?

While the definition of service may be broad enough to cover any activity for consideration by one person to another, would it extend to a situation where there is no activity?

There are two schools of thought both eventually suggesting that the amount forfeited as cancellation charges should suffer service tax.

According to one school of thought, which also propagates the guidelines laid down in the Education Guide, a service becomes taxable on an agreement to provide a service and the forfeited amount would represent consideration for the agreement to provide service.

Paragraph 2.3.2 of the Education Guide analyses whether advances forfeited for cancellation of an agreement to provide a service may be construed as consideration for service. In this regard it is stated that “Since service becomes taxable on agreement to provide a service such forfeited deposit would represent consideration for the agreement that was entered into for provision of service.” (emphasis supplied)

Even if it were to be argued that there is no reciprocal service provided by the hotel against the amount forfeited, the Education Guide seems to support an argument that the provision of service is not a pre-condition for the forfeited amount to be treated as consideration. The very fact that the forfeited amount emanates from an agreement to provide service would suffice for it to qualify as consideration liable to Service tax.

The other school of thought has a different reason to confirm the taxability of the cancellation charges forfeited. Service as defined u/s. 65B(44) of the Finance Act, includes declared service. Clause (e) of section 66E of the Finance Act, recognises “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;” as a declared service.

In the present circumstance, it may not be inappropriate to say that the hotel communicates the cancellation policy to the customer at the time of booking, and the customer, fully aware of this (atleast for all legal purposes) continues to make the booking. At the time of booking itself, the hotel as well as the customer agree to the possibility of cancellation of the booking. In the circumstances, it may be possible to take a view that when the customer actually cancels the booking, the hotel agrees to tolerate the act of cancellation, and the cancellation charge is a compensation for such an act by the client. Consequentially the cancellation charge should suffer service tax.

3.1.2 Taxability of a forfeiture Serviced apartments although common in Europe and the US, have gained popularity in India only recently. Just like booking a hotel room, a serviced apartment is essentially a fully furnished room that comes with cleaning services, mail receipt services, etc., and is available for a person to book for anywhere between 1 day and 11 months.

In case of a serviced apartment the operator recovers a monthly occupancy fee, a refundable security deposit/retainer which is usually a multiple of the monthly occupancy fee, and certain additional charges for additional services, depending on the nature of services.

The security deposit/retainer is usually recorded as a liability until the termination or completion of the service contract and on the appropriate termination of the contract, the operator returns the refundable security deposit/retainer to the client.

In instances where a client enters into an agreement and defaults on payment and is untraceable, the operator typically waits up to a certain period. After such waiting period is over, in the event the client is still untraceable, the operator terminates the agreement. In such an event, in order to


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recover the dues on account of monthly rent and/or fee for other additional services for the duration the agreement was in force, the operator adjusts the refundable security deposit/ retainer against the dues outstanding from the client.

The balance refundable security deposit/retainer, after adjusting such dues, if any, is typically continued to be held as security deposit/retainer and shown as a liability in the Balance Sheet for a period of three years.

If such an amount remains unclaimed at the end of three years in the event the operator is unable to trace the client, the operator decides to reduce such an amount from the refundable security deposit/retainer recorded in the Balance Sheet as a liability and shows it as ‘Other income’ in the nature of payable written back.

The issue under consideration is whether the write back would attract service tax?

The refundable service deposit/retainer under question is the portion that remains unclaimed with the operator after the termination of the agreement and adjustment of the outstanding amounts, if any.

After the termination of the agreement the refundable security deposit/retainer is equivalent to an ‘unclaimed deposit’. It is necessary to distinguish cancellation charges from such write backs. Cancellation charges are forfeited immediately after cancellation. However, in the present context, the amount is continued to be held by the operator as a liability, and a client may return and claim such amount from the operator.

Such ‘unclaimed deposit’ is typically recorded as an income in the nature of a payable written off long after the agreement is terminated. At the time such amount is written back or recorded as ‘Other income’ there is no obligation on the operator to perform any service/activity for the client, for consideration or otherwise, under the agreement. Therefore, it is not an income that emanates from the agreement.

Apart from there being no enforceable obligation/contractual agreement, there is no activity or reciprocal consideration, for the transaction to qualify as a service within the meaning of section 65B(44) of the Finance Act.

Therefore, it may be argued that the unclaimed refundable security deposit/retainer when forfeited and recorded as ‘Other income’ should neither qualify as consideration for any activity/service provided or agreed to be provided by the operator nor attract service tax.

The next question that arises is the taxability when the refundable security deposit/retainer is appropriated, as a consideration for the declared service of agreeing to tolerate an act or a situation under section 66E of the Finance Act.

In order to qualify as a declared service, activity, even if it is toleration of an act and consideration for such activity are indispensible ingredients. However, in this case, there exists no consideration. What does exist is the write back of an unclaimed deposit after the termination of any contract for service. It may be pertinent to reiterate that this is different from a forfeiture on termination of an agreement, where the client is disentitled to claim the balance refundable security deposit/retainer.

Therefore, it may be inappropriate to suggest that the operator tolerates the client’s act in exchange for the balance refundable security deposit/retainer.

Also paragraph 2.3.2 of the Education Guide analyses whether advances forfeited for cancellation of an agreement to provide a service may be construed as consideration for service. In this regard it is stated that “Since service becomes taxable on agreement to provide a service such forfeited deposit would represent consideration for the agreement that was entered into for provision of service.”

If an analogy were to be drawn to the present circumstances, the refundable security deposit/ retainer, may be construed as consideration for the agreement for provision of service and therefore liable to tax. However, in such an event it would be necessary to distinguish that the operator

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continues to hold the balance refundable security deposit/retainer up to a certain period, during which a client may approach the operator for reimbursement of such refundable security deposit/ retainer, it does not recognise this as income from the agreement.

Therefore, it is certainly arguable that the write back should not suffer service tax.

3.1.3 Taxability of compensation recovered for lost key At the time of checking in, every hotel issues a key to the guest booking a room. It’s not unusual for guests to misplace keys. A lost/ misplaced key is different from getting locked out. When a guest gets locked out, the key is in the room, but when a key is misplaced, there is no option for a guest but to ask the hotel to issue a new key. Without the hotel re-issuing a new key, the guest cannot enter the room again. Even if the guest manages to request the hotel to open the room without reporting the lost key, the hotel keeps a track of the key by ensuring every guest returns the key at the time of check out. At the time of reporting the key loss or check out, whichever may be earlier, the hotel recovers a certain amount for the lost key from the guest. You may verify this at the end of this course if you wish (obviously at your own risk)!The issue under consideration is the taxability of charges a hotel recovers for replacing the key. Can it be argued that by recovering a compensation for such loss the hotel is recovering a compensation for tolerating an act agreed upon between the hotel and guest, which should be taxable under section 66E(e) of the Finance Act? The Valuation Rules were amended vide the Service Tax (Determination of Value) Second Amendment Rules, 2012 to amend Rule 8 of the said Rules to exclude accidental damages due to unforeseen actions not relatable to the provision of service. Can it be argued that the compensation on account of lost key is an accidental damage not attributable to the provision of service?Perhaps. While explaining the scope of the exclusion entry related to accidental damages due to unforeseen actions not relatable to the provisions of service, the Education Guide prescribes two conditions for a particular recovery to qualify for such an exclusion. One the damages should be on account of unforeseen actions and two, the damages should not be related to the provision of service. It further illustrates this exclusion with an example where a landlord receives compensation from tenants for damage caused to the property. An analogy may be drawn in the present example to argue that compensation the hotel recovers from a guest is also on account of unforeseen actions and is not relatable to the provision of service. Nonetheless, it is necessary to highlight that the Education Guide is not an authority, and while one may rely on it the interpretations/illustrations are not legally binding on the Department or on the tax payer.Therefore, the taxability may certainly be argued. Would this transaction attract VAT?At a supermarket, if a person breaks an item or damages an item, the supermarket recovers the cost of the item from the person and it is assumed to have been sold to the person. The supermarket invoices/records such item just as it would invoice/record any other routine transaction and recovers and pays VAT on such transaction regardless of the fact that the person does not really purchase the item in the general sense of the term. How is the present example any different? If it isn’t, should VAT then be leviable on the compensation recovered by the hotel from the guest for the lost key?

3.1.4 Place of supply in case of hotel bookings using portals, travel agents, etc.Traditionally a guest intending to stay in a particular hotel would either make bookings with the hotel or reach out to a travel agent to facilitate such bookings. The bookings with the hotel in the former would usually happen over the phone or personally.

Today a person intending to book a particular place for accommodation has the option of booking a hotel room on-line with no geographic limitations. A person only needs to keep a few details such as travel dates and location handy and there are several websites that allow the person to (i) check the options available for stay in the prescribed location; (ii) check the availability of rooms during the prescribed travel dates in each hotel recommended; (iii) check the rates; (iv) check the rate


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inclusions i.e. inclusion of break-fast/other meals in the rates offered, other add-on service, check in-out timings, access to certain areas, etc., and (v) book the hotel. Often the rates available on such portals are also lesser than the rates the hotel would have offered.

Usually hotels have a quota for internet sales, and tie up with such portals for internet bookings. Most hotels also communicate a standard price list and discount instruction to the portal, and a portal usually is not allowed to sell a booking at a price lesser than that quoted by such a hotel.

The portals advertise the offer by the hotel, amongst offers by similar other hotels, usually by indicating the rate per night/for the period of stay. The portal requires a person making the booking to pay the entire amount for the stay upfront either by a credit/debit card. Once the portal receives a booking, the booking is communicated to the hotel, and the hotel blocks dates accordingly. The portal settles the account with the hotel (disbursement) on a periodic basis and the guest, having paid the entire amount upfront, is not required to pay any additional amounts for stay when actually at the hotel. Obviously, any additional service that the guest avails is charged separately. In the process, the portal retains a particular amount for mediation (margin).

Yatra, Makemytrip, Expedia, Agoda, etc., are popular names in the business with global presence and coverage. These websites have a geographic coverage that allow a person in India to book a hotel say in Cambodia as easily as anywhere in India, and a person sitting in Laos to book a hotel in India as swiftly as in London or Laos.

It is not unusual for a person sitting in India, booking a hotel room in Malaysia through Agoda, to receive a credit card transaction confirmation which says that the card has been used for a transaction in London. It is also not unusual for a person sitting in Chennai, booking a hotel room in Chennai through Expedia, to receive a credit card transaction confirmation in Paris.

This happens because the trade is executed in the location the transaction confirmation indicates, and the portal server is usually located in such a place. Any person sitting in a country outside India, booking a hotel in India on say Yatra, would also receive a confirmation for transaction in India.

If one looked carefully, some portals usually have a native currency and when the quotes are sought in a particular currency the portal converts these into the sought currency for the person booking. Nonetheless the transaction may not be executed in the currency sought. Although the credit card statement may not show a different transaction in foreign currency. The transaction is executed in the same manner as duty free shopping. The rates on display in duty free (for instance Mumbai) are in US Dollars, but the credit card statement (for an Indian Card) shows transaction in Indian Rupees.

Between the location of the hotel, the location of the person making the booking, the location where the transaction is executed (assuming this is the same as the location of the portal server base), and the currency in which the transaction is executed, there could be so many permutations and combinations. Listed below are few scenarios –

no. Location of a person booking

Hotel situated in Portal server located in

currency of charge

1 Chennai, India Chennai, India Paris, France Euros2 Mumbai, India Amritsar, India Mumbai, India Indian Rupees3 Mumbai, India Bentota, Sri Lanka Mumbai, India Indian Rupees4 Mumbai, India Bentota, Sri Lanka London, UK Pound Sterling5 London, UK Paris, France London, UK Pound Sterling6 London, UK Paris, France Mumbai, India Indian Rupees7 London, UK Mumbai, India London, UK Pound Sterling8 London, India Mumbai, India Mumbai, India Indian Rupees

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The Place of Provision of Service Rules, 2012, (‘POP Rules’) effective 1 July 2012 were enacted to enable the determination of the place of supply of service. Typically room rent transactions are covered by Rule 5 of the POP Rules, which concerns place of provision of services relating to immovable property. According to Rule 5, the place of provision of services provided directly in relation to an immovable property, including provision of hotel accommodation by a hotel, inn, guest house, club or campsite, by whatever name called, is the place where the immovable property is located.

