ISSUES UNDER NEGATIVE LIST & REVERSE CHARGE ...

ISSUES UNDER

NEGATIVE LIST & REVERSE

CHARGE SCHEME

SERVICE TAX –NEGATIVE LIST

Introduction of Negative List scheme

Service is being defined

Renting, construction, software etc are specifically termed as service as declared services

Certain services not liable - listed under negative list

Reverse charge / joint charge on certain services

DEFINITION OF SERVICE

DEFINITION OF SERVICE

Any activity for consideration

By one person to another

Includes declared services

Excludes

Transfer of title in goods or immovable property

Deemed sale in terms of Art. 366(29A)

Transaction in money or actionable claim

Functions of MP, MLA, Members of Panchayat or

Municipality or Local authority

Services by employee to employer in the course of

employment

DEEMED SALE –ART 366(29A)

BSNL VS. UOI 2006 (2) STR 161 (SC)

Issue: Whether the transaction involved in the use of

mobile telephone would amount to sale or service or

both, and whether there is a transfer of electromagnetic

waves concerned.

Held: The disintegration of composite contracts would

be permissible only in cases covered by relevant clauses

of Art.366 (29A) i.e., Works Contract & Catering

Contract. For all other composite contracts, the

dominant nature test applies to decide whether it is

sale.

Continued

BSNL VS. UOI 2006 (2) STR 161 (SC)

Supreme Court held that aspect legislation of taxing

services and sales separately does not allow sales tax

to be collected on services and vice versa.

Therefore, there can be no service tax on sale of goods

and alternatively, there can be no VAT on services

provided.

TRANSACTION IN MONEY

Delhi Chit Fund Assn. Vs. UoI, 2013(30) STR

347(Del).

Chit fund activity is a transaction in money

Excluded from definition of service

No service tax could be levied

Only those type of transactions in money which is

specified in explanation is considered as service and

not others.

Special Leave Petition against the above

decision is dismised- 2014-TIOL-23-SC-ST

ACTIONABLE CLAIM VS. AGREEING FOR AN

OBLIGATION OR REFRAIN FROM OBLIGATION

What is actionable claim

A claim to unsecured debts

A claim to beneficial interests in movable property not

in possession, actual or constructive, whether present

or future, conditional or contingent

Declared service:

(e) agreeing to the obligation to refrain from an act,

or to tolerate an act or a situation, or to do an act

Whether consideration received for giving up

right in an immovable property is covered under

actionable claim or under declared services

BUYING AND SELLING LOTTERY

Future Gaming Solutions India Pvt. Ltd. Vs.

UOI- 2013(200)ECR0145(Sikkim)

Buying and selling of lottery would not amount to

service.

TRADING OF GOODS

Is it a service at all

Transfer of title in goods or immovable property

Why is it covered under negative list

What about trading in services?

DECLARED SERVICE

&

NEGATIVE LIST

RENTING OF IMMOVABLE PROPERTY

Declared as service

What is the reason for declaring this as a service ?

All types of renting covered except:

Residential dwelling – covered under Negative list

Renting to educational institution- under Mega

exemption

Renting by educational institution is now taxable

DEVELOPMENT OF SOFTWARE

Covered under declared services

development, design, programming, customisation,

adaptation, upgradation, enhancement,

implementation of information technology software

What is the necessity of covering above in declared list

Whether licensing of software liable to service tax?

Sale of licensed software – whether amounts to mere

transfer of title in goods

Online sale of software ?

No specific clauses unlike under the earlier regime

Whether HC decision in Infotech Dealers Assn. would

still be applicable under Negative list scheme

INFOTECH SOFTWARE DEALERS ASSOCIATION & OTHERS V

UOI & OTHERS 2010 (20) S.T.R. 289 (MAD.)

Issue: Legislative competency of the Parliament to impose

service tax on sale of software made through internet

download.

Held: Parliament has the legislative competency to impose

tax on certain services provided or to be provided relating to

information technology software for use in the course or

furtherance of business or commerce to mean a taxable

service, in terms of the residuary Entry 97 of List I of

Schedule VII of Constitution.

As to whether the transaction would amount to sale or

service, it was held that it would depend upon the

individual transaction since the intention is not that of sale

of software, rather only transfer of contents to customer.

