12 July-14Case studies in Service Tax - Important …puneicai.org/wp-content/uploads/2015/03/Case-studies-in...No CENVAT Credit on inputs, input services and capital goods to be availed

Case Studies in Service Tax -Covering various important Issues/ Aspects

July 2014

Index

Exemption limit of Rs. 10 lakh1 Exemption limit of Rs. 10 lakh

Reverse Charge Mechanism2

Place of Provision of Service

1

3

CENVAT Credit on Input Services4

Index

Exemption limit of Rs. 10 lakh1 Exemption limit of Rs. 10 lakh1

Exemption Limit of Rs. 10 Lakh

Notification No. 33/ 2012 – Service Tax dated 20 June, 2012 – Exemption to

Small Service Providers

Exempts taxable services of aggregate value not exceeding ten lakh rupees in any financial year

Conditions for availing exemption:

1. Aggregate value of taxable services does not exceed ten

Notification shall not apply in the following cases:

1. Taxable services provided under a brand name or trade name, whether registered or not, of another person;

3

1. Aggregate value of taxable services does not exceed ten lakh rupees in preceding financial year;

2. No CENVAT Credit on inputs, input services and capital goods to be availed during the period for which exemption is claimed;

3. On the date of availing exemption, CENVAT Credit of any inputs lying in stock or in process, to be paid by service provider. Balance CENVAT Credit lying unutilized, if any, shall lapse;

4. Exemption limit shall be computed cumulatively for all taxable services provided from all premises and not separately for each premise or each taxable service;

5. Option given to service provider not to avail exemption and pay service tax. However, option once availed shall not be withdrawn for remaining part of the year.

person;

2. Value of taxable services in respect of which service tax is to be paid under reverse charge mechanism.


Aggregate Value of Taxable Services

Includes

1. Value of taxable services charged in the first consecutive

Does not include

4

1. Value of taxable services charged in the first consecutive invoices issued during a financial year;

2. Taxable service means any service on which service tax is leviable under Section 66B of the Finance Act, 1994 i.e. services provided in the taxable territory, other than services specified in the negative list.

1. Value of services which are not leviable to service tax under Section 66B of the Finance Act, 1994, including services specified in the negative list;

2. Value of services which are exempt from the whole of service tax under any other notification.


Case Studies:

Particulars Value of services for which

exemption available

Value of services for which

service tax to be paid

Case 1

• ABC Ltd., a Pune based company. is engaged in providing software services to clients in

India. Year wise aggregate value of taxable services provided by ABC Ltd. is mentioned

below:

Year 1 – Rs. 700,000;

Year 2 – Rs. 1,200,000;

Year 3 – Rs. 500,000

5

Year 3 – Rs. 500,000

• What happens if no service tax was required to be paid in the 1st year, however, ABC Ltd.

being ignorant of the exemption limit, pays service tax on Rs. 700,000.

Case 2

• Mr. A has obtained the franchise of McDonald's in Pune to provide restaurant services. Year

wise aggregate value of taxable services provided by Mr. A is mentioned below:

Year 1 – Rs. 1,200,000;

Year 2 – Rs. 500,000;

Year 3 – Rs. 800,000


Case Studies:


exemption available



Case 3

• ABC Ltd., a Pune based company is engaged in providing software services. XYZ Inc.

situated in USA is a group company of ABC Ltd.

• Following is the breakup of services provided and received by ABC Ltd. in the 1st year:

Software services provided to clients in India – Rs. 200,000;

Software services provided to clients outside India – Rs. 1,000,000;

Management Cross charges for administration support charged by XYZ Inc. – Rs.

6

Management Cross charges for administration support charged by XYZ Inc. – Rs.

1,200,000

• In the 2nd year of operation, ABC Ltd. provides software services to the extent of Rs.

500,000 only to clients in India.

Case 4

• XYZ Ltd., a Pune based company has obtained registration for 2 units in Pune.

• Unit 1 is engaged in providing construction services;

• Unit 2 is engaged in providing restaurant services with the facility of air-conditioning;

• Unit wise value of services provided by ABC Ltd. is mentioned below:

Unit 1 – Rs. 500,000 (Service tax abatement available on 75% of value of service under a

notification);

Unit 2 – Rs. 700,000.


Case Studies:


exemption available



Case 5

• XYZ Ltd., a Pune based company has obtained registration for 3 units in Pune.

• Unit 1 is engaged in providing restaurant services with the facility of air-conditioning;

• Unit 2 is engaged in providing restaurant services without the facility of air-conditioning;

• Unit 3 is engaged in providing lottery services.