Before discussing the place of provision of services in scenarios mentioned above, it is necessary to highlight Rule 8 and Rule 14 of the POP Rules. Rule 8 of the POP Rules, applies to instances where the provider and recipient of service are located in taxable territory. According to the said Rule, the place of provision of a service, where the provider of service as well as the recipient of service is the taxable territory, is the location of the recipient of service.

Rule 14 of the POP Rules, lays down the order of application of rules. Contrary to the general rule of interpretation, where the provision of a service is, prima facie determinable in terms of more than one rule, it is required to be determined in accordance with the rule that occurs later among the rules that merit equal consideration.

It is also necessary to note clause (34) of the Notification 25/2012 dated 1st July, 2012 (‘Mega Exemption Notification’) which exempts services provided by a person located in a non-taxable territory by a person located in a non-taxable territory.

For the sake of completeness it may be mentioned that taxable territory has been defined under the Finance Act to mean the territory to which the provisions of the Finance Act apply, i.e. the whole of India except the State of Jammu and Kashmir.

The implications of Rule 8 of the POP Rules have been explained elaborately in the Education Guide. According to the Education Guide, Rule 8 of the POP Rules, covers situations where the place of provision of a service provided in the taxable territory may be determinable to be outside the taxable territory, in terms of the application of one of Rule 4 to 6, but the service provider, as well as the service receiver, are located in the taxable territory.

The implication of this Rule is that in all such cases, the place of provision will be deemed to be in the taxable territory, notwithstanding the earlier rules. The presence of both the service provider and the service receiver in the taxable territory indicates that the place of consumption of the service is in the taxable territory.

The same analogy may be applied to a transaction where the service provider and service recipient are located in a non-taxable territory. Perhaps the reason such transactions have been categorically exempted under the Mega Exemption Notification.

With this background, the analysis of the scenarios mentioned above may be better informed. However, the analysis of the scenarios is incomplete without answering two questions.

The first question is, in case of such transactions, who is the service provider and the service recipient in the transactions being discussed. Evidently the person booking the hotel stay is the service recipient. Who is the service provider, the portal or the hotel?

The transaction is similar to a ticket booking agency. The booking may be taken by the agency, but the service of transportation is ultimately provided by the carrier. In the present case, while the services are actually performed by the hotel, for anything that goes wrong with the booking the person making the booking has recourse against the portal. And the services provided by a portal are undoubtedly in relation to an immovable property.

The second question is what is the location of the service provider. According to Rule 2(h) of the POP Rules, the location of a service provider is –

“a. where the service provider has obtained a single registration, whether centralised or otherwise, the premises for which such registration has been obtained;


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b. where the service provider is not covered under sub-clause (a):

(i) the location of his business establishment; or

(ii) where the services are provided from a place other than the business establishment, that is to say, a fixed establishment elsewhere, the location of such establishment; or

(iii) where services are provided from more than one establishment, whether business or fixed, the establishment most directly concerned with the provision of the service; and

(iv) in the absence of such places, the usual place of residence of the service provider.”

With that would the place of provision of service in the scenarios discussed above change?

This distinction will be stark in the case of bookings through travel agents, where a person usually residing in India, books hotels outside India through a travel agent in India. For instance, under Rule 5 of the POP Rules, the place of provision of service in case of a person intending to stay in a hotel at Paris would be the location of the hotel, i.e. Paris. However, as soon as the booking is made through a travel agent and the determination is required to be made under Rule 8 of the POP Rules, the place of provision of service is India, i.e. the location of service recipient.

Would this also affect the place of provision of service in case of a person in India, intending to book a stay in Taj Maldives and booking the stay through Taj Mumbai?

The scenarios have been recast for one to determine the place of supply under both rules, Rule 5 and Rule 8, as may be applicable, and the consequential taxability, below -

no. service recipient

Location of immovable property

service Provider (Portal/ agent)

currency of charge

rule 5

rule 8

1 Chennai, India Chennai, India Paris, France Euros2 Mumbai, India Amritsar, India Mumbai, India Indian Rupees3 Mumbai, India Bentota, Sri Lanka Mumbai, India Indian Rupees4 Mumbai, India Bentota, Sri Lanka London, UK Pound Sterling5 London, UK Paris, France London, UK Pound Sterling6 London, UK Paris, France Mumbai, India Indian Rupees7 London, UK Mumbai, India London, UK Pound Sterling8 London, India Mumbai, India Mumbai, India Indian Rupees

3.1.5 Valuation of food and drinks supplied by room serviceHotels allow guests to order food and drinks in the room. A guest needs to call room service, which is a dedicated number, and place an order. Once ready, the food and drinks are served in the room. The food and drinks supplied under room service are not sourced from the in-house restaurants. Room service is a different department, with a separate kitchen and staff.

The issue under consideration is whether a hotel is entitled to the abatement under Rule 2C of the Valuation Rules for food and drinks supplied by room service?

Rule 2C of the Valuation Rules allows abatement in regard to service involved in the supply of food or any other article of human consumption or any drink at a restaurant or service involved in the supply of food or any other article of human consumption or any drink as outdoor catering service.

The present scenario qualifies as neither. The food and drinks are neither supplied at a restaurant, nor are they supplied as an outdoor catering service. Circular No. 139/8/2011-TRU dated

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10th May, 2011, clarifies that when food is served in the room, service tax cannot be charged under the restaurant service as the service is not provided in the premises of the restaurant. Therefore, such transactions should not be eligible for an abatement, and should suffer tax at the full rate on the entire amount.

How would the present scenario be impacted if the food was dished out from the kitchen of a in-house restaurant for service in the room.

Circular No. 139/8/2011-TRU dated 10th May, 2011, clarifies that a taxable service provided by a restuarant in other parts of the hotel, e.g. swimming pool, or an open area attached to the restaurant are also liable to service tax, as these areas become extensions of the restaurant. Would this clarification also hold good for food served in rooms?

3.1.6 Taxability of mini-bar salesHotels place mini-refrigerators in rooms usually packed with a variety of items including but not restricted to chocolates, energy bars, chips, cashews, miniature alcohol bottles, aerated drinks, juices and beer. While a guest is entitled to consume one or more of these items, the charges for these are recovered separately from the guest, i.e. these do not form a part of the room rent.

Typically, the prices at which these food items and drinks are sold are marked up, often substantially. It is not unusual for a hotel to place a pack of chips in the room for sale to guests at INR 25, whereas the same pack is available in the market for INR 10, which incidentally is also the Maximum Retail Price (‘MRP’).

At the time of check out, the reception usually asks the guest about any consumption from the mini-bar. Assuming for the sake of example that a guest does consume a pack of chips, MRP of which is INR 10, but the price quoted by the hotel is INR 25, the hotel will bill the guest INR 25 for the pack of chips.

The issue under consideration is the taxability of such sales, which for the sake of convenience are referred to as mini-bar sales.

The sale of pack of chips is not disputed. Therefore, the transaction would certainly attract VAT. The next question that merits consideration is the value on which VAT would be levied. While MRP is relevant from a Legal Metrology perspective, VAT is only concerned with the sale price. Sale price is essentially the amount of valuable consideration paid or payable for any sale made. Such sale price could be lesser or more than the MRP.

Therefore, in the present scenario VAT would be payable on INR 25, at the applicable rate.

Would such a transaction attract service tax?

It is not disputed that the transaction qualifies as a sale and should attract VAT. There are judicial precedents that lay down that both the levies, i.e. VAT and service tax, are mutually exclusive. To add to it, trading in goods is categorically specified under the negative list u/s 66D of the Finance Act.

Having said that, it is also not disputed that the food articles/drinks are sold at a premium. Therefore, the possibility of the premium theoretically or otherwise being attributed towards providing a mini-bar and other ancillary services in the hotel room cannot be ruled out. In such cases, the premium/mark up may be subject to service tax.

In instances where the premium is not disclosed separately, on what value would the hotel be required to pay service tax?

If the premium is not disclosed separately, which is usually the case, in the absence of any abatement/ valuation method categorically prescribed, the hotel may be required to pay service tax on the entire value, in the present example INR 25.


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3.1.7 Taxability of packages under service taxSeveral hotels offer packages to patrons, where a person pays a certain amount for stay at the hotel for a specified period and in exchange in addition to a stay at the hotel, the hotel also offers the guest complimentary breakfast, a bottle of wine on arrival for stay and a massage at the spa that may be used during the stay, for no additional/ separate cost.

The issue under consideration is the taxability of such a package under service tax.

In the present scenario, each facility the guest is entitled to avail during the stay is chargeable to a different rate of tax, and perhaps also different tax.

• Hotel stay is liable to service tax at an effective rate of 7.416 percent (12.36 per cent of 60 per cent)

• Breakfast liable to service tax at an effective rate of 4.944 percent (12.36 per cent of 40 per cent) and VAT

• Wine liable to VAT

• Massage at the spa liable to service tax at the rate of 12.36 per cent.

Section 66F of the Finance Act lays down the principles of interpretation of bundled services. According to the explanation to section 66F(3) of the Finance Act, bundled service means a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of any other service or services.

Sub-section (3) of section 66F of the Finance Act, also prescribes the rule for determining the taxability of bundled services. According to the said clause, if various elements of a bundled service are naturally bundled in the ordinary course of business, it is required to be treated as provision of a single service which gives such bundle its essential character. However, if various elements of a bundled service are not naturally bundled in the ordinary course of business, it is required to be treated as provision of a service which attracts the highest amount of service tax.

In the present scenario can the components of the package said to be naturally bundled with any one service/ component giving the bundle its essential character?

The Education Guide, illustrates naturally bundled services with an illustration of a hotel providing a 4 day/ 3 night package with the facility of breakfast observing that the service of hotel accommodation gives the bundle the essential character and would, therefore, be treated as service of providing hotel accommodation.

The present scenario has more accessories than just breakfast, however, it cannot be denied that the guest’s intention is to book the hotel for accommodation. At the same time, each component of the package is also available individually in exchange for a separate consideration.

3.1.8 Valuation of composite charge for a stay including meals under VATSome hotels offer lodging along with a full board, half board or only breakfast. The rates such hotels quote for the stay are usually composite, i.e. the rates include the charges for room rent/ lodging as well as the meals supplied during the stay, regardless of whether consumed by the guest or not.

The issue under consideration is the valuation of the composite charge for the purpose of levying VAT.

In such instances the consideration that the hotel recovers is attributable to the provision of service of lodging and boarding as well the supply of meals. Therefore, it would be inappropriate to levy VAT on the entire consideration.

In the State of Maharashtra, Rule 59 of the MVAT Rules deals with the determination of taxable turnover of sales of residential hotels charging a composite sum for lodging and boarding. According to Rule 59 of the MVAT Rules, the taxable turnover of sales of residential hotels, providing lodging and boarding and charging a composite sum, which is inclusive of breakfast or lunch or dinner or,

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as the case may be, a combination of all or any of the above is required to be determined in the following manner –

no. composite fee includes taxable turnover of sales1 Charges for breakfast 5 per cent of the composite charges2 Charges for lunch 10 per cent of the composite charges3 Charges for dinner 15 per cent of the composite charges4 Charges for breakfast and lunch 15 per cent of the composite charges5 Charges for breakfast and dinner 20 per cent of the composite charges6 Charges for lunch and dinner 25 per cent of the composite charges7 Charges for breakfast, lunch and dinner 30 per cent of the composite charges

The proviso to Rule 59 also provides that if the claimant dealer produces evidence to the satisfaction of the Commissioner that the component of the taxable turnover of sales in the composite sum is less than the percentage mentioned above, the Commissioner is required to reduce the above percentage to the extent of actual sum of turnover of sales as established. This is only for the State of Maharashtra, where the provisions categorically prescribe the manner of computation of the taxable turnover. What should be the manner of determination of taxable turnover for the purpose of VAT in a State which does not specifically provide for the manner of such determination?The questions was analysed by the Supreme Court in the case of K. Damodarasamy Naidu & Bros. vs. State of Tamil Nadu and Another (and other appeals and writ petitions)11 when the State of Maharashtra had not prescribed the manner of determination of the value of supply of food and drinks in case of a composite charge, as in the present day. The Apex Court observed that there were several hundred residential hotels in the State of Maharashtra providing lodging and boarding to several thousands of customers in every assessment year. In practical terms it was impossible for the sales tax authorities to make assessments upon the basis of the facts relevant to each individual customer in each individual hotel. Generalisations was, therefore, inevitable and there was every likelihood that the basis of the generalisation made by one Sales Tax Officer would differ from the basis of the generalisation made by another, leading to unacceptable arbitrariness. Rules that indicate to Sales Tax Officers how to treat composite charges for lodging and boarding would eliminate substantial differences in their approach and, thus, arbitrariness. The Supreme Court restricted the State of Maharashtra from assessing tax on the supply of food and drink on hotel owners who provide lodging and boarding for a composite sum until it framed rules that set out formulae for such assessment which took into account the fact that residential hotels may provide lodging and full or part board as set out above. Therefore, in the absence of a method prescribed for determination of the value of food and drinks by a residential hotels, providing lodging and boarding and charging a composite sum, which is inclusive of breakfast or lunch or dinner or, as the case may be, a combination of all or any of the above, one may rely on the decision of the Supreme Court and argue the levy of VAT on the supply of food and drink altogether.