M/S SASKEN COMMUNICATION

TECHNOLOGIES LTD VS JCCT, BANGALORE

2011-TIOL-707-HC-KAR-ST

Issue: Whether the contract for development of a

software falls within the mischief of a "works

contract", and when the software so developed vests

with the customer from day one does it amount to

deemed sale under Article 336(29-A) (b) of the

Constitution of India?

Held: When copyright of software is developed under a

contract for development of software which vests with

the customer from day one, such contract does not fall

within the mischief of ‘works contract'

CONSTRUCTION

CONSTRUCTION

Can development of sites be brought to tax?

Can villas/multi storey houses be brought to

tax? What is a layout

Can development rights be brought to tax?

Will there be classification disputes between

works contract and construction services?

LARSEN & TOUBRO LTD. 2013-TIOL-46-

SC-CT-LB

Activities of developer of apartment- covered under

works contract

What is the impact on service tax ??

M/S KONE ELEVATOR INDIA PVT LTD VS STATE

OF TAMIL NADU AND ORS., 2014-TIOL-57-SC-

CT-CB

Sale Vs. Works Contract

Supply and installation of lifts is works contract

and not sale.

Installation of lift cannot be termed as an activity

incidental to sale of lift

M/S NAGARJUNA CONSTN CO LTD VS GOI

2012-TIOL-107-SC-ST

Issue: Assessee had challeged CBEC Circular No.

98/1/2008-ST, dated 4.1.2008 which clarified that

option of Composition is not available for ongoing

works contracts as being discriminatory.

Held: Circular No. 98/1/2008-ST, dt 4.1.2008

regarding the non availability of Composition option

for ongoing works contracts is not discriminatory

since Rule 3 (3) of the 2007 Rules makes it clear that

the assessee who wants to avail of the benefit under

Rule 3 must opt to pay service tax in respect of a

works contract before payment of service tax in

M/S NAGARJUNA CONSTN CO LTD VS

GOI 2012-TIOL-107-SC-ST

… respect of the works contract and the option so

exercised is to be applied to the entire works

contract and the assessee is not permitted to change

the option till the said works contract is completed.

As assessee had already paid Service Tax, they

could not change classification of composite service

to avail option of Composition and it cannot be said

that the appellant had exercised a particular option

with regard to the mode of payment of tax after 1st

June 2007 with regard to reclassified works

contract. Continued…

M/S NAGARJUNA CONSTN CO LTD VS GOI

2012-TIOL-107-SC-ST

Those who had paid tax as per the provisions

existing prior to 1.06.2007 and those who opted for

payment of tax under Rule 3 of the 2007 Rules and

paid tax before exercising the option belong to

different classes and, therefore, it cannot be said

that the Impugned Circular or the provisions of Rule

3(3) are discriminatory.

TAXABILITY AND VALUATION OF LAND OWNER’S

SHARE IN A JDA

Whether JDA could be brought to tax

If yes how to value Land owner’s share of property

Is it value of land to be adopted or construction cost?

HIRING/ LEASING / RIGHT TO USE

ASSOCIATION OF LEASING & FINANCIAL SERVICE

COMPANIES V UOI 2010-TIOL-87-SC-ST-LB

Issue: Legislative competence of the Central

Government to impose service tax on finance

leasing and hire purchase finance.

Held: Supreme Court upheld the legislative

competence of the Centre to impose service tax

as service tax is a tax on an activity and on the

value addition on account of the activity. the

activity of financial leasing and hire purchase

holding that they are clearly a financial service

covered under ‘Banking and Other Financial

Services’.

INDUS TOWERS LTD. VS. DEPUTY COMMR., OF

COMMERCIAL TAXES, BANGALORE 2012 (285) E.L.T. 3

(KAR.) Issue: Whether the transfer of right to use passive

telecommunication infrastructure, viz. towers, DG

sets, air conditioners, power management systems

etc., by provider of these services to mobile operator

is liable to VAT?

Held: Transaction is not within the ambit of Article

366(29-A)(d) of Constitution of India and Mobile

operators did not get possession and effective

control of passive infrastructure, and there was no

physical delivery of same.

INDUS TOWERS LTD. VS. DEPUTY COMMR., OF

COMMERCIAL TAXES, BANGALORE 2012 (285)

E.L.T. 3 (KAR.) The Mobile operators only used services provided by

service provider, and their access to the infrastructure did

not amount to its possession or right to use goods.