• Unit wise value of services provided by ABC Ltd. is mentioned below:

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Unit 1 – Rs. 500,000;

Unit 2 – Rs. 1,200,000;

Unit 3 – Rs. 700,000.

Index

Reverse Charge Mechanism2 Reverse Charge Mechanism2

Reverse Charge Mechanism

1. Scheme of Reverse Charge:

Section 68 (2) – Payment of Service Tax under Reverse Charge Mechanism

Specified taxable services notified by Central

Person responsible for payment of service tax

Point of Taxationnotified by Central Government

Notification No. 30/ 2012 dated 20 June 2012

payment of service tax

Prescribed under Rule 2 (1) (d) (i) of Service Tax

Rules, 1994

Point of Taxation

Prescribed under Rule 7 of Point of Taxation Rules,

2011

9


2. Specified taxable services covered under reverse charge mechanism:

S.No. Specified Taxable Service Service Provider Service Recipient % of Service tax payable by Service Provider

% of Service tax payable by Service Recipient

1. Insurance services Insurance AgentPerson carrying on insurance

businessNil 100%

2. Recovery Agent services Recovery Agent

Banking company, financial

institution or a non banking

financial company

Nil 100%

3.Goods Transport Agency services

(Transportation of goods by road)Goods Transport Agency Person liable to pay freight Nil 100%

4. Sponsorship services Any personBody Corporate or

Partnership FirmNil 100%

*

4. Sponsorship services Any personPartnership Firm

Nil 100%

5. Services provided by an arbitral tribunal Arbitral Tribunal

Any Business Entity

Nil 100%

6. Legal ServicesIndividual Advocate or Firm

of AdvocatesNil 100%

7. Support ServicesGovernment or local

authorityNil 100%

8. Rent a cab services Individual, HUF or

Partnership Firm, whether

registered or not, including

association of persons

Business Entity registered as

a body corporate

Abated – Nil

Non Abated – 50%

Abated – 100%

Non Abated – 50%

9. Manpower Supply or security services 25% 75%

10. Works Contract services 50% 50%

11. Import of ServicesAny person located in non-

taxable territory

Any person located in taxable

territoryNil 100%

12.

Services provided by Director of a

Company or a body corporate to the said

Company or body corporate

Director of a Company or

body corporateCompany or body corporate Nil 100%

10

*

*

* - Budget changes in Union Budget of 2014-15 effective from 11 July 2014.


3. Point of Taxation under reverse charge mechanism:

Rule 7 of Point of Taxation Rules, 2011

Point of Taxation in case of taxable services covered under Reverse Charge Mechanism

Service tax under reverse

charge to be paid in cash

only (Explanation to Rule 3

(4) of CENVAT Credit

Rules, 2004)

*

Where payment for services made within 6 months from date of invoice

Where payment for services not made within 6 months from date of invoice

Point of Taxation = Date of PaymentPoint of Taxation = Point of taxation for

any other taxable service as per normal provisions

Special Provision in case of Associated Enterprises:In case of associated enterprises, where person providing service is located outside India, point of taxation shall be date of debit in the books of accounts of the person receiving the service or date of making payment, whichever is earlier.

11- Budget Changes in Union Budget of 2014-15 effective from 1 October 2014 – Point of Taxation = Date of Payment or Expiry of 3 months from Invoice Date,

whichever is earlier.*


4. Other important provisions under reverse charge mechanism:

Taxable Services under Reverse Charge Mechanism

Availment of CENVAT Credit Registration Requirements*

Prescribed under first and second proviso to Rule 4 (7) of CENVAT Credit Rules, 2004

Section 69 of Finance Act, 1994 states that every person liable to pay service tax shall make an

application for registration

i. Service recipient is considered as a person liable for paying service tax under Rule 2 (1) (d) (i) of Service Tax Rules, 1994;

ii. Hence, registration would be required to be obtained in respect of services covered under reverse charge mechanism

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Full Reverse Charge

Partial Reverse Charge

Date on which service tax is paid

Date on which service tax and value of input service is paid

* - Budget changes in Union Budget of 2014-15 effective from 11 July 2014.