3.1.9 Availability of set-off under VATIt is not disputed that food is an integral part of a hotels offerings - several five star hotels have more than one restaurant offering different cuisines to guest, guests also have the option of ordering food from the pantry using room service during extended hours not to forget complimentary breakfasts. However, a hotel, unlike a restaurant is not set up with the primarily intention of supplying food to guests.

11. 2000 (117) STC 01


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As has been discussed above, revenues most likely to attract VAT/ CST include supply of foods at an in-house restaurant, supply of food in the rooms, sale of food items from the mini bar in rooms, sale of merchandise, sale of assets, sale of products are the spa, beauty salon, etc. Distinct from and in addition to such proceeds, hotels also have substantial receipts from room rent, rent from meeting rooms, convention halls, royalty receipts, management fee, ancilliery services such as dry cleaning, les concierge, rent-a-cab services, Bottom line is that a hotel’s revenue mix, from an indirect tax perspective includes sale (and deemed sale) and service income. While the former suffer VAT/ CST, the latter attract Service tax.Purchases on the other hand comprise several goods, for the restaurants, the rooms, the lobby, a gym within the precincts, poolside, common/recreational areas, the reception, the kitchen, all of which may not be used in supply of food, drinks or any other article for human consumption by way of or as part of any service or in any other manner for cash, deferred payment or other valuable consideration. The issue under consideration is the goods in regard to which a hotel can avail credit of set-off VAT paid on purchases?Is credit of VAT paid on the purchase of gym equipment, office equipment used at the reception, recreational areas available to the hotel? What about credit of VAT paid on refrigerators, televisions, the fixtures in the room? Hotels also incur substantial expenditure of equipment installed in the kitchen, would it be entitled to credit of VAT paid thereon? Purchases for the in-house restaurant include purchases for the restaurants kitchen, as well as the service area, but do all qualify for set-off?Rule 53(6)(a) of the Maharashtra Value Added tax Rules, 2005 (‘MVAT Rules’) lays down that in case of a hotel not covered under the composition scheme, if out of the gross receipts, receipts on account of sale are less than fifty per cent of the total receipts set-off may be claimed only – i. on purchases corresponding to the food and drinks which are served, supplied or, as the case

may be, resold or sold; andii. on the purchases of capital assets and consumables pertaining to the kitchens and sale,

service or supply of the said food or drinks.Rule 54(k) of the MVAT Rules, appears to be a logical consequence of Rule 53(6)(a) of the said Rules and disallows credit of VAT paid on purchases treated as capital assets by a hotel which do not pertain to the supply of goods by way of or as part of service or in any other manner of goods, being food, drinks or any other article for human consumption where such supply or service is made or given for cash, deferred payment or other valuable consideration.Basis these provisions availability of credit of VAT on purchases in the State of Maharashtra for a dealer may be summarised as under –

nature of goods Hotels with sales exceeding 50 per cent of total turnover

Hotels with sales less than 50

per cent of total turnover

dealers not exercising

composition

dealers exercising

compositionFood ingredients Allowed Denied AllowedKitchen equipment and utensils Allowed Allowed AllowedCutlery and table linen Allowed Allowed DeniedFurniture Allowed subject to

retentionAllowed subject to

retentionDenied

Office equipment Allowed subject to retention

Allowed subject to retention

Denied

Recreational equipment Denied Denied Denied

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4. caterIngCatering contracts are composite contracts that include supply of food and/or drinks along with an element of provision of service. While the levy of VAT on supply of food can be traced back to the Forty Sixth Constitutional Amendment, 1982, levy of service tax on catering was introduced only with effect from 10th June, 2004, under the taxable category of outdoor caterers.

The Finance Act, up to 30th June, 2012 defined a caterer to mean any person who supplies, either directly or indirectly, any food, edible preparations, alcoholic or non-alcoholic beverages or crockery and similar articles or accoutrements for any purpose or occasion. An outdoor caterer was defined to mean as a caterer engaged in providing services in connection with catering at a place other than his own but including a place provided by way of tenancy or otherwise by the person receiving such services.

The Service tax law underwent a complete overhaul upon introduction of the Negative List regime with effect from 1st July, 2012. While the service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity qualify as a service and the Valuation Rules also prescribe a mechanism for abatement, the service tax law presently does not define caterers/outdoor caterers.

4.1.1 Inclusion of subsidy in sale price for the purpose of VAT and Service taxIt’s a common practice in a lot of companies to run canteens for employees where food is supplied to employees at a subsidies rate. The prices are usually fixed by the management in consultation with the workers’ union or employee representative. The catering contract is usually outsourced to a caterer.

While the price at which food is supplied to the employees may be subsidised, the party appointed to cater does not always agree to supply food at a discounted rate. For instance, the company may decide to offer a full meal say at INR 25 per plate, but the caterer’s price for the same meal may be INR 32 per plate. In such instances, the company compensates the differential amount, i.e. the difference between the actual price and the subsidized value, in the form of subsidy to the caterer. In certain instances the subsidy may be per plate, in other instances it may be lump sum. A per plate subsidy in the present illustration is self explanatory, but a lump sum subsidiary is not intended to be a sum of per plate subsidy, the company only decides an ad-hoc amount, which is paid to the party on a periodic basis.

Essentially, in such cases the food is supplied by the caterer to the employees but the consideration for such food is received partly from the employees and partly from the company in the form of the subsidy, lump sum or piece meal.

It is not disputed that the consideration the caterer receives from the employees should suffer VAT. The issue under consideration is whether the subsidy the caterer receives from the company also forms a part of the sale price of the food supplied to the employees?

Sale price has been defined u/s 2(25) of the Maharashtra Value Added Tax Act, 2005, (‘MVAT Act’) to mean “the amount of valuable consideration paid or payable to a dealer for any sale made including any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof, other than the cost of insurance for transit or of installation, when such cost is separately charged.”

The definition of sale price does not stipulate that the consideration ought to be received from the person receiving the goods. It only emphasises on the valuable consideration paid to a dealer for any sale. Whether paid by the person receiving the goods, or any other source is of little relevance.

Nonetheless, only the sale consideration, whether in cash or otherwise, receivable in respect of sales made by the dealer can form part of the turnover of the dealer. It is that sum which can be legitimately regarded as forming part of the aggregate amount for which the goods have been bought or sold. The sum has to be paid either by the purchaser or on his behalf by some other


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person. Any sum received de hors the contract of sale from another entity cannot be regarded as being an amount which would form part of the sale price on which tax is payable.

Further, in case of lump sum subsidy, the quantum of lump sum subsidy is not dependent on the meals supplied by the caterer. Therefore, it may be argued that lump sum subsidy cannot be regarded as valuable consideration in respect of sale or supply of food. In the absence of a statutory obligation on companies to give subsidy, lump sum payment perhaps assumes the nature of an ex gratia payment, which should not be regarded as part of the sale price of the meals sold by the canteen to the employees.

(Reference may be made to the decision of the Supreme Court in the case of TISCO General Office Recreation Club vs. State of Bihar and Others – 2002 (126) STC 547 (SC) and Neyveli Lignite Corporation Ltd. vs. Commercial Tax Officer, Cuddalore and another (and other appeals and cases) 2001 (124) STC 586 (SC))

Would the answer remain the same if the subsidy were given on a per plate basis?

Perhaps not. The basic premise of excluding the lump sum subsidy from the sale price of meals, is – one it is not directly relatable to the food supplied by the caterer to the company, and two, these payments are essentially ex gratia in nature. In case of subsidy on a per plate basis, there is a clear nexus between the subsidy and the sales, and therefore, such subsidy unlike a lump sum subsidy may attract VAT.

Would such subsidy attract service tax?

In case of per plate subsidy there exists a clear nexus between the sale of meals, and the consideration in the form of subsidy for it to warrant a levy of VAT. Therefore, these being in the nature of receipts from sale of goods (being food articles) should not attract service tax. Even if argued, since service tax and VAT are for all technical purposes mutually exclusive, if the subsidy is offered to VAT, levy of service tax may be argued against.

However, in case of a lump sum subsidy, if the subsidy in not related to the sale of food articles, and consequentially does not suffer service tax, the possibility of this being classified as a declared service u/s 66E(e) of the Finance Act, where the party catering agrees to the obligation to do an act cannot be ruled out. The obligation being that of supply of food and drinks.

4.1.2 Taxability of sums deducted from wages towards food under VATIn instances where food is supplied to workmen, a notification issued under the Minimum Wages Act, 1948 requires deduction of certain sum from the wages of the workmen. If a workman opts not to receive food, the workman would be entitled to such amounts, otherwise deducted towards food.

Would it be appropriate to say that the transaction is essentially sale of food and drinks to a workman? Just because the amount is recovered directly from the wages of a workman by way of deduction, is there any difference between an outright sale and sale of food and drinks to a worker?

The workman has the option to either take food at the factory or elsewhere. Only in circumstances the workman takes food in the factory can an amount be deducted from the workman’s wages, not otherwise. Can it therefore be argued that what is deducted out of wages is the consideration paid towards the food that is supplied to the workman?

Where food is supplied to a workman, the wages would be reduced by the amount mentioned in the notification under the Minimum Wages Act, 1948. If such is the case, what a workman would get is only something short of minimum wages, permissible under law. Therefore, can it be argued that what is paid to a workman is the value of the food plus the minimum wages?

In that event, it may be argued that the deduction would otherwise only qualify as wages and not a consideration for purpose of sale.

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If there is no relationship of a seller and a buyer, but only that of a master and a servant and as an incident of relationship of master and servant, if any food is supplied and deductions are made out from the wages of the servant towards the food supplied, can the same must be treated as part of wages and not a separate contract of sale of food?

(Reference may be made to the decision of the Karnataka High Court in the case of Woodlands Hotel (P.) Ltd. vs. State of Karnataka (1995) 97 STC (251) Kar)

4.1.3 Taxability of sale of food supplied for sale on trainsLike full service airlines, the Indian Railways also runs full service trains, where a passenger with a confirmed ticket is entitled to meals on the train. Popular examples are the Rajdhani and Jan Shatabdi. The contract for supply of food on trains run by the Indian Railways is typically outsourced to Indian Railway Catering & Tourism Corporation Limited (‘IRCTC’). IRCTC in turn contracts with various sub-contractors.

The food is loaded in the trains as per the reservation chart finalised by Indian Railways and communicated to IRCTC. On completion of the journey, the Train Superintendent of Indian Railways issues certificate as to actual occupancy of seats from one station to another. For example, in the case of August Kranti Rajdhani, originating from Delhi and terminating at Mumbai, the certificate will be issued by the Train Superintendent once the train reaches Mumbai. IRCTCs invoicing is based on the Train Superintendent’s certificate.

The food on board the train is served by IRCTC staff to the passengers. While water is served at the origin, in this example Delhi, food items are served when the train is perhaps passing through another State.