Therefore, mobile operator were merely provided access to

the infrastructure, and that did not amount to service

provider losing control over the infrastructure, and

especially so as mobile operators could not transfer it

during period of contract to a third party.

Right of mobile operators was personal right to do

something on the passive infrastructure belonging to

service provider; it did not amount to creation of interest

therein, and was only in nature of licence as defined under

Section 52 of Easements Act, 1882

TEMPORARY TRANSFER OF IP

MALABAR GOLD PRIVATE LIMITED VS COMMERCIAL TAX

OFFICER 2013-TIOL-512-HC-KERALA-ST

Issue: The Company is engaged in marketing, trading,

export and import of jewellery, gold ornaments,

diamond ornaments, platinum ornaments, watches,

etc. under the name of 'Malabar Gold'. Single Judge

held that Trade Mark is goods - Royalty received from

franchisees for use of its trademark and for sharing

business know-how is leviable to VAT even if Service

Tax is paid.

Held: Single Judge’s decision was overruled as the term

'franchise' is included in Section 65(105)(zze) is a

taxable service and the taxable event is the service

rendered by the Company. Thus, any service provided

or to be provided to a franchisee will come within the

purview of the said provision.

MALABAR GOLD PRIVATE LIMITED VS COMMERCIAL TAX

OFFICER 2013-TIOL-512-HC-KERALA-ST

Going by the definition of franchise, it is an

agreement by which the franchisee is granted

representational right to sell or manufacture goods

or to provide service or undertake any process

identified with franchisor, whether or not a trade

mark, service mark, trade name or logo or any such

symbol, as the case may be, is involved.

As the Franchise services are liable to service tax

and demand of VAT on the same transaction by

state government as “right to use Trade Mark” is

rejected.

AGS ENTERTAINMENT PVT LTD VS UOI

2013-TIOL-521-HC-MAD-ST

Issue: Taxability on film distribution as being ‘Temporary

transfer of copyright’ u/s 65(105)(zzzzt) - Issues before the

High Court were:

1. Whether the taxable event provided u/s 65(105)(zzzzt) is

covered by Article 366 (29A)(d) as a "deemed sale of goods"?

2. Whether Petitioner’s contention is right that service tax

levy is on "temporary transfer or permitting the use or

enjoyment of copyright" u/s 65(105)(zzzzt) is covered under

Entry 54 of List II and whether it is transgression by

Parliament into the exclusive State Legislature domain?

3. Whether Petitioner’s contention is right that the copyright

is goods and transfer of copyright of Cinematograph films is

only delivery of goods for consideration and is absolute

transfer and no service element is involved?



4. Even assuming that there is an element of service

involved in the nature of transaction done by the

Petitioners, should the dominant intention of the

transaction being transfer of goods has to be only taken

into consideration?

5. Whether the Petitioners are right in contending that

Parliament has no authority to dissect a composite

transaction as in the case of the Petitioners and levy

service tax?

6. Whether Section 65(105)(zzzzt) levying service tax on

the temporary transfer or permitting the use or

enjoyment of copyright is ultra vires the Constitution?



Held: The variant modes of business transactions between

the producer and distributor, distributor and sub-distributor

or area distributor or exhibitor (theatre owner) are not 'sale

of goods' to fall under Entry 54 List II or Entry 92A List I.

By resorting to Entry 97 of List I Residuary Entry to levy

service tax, the Parliament is within its legislative

competence and Section 65(105)(zzzzt) is not ultra vires the

Constitution.

From the production of the cinematograph film till it is

exhibited, there are host of commercial activities. Service tax

is the value added tax, which applies to the business

transactions for consideration involving commercial

activities.



Over all, there is a huge rise in business of film

industry and huge money is involved. The temporary

transactions of copyrights or the permission to use or

enjoyment of the copyright cannot be brought either

under Entry 54 of List II or Entry 92A of List I.

Applying the ratio of the decisions of the Supreme

Court, it was held that the Parliament is well within

its legislative competence in levying service tax

resorting to Entry 97 of List I.

In view of the above, High Court dismissed the Writ

Petitions. HOTEL AND TRAINING

INDUSTRY

KERALA CLASSIFIED HOTELS AND RESORTS ASSOCIATION

VS UOI 2013-TIOL-533-HC-KERALA-ST

Issue: Petitioners challenged the levy of service tax under

the Restaurant services falling under section 65(105)(zzzzv)

and Hotel accommodation services falling under section

65(105) (zzzzw) of Finance Act, 1994.