5. Goods Transport Agency (‘GTA’) services under reverse charge mechanism:

GTA Services

Service Provider

Goods Transport Agency:

As per Section 65B (26) of Finance Act, 1994 – goods

Service Receiver

Person liable to pay freight:

i. Any factory registered under or governed by the Factories Act,

Abatement Exemption

Notification No. 26/ 2012 – Service Tax dated 20 June, 2012:

Notification No. 25/ 2012 – Service Tax dated 20 June 2012:

Entry No. 21 – Services provided

13

Finance Act, 1994 – goods transport agency means any person who provides service in relation to transport of goods by road and issues a consignment note, by whatever name called

governed by the Factories Act, 1948;

ii. Any society registered under the Societies Registration Act, 1860 or under any other law;

iii. Any co-operative society established by or under any law;

iv. Any dealer of excisable goods registered under Central Excise Act, 1944;

v. Any body corporate established, by or under any law;

vi. Any partnership firm whether registered or not under any law, including association of persons

dated 20 June, 2012:

i. Abatement of 75% available on GTA services;

ii. CENVAT Credit on inputs, capital goods and input services used for providing taxable service, shall not be taken

Entry No. 21 – Services provided by a goods transport agency, by way of transport in a goods carriage of:

a. …’

b. goods, where gross amount charged for the transportation of goods on a consignment transported in a single carriage does not exceed one thousand five hundred rupees;

c. goods, where gross amount charged for transportation of all such goods for a single consignee does not exceed rupees seven hundred fifty


Case Studies:

Description Whether

service tax is

required to be

paid under

reverse charge

Proportion of

service tax

payable by

service

recipient

Amount of

service tax

payable by

service

recipient

Point of

Taxation

Case 1:

• ABC Ltd., a Company registered under Companies Act, 1956 is engaged in

providing security services to XY Associates, a Partnership Firm;

• Value of services rendered for the month of May, 2014 is Rs. 100,000;

• Invoice for such services is dated 1 June 2014 and the payment in respect of • Invoice for such services is dated 1 June 2014 and the payment in respect of

such services is made on 30 June 2014.

Case 2:

• ABC Ltd., a Company registered in India is the subsidiary company of XYZ

Inc., USA;

• ABC Ltd. receives software services from XYZ Inc.;

• Value of Services rendered for the month of May, 2014 is Rs. 100,000;

• Invoice for such services is dated 1 June 2014;

• Expenses in relation to such services are booked by ABC Ltd. on 30 May 2014

as a provision for expenses;

• Payment in respect of such services is made on 30 June 2014.

14


Case Studies:

Description Whether

service tax is

required to be

paid under

reverse charge

Proportion of

service tax

payable by

service

recipient

Amount of

service tax

payable by

service

recipient

Point of

Taxation

Case 3:

• AB Associates, a Partnership Firm is engaged in providing works contract

services to ABC Ltd., a Company registered under the Companies Act, 1956;

• AB Associates has raised an invoice dated 1 June 2014, in relation to the

works contract services for Rs. 100,000;

• For the purpose of discharging service tax in relation to the works contract

services, AB Associates has adopted the Actual Value Method as prescribed

under Rule 2A (i) of Service Tax (Determination of Value) Rules, 2006;

• Payment in respect of such services is made on 30 June 2014.

15


Case Studies:

Description Whether

service tax is

required to be

paid under

reverse charge

Proportion of

service tax

payable by

service

recipient

Amount of

service tax

payable by

service

recipient

Point of

Taxation

Case 4:

• ABC Ltd. is a Pune based company registered under the Companies Act,

1956;

• During the month of April, 2014, ABC Ltd. has availed GTA services for

transport of raw materials from various vendors across India;transport of raw materials from various vendors across India;

• The goods transport agency from whom the GTA services are availed does

not provide GTA services to any other consignee;

• Following is the summary of GTA services availed during the month of April,

2014:

• A single invoice dated 1 May 2014 is raised in respect of the above GTA

services;

• Payment in respect of such services is made on 31 May 2014.

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S.No. Particulars Freight paid by ABC

Ltd.

1. 200 Trucks @ Rs. 1,400 per truck Rs. 280,000

2. 300 Trucks @ Rs. 1,600 per truck Rs. 480,000

Index

Place of Provision of Service3 Place of Provision of Service3


1. Concept of Place of Provision of Service:


Section 66B – Charge of Service Tax

Section 66C – Determination of Place of Provision

Place of Provision of Services Rules, 2012 (‘PPSR, 2012’)

Service Tax to be levied on all services, other than services

in negative list, which are provided or agreed to be provided in the taxable

territory

Central Government may frame rules in order to determine the place of

provision of service

Determination of Place of Provision of Service having

regard to the nature and description of various services

Note:Taxable Territory = Whole of India except the State of Jammu and Kashmir

18


2. Determination of Place of Provision of Service (PPSR, 2012):

Rule No. Description Place of Provision

3.