In exchange, IRCTC raises invoice on Indian Railways towards food and water bottles on the basis of occupancy of seats, certified by the Train Superintendent. The food menu, as well as the cost is fixed by the Railway Board. The invoice is raised by IRCTC on Indian Railways, and the revenue is shared between the Indian Railways, IRCTC and the sub-contractors. A typical revenue sharing arrangement has been illustrated below –

Particulars amountGross amount billed by IRCTC for catering, water and newspaper INR 1,00,000Indian Railway’s share (12.75 percent of gross amount billed) INR 12,750IRCTC’s share (2.25 per cent of gross amount billed) INR 2,250Sub-contractors share (85 per cent of gross amount billed) INR 85,000

The first question that merits consideration is the taxability of the transaction. Whether the transaction between the Indian Railways and IRCTC is that of sale/ deemed sale or service? Would it be appropriate to say that the IRCTC provides outdoor catering services to the Indian Railways?

It is not disputed that passengers travelling in the trains are served food and beverages as per a fixed menu approved by Railway Board. Neither IRCTC nor the passengers have any choice in respect of articles to be served in the trains or with respect to the quantity each passenger gets. It is not open to a passenger to ask for a food article of his choice, since neither such a food article is available in the train nor is the preparation or supply of food article as per the choice of the passenger, envisaged under the contract between IRCTC and Indian Railways.

The passenger has no role to play even with respect to the time and/or place at which the meals/snacks will be served to him. In fact, the passenger has absolutely no say in the matters relating to food/snacks, etc. provided on board. The passenger is not entitled to refund if he does not like or does not take the meals offered. If the passenger does not take the meals at the time they are offered to him, he does not get a meal at all.


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The only element of service in such case is heating the cooked food and serving the food and beverages. The service element, involved in providing meals to a passenger travelling in a train, is evidently incidental and bare minimal required in selling of a food article/beverage to a customer.

Therefore, it may be inappropriate to suggest that IRCTC provides outdoor catering services to the Indian Railways. On the contrary, since the transaction essentially comprises transfer of goods (food articles) by IRCTC to Indian Railways, for consideration, and the property in goods passes to Indian Railways, the transaction has all the elements of a sale, and should perhaps attract VAT.

(Reference may be made to the Delhi High Court’s decision in the case of India Railways Catering & Tourism Corporation Limited vs. Government of NCT of Delhi and Others (2010) TIOL (517) HC (Del.))

If this is regarded as a transaction of sale, what would be the situs of sale?

There are two possible views in this regard.

The meals and snacks are kept in the hot boxes and refrigerators, belonging to the Indian Railways in the train compartments. The moment the food is loaded in train and is kept in equipment belonging to Indian Railways, the property in the food gets transferred to Indian Railways. It would then be immaterial that the food is served to passengers after the train has left the territory of Delhi (in the scenario mentioned above). Once the property in food is transferred to Indian Railways, on account of their being loaded on the trains and kept in the gadgets belonging to Indian Railways, the food become the property of Indian Railways and at the time of service of such food to the passengers, title in the food vests in the Railways and not in IRCTC.

Another possible view is that the property in the goods is transferred to Indian Railways only when they are served to the passengers. However, that would result in a situation where it will not be possible to even ascertain the place where the property in goods passes to the Indian Railways. For instance, if meals are to be served to passengers, the train may be in one State when they are served to some of the passengers, whereas it may be in another State when they are served to another passenger. The meals will be served while the train is in motion, and it is almost impossible to serve all the passengers at the same time. An interpretation that the property in the goods is transferred to Indian Railways only when they are served to the passengers would perhaps render the statutory provision unworkable/ incapable of implementation.

(Reference may be made to Order No. 99/ CDVAT/ 2006, dated 20 March 2006 in case of a determination order issued in response to an application filed by the M/s. Indian Railways Catering & Tourism Corporation Limited).

Can the same analogy also be extended to supply of food and drinks for sale in an aircraft?

(Reference may be made to Order No. 156/CDVAT/2007/171 dated 21st November, 2007 in case of a determination order issued in response to an application filed by M/s. Amalgamated Bean Coffee Trading Company Limited)

4.1.4 Taxability of arrangements for supply of food for employees under Service taxEntities arrange for various facilities for employees in the course of employment. A classic example is the meals supplied in the cafeteria.

In certain instances the employer recovers certain costs, nominal or otherwise for providing these facilities, in other instances there are employee welfare initiatives for which the employer does not recover any money from the employees. Even in instances where certain costs are recovered from employees, the employer may adopt one or more ways for such recoveries. In certain instances, the employees may be required to pay as per use, in other instances the employer may deduct certain standard (usually) nominal amount from the employee salaries.

On the other hand the actual provision of facilities is usually outsourced by the employer to a third party, for certain consideration that may be agreed upon between the employer and the third party. The manner in which consideration is disbursed to the third party may also vary.

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The issue under consideration is the taxability of certain scenarios, summarised below, under the present service tax regime.

Scenario I An employer enters into an agreement with third party to provide food and beverages to its employees at its office premises free of cost. At the office cafeteria the dining area, furniture, waiters, cutlery, air-conditioner, music, television, etc, are provided to the employees, but owned and controlled by the employer.

Effectively this is a employee welfare measure where the employer does not recover anything from the employee. A service has been defined u/s 65B(44) of the Finance Act, to mean any activity carried out by a person for another person for consideration and includes a declared service. Therefore, in the absence of consideration, which is indispensible to a service contract, the question of determining the taxability under service tax does not arise.

Inconsequential perhaps, but is also worth mentioning that the definition of service categorically excludes provision of service by an employee to an employer in the course of business. However, there is no reciprocal exclusion for services an employer may provide to employees in the course of employment. In fact, certain facilities (including canteen services in some form) provided by an employer to an employee are sought to be made taxable if one relied on the presentation released by the Ministry of Finance on 13th July, 2012.

Regardless, in the present case, in the absence of a consideration, direct or otherwise, the question of service between the employer and employee and consequential service tax does not arise.

Nonetheless, between the employer and the third party, there is a contract, under which the third party is supplying food in the employer’s premise, in exchange for a consideration that is paid by the employer.

Would the third party assume the character of an outdoor caterer? Would the consideration the employer pays the third party attract service tax, on whole or part, as the case may be?

In order to qualify as a service, apart from consideration it is necessary that there also exists a service. In terms of Section 66E of the Finance Act that lists declared services, by virtue of clause (i) service portion in an activity wherein goods, being foods or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of activity is a declared service.

However, it is important to determine whether there is any service involved in the activity the third party undertakes for the employer.

It is not disputed that the third party is supplying food, but what could possibly be the service element? In the present scenario the infrastructure is owned and managed by the employer. The only activity the third party perhaps undertakes other than supplying food is keeping the food hot. If at all that were a service, it is insignificant to the entire arrangement, where the dominant intention is to supply food. If it were said that the activity the third party undertakes involves a service, then the same analogy would apply to a general store which sells snacks has a microwave which allows the storekeeper to heat the snacks for customers who want to eat it right away. Would that be appropriate?

Therefore, it may be argued that even the arrangement between the third party and the employer should not qualify as a service. If at all this would perhaps qualify as a transaction of sale and warrant the levy of VAT.

(Reference may be made to the decision of the Delhi High Court in the case of India Railways Catering & Tourism Corporation Limited vs. Government of NCT of Delhi and Others (2010) TIOL (517) HC (Del))


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Scenario IISame as Scenario I, i.e. the employer enters into an agreement with a third party to provide food and beverages to its employees at its office premises, where the dining area, furniture, waiters, cutlery, air-conditioner, music, television, etc., are provided, owned and controlled by the employer. The only exception is in that the food and beverages are provided at a concessional rate to the employees i.e. they are not free of cost.

For example, employee pays INR 40 and the employer pays INR 60 to the third party for the food and beverages sold / supplied to the employees. The employee pays the amount either in cash or by way of coupon to the outdoor caterer.

The only difference between scenario one and two is the payment mechanism. In the present scenario also there is no service between the employer and the employee. Only the consideration for supply of food flows from the both the employer and employee, instead of having only the employer bear the cost, the recipient still being the third party with no change in the activity that the third party undertakes.

Therefore, the taxability of the transaction should remain the same.

Certain other scenarios which are only a play of the payment mechanism, not the nature of service undertaken have been summarised below.

Scenario IIIThe employer enters into an agreement with a third party to provide food and beverages to its employees at its office premises, where the dining area, furniture, waiters, cutlery, air-conditioner, music, television, etc., are provided, owned and controlled by the employer. The employer recovers a nominal (fixed) amount every month towards supply of food from all the employees’ salary, irrespective of whether the employee eats at the office cafeteria or not. For example, the employer recovers INR 500 per month from all the employees towards food sold / supplied at the office cafeteria. The third party does not recover anything from the employees.

Scenario IVThe employer enters into an agreement with a third party to provide food and beverages to its employees at its office premises, where the dining area, furniture, waiters, cutlery, air-conditioner, music, television, etc., are provided, owned and controlled by the employer. The food is sold over the counter by the third party directly to employees, staff, visitors, etc., and the third party collects the entire consideration for such food directly from the employees, staff, visitors, etc.

Scenarios III and IV are the same transaction but with a different compensation mechanism. Therefore, the taxability of the transaction should remain the same.

Interestingly, the decision of the Mumbai Tribunal in the case of Larsen and Toubro Grahak Sahakari Sansthan Maryadit vs. Commissioner of Service Tax, Mumbai–II12 while hearing the stay petition suggests otherwise.

In this case, Larsen and Toubro Grahak Sahakari Sansthan Maryadit supplied food articles to Larsen and Toubro employees at the Larsen and Turbro canteen. The employees did not pay anything to the applicant. The applicant had entered into a contract with Larsen and Toubro and all recoveries towards the supplies were from Larsen and Toubro. The applicants raised an invoice every month toward meal recovery charges, and such receipts were offered to VAT. The applicants also received certain subsidy from Larsen and Toubro on a monthly basis, which were neither offered to VAT nor service tax. The facility at which food articles were served were owned and managed by Larsen and Toubro. For the period of 16th June, 2005 to 31st March, 2009, the Tribunal held that there existed a prima facie case for classification of the receipts from ‘meal recovery charges’ as well as subsidy as receipts towards outdoor catering services.

12. 2012 TIOL 711 CESTAT MUM

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5. banquetsThe English word ‘banquet’ is supposed to have been composed before 1475 with reference to a feast held by the God Apollo. In contemporary use, banquet literally means a ceremonial meal for many people. In general parlance, banquet is used to refer to a hall which may be booked for functions, social or otherwise, where the hall owner allows the person interested in booking the hall to use the hall and also offers to supply food and drinks for a function.

In terms of service tax, banquet service is a bundled service comprising supply of food or any other article of human consumption or any drink, in a premises together with renting of a premises, including hotel, convention centre, club, pandal, shamiana or any other place, specially arranged for organising a function.

5.1.1 Taxability of receipts from banquet halls under Service tax partly shown as rentMost banquets usually charge clients on a per plate basis with a minimum commitment. In a minimum commitment, basically the person intending to host a banquet is required to pay the per plate cost for a agreed number of guests, regardless of the actual turnout. The charge includes all costs associated with the hall, furniture, decoration, as well as the food and drinks.

For instance, if the minimum commitment agreed between a customer and the banquet is say 100, and the rate agreed upon is say INR 1000 per plate. Then regardless of the turnout of guests, the client is obliged to pay INR 100,000 i.e. the per plate cost for a minimum commitment of 100 guests. If the turnout is more than 1000 guests, the banquet will obviously recover the differential amount from the client. However, if in case only 90 guests are served, by virtue of the minimum commitment, the customer is not absolved of the differential on account of the 10 guest, in the present scenario INR 10,000.

The manner in which banquets record/ reflect the differential i.e. INR 10,000 may vary from case to case basis. However, in case of a turnout less than the minimum commitment it is not uncommon to see banquets, record only the actuals as banquet services, and the residual as hall rent. So a banquet adopting such accounting would, in the illustration in case, record INR 90,000 as banquet charges (i.e. amount attributable towards the hall rent, food and drinks) and INR 10,000 only as hall rent.