Held: Service Tax on Restaurants and hotels is beyond the

legislative competence of the Parliament for the following

reasons:

INDIAN HOTELS AND RESTAURANT

ASSOCIATION- 2014-TIOL-498-HC-MUM-ST –

Contrary view (division bench decision)

CST, BANGALORE VS. THE GRAND ASHOK

2013 (31) STR 528 (KAR.)

Issue: Whether ‘Outdoor Catering’ being a composite

contract is divisible one so as to claim the abatement of

50% vide Notification No.1/2006-ST.

Held: Outdoor catering consists of article of food which

constitutes sales and other part consists of service to

bring food to the designated place and the said service

portion would be liable to service tax and not the entire

cost received from client. It is composite but divisible

contract as provided in Article 366(29A)(f) of Constitution

of India and State legislature is competent to levy sale

tax on sale aspect only. Hence, assessee is liable to pay

service tax only the service aspect of the outdoor catering

contract.

TRAINING AND COACHING

Indian Institute Of Aircraft Engineering Vs UoI,

2013-TIOL-430-HC-DEL-ST

Flying Training Institutes providing training for

obtaining Commercial Pilot Licence (CPL) and on

Aircraft Engineering Institutes for obtaining Basic

Aircraft Maintenance Engineer Licence is not liable

to pay Service Tax

The expression 'recognized by law' is a very wide one.

The legislature has not used the expression

"conferred by law" or "conferred by statute". Thus

even if the certificate/degree/diploma/qualification is

not the product of a statute but has approval of some

kind in 'law', would be exempt.

VALUATION

REIMBURSEMENT OF EXPENSES

Valuation of services

Out of pocket expenses- what is

the treatment?

Intercontinental Consultants &

Technocrafts Pvt. Ltd.2012-TIOL-966-

HC-Del

INTERCONTINENTAL CONSULTANTS &

TECHNOCRAFTS PVT. LTD.2012-TIOL-966-HC-

DEL Issue: Valuation of services – whether reimbursement of

out of pocket expenses is includible in the value of taxable

services.

Held: Rule 5(1) of Service Tax (Determination of Value)

Rules, 2006 is ultra vires Section 67 which quantifies the

charge of Service Tax, both before and after its

amendment of 1-5-2006.

High Court also held that ‘consideration in money’ or

‘gross amount charged’ used in Section 67 did not have

widest sense of including such expenditure/costs; Further,

Explanation to the section, these expenditure/costs have

not been included

BHAYANA BUILDERS PVT LTD VS CST 2013-

TIOL-1331-CESTAT-DEL-LB

Issue: Whether free of cost material supplied by the

customer should also be included, for availing the benefits

under Notification No. 15/2004-ST, dated 10.09.2004 as

amended by Notification No. 4/2005-ST dated 01.03.2005

which added an "Explanation" to Notification No. 15/2004-

ST.

Held : (a) The value of goods/ materials supplied free of cost

by the recipient to the provider of construction service, being

neither monetary or non-monetary consideration paid by or

flowing from the service recipient, accruing to the benefit of

service provider, would be outside the taxable value or the

gross amount charged, within the meaning of the later

expression in Section 67 of the Finance Act, 1994; and

BHAYANA BUILDERS PVT LTD VS CST

2013-TIOL-1331-CESTAT-DEL-LB

(b) Value of free supplies by service recipient do not

comprise the gross amount charged under Notification

No. 15/2004-ST, including the Explanation thereto as

introduced by Notification No. 4/2005-ST.

The ruling of Larger Bench decision will apply only for

the period up to 30.06.2012.

DEDUCTION FOR MATERIALS SUPPLIED

Whether VAT paid on specified portion of the works

contract (as per VAT laws) could be deducted as

actual value of goods supplied?

DEDUCTION FOR MATERIALS SUPPLIED-

UNDER NEGATIVE LIST

Is there any deduction available under negative

list scheme for goods supplied (similar to

Notification No. 12/2003)

IMPORT AND EXPORT

PLACE OF PROVISION OF SERVICE

Introduction of Rules governing place of

provision of service

Services received from outside India –

Charging Section similar to 66A????