General Rule

- Where location of service receiver available in ordinary course of business

- Where location of service receiver not available in ordinary course of business

Location of Service Recipient;

Location of Service Provider

4.

Performance based services:

i. In respect of goods to be made physically available;

ii. In respect of services provided from a remote location by electronic means;

iii.In respect of services provided to an individual requiring physical presence

Where services are performed;

Location of goods at the time of provision of service;

Where services are performed

5. Services directly relating to immovable property Location of immovable property

6. Services relating to events Place where event is actually held

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6. Services relating to events Place where event is actually held

7.Services referred to in Rule 4, 5 and 6 are provided at more than one location,

including a location in the taxable territory

Location in taxable territory where greatest proportion of

service is provided

8. Provider and Recipient of service located in the taxable territory Location of Service Recipient

9.

Specified Services:

i. Services provided by Banking Company, non banking financial company or

financial institution to account holders;

ii. Online information and database access or retrieval services;

iii.Intermediary services;

iv.Services in relation to hiring of means of transport, upto one month

Location of Service Provider

10.Services of transportation of goods, other than by way of courier or mail

Goods Transportation Agency Services

Place of destination of goods

Location of person liable to pay tax

11. Passenger Transportation Services Place where passenger embarks for continuous journey

12. Services provided on board a conveyance First scheduled point of departure


3. Location of Service Provider/ Service Recipient:

Registration

Single Registration, whether centralized or otherwise

Multiple Registrations

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Services provided/ used from/ at one location

Services provided/ used from/ at more than one

location

In the absence of any establishments, whether

business or fixed

Location of Business Establishment

Location of other Fixed Establishment, where

services provided/ used from/ at a place other than Business Establishment

Location of Establishment most directly concerned with the provision/ use of service

Usual Place of Residence of the provider/ recipient of

service


Case Studies:

Description Which Rule is

applicable to

determine Place

of Provision

Place of Provision Whether Place of

Provision within

taxable territory

Case 1:

• ABC Ltd. is a Pune based Company registered in India under the Companies Act, 1956.

ABC Ltd. has opened a branch office in Dubai;

• For the new office in Dubai, XY Associates, a Bangalore based partnership firm in India,

has provided interior decoration services.

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has provided interior decoration services.

Case 2:

• ABC Ltd. is a Pune based tax and management consulting company;

• ABC Ltd. has entered into a contract with its group company US Inc. situated in USA to

provide a report on company law updates in India;

• Such report on company law updates in India is intended to be used by XYZ Inc, USA

which has entered into a contract with US Inc. to provide such report.

Case 3:

In the above case, assuming all other facts remaining the same, what would be the place of

provision of service, where the managing director of XYZ Inc. has visited India to attend a

training on company law updates conducted by ABC Ltd.

Please note that there is no contract of service between ABC Ltd. and XYZ Inc.

Index

CENVAT Credit on Input Services4 CENVAT Credit on Input Services4

CENVAT Credit on input services

Rule 2 (l) of CENVAT Credit Rules, 2004 – Input service

Means

Any service:

i. used by a provider of

output service for providing

an output service; or

Includes

i. modernization, renovation or repairs of a

factory, premises of provider of output service

or an office relating to such factory or

premises;

Excludes

i. service portion in the execution of a works contract and

construction services (declared services);

used in relation to building or civil structure or part

thereof or laying of foundation or making of structures for

23

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 upto the

place of removal

ii. advertisement or sales promotion, market

research, business exhibition;

iii. accounting auditing, financing;

iv. recruitment and quality control, coaching and

training;

v. computer networking;

vi. credit rating;

vii. share registry;

viii.security;

ix. legal services;

x. procurement of inputs, storage upto the place

of removal, inward transportation of inputs and

capital goods and outward transportation upto

the place of removal

thereof or laying of foundation or making of structures for

support of capital goods;

except for the provision of one or more of the above

mentioned declared services;

ii. renting of motor vehicle which is not capital goods;

iii. general insurance, servicing, repair and maintenance of

motor vehicle which is not capital goods

except when used by:

– a manufacturer of motor vehicle in respect of motor

vehicle manufactured by such person; or

– an insurance company in respect of motor vehicle

insured or reinsured by such person

iv. services primarily meant for personal use or

consumption of an employee such as outdoor catering,

health services, life insurance, health insurance etc.

Thank You

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