Subject to fulfilment of conditions prescribed, Notification 26/2012 dated 20th June, 2012 partially exempts certain taxable service. One such exemption is extended in the case of “bundled service by way of supply of food or any other article of human consumption or any drink, in a premises (including hotel, convention center, club, pandal, shamiana or any other place, specially arranged for organizing a function) together with renting of such premises” i.e. banquet services.

Subject to fulfilment of other conditions, an arrangement comprising of a supply of food or any other article of human consumption or any drink, in a premises together with renting of a premises, including hotel, convention centre, club, pandal, shamiana or any other place, specially arranged for organising a function, qualifies for 70 per cent exemption.

The fundamental condition however is the bundled supply of article of human consumption with renting of premises.

The issue under consideration is the taxability in instances a banquet records certain amount as banquet charges and residual amount separately as hall rent.

Would such an arrangement qualify for an exemption under Notification 26/2012 dated 20th June,2012 which requires these to be bundled?

5.1.2 Taxability of receipts from banquet halls under VATBanquets usually recover charges on a per plate basis. This is a composite charge expected to cover costs towards the hall, furniture, decoration, as well as the food and drinks. The issue under consideration is the value on which VAT should be levied/paid. Should it be levied on the such


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portion of the composite charge that is reasonably attributable to food and drinks or the on the entire composite charge i.e. plate rate.

One view is that there should be tax only on the supply of food and drinks and not on the hall the charges, etc. Further in the absence of any specific rules to determine the sale price for sale of such food and drinks out of the composite sum, there should not be any VAT on the food supplied.

The said view finds support in the Supreme Court judgment in case of K. Damodarasamy Naidu & Bros. And Others, Appellants vs. State of T. N. And Another, Respondents13 where it held that, “The State of Maharashtra is directed henceforth not to make assessments of the tax on the supply of food and drink on hotel-owners who provide lodging and boarding for a composite sum until it frames rules that set out formulae for such assessment which take account of the fact that residential hotels may provide lodging and full or part-board. If the rules are framed by 1-6-2000 the assessments that are not completed only by reason of this order may be proceeded with. If the rules are not framed by the said date, these assessments shall lapse. No proceedings for assessments shall be commenced hereafter until the rules have been framed.”

Another possible view is that charges towards hall form the part of costing of food without which it would not be possible to serve the food and hence should be included in the sale price.

The said view finds support in a DDQ by Commissioner of Sales Tax of Maharashtra in the case of M/s Tiptop Enterprises where it held that, “The bill is prepared with regard to the number of persons attending the banquet hall. The bifurcation of charges as shown by the dealer is artificial and contradicts what the applicant has informed that the charges are levied per thali basis and if the number of guests increases, then the charges for the additional 50 guests are calculated by multiplying the rate of thali. The charges consist of a single element and that is the charges on account of food served by the applicant to the number of people attending the banquet hall. Such a bifurcation is artificial as the service of the banquet hall is only along with the supply of food. I have already observed earlier that the supply of food is as a part of the service of letting out the banquet which is taxable as per the expanded definition of sale as per the 46th amendment. I have also discussed earlier that the pricing offered by the applicant determines the nature of the transaction. The customer agrees to the prices so offered and pays accordingly. All the above discussion, as well as, the discussion on the earlier pages clearly indicate, that the consideration received comprises charges on account of food only”

In this case, the Commissioner finally concluded that, “The composite charges in the bill are nothing but charges on account of food and proportion of charges is illogical. Even the charges towards Hall form the part of costing of food without which it would not be possible to serve the food.”

Further in the East India Hotels vs. Union of India14, it was contended before the Supreme Court that on a correct interpretation of Delhi Sales Act, 1975, the sales made in the restaurant could not be taxed even after 46th Amendment to the Constitution. Rejecting the reliance placed by the petitioners on Northern India Caterer’s (supra), Supreme Court, inter alia, held as under:

“9. According to Section 2(g), all movable properties, materials, articles or commodities are goods. Therefore, food in a restaurant has necessarily to be regarded as goods. According to Section 2(l), transfer of property in goods by one person to another would amount to sale. With cooked food or food which is supplied in a restaurant falling within the definition of the word “goods” in Section 2(g), transfer of property in the same would amount to sale as provided by Section 2(l) 12. In the present case, when a customer goes to a restaurant and orders food and in respect of which he pays the price indicated therein and the said food items are supplied to him, it would clearly be a case of transfer of property in goods to the customer. Whether the customer eats the entire or part of the dish or chooses not to eat at all would make no difference if he pays for the dishes supplied. The moment the dish is supplied and sale price paid, it would amount to a sale.”

13. 2000 (117) STC 0001 SC14. (121) STC 46 (SC)

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However it is also possible to argue this levy by relying upon Supreme Court in the case of Tamil Nadu Kalyana Mandapam Assn. vs. Union of India (UOI) and Ors15 who held as under:

“Similarly the services rendered by outdoor caterers are clearly distinguishable from the service rendered in a restaurant or hotel in as much as, in the case of outdoor catering service the food/eatables/drinks are the choice of the person who partakes the services. He is free to choose the kind, quantum and manner in which the food is to be served. But in the case of restaurant, the customer’s choice of foods is limited to the menu card. Again in the case of outdoor catering, the customer is at liberty to choose the time and place where the food is to be served. In the case of an outdoor caterer, the customer negotiates each element of the catering service, including the price to be paid to the caterer. Outdoor catering has an element of personalised service provided to the customer. Clearly the service element is more weighty,visible and predominant in the case of outdoor catering. It cannot be considered as a case of sale of food and drink as in restaurant.”

Considering the same it may become possible to argue that composite charge under banquet arrangement are not only for sale of food but also for providing services and accordingly law should provide for deduction of such charges and only consideration in relation to sale of foods should be made liable to VAT. This should be in tune with Article 366(29A) of the Constitution of India which provides for levy of tax on supply of food as part of any service.

6. PandaLs and sHaMIanaThe issue under consideration is whether an activity of providing pandal and shamiana along with erection thereof and other incidental activities like supply of crockery, furniture, sound system, lighting arrangements, etc. qualify as a transaction involving transfer of right to use goods or provision of service?

In 2002, the Supreme Court16 upheld the decision of the Andhra Pradesh High Court in the case of Rashtriya Ispat Nigam Ltd. vs. CTO17 where it was held that effective control and possession over the assets transferred was indispensible for a transaction to qualify as transfer of right to use. In the absence of transfer of control and possession an arrangement did not qualify as transfer of right to use.

Then in 2006, the case of Bharat Sanchar Nigam Ltd & Another vs. Union of India & Others18 the Supreme Court held that in order to qualify as transfer of the right to use the goods, the transaction must have the following attributes -

1. There must be goods available for delivery;

2. There must be a consensus ad idem as to the identity of the goods;

3. The transferee should have a legal right to use the goods. Consequently all legal consequences of such use including any permissions or licenses required therefore should be available to the transferee;

4. For the period during which the transferee has such legal right, it has to be the exclusion to the transferor. This is the necessary concomitant of the plain language of the statute viz. a “transfer of the right to use” and not merely a licence to use the goods;

5. Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.

A transaction that fulfills the conditions prescribed by judicial precedents may qualify as a transaction of transfer of right to use.

15. (2004) 135 STC 48016. 2002 (126) STC 011417. 1990 (77) STC 18218. 2006 (003) STT 245 (SC)


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Section 42(4) of the MVAT Act, inserted with effect from 20th June, 2006 provides for payment of tax at the full applicable rate or by way of composition on lease of mandap at the rate of 1.5 per cent of the turnover of sales in respect of period starting on or after 1st April, 2005.

For this purpose the term mandap includes mandap, pandal, shamiana or the decoration of such mandap, pandal or shamiana, furniture fixtures, lights and light fittings, floor coverings, utensils and other articles ordinarily used alongwith a mandap, pandal or shamiana.

The taxable category of pandal or shamiana contractor service was introduced with effect from 10th September, 2004, which brought services provided by a pandal and shamiana contractor within the purview of service tax.

The taxability of such transactions has been a topic of debate since.

Recently the Government issued Circular No. 168/3/2013 F. No. 356/2/2013-TRU dated 15th April, 2013, which clarified that the activity of providing pandal and shamiana along with erection thereof and other incidental activities does not amount to transfer of right to use goods, but it is a service of preparation of a place to hold a function or event. In such transactions the effective possession and control over the pandal or shamiana remains with the service provider even after the erection is complete and the specially made–up space for temporary use is handed over to the customer. The said circular concludes that services provided by way of erection of pandal or shamiana would attract the levy of service tax.

Such an interpretation is likely to fuel another debate, and a fresh cause of litigation with both VAT and Service tax authorities wanting to claim a share in the pie.

7. LoyaLty PrograMsMost chains of hotels run loyalty programmes where patrons are enrolled free of cost and awarded points for their spends at any hotel which is a part of the chain. These loyalty points fetch patrons free stays, meal coupons, spa vouchers, deals, etc.

Popular examples are Hilton Honors for the Hilton chain of hotels, Hyatt Gold Passport for the Hyatt chain of Hotels, Starwood Preferred for the Sheraton, Westin, Le Meredien, W Hotels, Four Points, Aloft, etc.

7.1.1 Taxability of transactions under loyalty programs under service tax Typically the loyalty programme for a chain is run by the parent company. Each time a member spends at any of the participating hotels he accumulates loyalty points. The participating hotel at which the member spends, pays a fraction of the receipts from the member to the parent company.

A loyalty programme may have different categories of members, for instance, gold, silver, platinum, etc. Depending on the status of the member and the points accumulated, each loyalty programme, allows the member to redeem the points in exchange for certain facilities, including a free stay at any other participating hotel.

For instance, a member may frequent participating hotel units at Mumbai, Goa and Delhi. Each time the member spends at any of these hotels, the member accumulates points, and as a participating hotel, each hotel will also pay certain percentage of the spends to the parent entity operating the loyalty programme. After having accumulated sufficient points, the member may consider redeeming them for a two night stay in another participating hotel at say Maldives. In such a case the member may redeem the points, and stay at the participating hotel at Maldives without any additional payments for accommodation. However, it would be impractical from a business standpoint for hotel at Maldives to bear the costs for the stay, when the spends which earned the member points were accumulated by another participating hotel. The loyalty programmes are designed fully aware of the possibility of such a situation arising. In such an instance the parent entity will make good the costs to the participating hotel at Maldives from the pool accumulated from the receipts from the participating firm.

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The first issue under consideration is the taxability of the payments the participating hotels make to the parent entity on each spend by a member. Assuming that the parent entity and the participating hotel are both in India, would such payments be liable to service tax? If yes, what is the nature of service?

The next question that merits consideration is at the time of redemption, assuming that the parent entity and participating hotel are both in India, and the points are redeemed by the member for a stay at a hotel outside India, would such transaction qualify as that of service? If yes, who is the service provider and who is the service recipient? Also what is the nature of service and the consequential taxability?

7.1.2 VAT on sale of loyalty pointsMost loyalty programmes allow members to also purchase points. Suppose a member needs 7000 points to earn a free stay at the hotel at Maldives and has only 6500 points to his credit. Therefore, in such a case, the member may, instead of paying for the room, buy the differential 500 points he is falling short of from the parent entity.

Assuming the member and the parent entity is located in India, the issue under consideration is whether the sale of loyalty points can be treated as sale of goods? Will the sale attract VAT?

Interestingly, in the case of Yasha Overseas vs. Commissioner of Sales tax, State of Maharashtra19, the Supreme Court equated Duty Entitlement Passbook with prepaid meal tickets or prepaid petrol coupons or accumulated flying miles and held that such products have their own intrinsic value. If permitted free transferability these would become market commodities and sold and bought for their values as goods. As a consequence DEPB (and by inference, meal tickets, flying miles, petrol coupons, etc.) was construed as goods within the meaning of the Sales tax laws of Delhi, Kerala and Mumbai, exigible to tax.

If an analogy were drawn to the present circumstances, the possibility of loyalty points (which are similar in nature to accumulated flying miles) being treated as goods and subject to VAT cannot be ruled out.