No link between Section 66B and 66C

EXPORT OF SERVICE

Location of recipient outside India

Place of provision of service –outside India

Receipt of consideration in convertible foreign

exchange

Is it taxable if

Other conditions met but consideration is receive in

INR

Other conditions met but the recipient is located in

India

REVERSE CHARGE AND

JOINT CHARGE

REVERSE CHARGE / JOINT CHARGE

Constitutional validity of reverse charge/joint charge

Whether recipient of service could adopt a

different valuation method. Explanation-II to Notification No. 30/2012. - In works

contract services, where both service provider and service

recipient is the persons liable to pay tax, the service

recipient has the option of choosing the valuation method

as per choice, independent of valuation method adopted

by the provider of service

REVERSE CHARGE / JOINT CHARGE

Extent of liability of recipient where provider pays

tax in full

In joint charge where the provider fails to pay his

portion of service tax, what is the implication ?

Proviso to Section 68(2)

Provided that the Central Government may notify the

service and the extent of service tax which shall be

payable by such person and the provisions of this Chapter

shall apply to such person to the extent so specified and

the remaining part of the service tax shall be paid by the

service provider

GTA ISSUES

Where a truck owner / operator provides transportation

services, to a company whether reverse charge apply

Reverse charges applies only where goods transport services

are provided by GTA. Services provided by other than GTA is

not taxable (covered in negative list)

GTA has been defined as person providing services in

relation to transport of goods by road and who issues a

consignment note

GOODS TRANSPORTATION AGENCY

Hon’ble Tribunal in C.C.E. & C., Guntur Vs.

Kanaka Durga Agro Oil Products Pvt. Ltd

2009 (15) S.T.R. 399 (Tri. - Bang.) held that:

Transport booking agents alone are covered

under Goods Transport Agency service.

Transportation undertaken by individuals

owning and operating trucks is not liable

considering definition of GTA and

clarification by Finance Minister in Budget

Speech.

BODY CORPORATE

Whether a Partnership firm / Society also comes

under ambit of Body corporate

Definition of body corporate

Companies Act, 1956: Section 2(7) "body corporate" or

"corporation" includes a company incorporated outside

India but does not include -

(a) a corporation sole ;

(b) a co-operative society registered under any law relating to

co-operative societies ; and

(c) any other body corporate (not being a company as defined

in this Act), which the Central Government may, by

notification in the Official Gazette, specify in this behalf

BODY CORPORATE

In Board of Trustees Ayurvedic and Unani Tibia

College, Delhi v. State of Delhi, AIR 1962 SC 458,

Supreme Court held that a society registered

under Societies Registration Act does not come

within the term ‘ body corporate’.

LEGAL SERVICES

Where advocate provides services to an

individual in relation to his personal assets

whether Service tax liability would arise on the

recipient

Legal Services other than to Business entity is

exempted

Business entity defined as

(17) "business entity" means any person ordinarily

carrying out any activity relating to industry,

commerce or any other business or profession

COLLECTION OF SERVICE TAX

KISHORE K. S. VS. CHERTHALA

MUNICIPALITY 2011 (24) STR 538

(KER.)

Issue: Whether service tax on rent could be recovered

from tenant even if agreement does not provide for

same?

Held : Service tax is an indirect tax and is meant to be

passed on. Therefore, even in the absence of any

agreement, it can be recovered from the tenant.

BHAGWATI SECURITY SERVICES (REGD.) VS. UOI

2013 (31) STR 537 (ALL.)

Issue: Reimbursement of service tax by the recipient of

service where the agreement does not provide for collection

of service tax.

Held: Petitioner has provided security service and deposited

the service tax with Government, as regards collection of

service tax from the recipient, it was held that service tax

being a statutory liability as statute is imposing the tax

upon the person to whom service is being provided and the

service provider is merely a collecting agency. Hence, HC

directed the reimbursement of service tax to the petitioner.

OTHER DECISIONS

Pearey Lal Bhawan Association Vs Satya

Developers Pvt. Ltd., 2011 (23) S.T.R. 213 (Del.)

Service provider is entitled to collect tax from

recipient

Questions?

Thank you

V.RAGHURAMAN .B Com, FCA, LLB, ACS, Grad.CWA

Partner , M/s.. Raghuraman & Chythanya,

Advocates

Email id : [email protected]

[email protected]

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