DisclaimerThe information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

ooo

19. 2008 TIOL 97 SC CT


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Case Studies on Negative List and Reverse Charge Mechanism under Service Tax

CA S. S. Gupta

NeGAtive LiSt1. ServicesprovidedbyRBIarespecifiedinsection66D(negativelist).RBI inter alia provides

servicesofclearinghousewherebychequesissuedbytheaccountholdersofvariousbanksarecleared.Itchargesfixedamountperchequefrombankwhichparticipates inclearinghouse.

RBIapproaches ‘X’bank foroperating theclearinghouse inVijayawada,Bellari,etc. inAndhraPradesh.‘X’BankagreestooperateclearinghouseinVijayawada.Itchargesamounttothebanksparticipatinginclearinghouse.‘X’bankhasapproachedyouforadviseforlevyofservicetaxonchargesrecoveredbythemfrombanksparticipating inclearinghouseatVijayawada.

2. TheDepartmentofPost intendstoundertakefollowingactivities:

(a) TheyhaveapproachedtelecomcompanieslikeAirtel,Ideaforcollectionofbillsraisedbythemonsubscribers.ThesubscribersapproachvariousofficesofDepartmentofPostanddeposittheamountofbill inthepostoffice.Postoffice inturnremitstheamounttotelecomcompanieswithdetailsofsubscriber,billnumber,amount,etc.Thedepartmentofpostreceivescertaincommissionforcollectionofthebillamount.

(b) LIChasalsoapproachedthedepartmentofpost forcollectionofpremiumamountfromvariouspolicyholders.LICpayscommissiontodepartmentofpostforcollectionofpremiumamount.

(c) MinistryofExternalAffairsapproacheddepartmentofpost forprovidingpassportapplication formstoanyperson forconsideration.Theyreceivecommission fromMinistryofExternalAffairs.

DepartmentofPosthasapproachedyouforadvisewhetherservicetaxispayablebythemoncommissionreceivedforaboveactivities.

3. Clause (o)of section66Dprovides that servicesof transportationofpassengerswithorwithoutaccompanyingbelongingsbystagecarriageorpublic transport,other thanpredominantlyfortourismpurpose inavesselbetweentheplaces located inIndiawillnotbe taxable.

‘X’CompanyhavingtouristvehiclesareengagedinprovidingtheservicesoftransportationofpassengersfromMumbaitoPune.Theyhaveapproachedyouforguidancewhetherservicetax ispayableon thebus fare receivedby themfor transportationofpassengers fromMumbaitoPune.

4. Oneofthefranchisees‘X’ofIndianPremierLeague(IPL)hasorganisedmatchatWankhedeStadiuminMumbai.Theyhavesoldticketstovariousspectatorsforallowingthemtoviewthematch.‘X’franchiseehasapproachedyoutoknowwhetherservicetaxispayableontheamountreceivedbythemforsaleofticket.

5. Atmanyplaces inMumbai,share-a-taxi,share-a-rickshawareavailable.Fixedchargesarepaidbythepassengersandthetaxi/rickshawdoesnotchargeaspermeterreading.The

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associationofsuchtaxiowners/rickshawownerswhoarerunningsharetaxi,sharerickshawhasapproachedyouforadvisewhetherservicetax ispayablebythetaxiowners/rickshawownersontheamountoffarecollectedbythem.

6. M/sXownspoultry farmwhereactivityof rearingofchicken iscarriedout.TheyhaveapproachedM/sYforsupplyof labour foractivitiesofcleaningthefarm/feedingchicken.M/sYhasapproachedyouforadvisewhetherservicetaxispayablebythemontheamountreceivedfromM/sX.

7. M/sX isundertakingtheprocessofcuttingandM/sX1 isundertakingconversionofmetalsheet intopartsforaunit ‘Z’ located inSEZarea.BothM/sXandX1receivejobchargesforthejobundertakenbythem.Theyhaveapproachedyouwhetherservicetaxispayablebythemonthejobchargesreceivedbythem.

ReveRSe ChARGe1. ThreebrothersA,B&Cafterdeathoftheirfatherhavedisputefordistributionofproperty

ownedbythefatherD.TheyhavearrivedattheagreementforappointmentofArbitratorviz.Mr.E.TheamountispaidbyallthethreebrothersseparatelytoMr.E.Mr.EandallthethreebrothershaveapproachedyouforadvicewhetherservicetaxispayableontheamountreceivedbyMr.Eor is itpayableunderreversechargebythebrothersA,B&C.

2. XTrust isengaged inrunningprimaryandschool for teachingstudents from1stto10thstandard.TheschoolisattachedtoPuneBoard,Maharashtra.TheschoolhashiredcarfromM/sYforthepurposeoftransportingPrincipal/Examinersofpaperfromtheirresidencetoschoolandback.SchoolandM/sYhasapproachedyouforadvicewhetherservicetax ispayableonthecarhirechargestoM/sYbyschoolorM/sY.

3. M/sA isengaged inprovidingservicesofaccommodationtovariousguests in thehotelownedbythem.Manyguestsrequests forcar forvisitingvariousplaces.M/sAhiresthecarsfromMrXwhoistheproprietorandprovidethecaronhirebasistoguestMr.Z.Mr.XispaidRs.1000/-whereasanamountofRs.1200/- isrecoveredbyM/sAfromMrZ.Mr.XhasapproachedyouforadvicewhetherservicetaxispayableontheamountreceivedfromM/sAunderreversechargeforrentingofcar.

4. M/sXCompanyhas5DirectorsonBoard.Thecompanyhasobtained loanfromLICwhohas insistedthat2nomineedirectorsshallbeappointedontheBoard.Fee forattendingboardmeetingofsuchnomineedirectors ispaidbythecompanytoLICdirectlyandnottothenomineedirector.M/sXCompanyhasapproachedyouwhetherservicetax ispayable underreversechargedbythemorLICwillpaytheservicetaxontheamountreceivedbythem.

5. M/sALtd.hasemployedhouse-keepingagencyM/sX(Proprietor)orcleaningofficepremise.Asperthetermsofcontract,M/sAisrequiredtocleanfollowingeveryday.

(a) 100tables

(b) 5bathrooms

(c) 1kitchen

(d) 125chairs

(e) 5windowpanes

DuringdiscussionbetweenM/sALtd.andM/sX itwasagreed that7personswillberequiredforcarryingouttheabovejob.EachofthepersonwouldbepaidRs.10,000/-permonth.Thus the totalconsideration forcarryingout theabovework isRs.70,000/-permonth.7personswillberesponsibleforcarryingoutthejobspecifiedaboveandtheirworkwillbesupervisedbyM/sA.M/sAhasapproachedyouforadvisewhetherservicetax is

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payableunderreversechargebythemunderthecategoryofManpowerRecruitmentandSupplyAgencyServices.

6. M/sXLtd.hasappointedM/sY(Partnershipfirm)forcarryingoutrepairofmachines.Thesaid repair inter alia involvesreplacementofpartsA,B&C.M/sYhasbilledseparatelyforpartsandservices.M/sYhascharged12.36%asservicetaxontheservices.M/sXhasapproachedyouwhetherservicetaxispayableunderreversechargebythem.

7. Proprietor ‘A’ isengaged inprovidingsecurityservicetoM/sZLtd.AhaschargedservicetaxonentireamountofconsiderationchargedforsuchservicetoZLtd.M/sZLtd.haspaidtheentirepaymentincludingservicetaxtoA.TheentireamountofservicetaxcollectedbyAisdepositedwithGovernment.ThedepartmentallegesthatM/sZLtd. is liabletodepositservicetaxunderreversechargeandaccordingly issuesashowcausenoticetoM/sZLtd.whohasapproachedyouforadvice.

8. M/sABCLtd., limited liabilitypartnershipfirm isengaged inproviding legalservices tovariousclientsgivenbelow:

a. M/sXYZLtd. (Acompany registeredunder companiesAct)engaged in tradingactivities.

b. ABCHousingco-operativesociety(RegisteredunderCo-operativeSocietyAct)

c. B(Aproprietor)whoseaggregatevalueofservicesprovidedinprecedingyearisRs9.50lakhs.

d. PQR(ALimitedliabilitypartnership)

All the fourclientshaveapproachedyou toknowwhetherprovisionsof reversechargewillbeapplicable.

9. ‘ALtd.’ located inGorakhpur (UP) isengaged inprovidingserviceof transportationofgoodsbyroad.M/s.BLtd. located inPatnahasappointed ‘ALtd.’ for transportationofaconsignmentfromVaranasi(UP)toKathmandu(Nepal) fordeliveryofgoodstoZLtd.AsperthetermsofcontractM/sZLtd.willbeliabletopaythefreightofsuchtransportation.‘A’hasapproachedyoutoknowtheapplicabilityofservicetax.

NeGAtive LiSt66D. Thenegativelistshallcompriseofthefollowingservices,namely:–

(a) servicesbyGovernmentora localauthorityexcludingthefollowingservicestotheextenttheyarenotcoveredelsewhere–

(i) servicesbytheDepartmentofPostsbywayofspeedpost,expressparcelpost, lifeinsuranceandagencyservicesprovidedtoapersonotherthanGovernment;

(ii) servicesinrelationtoanaircraftoravessel, insideoroutsidetheprecinctsofaportoranairport;

(iii) transportofgoodsorpassengers;or

(iv) supportservices,otherthanservicescoveredunderclauses(i)to(iii)above,providedtobusinessentities;

(b) servicesbytheReserveBankofIndia;

(c) servicesbyaforeigndiplomaticmissionlocatedinIndia;

(d) servicesrelatingtoagricultureoragriculturalproducebywayof–

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(i) agriculturaloperationsdirectly related toproductionofanyagriculturalproduceincludingcultivation,harvesting,threshing,plantprotectionortesting;

(ii) supplyoffarmlabour;

(iii) processescarriedoutatanagricultural farm including tending,pruning,cutting,harvesting,drying, cleaning, trimming, sundrying, fumigating, curing, sorting,grading,coolingorbulkpackagingandsuch likeoperationswhichdonotaltertheessentialcharacteristicsofagriculturalproducebutmakeitonlymarketablefortheprimarymarket;

(iv) rentingor leasingofagromachineryorvacant landwithorwithoutastructureincidentalto itsuse;

(v) loading,unloading,packing,storageorwarehousingofagriculturalproduce;

(vi) agriculturalextensionservices;

(vii) servicesbyanyAgriculturalProduceMarketingCommitteeorBoardorservicesprovidedbyacommissionagentforsaleorpurchaseofagriculturalproduce;

(e) tradingofgoods;

(f) anyprocessamountingtomanufactureorproductionofgoods;

(g) sellingofspaceortimeslots foradvertisementsotherthanadvertisementsbroadcastbyradioortelevision;

(h) servicebywayofaccesstoaroadorabridgeonpaymentoftollcharges;

(i) betting,gamblingor lottery;

(j) admissiontoentertainmenteventsoraccesstoamusementfacilities;

(k) transmissionordistributionofelectricitybyanelectricitytransmissionordistributionutility;

(l) servicesbywayof–

(i) pre-schooleducationandeducationuptohighersecondaryschoolorequivalent;

(ii) educationasapartofacurriculumforobtainingaqualificationrecognisedbyanylawforthetimebeinginforce;

(iii) educationasapartofanapprovedvocationaleducationcourse;

(m) servicesbywayofrentingofresidentialdwellingforuseasresidence;

(n) servicesbywayof–

(i) extendingdeposits, loansoradvances insofarastheconsideration isrepresentedbywayof interestordiscount;

(ii) inter se saleorpurchaseofforeigncurrencyamongstbanksorauthoriseddealersofforeignexchangeoramongstbanksandsuchdealers;

(o) serviceoftransportationofpassengers,withorwithoutaccompaniedbelongings,by-

(i) astagecarriage;

(ii) railwaysinaclassotherthan–

(A) firstclass;or

(B) anairconditionedcoach;

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(iii) metro,monorailortramway;

(iv) inlandwaterways;

(v) publictransport,otherthanpredominantlyfortourismpurpose, inavesselbetweenplaceslocatedinIndia;and

(vi) meteredcabs,radiotaxisorautorickshaws;

(p) servicesbywayoftransportationofgoods–

(i) byroadexcepttheservicesof–

(A) agoodstransportationagency;or

(B) acourieragency;

(ii) byanaircraftoravessel fromaplaceoutsideIndiauptothecustomsstationofclearanceinIndia;or

(iii) byinlandwaterways;

(q) funeral,burial,crematoriumormortuaryservicesincludingtransportationofthedeceased.

ReveRSe ChARGe PRoviSioNNotification No. 30/2012-ST, dated 20-6-2012 as amended by notification no. 45/2012-st, dated 7-8-2012

Inexerciseofthepowersconferredbysub-section(2)ofsection68oftheFinanceAct,1994(32of1994),andinsupersessionof(i)notificationoftheGovernmentofIndiaintheMinistryofFinance(DepartmentofRevenue),No.15/2012-Service Tax,datedthe17thMarch,2012,publishedintheGazetteofIndia,Extraordinary,PartII,Section3,Sub-section(i),videnumberG.S.R213(E),datedthe17thMarch,2012,and(ii)notificationoftheGovernmentofIndia intheMinistryofFinance(DepartmentofRevenue),No.36/2004-ServiceTax,datedthe31stDecember,2004,publishedintheGazetteofIndia,Extraordinary,PartII,Section3,Sub-section(i),videnumberG.S.R849(E),datedthe31stDecember,2004,exceptasrespectsthingsdoneoromittedtobedonebeforesuchsupersession,theCentralGovernmentherebynotifiesthefollowingtaxableservicesandtheextentof service tax payable thereon by the person liable to pay service tax for the purposes of the said sub-section,namely:—

I. The Taxable ServIceS,—(A) (i) providedoragreedtobeprovidedbyaninsuranceagenttoanypersoncarryingon

theinsurancebusiness;

(ii) provided or agreed to be provided by a goods transport agency in respectoftransportationofgoodsbyroad,wherethepersonliabletopayfreight is,—

(a) anyfactoryregisteredunderorgovernedbytheFactoriesAct,1948(63of1948);

(b) anysocietyregisteredundertheSocietiesRegistrationAct,1860(21of1860)orunderanyotherlawforthetimebeinginforceinanypartofIndia;

(c) anyco-operativesocietyestablishedbyorunderanylaw;

(d) anydealerofexcisablegoods,whoisregisteredundertheCentralExciseAct,1944(1of1944)ortherulesmadethereunder;

(e) anybodycorporateestablished,byorunderanylaw;or

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(f) anypartnership firmwhether registeredornotunderany law includingassociationofpersons;

(iii) providedoragreedtobeprovidedbywayofsponsorshiptoanybodycorporateorpartnershipfirmlocatedinthetaxableterritory;

(iv) providedoragreedtobeprovidedby,–

(A) anarbitraltribunal,or

(B) anindividualadvocateorafirmofadvocatesbywayof legalservices,or

(C) Governmentor localauthoritybywayofsupportservicesexcluding,–

(1) rentingof immovableproperty,and

(2) servicesspecifiedinsub-clauses(i),(ii)and(iii)ofclause(a)ofsection66DoftheFinanceAct,1994,

toanybusinessentity locatedinthetaxableterritory;

(iva) providedoragreedtobeprovidedbyadirectorofacompanytothesaidcompany;

(v) provided or agreed to be provided by way of renting of amotor vehicledesigned to carry passengers to anypersonwho is not in the similar line ofbusinessorsupplyofmanpower foranypurposeorsecurityservicesorserviceportion in execution of works contract by any individual, Hindu UndividedFamilyorpartnershipfirm,whether registeredornot, includingassociationofpersons, located in the taxable territory toabusinessentity registeredasbodycorporate, located in thetaxable territory;

(B) providedoragreedtobeprovidedbyanypersonwhichis locatedinanon-taxableterritoryandreceivedbyanypersonlocatedinthetaxableterritory;

(ii) The extent of service tax payable thereon by the person who provides the service andthe personwho receives the service for the taxable services specified in (I) shall be asspecified in the following Table, namely:–

tABLe

Sl. No.

Description of a service Percentage of service tax

payable by the person providing service

Percentage of service tax payable by the

person receiving the service

1. inrespectofservicesprovidedoragreedtobeprovidedbyaninsuranceagenttoanypersoncarryingoninsurancebusiness

Nil 100%

2. inrespectofservicesprovidedoragreedtobeprovidedbyagoodstransportagencyinrespectoftransportationofgoodsbyroad

Nil 100%

3. inrespectofservicesprovidedoragreedtobeprovidedbywayofsponsorship

Nil 100%

4. inrespectofservicesprovidedoragreedtobeprovided by an arbitral tribunal

Nil 100%

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5A in respectofservicesprovidedoragreed tobeprovidedbyadirectorofacompanytothesaidcompany

Nil 100%

5. inrespectofservicesprovidedoragreedtobeprovided by individual advocate or a firm ofadvocatesbywayoflegalservices

Nil 100%

6. inrespectofservicesprovidedoragreedtobeprovidedbyGovernmentor localauthoritybywayofsupportservicesexcluding–

(1) rentingofimmovableproperty,and

(2) services specified in sub-clauses (i), (ii)and(iii)ofclause(a)ofsection66DoftheFinanceAct,1994

Nil 100%

7. (a) inrespectofservicesprovidedoragreedtobeprovidedbywayofrentingofamotorvehicle designed to carry passengers onabated value to any person who is notengagedinthesimilarlineofbusiness

(b) inrespectofservicesprovidedoragreedtobeprovidedbywayofrentingofamotorvehicle designed to carry passengers onnon-abatedvaluetoanypersonwhoisnotengagedinthesimilarlineofbusiness

Nil

60%

100%

40%

8. inrespectofservicesprovidedoragreedtobeprovidedbywayofsupplyofmanpowerforanypurpose or security service

25% 75%

9. in respect of services provided or agreed tobe provided in service portion in execution of workscontract

50% 50%

10. in respect of any taxable services provided or agreed to be provided by any person who islocatedinanon-taxableterritoryandreceivedby any person located in the taxable territory

Nil 100%

Explanation-I.–Thepersonwhopaysor is liabletopayfreightforthetransportationofgoodsbyroadingoodscarriage, locatedinthetaxableterritoryshallbetreatedasthepersonwhoreceivestheserviceforthepurposeofthisnotification.

Explanation-II.–Inworkscontractservices,wherebothserviceproviderandservicerecipientisthepersonsliabletopaytax,theservicerecipienthastheoptionofchoosingthevaluationmethodasperchoice, independentofvaluationmethodadoptedbytheproviderofservice.

ooo

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BackgroundSector generally covers the following areas:

Freight Forwarding Ø Booking of cargo space for customer on the airlines and shipping lines, transportation,

loading/unloading at destination/origin, handling activities etc.

Ø Activities involving customs clearance in relation to goods imported as well as exported

Ø Courier services

Storage/warehouSing and inventory managementØ Activities of acquiring warehouses and operating them wherein customer’s goods are received,

stored and dispatched as per their instructions

Ø Sorting and grading as per client instructions, packing and repacking (special packing required as per customer specifications) distribution with the help of third party vehicles, etc.

tranSportation ServiceSØ Transportation services (including loading/unloading services) which are normally clubbed

with the above

Freight Forwarding

BackgroundFreight services are generally divided into activities as below:

Ø consignment origination activities

v Local Transportation

v Loading, unloading, handling services, etc. at origination

v Custom clearance

Ø international freight (export consignment/import consignment)

Ø consignment destination activities

v Local Transportation

v Loading, unloading, handling services, etc. at destination

v Customs clearance

Under the freight forwarding activities, Logistics companies also have certain other revenues streams which include:

Service Tax on Logistic Sectorprasad paranjape

Advocate

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v Margin on international freight cost and income

v Commission earned as an IATA Agent

v Incentive/Discounts received from airlines for booking of cargo space

poSSiBle Service categorieS For claSSiFicationGenerally the revenue earned as freight forwarders is classified under the following categories:

Ø Business Support services (“BSS”)

v They are services in relation to managing the logistics of export and import of cargo

v It includes various other activities such as handling, loading and unloading, transportation, warehousing, stuffing, de-stuffing etc.

v Prior to the Place of Provision of Service Rules, 2012 (“PoPS Rules”), BSS services were taxable basis the location of the service recipient

Ø custom house agency Services (“cha”):

v Activities in relation to customs clearance in respect of goods imported as well as exported.

v Prior to the PoPS Rules, CHA was taxable on performance basis

export oF Service

old law:Ø Prior to 1 July, 2012, as per Rule 3(2) of the Export of Service Rules, 2005 any taxable service

would be treated as an export of service if the conditions specified therein were satisfied:

v such service is provided from India and used outside India; and

v payment for such service is received by the service provider in convertible foreign exchange

new law:Before we move on the applicability of the new law, it is important to refresh the PoPS Rules which would have relevance in this regard:

Ø Rule 3 – Location of service recipient

Ø Rule 4 – Services provided in respect of goods, location where the services have been actually performed

Ø Rule 7 – For rule 4, 5 or 6 service, provided at more than one location, taxable territory where the greatest proportion of the service is provided

Ø Rule 8 – Where the location of the provider of service as well as that of the recipient of service is in the taxable territory, shall be the location of recipient of service

Ø Rule 9 - Intermediary service – Location of service provider

Intermediary means broker, an agent or any other person, who arranges or facilitates a provision of a service (the ‘main’ service) between two or more persons, but does not include a person who provides the main service on his account”

Ø Rule 10 – Services in relation to transportation of goods other than by way of mail or courier should be taxable at the place of destination of goods

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Given the above, following rules of the PoPS are of relevance to determine the taxability of these transactions:

Ø Services in respect of goods which need to be made physically available by the service recipient would be taxable at the place where the services have been actually performed (Rule 4)

Ø Place of provision of a service, where the location of the provider of service as well as that of the recipient of service is in the taxable territory, shall be the location of the recipient of service (Rule 8)

Ø Place of provision of service, of transportation of goods, other than by way of mail or courier, shall be the place of destination of the goods

Ø Where determinable in terms of more than 1 rule, the rule that occurs later is to be considered (Rule 14)

Ø Thus origin services in an export consignment and destination services in an import consignment would be taxable

international FreightInternational freight is the value of freight charged from the customer for movement of its goods from a place in one country to a place in another country. We have summarized the service tax applicability on international freight for the period prior to 1 July 2012 and later:

Ø prior to negative list based service tax regime

particulars export consignment import consignment

International air freight Exempt Vide Notification Exempt Vide Notification

International ocean freight Non-taxable (not covered in any category)

Non-taxable (not covered in any category)

Ø post to negative list based service tax regime

particulars export consignment import consignment

International air freight Rule 10 of PoPS Entry No. P(ii) of the Negative List

International ocean freight Rule 10 of PoPS Entry No. P(ii) of the Negative List

Bundling oF ServiceSØ Bundling provisions have been introduced through Section 66F of Finance Act, 1994 (“the

Act”) (principles of interpretations of specified descriptions of services or bundled services) wef 1 July 2012;

Ø Where a service is capable of differential treatment, more specific description shall be preferred over a general description;

Ø For bundled service the classification shall be as follows:

v If naturally bundled in ordinary course then shall be treated as provision of single service which gives essential characteristic

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v If not naturally bundled then shall be treated as provision of single service which results in highest liability of service tax

Ø Bundled services means “a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of any other service or services”.

In this regard, reference is drawn from the Guidance Notes which has explained the manner of determining if the services are bundled in the ordinary course of business:

Ø The perception of the consumer or the service receiver.

Ø Majority of service providers in a particular area of business provide similar bundle of services

Ø The nature of the various services in a bundle of services

Ø There is a single price or the customer pays the same amount, no matter how much of the package they actually receive or use

Ø The elements are normally advertised as a package

Ø The different elements are not available separately

Ø The different elements are integral to one overall supply – if one or more is removed, the nature of the supply would be affected

Few illustrations from the guidance notes are given below for better understanding of bundling:

Services which are naturally bundled:

Ø A hotel provides a 4-D/3-N package with the facility of breakfast

Ø This is a natural bundling of services in the ordinary course of business

Ø The service of hotel accommodation gives the bundle the essential character and would, therefore, be treated as service of providing hotel accommodation

Services not considered as naturally bundled:

Ø A house is given on rent, one floor of which is to be used as residence and the other for housing a printing press

Ø Such renting for two different purposes is not naturally bundled in the ordinary course of business

Ø Therefore, if a single rent deed is executed it will be treated as a service comprising entirely of such service which attracts highest liability of service tax

Ø Since the latter category attracts highest liability of service tax amongst the two services bundled together, the entire bundle would be treated as renting of commercial property

arguments in favour of bundling:Ø In case of an Export consignment, the main characteristic of the bundle would be

transportation of goods service

Ø Such services would need to be evaluated under a Rule 10 of PoPS rules (location shall be the destination of goods)

Ø Given that the goods are destined outside India, such services would qualify as export

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arguments in favour of unbundling:Ø In case of an Import consignment, the main characteristic of the bundle would be

transportation of goods service

Ø Such services would need to be evaluated under a Rule 10 of PoPS rules (location shall be the destination of goods)

Ø Given that the goods are destined to India, such services would qualify as taxable

Ø International freight in an unbundled scenario is not taxable. If the activities are bundled, then the benefit of non taxability on international freight might also be withdrawn

Ø On an average 70% to 80% of the total turnover is International freight and hence the above evaluation is very important

Ø Customer has an option to avail part of the services from one logistics service provider and part of the services from another

courierØ Term “courier agency“ has been defined under Section 65A (20) of the Act as under:

“Courier Agency means any person engaged in the door-to-door transportation of time –sensitive documents, goods or articles utilising the services of a person, either directly or indirectly, to carry or accompany such documents, goods or articles.”

Ø As per the inherent nature of the service performed, it is not possible to bifurcate the various services performed i.e. the whole service taken together is classifiable as one service or bundled service

Ø Accordingly the services of courier agency are to treated as a naturally bundled service

Ø Courier agency service is the service which determines the essential characteristic of the entire bundle. Thus, it appears that the whole service provided by the courier agency shall get classified as courier agency service

Ø In a courier service atleast some part of the service is always performed in the taxable territory (i.e., in India)

Ø Given this, even though the service may qualify as Rule 4 (based on performance of service), as per Rule 7 the service would always be taxable

Freight Forwarder as an intermediaryØ A freight forwarder could also be viewed as an intermediary

Ø Where the freight forwarder acts as an intermediary, the place of provision will be his location (Rule 9 of the PoPS)

Ø Service tax will be payable on the services provided by him

Ø However, when he provides a service to an exporter of goods, the exporter can claim refund of service tax paid under notification prescribed for this purpose

Ø However, the major distinguishing factor would be providing services on own account rather than acting as an agent to the customer

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proFit margin on international FreightØ There is generally a difference in the freight recovered from the customer and the freight

paid to the airline/shipping line

does the margin earned on international freight be subject to service tax?Ø It is argued that freight forwarder only offer space on the carrier which is offered to them

by the airline or shipping companies

Ø Airline and shipping companies never charge service tax to them on the invoice (as it is international freight)

Ø Thus, service tax is not chargeable even on the international freight earned by freight forwarder

Ø Even if it is assumed that international freight is subject to service tax, total value of international freight and margin should be taxed or nothing should be liable to service tax at all but only margin cannot be taxed

Ø The freight forwarders are not agents of the airlines or shipping lines facilitating any service but are rather providing service on P2P basis and thus the profit earned cannot be considered as commission and charged to service tax

Ø Even if margin is termed as service provided by the freight forwarder, it is a service to self and hence not subject to service tax

commiSSion/incentive received By iata agentSØ Freight forwarders are normally IATA agents who are engaged in the business of

booking cargo space for customers on the airlines for which they receive a fixed commission

Ø In addition to fixed commission, they receive incentive or market price adjustment or discount from the airline, which is actually the reduction from the freight amount charged by airlines

Ø The industry practice is to pay service tax on commission under Business auxiliary service

Ø However, the Logistics companies and Revenue are on different footing with respect to taxability of incentive/ discount

Ø The authorities dispute that the incentive received is based on similar lines as commission and the nature of income does not change by just changing the nomenclature of the revenue

Ø Also the added argument is that this additional incentive is received for promotion or marketing of the airlines

Ø Besides, some of the IATA agents deduct TDS on the incentives received, which strengthens the authorities argument on taxability of incentives

Ø However, an argument in favour of non-taxability is that freight forwarders are not involved in promotion or marketing of any airlines and most times the customers communicate their preference to the freight forwarder

reimBurSementSØ Freight forwarders incur a number of expenses on behalf of their customers while rendering

these services

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Ø In some cases these services are not used by freight forwarders in providing their output services and freight forwarders are only facilitating payment of service charges on behalf of the customers

Ø There is no clarity as to whether such expenses would qualify as pure reimbursements or expenses incurred for provision of output service

provision in lawØ Benefit of reimbursement would be available only on satisfaction of the conditions specified

in Rules 5(1) and 5(2) of the Service (Determination of Value) rules, 2006, in respect of all expenditure or cost incurred as a ‘Pure Agent’

Judicial precedentsØ Reference is drawn to recent judgment of Delhi High Court in case of Intercontinental

Consultants & Technocrats Pvt. Ltd. vs. Union of India 2013 (29) STR 9 (SC) which says that the provision is ultravires

Ø The above ruling was also referred by the Chennai Tribunal in case of M/s PVGT Freight Forwarders & Logistics Pvt Ltd vs. Commissioner of Service tax 2013-TIOL-766-CESTAT-MAD

Storage/warehouSing and inventory management

BackgroundThe activities which are generally carried out under storage/warehousing and inventory management are:

Ø Receiving the goods from the factories or premises of the customer or his agent

Ø Warehousing the goods received

Ø Receiving dispatch orders from the customer

Ø Arranging dispatch of goods as per the directions of the customer by engaging own transport or through the third party transporters

Ø Maintaining records of the receipt and dispatch of the goods and the stock available at the warehouse

Ø Preparing invoices on behalf of the customer

Ø Carrying out such other activities as may be agreed in relation to goods, including packing, re-packing, etc.

poSSiBle Service categorieSGenerally the above mentioned revenues are classified under the following categories:

Clearing and Forwarding Agent’s Service (“C&F”)

Ø Services in relation to owning warehouses and operating them for receiving, storing and dispatching customer’s goods as per the instructions of the customer

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Ø Further, services in relation to inventory management, sorting and grading as per client instructions, packing and repacking, distribution with the help of third party vehicles, etc., are also rendered

Storage and warehousingØ “Storage and warehousing ” includes storage and warehousing services for goods including

liquids and gases but does not include any service provided for storage of agricultural produce or any service provided by a cold storage

cargo handlingØ “cargo handling service” means loading, unloading, packing or unpacking of cargo and

includes,–

(a) cargo handling services provided for freight in special containers or for non-containerized freight, services provided by a container freight terminal or any other freight terminal, for all modes of transport, and cargo handling service incidental to freight; and

(b) service of packing together with transportation of cargo or goods, with or without one or more of other services like loading, unloading, unpacking, but does not include, handling of export cargo or passenger baggage or mere transportation of goods.

changeS in legiSlation For warehouSing oF agricultural produceØ Prior to the introduction of the negative list, the term agricultural produce was defined as

below:

‘Agricultural produce’ means any produce resulting from cultivation or plantation, on which either no further processing is done or such processing is done by the cultivator like tending, pruning, cutting, harvesting, drying which does not alter its essential characteristics but make it only marketable and includes all cereals, pulses, fruits, nuts and vegetables. Spices, copra, sugarcane, jaggery, raw vegetables, fibres such as cotton, flax, jute, etc. indigo, unmanufactured tobacco, betel leaves, tendu leaves, rice, coffee and tea but does not include manufactured products such as sugar, edible oils, processed food, processed tobacco

Ø However, post introduction of the negative list, with effect from 1 July 2012, the definition of agricultural produce has changed as below:

‘agricultural produce’ means any produce of agriculture on which either no further processing is done or such processing is done as is usually done by a cultivator or a producer which does not alter its essential characteristics but makes it marketable for primary markets

Ø It is important to evaluate what extent can processing be done on agricultural produce to render its storage as non-taxable under the new law

changeS in law with reSpect to cold StorageØ Prior to the Mega Exemption Notification, service tax was not levied on any services in

relation to storage and warehousing rendered by a cold storage

Ø The definition of storage and warehousing services specifically excluded services provided by a cold storage:

“Storage and warehousing includes storage and warehousing services for goods including liquids and gases but does not include any service provided for storage of agricultural produce or any service provided by a cold storage”

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Ø With the introduction of negative list based service tax regime, even though the reference to service categories is available, but the above mentioned definition is not part of the legislation

Ø Further, Notification No. 25/2012-ST dated 20 June 2012 has been introduced wherein at serial number 14 (d) the benefit of exemption with regard to cold storage is available only in terms of services by way of construction, erection, commissioning, or installation of original works pertaining to post harvest storage infrastructure for agricultural produce including a cold storage for the purpose

Ø Given this, under the new law, exemption for cold storage is not available

tranSportation

BackgroundØ In the scope of providing logistics services,

freight forwarders/warehousing companies also provide services of transportation of goods by road

Ø These services are either provided on its own account or by hiring third party transporter

Ø On the cost of transporter the freight forwarder/warehousing companies pays service tax as recipient of service

Ø However, in cases where the freight forwarder/warehousing companies provides these services on its own account by issuance of consignment note, service tax is not charged on the output

invoices as the recipient of service pays service tax under reverse charge mechanism

goodS tranSport Service vs. cargo handlingØ GTA providing service in relation to transportation of goods by road in a goods carriage

also undertakes packing as an integral part of the service provided. In such cases, can the services provided be classified under GTA service?

Ø Clarification for the above is given in Circular No 104/07/2008 dated 6 August 2008

Ø Cargo handling service means loading, unloading, packing or unpacking of cargo and includes the service of packing together with transportation of cargo with or without loading, unloading and unpacking

Ø Transportation is not the essential character of cargo handling service but only incidental to the cargo handling service

Ø Where service is provided by a person who is registered as GTA service provider and issues consignment note for transportation of goods by road in a goods carriage and the amount charged for the service provided is inclusive of packing, then the service shall be treated as GTA service and not cargo handling service

loading/unloading ServiceS – naturally BundledØ Whether loading/unloading services can be construed to be naturally bundled with

goods transportation so that the whole transaction would be covered by reverse charge

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notification – along with abatement benefit under the new regime of taxation with the advent of negative list with effect from 1 July 2012?

Ø CBEC had issued a Circular No 104/07/2008 ST dated 6 August 2008 in this regard

Ø It clarified that if any ancillary service is provided in relation to transportation of goods, and the charges, if any, for such services are included in the invoice issued by the GTA, such service would form part of GTA service and, therefore, the abatement of 75% would be available on it

Ø One can argue that loading/unloading support is merely a component of the overall supply of transportation of goods (as part of combo or packaged service) rather than being a distinct and independent supply in its own right and thus can be considered as naturally bundled

tax liaBility on reverSe charge BaSiS (conSignor/conSignee vs. perSon paying Freight to tranSporterØ For the purpose of providing transportation services to the customer, at times the freight

forwarders and warehousing companies hire a transporter who provides GTA services

Ø The question that arises is that who is liable to discharge the service tax on reverse charge basis on the GTA services availed since the consignment note mentions name of customer as the consignee/consignor

Ø In the above, the freight forwarder/warehousing company does not act as an agent of Customer as it decides on its own discretion which transporter is to be hired and the value to be paid thereon.

Ø As per Section 2(d)(i) of Service Tax Rules, 1994, any person who pays the cost is liable to pay service tax under the reverse charge mechanism

Ø Thus, even though the consignment note may specify the Customer as the person liable to pay service tax, the freight forwarder/warehousing company is liable to discharge the liability as the Customer is not discharging actual cost to the transportation.

qqq

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ii - Bombay Chartered Accountants' Society · PDF file · 2017-10-17We wish to...

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